Target Date Fund

[dvd7e]

My basic problem: When I started working ~2yrs ago, my 401k holdings consisted of a half dozen funds. But after 6 months, I decided to go with a target date fund so that I could get International stock exposure that I couldn't get elsewhere in my 401k. After a year in the target date fund, I'm concerned about their dangers and wondering if I should switch back to selecting a handful of funds. Alternatively, I'm considering doing this in 5-10 years when, but concerned about how to do this logistically. What's my best approach?

Quick Bio: I'm 25, Male, an engineer, married (wife will likely work most of her career), frugal, and investing for the long-haul. Contributing 15%+ of income to 401k. Through my career, would also like to have money for downpayments on rental properties and investment farms.

My Questions:
1) I always hear about the dangers of blind investing in target date funds, but I've decided to invest in one (in my 401k) that isn't necessarily my projected retirement date, but matches my risk profile. This ok? I've got 85% equity, 15% bond

2) ...But I also have accounts in my IRA (pre-tax) and taxable Mutual Funds (pre-existing, I don't regularly contribute to the taxable). When making asset allocation decisions, do I look at all accounts combined? How do I handle taxable vs. non-taxable.

3) What happens in 5-10 years if I want to move away from the target date fund and more actively manage my asset allocation? Do I just transfer all my money at once into the appropriate allocations, or do it gradually (which make take a while with a larger account balance.) Does this mean the longer I'm in the target date fund, the more tied to it I become? I know that a single target date has a predefined glide path, but this may deviate from my situation as time passes on, and/or become difficult to achieve proper asset allocation when dealing with multiple accounts (multiple 401k's, IRA, taxable, etc). How do I handle this?

Thank you!

[jpg7n16]

My Questions:
1) I always hear about the dangers of blind investing in target date funds, but I've decided to invest in one (in my 401k) that isn't necessarily my projected retirement date, but matches my risk profile. This ok? I've got 85% equity, 15% bond

Where have you heard that? Do you have any credible info to support that they're somehow bad? Why do you feel that way about them?

2) ...But I also have accounts in my IRA (pre-tax) and taxable Mutual Funds (pre-existing, I don't regularly contribute to the taxable). When making asset allocation decisions, do I look at all accounts combined? How do I handle taxable vs. non-taxable.

Yes. You look at all accounts combined. Handling taxable vs. non-taxable, all you really need to do is make sure that since you're going to have both tax-efficient (growth stocks, muni bonds, funds with low asset turnover - like index funds, etc) and non tax efficient (bonds, real estate investment trusts, dividend stocks, funds with high turnover, etc). Since you'll have both, just keep the non tax efficient ones in your retirement accounts, and the tax efficient ones out of them

3) A What happens in 5-10 years if I want to move away from the target date fund and more actively manage my asset allocation? B Do I just transfer all my money at once into the appropriate allocations, or do it gradually (which make take a while with a larger account balance.) C Does this mean the longer I'm in the target date fund, the more tied to it I become? D I know that a single target date has a predefined glide path, but this may deviate from my situation as time passes on, and/or become difficult to achieve proper asset allocation when dealing with multiple accounts (multiple 401k's, IRA, taxable, etc). How do I handle this?

Thank you!

[3 is actually several questions]

a. That's no problem at all, it's just more work to manage; b. either way, it doesn't matter; c. only if you somehow let yourself get emotionally attached, but I wouldn't think so; d. Either supplement with other funds, or don't use the target date fund at all.

What I mean by 'supplement' is this: instead of putting 100% into the target date fund, if you wanted to be more aggressive, you could do 70-80% in the target date, 10-15% in small cap stocks, and 10-15% in international. That would amp up the more risky areas of the asset allocation.

If you felt the target fund was too risky and wanted to reduce risk, you could do 85-90% in target date fund and 10-15% in a bond fund. This would shift the overall allocation towards bonds, and reduce risk (and likely reduce returns as well). But you have to remember that the target fund will have it's own portion of bonds - so you don't want your supplement to be too high. A 70/30 split would put far too much into bonds - even for a conservative young investor.

[disneysteve]

Where have you heard that? Do you have any credible info to support that they're somehow bad? Why do you feel that way about them?

I suspect this comes from what happened in the market meltdown a while back. Target funds, which investors thought would protect them from major market swings by being well-diversified, especially close to retirement age, saw sharp losses, like in the 40% range. That spooked a lot of people. Fortunately, it also made the fund companies take a hard look at how they were investing those funds and they've tweaked the allocation formulas and glide paths to reduce that risk factor and volatility. I think target funds today are probably safer than they were 5 years ago.

[disneysteve]

Another thing that I'd point out is that not all target funds are the same. The 2045 fund from 3 different companies will have 3 different allocations today and 3 different glide paths for the future. Look at them all and choose the one that best matches what you feel most comfortable with.

I agree with JPG that if you want to make your portfolio more or less aggressive, you need not ditch your target fund. You can supplement it instead to adjust the risk level up or down.

[jpg7n16]

I suspect this comes from what happened in the market meltdown a while back. Target funds, which investors thought would protect them from major market swings by being well-diversified, especially close to retirement age, saw sharp losses, like in the 40% range. That spooked a lot of people. Fortunately, it also made the fund companies take a hard look at how they were investing those funds and they've tweaked the allocation formulas and glide paths to reduce that risk factor and volatility. I think target funds today are probably safer than they were 5 years ago.

Hmmm well if that's the case, that wasn't really a problem with the funds, it was a problem with people's understanding of the funds. They were never designed to go 'oh you're retired? let's transfer everything to cash so that you can never lose money'

They are funds that help provide money throughout retirement (beginning at the target date). Which hopefully you'll live more than 5 years after you retire and if you want to live at least 5 more years, you'll need some amount invested in stocks. The longer you want to live, the more you need the growth potential of stocks to provide you with enough income. For many people that will be longer than 20 years. You need stocks to make the money last that long. And stock ownership carries risks.


And also a really abnormal occurence in the market. Any fund with a good percentage in stocks lost a lot.

I totally understand the desire to not lose money, but I think that's making some people draw the wrong conclusion about these funds.

I personally plan on having a good bit in stocks at retirement. And I'll just hope that I don't run into a -50% year right when I retire

[kork13]

2) ...But I also have accounts in my IRA (pre-tax) and taxable Mutual Funds (pre-existing, I don't regularly contribute to the taxable). When making asset allocation decisions, do I look at all accounts combined? How do I handle taxable vs. non-taxable.

Just to add on here, you don't necessarily have to combine everything together. In my mind, as long as each account has the allocation you want it to have, then you're set. Personally, I do run with different allocations in my different accounts, because they're designed for different purposes. In my retirement accounts, I keep it much more aggressive (~95% stock/5% bond), because I want it to have strong growth over the next 40 years and am willing to take the added risk due to my long timeframe. My taxable accounts are intended as a home downpayment fund, which I expect to use within 5-7 years, so I keep that one much more conservative (~65% stock/30% bond/5% cash). My total allocation is somewhere in between the two, but each account is set up to do what I want it to do, so I don't really worry about the total allocation between all of my accounts. Just my technique, but another option. Probably not the most tax efficient method, but it makes sense to me, so I'm good with it.

[ETF Trading Strategies]

I would have to agree with with some of the other comments that you don't need to only do one thing. You can start your asset allocation plan right now with a portion of your account. No need to put all your eggs into one strategy.