Equity Income or Target fund 2045?

[savingdealz]

Right now I have Equity Income (PRFDX) with Trowe Price. I am thinking to change it to Target fund 2045 in Trowe Price. Do you think I should change or not? I am 30 years old now.

[Petunia 100]

Right now I have Equity Income (PRFDX) with Trowe Price. I am thinking to change it to Target fund 2045 in Trowe Price. Do you think I should change or not? I am 30 years old now.

It sounds as though you do not have an asset allocation plan? If you do not want to make one, then IMO yes, you are much better off with a fund-of-funds, such as a Target Retirement Fund.

Asset allocation refers to a plan to own x% stocks, x% bonds, etc. What you own now is a large cap value fund. That's fine, but it is not a complete portfolio all by itself. The target retirement fund will include growth and value stocks, large, mid, and small caps, some foreign stocks, and some bonds.

The T. Rowe Price Target Retirement Funds are pretty good funds. I prefer the Vanguard TR funds myself, but T. Rowe is also a solid choice.

[savingdealz]

You are right. I picked this fund because somebody suggested it in some investing forums in 2008. I didn't know how to invest. I just bought this fund. So far, I have earned some dividends. How do you know my fund is a large cap value fund? If I want to invest in another fund. What fund should I buy? Thank you so much!

[Petunia 100]

You are right. I picked this fund because somebody suggested it in some investing forums in 2008. I didn't know how to invest. I just bought this fund. So far, I have earned some dividends. How do you know my fund is a large cap value fund? If I want to invest in another fund. What fund should I buy? Thank you so much!

If you go here, you can see a lot of info about your fund:

PRFDX T. Rowe Price Equity Income Fund PRFDX Quote Price News

For example, the expense ratio is .68% per year. That's pretty good, but not rock bottom. And there's no load of course, so someone steered you in the right direction there. Also, you can see that it is an actively managed fund, meaning the manager is choosing which securities to buy and sell. The manager here seems to be right more than s/he is wrong, because the fund is performing well relative to other large cap funds.

In general, a large cap value fund is going to own a lot of banks, utilities, and other dividend rich companies. It will likely own some stocks considered to be growth stocks, but bought at a discount (typical value strategy).

Do you own this fund in a taxable account or in an IRA? I ask because selling in a taxable account might trigger capital gains taxes. You'll want to consider the tax implications before making any sell decisions.

So all in all, it is an OK fund to own but not as an only fund. If you want to own only 1 fund, then a Target Retirement Fund is a better choice.

You're very welcome. Investing can be confusing at first, especially if there are a lot of new terms being thrown at you. If you are interested in learning more, here as an excellent place to start:

Investment Education, Investing 101, Investment Basics, Investment Classroom, Learn to Invest | Morningstar

The "classes" are free, though registration is required.

[savingdealz]

Thanks, it is my roth IRA. Do you think that I should keep Equity Income until 65 years old? Right now I have only this fund. I am looking for the second fund. I think I should read the link you gave. Thank you so much for your help ^_^

[dontgopoor]

T Rowe is a very good family of funds. You may also want to consider the Vanguard family as well for the Target Date funds.

[jpg7n16]

Right now I have only this fund. I am looking for the second fund.

well target date funds, because they have a plan based on overall asset allocation, are usually the entire portfolio. If you have 1/2 in Equity Income, and 1/2 in a Target fund, you are off track from their asset allocation standpoint -- being much more equity heavy overall.

You should probably go with the target date fund as your whole portfolio, unless you have a specific reason for adjusting the overall asset allocation.

SEC.gov -- Investor Bulletin:* Target Date Retirement Funds

[savingdealz]

If you have 1/2 in Equity Income, and 1/2 in a Target fund, you are off track from their asset allocation standpoint -- being much more equity heavy overall.

Would you explain about this please? I dont understand clearly this...Do you mean that I need to have 1/2 in Equity Income and 1/2 in Target Date Fund?

What do you mean "being much more equity heavy overall" ? is it good or bad? safe or dangerous when I reach 70 years?

For example, the expense ratio is .68% per year. That's pretty good, but not rock bottom. And there's no load of course, so someone steered you in the right direction there. Also, you can see that it is an actively managed fund, meaning the manager is choosing which securities to buy and sell. The manager here seems to be right more than s/he is wrong, because the fund is performing well relative to other large cap funds.

Does he mean that I should be careful about this fund because if the manager made a wrong choice in the future, the Equity Income will be a bad choice? In addition, if the Equity goes down in the future, Should I change to another fund or still keep the fund?

Thank you very much for your help

[jpg7n16]

Sure. Asset allocation is the primary determining factor of how much risk you will take and returns you will get.

It's worth reading this article to get a better understanding of the strategy -- Achieving Optimal Asset Allocation


Using Instant X-Ray Stock Fund Investment Portfolio Holdings Free Analysis Research Tool - Morningstar let's evaluate what the two portfolios would look like.

If you go with the Target Date fund as your whole portfolio, here is the overall allocation:
Domestic Stock: 60%
International Stock: 29%
Bonds: 7%
Cash: 4%

Which is the asset allocation strategy T Rowe price feels is appropriate for someone retiring around 2045.

If you go with 1/2 TRRKX and 1/2 PRFDX:
Domestic Stock: 75%
International Stock: 17%
Bonds: 4%
Cash: 4%

So whereas the target date fund has a higher bond and international stock allocation, when you combine the two funds together, your overall mix shifts largely to domestic equities -- hence my statement that you would be off track compared to their targeted allocation.

And the closer you get to retirement, the more amplified the difference will be - particularly around bond allocation. Most people shift to more bonds (aka more conservative) as they get closer to retirement. Your account wouldn't shift as much, as half your account would stay in stocks no matter what. Effectively, you would always have about half the bond allocation that you should.