Switching Funds

[keelerjr12]

A little background before I get to my question:

23 years old
EF: $4k
Loan @ 2.99%: $25k (student and car loan) paying at $1k/month
Net salary: $32k/yr
Roth IRA: Currently at $3k, maxing at $5.5k/yr

Anyway, I am currently invested in VFFVX - Vanguard Target Date Fund 2055, which has done pretty well. It has an asset allocation of 90% stock and 10% bonds. This fund has not been around long so compared to the benchmarks it's done well. However, when looking at performance of most target date funds through Vanguard, most funds returned roughly 6-7% since inception.

I'm debating on doing away with VFFVX and investing my money in the Vanguard S&P500 Index Investor Fund (VFINX). I understand that most target-date funds are made up of other index funds, but being so young I feel that I can be very aggressive and achieve greater gains (8-10+%).

In addition, I noticed VFINX pays dividends quarterly, whereas VFFVX only pays dividends annually. Should this affect my decision to invest solely in an S&P500 index fund or would you recommend to stick with a target-date fund to have some diversification?

[JustBill]

I assume you're asking about VG500 swap out for your Roth. You're in the right family for low ER investing, and that alone will have a tremendous impact on your results a mere 45 years down-the-road.

As for TD2055, I'm not sure at your age I would be contributing anything to bonds whatsoever. Two reasons are the time horizon you have, and the historic low interest rates we currently experience are likely (IMO) to send bond returns backwards.

Regarding distribution of dividends, if this is in a Roth it's irrelevant. Frequent distribution, again IMO, heightens the likely hood that one will "buy a dividend" upon purchase of shares.

[keelerjr12]

I assume you're asking about VG500 swap out for your Roth. You're in the right family for low ER investing, and that alone will have a tremendous impact on your results a mere 45 years down-the-road.

As for TD2055, I'm not sure at your age I would be contributing anything to bonds whatsoever. Two reasons are the time horizon you have, and the historic low interest rates we currently experience are likely (IMO) to send bond returns backwards.

Regarding distribution of dividends, if this is in a Roth it's irrelevant. Frequent distribution, again IMO, heightens the likely hood that one will "buy a dividend" upon purchase of shares.

JustBill,

So your recommendation would be to sell the 100 shares I have in the TD2055 fund and purchase shares in the VG500 (VFINX)?

[Petunia 100]

I do not think an S & P 500 Index fund all by itself is a good portfolio. It includes no US mid or small caps, it includes no foreign. If you want to eliminate bonds completely, consider the Total World Index fund, or consider keeping what you have until you have accumulated 6k, then switch into Total Stock Market and Total International Stock Market. If you don't want to hold them 50/50, just keep adding to Total Stock Market until you get to your desired weight.

[JustBill]

JustBill,

So your recommendation would be to sell the 100 shares I have in the TD2055 fund and purchase shares in the VG500 (VFINX)?

Have you looked at VTSMX? That is specifically the direction I would go, but your question was between 500 & 2055.

[feh]

If you want to go 100% US equities, I'd recommend the total market (VTSMX/VTI).

I also recommend you have some international stock. Given your age, 100% in equities is probably ok, although some people will say you should have something in bonds (even just 10%) for rebalancing purposes.

I suggest you visit bogleheads - lots of people to help you over there.

[keelerjr12]

Thank you everyone. You opened me up to more funds. I'm now looking at Vanguard's Total Stock Market and Total International Indexes with 60% domestic and 40% international. I understand this carries a lot of risk, but I have time to recover.