Index Funds Vs Target-Date Funds: How Can You Decide Which Is Right For You?

[dczech09]

I really love your piece but then how Can you hold firm during troubled markets?

I do not view troubled markets as being necessarily a bad thing. The stock market fluctuates normally, and as a result, mutual funds and index funds fluctuate as well. It is completely normal.

When the market is down, you can buy your investments at a discount. Then when it goes back up, you ride it up and make even more money. That's the power of dollar-cost-averaging.

Another way to look at it is this...

Let's say your investment horizon is 20 years (so you have 20 years until retirement). What happens today does not necessarily matter. You still have 20 years to make up for it.

If you are closer to retirement age, you should not be so heavily invested in stocks that a market crash completely wipes you out. As you age, your investments should gradually become more conservative, that way your risk profile is lower.

[feh]

I like to keep expenses as low as possible. To that end, I use index funds and rebalance myself.

[parafly]

In my experience, it comes down to the person's specific investment options.

In my Roth and Rollover IRAs at Vanguard, I invest in a target date fund because the expenses are low and on par with the underlying index funds. I am comfortable with the current asset allocation of the fund and hope that trend will continue over the coming decades. If the asset allocation ever starts to deviate from my desired comfort level, I can always transfer to index funds and control the asset allocation myself.

In my 401K, the target date funds available to me are about 4 to 5 times more expensive than the index fund options. In this case, I invest in the index funds and manage the asset allocation myself. It's a no brainer as long as you know what you are doing.

[Petunia 100]

However, the minimum for their Target funds is only $1,000. That makes them a great starting point for people. Rather than needing $3,000 to invest in any of the individual funds that make up the Target fund, with just $1,000, you can have a piece of all of them.

Also, I don't believe Vanguard adds any additional expenses with the Target funds. You pay the ERs of the component funds. If anyone knows this to not be true, please post a link to the info.

You are correct, that is absolutely true. However, what is also true is that Vanguard offers two share classes to individual investors. "Investor" shares have low expense ratios, but "admiral" shares are even lower. The target funds use only investor shares, no matter how much you have invested. With individual index funds, admiral shares are generally available when your fund balance reaches 10k.

Even so, IMO, the Vanguard Target Retirement Funds are excellent. I hold shares of the 2030 fund myself.

[Like2Plan]

I like to keep expenses as low as possible. To that end, I use index funds and rebalance myself.

This is a question that I have been pondering lately: How often do you rebalance? And, do you do it only at scheduled intervals?

Background: DH and I used to be invested mainly in target funds, but with DHs latest job the only good 401k choices with low ERs are 100% stock index funds. I have been thinking of switching to either a 2 (or3) index fund portfolio, but haven't made any changes, yet.

[BuckyBadger]

This is a question that I have been pondering lately: How often do you rebalance? And, do you do it only at scheduled intervals?

Background: DH and I used to be invested mainly in target funds, but with DHs latest job the only good 401k choices with low ERs are 100% stock index funds. I have been thinking of switching to either a 2 (or3) index fund portfolio, but haven't made any changes, yet.

I rebalance whenever my allocation drifts by more that 5% from target. I enter my numbers once a month to determine this. If i can balance by changing my contribution rather than doing a "hard rebalance" and actuality song and then buying something I'll do that instead.

[feh]

This is a question that I have been pondering lately: How often do you rebalance? And, do you do it only at scheduled intervals?

Background: DH and I used to be invested mainly in target funds, but with DHs latest job the only good 401k choices with low ERs are 100% stock index funds. I have been thinking of switching to either a 2 (or3) index fund portfolio, but haven't made any changes, yet.

You can do it on a time basis, or when things drift a certain percentage, as Bucky says above.

If you're still contributing, you should be able to "rebalance" with contributions. If you do it by time, a common interval is annually. I've seen studies that indicate every 4 years is more than enough.

My 401K also doesn't have the best options. As a result, it holds only an S&P 500 index fund.

[clatoden99]

I like to keep expenses as low as possible. To that end, I use index funds and rebalance myself.

The advent of ETF based index investing has increased short term volatility due to the ease they provide large investors such as hedge funds and pension funds and HFT traders to move quickly in and out of very large positions. Any time there is an increase in volume there can be a corresponding increase in volitility.

There is also some worry about commodity ETFs such as the GLD having liquidity issues during periods of extremely high volume and rapid moves in the downward direction. Also during periods of high demand for GLD there has been some talk as to if there is enough gold production to keep up with GLD's demand for gold but that seems to be a smaller issue.