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TARGET-DATE FUNDS from Vanguard Group are, I believe, fantastic products. My first investment was a $3,000 purchase of Vanguard Target Date 2045 Fund (symbol: VTIVX) in late December 2005, shortly after I turned age 18. That was also my first Roth IRA contribution.
A target-date fund is an off-the-shelf globally diversified portfolio that automatically becomes more conservative over time. You don’t have to do any fiddling with the allocation, such as rebalancing or adjusting down your portfolio’s risk level. It’s a terrific, hands-off investment vehicle for building long-term wealth.
I’m concerned at the moment, however. Last year featured monster gains in the S&P 500 and Nasdaq 100. Even the broad Vanguard Total Stock Market ETF (VTI) returned almost 26% in 2021. By contrast, Vanguard Target Retirement 2060 Fund (VTTSX) was up “just” 16%. While that gain is nothing to sniff at, relative return differences can be powerful. And dangerous.
I fear that 401(k) plan participants will see 2021 returns early this year and simply allocate to the biggest winners. That might be fine—owning a low-cost S&P 500 index fund will probably work out okay over the decades ahead. Still, a large-cap U.S. index fund misses out on the diversification benefits that come with owning other stock market segments, such as U.S. small-cap stocks and foreign shares.
Recency bias plagues us as investors. If we aren’t careful, we can pick the hot index fund one year, and then ditch it when it has the inevitable stretch of sour returns compared to other index funds. Target-date funds help keep that kind of performance chasing in check.
My tip: As you review your portfolio, don’t get lulled into thinking that what worked over the past few years will keep winning. A diversified, low-cost approach that doesn’t require tinkering is a solid strategy for long-term investment success.
I’m struggling a bit with this. We’re still working. We both have rollover IRAs from our previous jobs with Schwab, all invested in Vanguard target date funds. Our current jobs require the use of Fidelity, so we have our 401Ks & my 457 in Fidelity target date funds. It’s about a 50-50 split right now, but if we keep working a few more years (that’s the plan), we’ll have more money in Fidelity.
I had a call with a Personal Capital adviser who said the target date funds left us overexposed in certain sectors. His argument made sense, but I really want set it and forget it investments. I don’t need to finish first on the leaderboard with our retirement funds because we both have pensions coming. I just want steady growth. I can’t decide if I want to diverge from a strategy that’s easy and has been working nicely—but probably could be at least a bit better with a little more time and effort.
Advisors will sometimes say anything to make you do what they want. I had an Etrade rep tell me it was a great time to rollover my IRA to them since the market was “up a lot”. That was after I voiced concern about liquidating it all in order to do the rollover.
Whenever a financial advisor argues that you can do better than a target-date fund, you should ask what’s the benefit — for the financial advisor. Did anyone say, “conflict of interest”?
I’ve encouraged my nephew to put 95% of his retirement contributions into a target date fund for the broad diversification and automatic rebalancing features you mention. He says they’re boring, like many things that are good for you, but understands the logic of slow and steady wins the retirement race.
I use a target date fund for my 403b contributions, with a target date in my early 80s. I’m fortunate to be in a well-funded pension plan, but it doesn’t include cost of living adjustments, so the target date fund is intended to offset inflation during a long retirement.
Thanks, Ginger. Sometimes I wish I had one account with just a TDF. So many accounts and so many funds. 403bs, 457bs, 401ks, IRA, taxable/brokerage accounts, solo 401k, Roth IRAs etc! Simplicity has its rewards.