Ah, mutual fund companies love your money, and fully realize many people are lazy, busy, or just don’t want to deal with money. So they created the All-in-One fund. The one I like the best for our purposes is the Vanguard Target Retirement 2045 Fund (VTIVX). I don’t really care about the dates on the funds, as each company does things a bit differently. Let’s look under the hood. Currently, VTIVX has the following underlying funds:
Vanguard Total Stock Market Index Fund (VTSMX) – 70.4%
Vanguard Total Bond Market Index Fund (VBFMX) – 12.1%
Vanguard European Stock Index Fund (VEURX) – 11.8%
Vanguard Pacific Stock Index Fund (VPACX) – 5.7%
Breaking that down roughly gives you:
Actual Asset Allocation
46% Large Cap
18% Mid Cap
6% Micro/Small Cap
12% Euro
6% Pacific (Japan mostly)
12% Bonds
There is no Emerging Markets at all, and only a small amount in Small Cap stocks. Those, along with a more value focus, are what I felt was missing from this mix, and looked to achieve by using more one fund. In addition, there is no ability to place more tax-inefficient assets into tax-sheltered accounts. Still, with this there is no rebalancing to worry about, the allocation adjusts with time, and the annual expense ratio is a low $21 per $10,000, or 0.21%.
But wait! Just as I write this, Brian of Our Money alerts me that Vanguard is changing the makeup of their Target funds, as well as adding some more dates.
From the press release:
* The funds’ equity allocation paths will be modified to provide a somewhat greater exposure to equities over a longer period of time. The result will be an increase of roughly 10 to 20 percentage points per fund, depending on the target retirement date.
* Vanguard Emerging Markets Stock Index Fund will be added to each of the funds (representing roughly 1% to 2.5% of assets), further diversifying their exposure to international markets.
The first bullet about having less bonds and more equities doesn’t really concern me, as again you shouldn’t just go by the dates, but examine the asset allocation underneath. If it gets too aggressive, simply switch to another fund with an earlier date like 2035. Adding a bit of Emerging Markets is nice, but it’s still only a small change.
The overwhelming appeal of this fund remains that (1) even though it is simple, you could easily do worse if you mess around with actively-managed funds or go nuts trading individual stocks, and (2) you don’t have to think about what to buy. Got your annual bonus, and want to invest it? Buy some VTIVX. Think you can set aside $100 every month? Buy some VTIVX. Hubby sleeping with your best friend? Hire a private investigator and blackmail him. Then take the money… and buy some VTIVX. =)
—
What were the other options again?
Portfolio Option #1 – Slice and Dice
Portfolio Option #2: Keep It Simple
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That *is* tempting with their new allocation… still no REIT or gold. What about the “value” stocks? I suppose the value class is built in to their other categories.
Vanguard is certainly making their TR funds much more attractive than the alternatives. I know where i’m putting my IRA contribution.
I just changed my Roth IRA from Vanguard’s 500 Index Fund to the Target Retirement Fund 2045. I did it after reading “The Coffeehouse Investor” by Bill Schultheis. I also changed my 401k around at work and put everything in index funds, but a little more spread out. I think it’s 50% total stock market, 15% small cap, 15% international, 15% mid-cap and 5% 500 index.
We’ll see how it goes! I know I think about it WAY less though. I’m not so stressed out about it so that I can “get on with my life” as the book recommends.
Fidelity and Vanguard are adding more stocks to those life-cycle funds because T Rowe Price has been outperforming them.
http://finance.yahoo.com/q/bc?s=VTIVX&t=3m&l=on&z=m&q=l&c=trrdx
I’m pretty happy to hear they’re going a bit more aggressive with the funds. I chose the 2045 fund as well – not b/c that’s when I want to retire, I hope to do it much ealier – but b/c that fund make-up resembled my risk tolerance. I’m happy to hear of the change.
holy smoke! i signed up cuz i saw it on your site
The WSJ said just today that Vanguard has announced it is adding some Emerging Markets to its life-cycle funds. The amount is from 1%-2.5% depending on the fund. They also said that they are going to reduce the bond allocation in some of their life-cycle funds.
People apparently want more risk.
How did you calculate the actual asset allocation?
VTIVX is not a perfect fund of fund, but it’s good enough for lazy people. It’s also good for people with limited funds.
Wes – Yes, no REIT, perhaps that is Bogle’s influence. He doesn’t see REIT as a separate asset class. It also only has the market-weighted amount of Value stocks.
AA – Yeah, even though that is only because TRP has more stocks in it’s funds, I believe you are in correct in that it is pressure from people. Many of the same people who buy these funds are the same people that would buy TRP simply because it has a better recent historical return. Not all people, but enough to make a big difference.
trip – You didn’t read my whole post, did ya? 😉
Mike – The overall US stock market, which VTSMX tracks, is roughly 65% Large Cap, 25% Mid Cap, and 10 Micro/Small Cap. I just used those to estimate.
This mutual fund stuff is really dull.
Where’s the fun stuff: free money?
— zzzz
LOL. Your wish is my command. Publishing now…
Jon-
Those life cycle funds while like ron popell “set it and forget it” earn really low low returns compared with other funds. True you have to be more active in ur management but over the long term, wouldnt u give up some time so u can retire earlier and richer?
You should invest more outside of Japan in Asia. They are more up and coming and Japan has huge demographic problems that are going to bit it in the ass.
Then again maybe u have a really low risk tolerance..
Every All-in-One fund is not the same. As for Vanguard’s version, as they are simply a group of index funds, so I fail to see how they could possibly have ‘low low returns’. By definition, they all track indexes. Since the expense ratio is so low, I would bet they actually *beat* most other funds. It is simply a pre-defined asset allocation.
Do I think I can do better with some more work? Probably. Check out my other options.
I don’t see how risk tolerance has anything to do with choosing one fund or 100 funds. Risk remains a function of asset allocation, and this fund still has a large component of domestic and foreign equities.
I personally like your option 2, reasons:
1) You have better diversification including REITs. You have more control on how you want to invest. I know there is some overlap but that can be reduced in future as your assets increase.
2) Expense ratio is not all that bad.
3) You don’t need to keep changing your strategy when you have more money. Yes I believe you’ll be richer 🙂
Once again, thanks for sharing this with rest of us. I just ordered couple of books you mentioned earlier.
If my work used Vanguard instead of Fidelity for their 401 plan, I’d definitely go this route.
But Fidelity charges too much of a premium for their life-cycle funds, which are full of actively managed funds on top of that!
As for the Roth and taxable account, I just use Vanguard index funds to make up for the asset classes that have no reasonable offerings in my 401, with the least tax-efficient of those in the Roth of course.
But, yeah, I can see how this fund might be great for someone else, especially if either they’re just starting out with $3K in their Roth or if their company’s plan is with Vanguard!
Curses. Yeah I got all excited. RTWP Trip!
Jonathan
Have you ever looked at http://www.scottburns.com
and his couch potato portfolio??
I’ve been meaning to ask this for a long time and this thread finally prompted me — can one of you wise people give me a clear, concise answer? I invest in Vanguard’s 2035 Target Retirement Fund but, separately, I have $$ in many of the funds that make up the 2035 fund. Is it wise to do this? My thinking is that if the Total Stock Market Index fund does great, wouldn’t I want to own that fund individually AND in a fund-of-funds?
Rick,
Think of it this way: Any fund you own both in the fund of funds as well as individually will (to state the obvious) be weighted more in your overall portfolio than it is in the target retirement fund.
So, if your personal tastes lean more toward US equities than what is already provided in the target fund, then yes, owning enough TSM index separately to balance out your overall portfolio toward your desired allocation is fine.
Likewise, if you feel the target fund is already too heavy on market-weighted US equities for your tastes, then of course owning the TSM index separately would not be true to your best interest.
It all depends on what you’ve decided is the asset allocation mix for you.
I really dig these funds, and have moved nearly all of our taxable account into the Vanguard 2035 fund.
To the people commenting on higher returns through individual fund picking; that’s great in theory. In reality, there are very few people who have the discipline to pick a good allocation and then stick to it. This is precisely how people get in trouble in their investments.
Rick: If you think you can get better returns with the same risk by investing in the Vanguard TSMI fund, why not put everything in that fund? Your strategy makes sense if you’ve decided that you want a more equity oriented portfolio, but just bear in mind that this increases your risk.
The hope is that the person who picked the TR 2035 fund’s allocation did so in such a manner as to maximize risk/return. You can almost certainly get higher return using another fund by taking on more risk. Or you can decrease your risk by accepting lower returns.
But if you’ve decided the 2035 fund has the appropriate risk level for you, then by investing in the constituent funds in varying (and likely somewhat haphazard) amounts you’re defeating the allocation of the 2035 fund.
In the past, I’ve owned some foreign funds in addition to the 2035 fund because I wan’t happy with the low foreign exposure of the TR funds, but with these changes, I may be able to dump my foreign funds and go entirely TR.
while these life cycle funds will trakc the market…lets say you get the market return…average 10%…
What I am saying is you could pick funds that get a much much higher return than that…some mutual funds have returns over their life time of 20% or more.
Yes, and if I had a time machine so I could go back and pick those funds I’d be rich =) If only everything were that easy.
What exactly are “good investments” for a Roth IRA? Since it’s tax-free, I’d assume you could go buck-wild on funds that have high turnover/high capital gains distributions?
Jonathan,
If you would have chosen this option what fund would you have put your taxable account money into (since TR2045 is pretty tax-inefficient)?
The new Vanguard Target Retirement funds were launched today.
I personally use a slice-and-dice approach with other Vanguard funds for my own Roth IRA, but I think I’m going to establish my fiancee’s Roth with $4000 in the new 2050 fund (VFIFX).
Once we have enough assets in her Roth we’ll go slice-and-dice to add more small-cap and emerging markets exposure, but for now, I think we would be hard pressed to find better diversification and lower cost with just $4K assets to play with.