Any BSD on here have Target Date Fund Recos? I’m interested in throwing in a dollar cost average recurring buy to help with market swings.
http://www.forbes.com/sites/baldwin/2013/06/05/the-trouble-with-target-funds/?partner=yahoomag
Whoever invented target retirement funds, the portfolios that automatically turn more conservative as you age, must be some kind of marketing genius. There are 2,019 of these things on Morningstar, if you count all the share classes. The category has swallowed 13% of 401(k) dollars.
Whoever is buying the funds would not be at the genius level. They have not figured out that they are getting ripped off.
The sales pitch goes like this: When you are young, you can withstand a lot of investment risk and your portfolio should have a high dose of stocks. When you are old, you should have half or more of your savings in bonds. So the fund sets your portfolio on a 40-year “glide path.”
The image conjured up: In your bold youth you soar to the heights. As you turn 67 you coast into a worry-free retirement where, to judge from the photos used in ads, the main activity is fishing with your grandson.
The problem with target funds is that they carry stiff expense burdens. Let’s illustrate this by picking on BlackRock, whose LifePath 2040, intended for a saver who is now 40 or so, is typical of the genre. The prospectus discloses that your projected ten-year expense bill (assuming the account grows at 5%) totes to $2,478 per $10,000 invested.
At 40 you should have $300,000 salted away, if you want any prospect of fishing at age 67. On this sum BlackRock is proposing to soak you $74,340 between now and when you turn 50.
For this you don’t get market-beating security selection. Over the past five years the BlackRock 2040 fund has averaged a pathetic 1.9% annual return. All you’re getting is that glide path, a gradually declining allocation to the stock market.
Now consider Vanguard Group, which uses low-cost index funds to construct its target portfolios. Its offering is more economical, but not as economical as it should be. Evidently the tradition of gouging target fund customers is so strong on Wall Street that even Vanguard can’t resist it.
The Vanguard Target Retirement 2040 has a ten-year cost of $230 per $10,000 invested, less than a tenth that of the BlackRock fund. But why pay even $230 if you can get the same portfolio cheaper?
The prospectus for Vanguard Target 2040 reveals that the fund consists of a 62.7% allocation to the Vanguard Total Stock Market Index Fund (VTSAX), a 27.3% allocation to the Vanguard Total International Stock Index Fund (VTIAX) and a 10% allocation to the Vanguard Total Bond Market Index Fund (VBTLX).
If you have at least $100,000 to invest, you can replicate these three positions while qualifying for the ultracheap Admiral share class for each. Knock off Vanguard’s target fund with a do-it-yourself mix of Vanguard’s own funds and you’ll get the ten-year cost down to $109 per $10,000 invested.
The Vanguard target fund will not make you rich, but it will probably leave you capable of paying for bait. Its performance over the past five years averages to 4.8% a year. That’s not far from what I would expect it to earn, on average, between now and 2040. The do-it-yourself version will average a tenth of a percentage point more.
To follow the glide path, put a disproportionate share of your new 401(k) contributions into fixed income. You don’t have to be scientific about it. Review your balances once a year and get your allocations reasonably close to the ones in the fund you’re imitating.
If your 401(k) plan doesn’t have cheap index funds, your best bet may be to use the plan’s brokerage window to buy exchange-traded funds. Tickers for Vanguard ETFs that match the funds cited above are VTI for Total Stock Market , VXUS for Total International Stock and BND for Total Bond Market.