Part 4: Good Advice, Bad Advice, and News About Investment People (continued)
Target Date Funds Revisited – Good or Bad Advice?
Here’s an article to check out:
After Losses, Target-Date Funds Draw Scrutiny
In Posts 23 and 39 I talked about using the Vanguard Target Retirement 2050 Fund as a one fund answer if you are way too busy to even think about looking at your portfolio for ten minutes a year. Was this a bad recommendation?
No.
If not, then why is Vanguard mentioned in this article?
Vanguard is guilty of having 52% of the Target Retirement 2010 Fund portfolio in equities in 2008. Consequently, they got pasted with a 21% loss as a result. Other funds, offered by Wells Fargo and Deutsche Bank, had more bonds in their funds with the same target year. Those funds suffered lower losses. I guess the author of the article is implying that the Target 2010 funds should have had much lower levels of stocks in their portfolios, because retirees want safety. The author mentions that those who buy target date funds are usually the investors who are the least informed. In other words, the buyers thought they were buying something that was very safe, and found out that having 52% of your money in equities could lead to a big loss.
Vanguard doesn’t have excessive fees. The annual expense ratio of the 2010 fund is .19%, which is minuscule. So you can’t fault them there.
Vanguard has 11% of the fund portfolio in foreign stocks, which isn’t excessive.
Vanguard uses the Total Bond Market II fund and Treasury Inflation Protected Securities for the bond portion of the portfolio in the 2010 fund. This is not a risky bond portfolio.
Just to put things into perspective, this fund has been around for less than 5 years. It has a three year annualized loss of .4%, which ranks it in the top 24% of all funds in this category. This means that 76% of the Target 2010 funds did worse. But I agree that it is a big shock for some old guy who doesn’t know much about stocks to lose 21% a few years before he retires.
So I’m all for the regulators forcing the fund companies to disclose the exact composition of their target date portfolios before they sell them. Personally, when I retire, I would prefer a fund that is 50/50 stocks to bonds, rather than 10/90. But many people won’t, and they should know what they are buying.
Now, let’s get back to the fund I recommended, the Vanguard Target Date Fund 2050. If you re-read posts 23 and 39, you will see that I don’t recommend it unless you are so strapped for time that you cannot devote a few minutes a year to maintaining a portfolio with more funds.
For those of you who are in that position, it’s a much better choice than most of the other Target Date 2050 Funds. Low fees (expense ratio of .19%) and reasonable asset allocation for young people (10% bonds, 72% US stocks and 18% foreign stocks). It gets more conservative as you get older, so that within seven years of 2050, the fund’s asset allocation will resemble the Vanguard Target Retirement Income Fund. (66% bonds, 24% US stocks and 10% foreign stocks).
How did this fund do in 2008? It lost 34%. That’s a big loss, but it’s not unexpected. After all, 90% of the fund holdings are equities.
Let’s look at how the fund held up compared to its peer group. The fund has been around for less than five years. It has a three year annualized return of -2.58%. This return is ranked in the top 1% of all funds in its category.
So I’m good with my recommendation.
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