Friday, March 06, 2015

Target Date Funds (TAG 401k Fund)

The Vanguard Target Date Funds, which most Animation Guild 401(k) participants are using, will be changing their investment lineups in coming months.

Right now, the Target Date Funds stock allocations are invested 70% in Total U.S. Stock Market and 30% in International Stocks. By the end of 2015, that will change to

60% U.S. stocks
40% International stocks

The new allocation will bring Target Date funds closer to the actual world market, which is (approximately) 50% U.S. and 50% everything else.

As for bonds, the current allocation is: 80% Total Bond Market (U.S.), and 20% Total International Bond. The newer lineup will be

70% U.S. Bond
30% International Bond

The intent is to bring more diversification to the Target Date portfolios, which these changes do. The costs of the TAG 401(k) Target Date Funds will remain low.

There's a bajillion different investment strategies, and all of them have their points, The Target Date Funds are good for most people because they allow you to set up a program and then not think about it anymore. A professional team is rebalancing a broadly diversified mix of stocks and bonds, and it ceases being a worry. (Okay, it ceases being a major worry.)

You could also use actively-managed funds, but they will probably -- over time -- fail to outperform market index funds because they cost more, and costs kill active funds' advantages. You could tilt to small cap or value, but that strategy might under-perform the total market for years ... or decades.

So if you are somebody whose head throbs trying to figure out which investment road to take, Target Date funds are probably a good highway to travel. The key is sticking with it.


Steven Kaplan said...

Important to note, these rebalances are taking place within each of the funds themselves, but do not reflect the holding mixture of Stocks-to-Bonds in each fund.

Take the Target Retirement 2035 for example ..

That fund current holds 82% stocks and 18% bonds mix. Checking the stocks, they are split between two index funds: Total Stock Market and Total International Stock Market. The same can be said for Bonds.

It's the mix of those two same-class index funds within the Target Retirement Fund that is going to change.

Celshader said...

Thanks for posting this info.

I switched to Vanguard's LifeStrategy Funds in early 2013 for my IRAs because I wanted to partially automate my portfolio. At the time, I was bummed that LifeStrategy had no TIPS and a lower international allocation, but the mindlessness and convenience of an automated all-in-one fund won out.

I've been happy with the LifeStrategy funds for the past two years. I could ignore my portfolio, focus on making regular contributions to it, and not worry about rebalancing.

I was initially bummed to learn that LifeStrategy would also be increasing its international allocation. Even though the new allocation was closer to what I myself would have wanted, I had hoped that the LifeStrategy funds were immutable, like the Vanguard Balanced Index fund.

Despite this, I have decided to do nothing and to stick with the LifeStrategy funds. They remain mindless, convenient and cheap, which is what I want in a portfolio right now.

So if you are somebody whose head throbs trying to figure out which investment road to take, Target Date funds are probably a good highway to travel. The key is sticking with it.

Yep. Also, in the beginning, one's savings rate trumps one's asset allocation. The know-nothing artist who saves $18,000/year will initially do better than the investing-savvy artist who saves only $1000/year.

Years later, when the ups-and-downs of the portfolio exceed $18,000/year, the know-nothing artist may want to learn more about asset allocation. If the know-nothing artist has no interest in learning, though, sticking with one of the Vanguard Target Date funds should be good enough.

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