The Ignorant Investor
Ignorance Can't Stand in the Way of My OpinionWednesday, August 16, 2006
Vanguard's Target Retirement Funds Seem a little . . . Risky
Checking out the investment mix in Vanguard's target retirement funds and noticed that they're way too equity oriented.
The targeted or "Life cycle" or "Life Point" funds concept involves setting up a single fund composed of some mix of the company's other funds. Investors don't want to have to decide on allocating their money among various large cap, small cap, bond or foreign funds. All they do is buy the Life Cycle fund and that's it. It's essentially one-stop shopping. Just pick the one that matches your target retirement date, the company says, and they'll handle the allocations and periodic rebalancings suitable for a person of your age or for your desired level of risk/volatility.
In Vanguard's case, for example, investors get what is essentially a pre-set package of their index funds allocated among the total stock market fund, Europe and Pacific foreign stock funds, and a bond fund. The fees are rock bottom, and the company's reputation stellar. That's good. But in allocating the money among the various funds, Vanguard leans heavily towards equities. Big time. Like 85% towards equities. And that's too risky for me.
Yes, I know that even when you're retired you'll want equities in my portfolio. But if your retirement date is 2010, barely three years away, should you have more than half your money in equities? Probably not. Most people won't be able to handle the volatility such an allocation brings. Even among someone middle aged like me, who is supposed to have a higher tolerance for risk, having 85% in equities would require some steely-eyed resolve and faith in the power of equities if we face a huge drop in prices (and let's face it- at some point we will). And these "target retirement" funds from Vanguard don't even include real estate, which is an important asset class for diversification.
I've seen other one-decision funds with much more conservative allocation mixes for given age ranges. I'm kind of wondering why Vanguard has gone overboard with equities in theirs. It's just odd. I like the concept because simple is always better. But it's still important to see what's under the hood so you know what you're getting.
The targeted or "Life cycle" or "Life Point" funds concept involves setting up a single fund composed of some mix of the company's other funds. Investors don't want to have to decide on allocating their money among various large cap, small cap, bond or foreign funds. All they do is buy the Life Cycle fund and that's it. It's essentially one-stop shopping. Just pick the one that matches your target retirement date, the company says, and they'll handle the allocations and periodic rebalancings suitable for a person of your age or for your desired level of risk/volatility.
In Vanguard's case, for example, investors get what is essentially a pre-set package of their index funds allocated among the total stock market fund, Europe and Pacific foreign stock funds, and a bond fund. The fees are rock bottom, and the company's reputation stellar. That's good. But in allocating the money among the various funds, Vanguard leans heavily towards equities. Big time. Like 85% towards equities. And that's too risky for me.
Yes, I know that even when you're retired you'll want equities in my portfolio. But if your retirement date is 2010, barely three years away, should you have more than half your money in equities? Probably not. Most people won't be able to handle the volatility such an allocation brings. Even among someone middle aged like me, who is supposed to have a higher tolerance for risk, having 85% in equities would require some steely-eyed resolve and faith in the power of equities if we face a huge drop in prices (and let's face it- at some point we will). And these "target retirement" funds from Vanguard don't even include real estate, which is an important asset class for diversification.
I've seen other one-decision funds with much more conservative allocation mixes for given age ranges. I'm kind of wondering why Vanguard has gone overboard with equities in theirs. It's just odd. I like the concept because simple is always better. But it's still important to see what's under the hood so you know what you're getting.
posted by Worker 17 # 1:54 PM 
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