Real Life Example of a Major Target Date Flaw

[Anonymous]

Lets Take the Vanguard 2025 Fund. Since it buckets five years of birth dates at once into a Target date, someone born in 1962 this would be the default target date if you do not select funds on your own. It is also what Vanguard would suggest.

However, it is not actually a 2025 Retirement date. It is for people retiring between Target-Date 2021-2025.

As of today it is very conservative with 52.54 percent in stock and 46.46 bonds. It has been aggressively selling stocks in the last ten years as part of the glide path as you are supposed to be retiring between 2021 and 2025. However, normal retirement age per SS for someone born in 1962 is actually 67 in 2029 and the average age per Fidelity people start RMDs is 73. Which is 2035.

So a person born 1962 should at least be the Vanguard 2035 fund. Which is 69.46 stock and 29.62 bonds currently still pretty low risk given age to RMDs.

The 2025 fund last ten years is 5.96 percent
The 2035 fund last ten years is 7.3 percent

To be honest, the 2040 Target date is actually better (for people retiring between 2038 and 2042), given RMDs will move to age 75 for someone born 1962 which is 2037 I would argue this might be best choice as almost lines up.

The 2040 last ten years is 7.55 percent and I suspect higher as it got more juice from Bull Market from 2009 to present as more stocks. But it is still is moving towards bonds pretty heavily. But was less bond heavy in the 2022 bond crash.

My opinion the Vanguard 2025 fund is insanely too much bond focused for someone five years from retirement and missed a large amount of the stock gains of last ten years. Honestly, it is has been a flop since 2009. Selling stocks in a rising market to buy bonds at record low interest rates only to get crushed in 2022. The glide started too early.

https://investor.vanguard.com/investment-products/mutual-funds/profile/vttvx

[Anonymous]

Your argument is based on arguing over whether a target date 2025 fund is appropriate for someone starting withdrawals in a year other than 2025, with dash of rear view mirror asset allocation based on the worst year for bonds perhaps ever.

I guess if your point is people should think about whether their target date funds match their plans and risk tolerance that’s reasonable, but if you are suggesting that target date funds are all a terrible idea then you have a ways to go.

[Anonymous]

Target funds are very conservative. I learned that the hard way.

[Anonymous]

Probably the kind of people that pick a target date fund without doing further research tend towards the conservative.

And I don’t think it’s fair to look argue on the basis of recent returns. If the stock market had crashed instead of going to record highs then the portfolio would have done much better than the riskier one you would recommend.

[Anonymous]

OP I read an article where doing something not recommended such as layering Target Date Funds back tested performed better no risk.

Let’s say retiring 2025 they had 2025, 2030,2035, 2040, 2045 funds with 20 percent each.

Strategy is to start RMDs with with the lower years RMDs and don’t tough night year RMDs till their early 80s.

You are not withdrawing all your funds on retirement date

[Anonymous]

Anonymous wrote:Target funds are very conservative. I learned that the hard way.

not just the bonds it is the international stocks that drag them
Down.

A plain old 60/40 find would do better as no international

[Anonymous]

Anonymous wrote:

Anonymous wrote:Target funds are very conservative. I learned that the hard way.

not just the bonds it is the international stocks that drag them
Down.

A plain old 60/40 find would do better as no international

This is all ex post facto reasoning! If you decided you didn't want international stocks as part of your asset allocation, why would you include them? It's not necessarily a growth thing per se, it's about diversification. This is like getting mad after buying a truck and it's not as fast as a sports car. Or buying a sports car and it can't haul as much as a truck. They do different things! And I am sure you can find a 5 year period where the international portion of a fund outperformed the US stocks.

If you decide your risk/diversification preference is different than the way TR funds are setup then do something different.

[Anonymous]

Your best bet is to just invest 100% allocation to S&P 500 index for as long as possible and then at retirement structure a bond ladder so you can weather a stretch of a few down years in the S&P if needed without having to sell low. The S&P outperforms everything and builds your nest egg better than anything else. Why be conservative at all until you are just a few years out from retiring? Look at how quickly it takes for the S&P to rebound after a market shock like 2001, 2008, 2020. American big business always rebounds and reacts to increase shareholder value and so much wealth is tied to it that the US Government has to adjust the macro environment to enable a rebound to preserve wealth, jobs, power, and social stability. Especially in the era we are now entering where pensions are replaced by market assets through 401ks, IRAs, etc.

[Anonymous]

Anonymous wrote:Your best bet is to just invest 100% allocation to S&P 500 index for as long as possible and then at retirement structure a bond ladder so you can weather a stretch of a few down years in the S&P if needed without having to sell low. The S&P outperforms everything and builds your nest egg better than anything else. Why be conservative at all until you are just a few years out from retiring? Look at how quickly it takes for the S&P to rebound after a market shock like 2001, 2008, 2020. American big business always rebounds and reacts to increase shareholder value and so much wealth is tied to it that the US Government has to adjust the macro environment to enable a rebound to preserve wealth, jobs, power, and social stability. Especially in the era we are now entering where pensions are replaced by market assets through 401ks, IRAs, etc.

So you don’t believe the risk premium is compensating for risk at all?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Your best bet is to just invest 100% allocation to S&P 500 index for as long as possible and then at retirement structure a bond ladder so you can weather a stretch of a few down years in the S&P if needed without having to sell low. The S&P outperforms everything and builds your nest egg better than anything else. Why be conservative at all until you are just a few years out from retiring? Look at how quickly it takes for the S&P to rebound after a market shock like 2001, 2008, 2020. American big business always rebounds and reacts to increase shareholder value and so much wealth is tied to it that the US Government has to adjust the macro environment to enable a rebound to preserve wealth, jobs, power, and social stability. Especially in the era we are now entering where pensions are replaced by market assets through 401ks, IRAs, etc.

So you don’t believe the risk premium is compensating for risk at all?

I cannot predict the future, but the US stock market is already around 50% of the global stock market capitalization, but the US economy is only around a quarter of the global economy. At some point it seems unlikely that the US stock market will continue to outperform international stocks for next few decades. It’s possible that the outperformance will continue, but I wouldn’t feel comfortable betting my entire portfolio on the stock market performance of a single country.