Vanguard Target Date funds (in taxable accounts) --- WHAT IS GOING ON?

[Anonymous]

Thanks for bringing this up. Really good point about target date funds that I hadn't considered. We have money in target date funds but just for 529s so no tax issues there.

I just checked our funds that are managed by financial advisors. I guess they are considering tax implications (as they better, given their fees!). Our regular investments had very little in the realized gains section -- looks like they did some tax loss harvesting and rebalancing to even it out. But then our IRA funds (tax-protected) are pretty heavy on the realized gains but no issue since those are not taxable currently.

Glad we have advisors doing this -- I know I'd have messed it up or overlooked it if I tried to manage it!

[Anonymous]

OP, it is terrible. Thank you for telling us. I didn’t know that target funds are not good funds for taxable account. Vanguard should have done a better job to tell investors that target funds are not good funds for taxable accounts.

[Anonymous]

OP, thanks for posting. I had about $8K in VTTHX in a taxable account. I put it there probably 15 years ago and forgot about it. This has forced me to understand ETFs better. I hope there is some restitution for you.

[Anonymous]

Target date fund by definition change their asset allocation over time, right? Isn't that the entire point of these funds? is the only way to do that to reallocate by buying and selling in a way that would create a taxable event? So wouldn't that be expected, or am I missing something? I have money in the vanguard total market index fund but I would expect less reallocation there.

[Anonymous]

Anonymous wrote:

Anonymous wrote:https://m.youtube.com/watch?v=CxAEi42U3gU

15 min video but he gives an good overview of what happened and some potential risk for other Vanguard funds.

Very useful video, thanks for posting.

This was a great video. Rob was a securities lawyer in DC, anybody know him?

[Anonymous]

Because of this problem, I am thinking about converting vtsax into vti etf.
Is there a downside to do it other than I cannot auto invest fix amount monthly ? Thx

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:https://m.youtube.com/watch?v=CxAEi42U3gU

15 min video but he gives an good overview of what happened and some potential risk for other Vanguard funds.

Very useful video, thanks for posting.

This was a great video. Rob was a securities lawyer in DC, anybody know him?

Concur. That was a good video.

The key takeaway for me - don't buy mutual funds (the ones that have a calculated closing price e.g VTSAX) in a taxable account; buy instead the ETF equivalent (the ones whose price fluctuates with market intraday e.g VTI)

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Anyone find this kind of amusing? The bogleheads and FIRE crowds are so smug about their investing in index funds. I personally think diversity is so important. Index funds are fine but there is always a risk.

This specific issue has been discussed on the Bogleheads forum. It has nothing to do with index funds and everything to do with an investor being educated enough to know what they buying and about asset location. TDF do not belong in taxable accounts for a variety of reasons, this being one of them. Even ETFs have capital gains distributions.

Your response very much conflicts with the message I’ve seen shared over and over again by those who promote index funds. The message has been something along the lines of “index funds allows you to be a passive investor. You don’t need to research the funds. Do the three index fund approach. Put your money in the funds and sit back.”

It seems odd to me that now the promoters are saying you need to educate yourself about index funds and this happened because the investors are uneducated.

The three funds approach obviates the need for a target fund. It is the nature of a target fund that caught people up--they are not really an index fund--together with having it in a taxable account.

Personally would never do a target fund.

[Anonymous]

So glad I listened to Kiplinger when I was in my twenties and put my TDF in a T Rowe Price Roth. Those dudes in Baltimore killed it last year.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Anyone find this kind of amusing? The bogleheads and FIRE crowds are so smug about their investing in index funds. I personally think diversity is so important. Index funds are fine but there is always a risk.

This specific issue has been discussed on the Bogleheads forum. It has nothing to do with index funds and everything to do with an investor being educated enough to know what they buying and about asset location. TDF do not belong in taxable accounts for a variety of reasons, this being one of them. Even ETFs have capital gains distributions.

Your response very much conflicts with the message I’ve seen shared over and over again by those who promote index funds. The message has been something along the lines of “index funds allows you to be a passive investor. You don’t need to research the funds. Do the three index fund approach. Put your money in the funds and sit back.”

It seems odd to me that now the promoters are saying you need to educate yourself about index funds and this happened because the investors are uneducated.

The three funds approach obviates the need for a target fund. It is the nature of a target fund that caught people up--they are not really an index fund--together with having it in a taxable account.

Personally would never do a target fund.

No it was not because it was a target fund.

It’s because institutional investors left the fund in mass, and their redemptions triggered lots of churn within the fund.

I don’t understand how i have to pay tax on gains I don’t see, but then when I sell the fund later after it’s risen, so I pay taxes again?

[Anonymous]

This is an usual event that vanguard created by recalibrating the fund, but hardly means an advisor would be better. They charge 1% off the top, so $10000 on a $1M account every year. And unless you solely buy stocks (and maybe ETFs), this is a risk in any type of fund, more so in actively managed funds.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Anyone find this kind of amusing? The bogleheads and FIRE crowds are so smug about their investing in index funds. I personally think diversity is so important. Index funds are fine but there is always a risk.

This specific issue has been discussed on the Bogleheads forum. It has nothing to do with index funds and everything to do with an investor being educated enough to know what they buying and about asset location. TDF do not belong in taxable accounts for a variety of reasons, this being one of them. Even ETFs have capital gains distributions.

Your response very much conflicts with the message I’ve seen shared over and over again by those who promote index funds. The message has been something along the lines of “index funds allows you to be a passive investor. You don’t need to research the funds. Do the three index fund approach. Put your money in the funds and sit back.”

It seems odd to me that now the promoters are saying you need to educate yourself about index funds and this happened because the investors are uneducated.

The three funds approach obviates the need for a target fund. It is the nature of a target fund that caught people up--they are not really an index fund--together with having it in a taxable account.

Personally would never do a target fund.

No it was not because it was a target fund.

It’s because institutional investors left the fund in mass, and their redemptions triggered lots of churn within the fund.

I don’t understand how i have to pay tax on gains I don’t see, but then when I sell the fund later after it’s risen, so I pay taxes again?

I don't disagree that the institutional move compounded the hit. But in a target fund, the managers have to rebalance in ways that make sense for the fund goals and not for your individual tax situation. You have far more control when the rebalancing is in your hands and you can think through your specific tax situation in deciding how and when to do it. This is what you get with the three funds approach.

My broader point is that this move by Vanguard does not invalidate the benefits of the three fund approach.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Anyone find this kind of amusing? The bogleheads and FIRE crowds are so smug about their investing in index funds. I personally think diversity is so important. Index funds are fine but there is always a risk.

This specific issue has been discussed on the Bogleheads forum. It has nothing to do with index funds and everything to do with an investor being educated enough to know what they buying and about asset location. TDF do not belong in taxable accounts for a variety of reasons, this being one of them. Even ETFs have capital gains distributions.

Your response very much conflicts with the message I’ve seen shared over and over again by those who promote index funds. The message has been something along the lines of “index funds allows you to be a passive investor. You don’t need to research the funds. Do the three index fund approach. Put your money in the funds and sit back.”

It seems odd to me that now the promoters are saying you need to educate yourself about index funds and this happened because the investors are uneducated.

The three funds approach obviates the need for a target fund. It is the nature of a target fund that caught people up--they are not really an index fund--together with having it in a taxable account.

Personally would never do a target fund.

No it was not because it was a target fund.

It’s because institutional investors left the fund in mass, and their redemptions triggered lots of churn within the fund.

I don’t understand how i have to pay tax on gains I don’t see, but then when I sell the fund later after it’s risen, so I pay taxes again?

I don't disagree that the institutional move compounded the hit. But in a target fund, the managers have to rebalance in ways that make sense for the fund goals and not for your individual tax situation. You have far more control when the rebalancing is in your hands and you can think through your specific tax situation in deciding how and when to do it. This is what you get with the three funds approach.

My broader point is that this move by Vanguard does not invalidate the benefits of the three fund approach.

That happens every other year and every other year the tax hit is negligible. This is all about Vanguard favoring one class of investors over another, which is perfectly fine when you put them in different products to begin with, but the ham handed execution here is going to get them nailed by regulators.

[Anonymous]

I didn't know these target date funds were unsuitable for taxable accounts.

[Anonymous]

Don't you pay these hefty taxes eventually and it's just a matter of when?