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Thoughts on modeling your retirement portfolio off of a target date fund

Started by ForgingFinance, March 09, 2019, 02:23:06 PM

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ForgingFinance

I'm currently writing a blog post about this on my site, Forgingfinance.com. I'm curious on thoughts about this approach. 

If you're looking to invest, especially if you are new, and you are having difficulty wrapping your mind around the typical risk questions, or gauging your risk tolerance, how about modeling your portfolio off of a target date fund.  That way all you have to do is pick your retirement date, then find a target date fund (Vanguard and Fidelity have them) that matches that date. You can then go into that fund and see the allocation of various equities and bonds, then purchase corresponding ETFs or index funds to match that allocation. 

Of course you can just buy the fund yourself, but I'm looking into this as a DIY lower cost option by using ETFs or index funds. 

Another caveat is that it isn't fire and forget. You'll have to come back periodically and rebalance such a portfolio periodically over time.

Curious to hear others thoughts on this.

http://www.forgingfinance.com/2019/03/12/still-unsure-about-risk-tolerance-try-this/

whitetail

Many of the target date funds balance themselves over time, but I think you mean even if you put most of your equity investments into a target date fund you would want to make sure you were balanced overall.

I think target date funds are good options in a lot of 401k plans where they're low on expense ratios and they can fit your overall portfolio.

I'm not sure I'd be okay with literally all of my equity investments being in a target date fund, but I'm not sure if that is prejudice or rational. A well run such fund with super low expense ratios might be a great long run equity play in retirement accounts. Outside retirement accounts some of the tax issues of rebalancing the internal fund structure might be annoying. Not many of these funds (that I am personally aware) have moved from birth to retirement. Maybe the jury is still out on how well they navigate it?

Cheezus

For my Simple IRA at Vanguard, the target date fund and the total stock market fund have a fee difference of .01.  It's negligible.  So I just use the target date fund on my retirement funds.

For my personal non-retirement brokerage accounts, I would not use a target date fund.  I'm also looking at switching over to the new Fidelity no-fee funds.

ForgingFinance

Quote from: Cheezus on March 13, 2019, 03:20:13 AM
For my Simple IRA at Vanguard, the target date fund and the total stock market fund have a fee difference of .01.  It's negligible.  So I just use the target date fund on my retirement funds.

For my personal non-retirement brokerage accounts, I would not use a target date fund.  I'm also looking at switching over to the new Fidelity no-fee funds.

I also have a Vanguard target date fund, in my case it's my 401k.  This idea came to me when I got a new HSA provider and the investments were limited. I decided to model the HSA investments after the allocation in my target date fund. 

Fat Tony

Target date funds are usually good baselines and I use them to sanity check my taxable portfolio allocations. However, I tend to switch up the bond allocations: I would rather hold munis/treasuries in about a 2:1 ratio than hold US + international bonds, in our current yield + currency risk regime. The advantage with multiple funds instead of 1 is also that you can tax-loss harvest more effectively in taxable accounts.

dpmf01

Two thoughts on this:
(1) Paul Merriman and Chris Pederson have developed a really solid "set-it-and-forget-it" strategy using a combination of a Target Date Fund and a Small-Cap Value Fund.  Their point is that the TDF is, in most cases, too conservative.  In order to add some aggression to your portfolio, you can allocate about 70% of your capital to a TDF and 30% to a SCV Fund.  Just do a quick Google search for: Two Funds for Life and Paulmerriman.com and you'll find both their write-ups and their podcasts explaining the strategy. 
(2) For automatic rebalancing, check out M-1 Finance - the new "no fee" Roboadvisor which lets you set an asset allocation and make regular contributions of capital as often as you want.  Every time you buy a new "slice" of your asset allocation pie, you are automatically re-balanced.  The service allows for owning of fractional shares so re-balancing is easy.

I find Paul Merriman's investing podcast and website to be highly informative and bias free.  He is a retired financial advisor who formerly ran Merriman Wealth Management.  In his retirement he now spends his spare time running a non-profit with the sole mission of spreading the message of his life's work: responsible, steady, and well-balanced investing will give you peace of mind and eventually set you free!