Choosing Target Funds

[Guest Spicoli]

I'm looking at establishing a Roth IRA in a Target Retirement Fund. Does anyone have a preference on which one to choose, or is there even much difference in them? Right now, I'm looking at Vanguard 2040 Retirement fund, or the T Rowe 2040 Retirement fund. Is there really much difference in Vanguard or T Rowe?

Thanks.

[ERISAnut]

Is there really much difference in Vanguard or T Rowe?

For starters, T Rowe is based out of Maryland and Vanguard is based out of Pennsylvania. For other details that would matter, the prospectus for each fund would likely be your best bet.

You do not want to rely on strangers for investment advice; need the know whose ass to kick when they lead you wrong:-)

[GBurns]

IMHO, you have already made missteps;

1. Get financial advice from persons whose expertise you can verify. Not credentials, I said expertise.

2. Selecting a type of fund before you have finished researching. Why would a Target fund be better? The name is not what makes it good.

[K2retire]

Both of the above answers are good advice. Finding an appropriate adviser (someone motivated by your best interest, not the highest commission check for what they sell you) is very difficult.

Start at your local library where you should be able to find Morningstar reports on the particular funds you are considering. They are a great source of information. But notice I said the specific funds -- not the fund company. Personally I own funds with both of the companies you mentioned. Which is better depends on the particular fund, your specific objective and your overall investment allocation. One company might have a less expensive index fund while another has a better managed small cap fund.

[Bird]

Spicoli, it probably doesn't matter too much, as long as you realize that if you pick that kind of fund you need to stay in it for a long time. In hindsight, one or the other will prove to have been "better," at least in absolute returns, but don't fret about it. You've apparently made a good decision to invest for the long term and that's a lot more important than which of these two similar funds to invest in.

Since you're obviously looking at no-load funds I don't understand the other references about talking to an adviser.

[GBurns]

Bird

It is conceivable that anyone can replace the brake pads on their car and save some money. But such a person would be foolish if they did not research first or learn from someone else first. Some people do not know where or how to reaearch, some have problems reading technical stuff, and then you have those who have no tools with which to do the job in the first place.

An advisor could give valuable directions and insight and also advise on the tools needed.

Spicoli may not know that he/she might not know enough. I can think of no other way for him/her to check their knowledge level.

[jpod]

I agree with everything Bird said. I may have to duck after saying this, but for a $4k investment per year, don't worry about seeking professional advice or spending a good deal of time studying before you take the plunge; just do it. Once you've accumulated a critical mass (maybe $20k? $40k?), then start thinking about whether or not you need some professional guidance.

[GBurns]

How long will that take and how much will it cost if the selected fund loses 12-20% each year or drops 50% in year 3 ?

Especially in these times, the return of your money is more important than the return on your money. What is the track record of these funds ?

[Bird]

How long will that take and how much will it cost if the selected fund loses 12-20% each year or drops 50% in year 3 ?

Especially in these times, the return of your money is more important than the return on your money. What is the track record of these funds ?

An adviser would only give the illusion of value with these kinds of questions. What is an adviser going to do to prevent those kind of losses? Nothing, other than not buy that type of fund at all. There is no way in the world to determine in advance that one of these funds would be prone to such losses and the other not. Each invests in 5 to 10 mutual funds offered by the fund family. The Vanguard funds are all index funds and the T. Rowe Price funds are actively managed. The Vanguard expenses are lower because they aren't actively managed. We could have a long discussion about active management vs. index funds but it doesn't matter that much for this discussion.

It's time in the market that matters, not timing the market. Here is a motivated person who seems to understand that, and doesn't need to worry about short term market fluctuations, or which exact fund is the "best." If you invested in a market basket of stocks in 1928 you'd have more than you started with in 1948 - likewise any 20 year period thereafter. That's about all this person needs to know.

BTW, I'm not saying advisers are useless. But the ones I've seen that purport to pick the "best" funds from different families aren't worth whatever fee they charge, IMO. They just chase performance.

[GBurns]

An advisor is recommended for purposes of education not for picking a fund ?

Buying a "basket of stocks" is vastly different from buying a mutual fund.

The "basket of stocks" that sellers use to illustrate the value of long term investing is usually hypothetical. I have yet to see an illustrative "basket of stocks" that was anything but that.

[masteff]

For starters, T Rowe is based out of Maryland and Vanguard is based out of Pennsylvania. For other details that would matter, the prospectus for each fund would likely be your best bet.

You do not want to rely on strangers for investment advice; need the know whose ass to kick when they lead you wrong:-)

First, I have to applaud ERISAnut for giving me my 2nd chuckle of the day.

Second, I'll generally agree w/ what the others have said above. Step One is getting started by putting your money in a well diversified fund that has an investment profile appropriate for your age and risk tolerance; a target fund like either of those is a good place to begin. Step Two is gaining some general education; Motley Fool, among other sites, has some good content. Step Three is check up on your investment, but only once every year or three; mainly you want to make sure your funds haven't suddenly turned into dogs and dropped to last place in the Morningstar ratings.

[John G]

Can we agree on some "facts"?

1. Target funds are recently created investment designed to appeal to new investors who don't understand the details. I would call them a marketing gimic. You can search under "target" to see more of my comments on these funds. If they give you some comfort as a beginner, then perhaps they perform a reasonable function. But over the long haul, you need to understand what you are doing and not believe is "automatic" investing.

2. Investment advisors - there are a huge range from dangerous to ineffective to knowledgeable. It is hard to know in advance who will be helpful. Clearly, one concern is that some advisors have conficts of interest - mixing advice with pitching products where they get a financial fee for sales.

3. There are lots of magazines and publications that provide general knowledge to beginner investors. A taxpayer who invests 2 hours a month reading Kiplinger, Worth, Money or books from the library will be miles ahead to someone who completely relies upon others. At a minimum, it will help you understand jargon, recognize the array of products, and help you identify critical questions.

4. Vanguard and T Rowe are long established, solid companies that offer an array of products with low fees. Since no specific products were mentioned, I won't step into details about active managed vs index. The original poster can search on the terms "beginner" or "no load" to get more info on fund selections.

5. No one can tell you which fund is "best", nor can they tell you in advance which asset class, industry or specific company will out perform the others. Not me, not Charles Schwab, or Bernanke or any investment advisor. Frankly, "best" is not the criteria to use. You will probably reach your long term goals with a reasonable no load mutual fund.

6. Throwing around 10-20% annual decline and 50% down in year 3 sure looks like a boogieman story. I don't understand why it was brought up in this thread. Was the author warning against do it yourself investing? It is highly unlikely that a well diversified mutual fund (especially one that included dividend paying stocks and bonds) would have this kind of performance. A country or sector fund might whip around like this, but it would be extremely rare for a broadly based mutual fund. See next point.

7. Single year results can be up or down, sometimes rather dramatically. But we have a 100 year history of investing that suggests that over decades investments provide positive returns. To the best of my knowledge, there is NOT ONE twenty year period where overall equity markets declined. I think there is only 1 or 2 ten year periods in the last century where the markets ended up slightly down.

8. History is informative, but can not predict future results.

I agree that if you are talking about putting a few thousand in a new Roth, the best thing you could do is just get started using one general purpose no load mutual fund. Perhaps choosing a different fund in year 2 or 3. After you have been doing this for 4-5 years, you will have amassed a modest amount of retirement assets and can consider making some changes. I am not sure you need a financial advisor at day 1.

[K2retire]

John, that's a terrific explanation.!

[Guest seanof30306]

Hi all, newb here.

There are a couple of things in this thread that stick out to me.

First, how do you find a qualified financial advisor with no agenda, who will keep your best interests at heart? Every one I've spoken to discusses their credentials and certifications, but stays pretty non-specific when it comes to track record, then they all try to sell me something they're being paid a commission on. For some time, I've known I should look for a financial advisor who is paid by me, and who takes no sales commissions, but I have no idea how to find that person.

Second, at least for me, spending a few hours a month reading Kiplinger, Money, etc. is like spending a couple of hours a month reading a text where every other word is written in Latin. I've tried it. I take my weakly beating by watching Suze Orman berate people, and I honestly believe I've learned a bit, but again, Suze tells me what I should do, not how to do it.

Third, I'm not lazy, and I hope I'm not stupid, but I'm 3 years into recovering from a complete financial crash and burn, and between work and developing a business idea I have, I just don't have the time it will apparently take me to develop an understanding of investing sufficient to feel comfortable making my own investment choices. I work with a guy who sees himself as an investor. He's always talking about what he's investing in, spends every break checking his investments or doing "research", etc. Meanwhile, he was down over 40% this year before the market tanked. I don't want to be that guy. I only have 15 years till retirement, and I can't afford to make any boneheaded mistakes. Before I worry about how much I earn, I have to make sure I'm not losing. I can bury my money out back in a a cookie tin and preserve it (provided I don't get Alzheimer's); I can put it in a long-term money market CD and earn a guaranteed 4%. I can't assume the risk of losing it all in non-guaranteed investments if I don't have a reasonable expectation of a return significantly better than that 4% I can earn with the CDs

A customer of mine is a guy who is pretty high up in the investments department at a local bank. After hearing a bit about my situation, he said I couldn't go wrong with a Fidelity Freedom fund; I've been looking at the 2025 fund. What I find attractive about a targeted fund is simplicity and the fact that the investments are adjusted towards asset protection as it approaches maturity. For someone who just doesn't have the the time, smarts, etc. to become an informed investor, and whose contributions are small enough that the $50-100 per hour you'd pay a financial advisor (if you can find one) represents a significant load, wouldn't a targeted fund make sense? If not, what does?

Consider this, someone putting $10,000 per year into their 401K and Roth IRA who pays a financial advisor just $200 has a 2% pre-investment "load", don't they?

Please understand, I'm not trying to challenge anyone, I have no idea what I'm talking about when it comes to investing. If I knew more about money, I wouldn't have gone broke in the first place. I'm just trying to understand.

[John G]

Newbie - - your post demonstrates that you are clearly smart enough to develop an understanding about investing.

You are absolutely correct about investment advisors "selling" ~ they do need a method of making a living. But the bigger problem is that advisors are not a "solution" for many reasons: (1) most of them really don't know much about investing, just a little more than you do {the best and brightest run pension funds, hedge funds, etc. because it pays more}, (2) they are not going to think of calling a small investor at key decision times {how many folks that read this post got a call from their broker in the past month?}. Track record is historic data - and as the saying goes past experience is not a reliable indicator of future performance...and that assumes that they would be telling you the truth about their track record and not just peddling some selective good results.

What exactly are you looking for in an investment advisor? Do you want individual stock picks? Have some idea about a target rate of return? How much expertise do you expect from someone you pay just $200 a year? My mechanic charges me at least that much each year for his auto sense. My accountant charges me more than 6x that amount for tax advice. There are lots of "vultures" in the market place that look to prey upon folks with money but no time or training. You are going to be considered small potatos if you are starting with 10k. Doctors and lawyers are considered prime targets.

I am sorry that I can't offer great ideas on how to find a good investment advisor. You could pay me the $200 and I would give you specific funds to buy... that would mean an investment of 2 to 4 hours of my time. I would send you a set of questions about your goals, knowledge, income, other assets, etc. We would exchange emails and phone calls and develop a starter program. A good investment advisor starts by trying to understand the client. Your not going to get much more concrete advice for $200. No one is going to really monitor a 10K account all year long for that amount. A talented advisor is not going to work for $25 per hour...or let me put it this way, you don't want the advice of someone charging you at that rate.

Target funds are basically a marketing gimic aimed exactly at YOU, the novice investor who is busy. They promote simplicity. Essentially they are someones notion of what a person like you should have in asset allocation, with that mix changing slightly over time by their formula. Maybe that works for you. Each chunk is invested in that firms fund for each catagory. It is something you can do your self - by using a percent of your assets to buy a general stock fund, bond fund, and CDs. Some of these target funds have very annual expenses...some even are LOADED (this means they have front end or exit commissions). But... don't think that investing is some kind of set it and forget it when you use target funds.

What can you do on your own?

Note, I am the guy who says you should spend 1-2 hours a month reading about investing and do-it-yourself. (I have clients who pay me for advice, but they operate at a different level than what we are talking about ther, and the investment choices are much more complicated)

Here is my suggestion for the next three years. Pick one or two no load general stock funds. Pick one or two general bond funds. Select either a money market or CD for cash. Given the depressed state of the equity (stock) markets and noting that you might retire in 14 years, I would allocate perhaps 60% for stocks, 25% for bonds and 15% for cash. I might modify that allocation if I knew more about you. You would then use what ever custodian you have selected for you tax shelter - Roth, 401K, 403b, etc. and make your choices. These picks might work for many years, or as more money gets put into your Roth other choices might be made.

Do you need an investment advisor for this? Probably not. You could avoid their bias and fees for the next few years. Use Morningstar ratings for anything with 3 or more stars. That's probably the same screening tool an investment advisor who is not steering you to high cost funds would use. Neither you nor the advisors would make a "perfect" choice. You don't really need perfection, just a reasonable set of funds.

Don't want to make a choice of specific fund? Then look for a no load total market fund - this means the equity part of your assets would give you average market performance.

This is my short term recipe. After two or three years, perhaps you will have a little more time to more actively manage your investments.

Note, you can not get a guarentee with any kind of investment, not even cash (because inflation erodes away the value of money). You need to think long an hard on how much "risk" you can tolerate vs your need to grow your assets to meet retirement goals. Part of that is how many years before you tap the funds. Part of that is your temperment. There are lots of other factors.

I hope this helps. Post again if you need additional pointers.