Vanguard Target Retirement 2035 Fund (VTTHX) - NEWBIE

[Guest jbo]

I have a 401k plan at work and I wanted to get into mutual funds and have a roth IRA. I just recently purchased a mutual funds book so I can start learning. I wanted to have a Roth IRA account that I wouldn't have to worry that much about it and then other mutual funds that are outside of the Roth IRA.

I was thinking about at least starting out with this Vanguard Target Retirement 2035 Fund (VTTHX). Is this a good idea or am I better off pickig another mutual fund?

I was thinking about going with this one for my Roth and then having another mutual fund (wellington). Any suggestions?

[Guest rubindj]

Mutual fund selection is a large and varied topic.

That being said, the particular fund you are looking at is probably one of the best for you to be looking at (IMHO). I like Vangaurd, fees are the lowest in the industry, and they are a mutual company.

The particular fund uses an allocation of Vangaurd index funds based on your taget date -- in this case 2035. Although you might want to tweak it later down the road, and the fund is a little more expensive than buying the individual funds (0.05% I think), its still an excellent place for a new investor to be.

[John G]

The phrase that caught my eye was "wouldn't have to worry that much about". Frankly, there is no investment that you can buy today, put in a lock box and never think about it until you start pulling our the money.

You might be able to be a passive investor using one specific fund - in this case the "life cycle" 2035 Vanguard version.... but I would suggest that you need to be more actively involved in your investment decisions. I wonder why you would want to give away 0.05% extra cost of a life cycle fund when you can just buy a Vanguard stock index fund. Here is what you currently get with 2035: four Vanguard funds (total stock 62%, bond 22%, European stocks 11% and Asian stocks 5%). The significant bond component will reduce your long term annual returns but give you some stability in weak years. Is that what you want, or do you want to be 100% in stocks at your age?

Some life cycle funds include layer upon layer of expenses. Vanguard says that the expenses of 2035 is 0.22% annually but I could not tell if that was in addition to the individual funds. You should ask about that.

Go ahead with any general purpose Vanguard fund for the moment - they generally have very low expenses. But, do start reading about mutual funds and investment choices. When you opt for a life cycle fund - the premise is that you leave all of the asset allocation issues to the fund mgmt. You need to understand that a life cycle fund will be a blend of investments, often a larger percent in bonds as you get older. But, is that the right mix for you?

Index funds offer considerable diversification. If your 401k and Roth are both in general index funds, you will have better diversification then if they were both in growth funds.

[Guest jbo]

Wow thank you both for the great information and responses.

I'm in my mid twenties and my 401k plan at work is out of the 5 index funds

5% government security

5% fixed index fun

30% large capital index fund

30% small index fund

30% international index fund

My employer matches up to 5% of what I put in and right now I'm doing 8% and I think 15% is the max. I didn't know anything about mutual funds, so I bought the book mutual funds for dummies to get myself started and I'm half way though.

What I would like to do is be more conservative with a Roth IRA. I would like to have mutual funds outside of the Roth IRA also that are more aggressive. Since my Roth IRA I won't pull out until I retire I don't mind being more conservative and I would like to be more aggressive with my mutual funds that are outside of the Roth IRA, but it will probably be awhile before I get into mutual funds outside of the Roth IRA. I want to start with the 1k and learn the ropes a little bit before I fork out the 3k that the ones require outside of the Roth IRA.

For my Roth IRA do you guys think the Wellington is a much better investment than the 2035 retirement one?

I love to read books and right now I just started with mutual funds for dummies to get myself started. The book is originally from 2001 with some updates, but I thought it would be better than nothing since I'm learning from scratch.

I really appreciate the inputs so far

[No Name]

I think some would agree that last year's best fund is unlikely to be this year's best.

Good 3,5 and 10 year track records and consistency of managers is a good guideline, but only that.

Look under the hoods of these things to see if the underlying assets are what you would want to own.

Sometimes, you have limited choices, and hopefully those choices have been vetted by a commitee. Of course, a camel is a horse designed by commitee!

[Guest jbo]

I know i've read that todays winners can be tomorrows losers, but I really don't have enough experience yet to be 200% certian about any mutual fund.

[Guest rubindj]

The Wellington Fund has been a good fund for the last 30 years. That being said, it is not conservative -- its an agressive fund which could easily lose 20% or more in any given year.

Something like 95% of all portfolio gains/losses can be reduced to two things -- asset allocation and fees. For that reason, the lowest cost funds, in the best allocation for your age, its the best for you to go with. Vanguard and DFA are my two favoriate fund companies.

Due to minimums and fees, I personally would uses the 2035 fund while building your balance to 10k or so, and doing more reading regarding asset allocations, and what you need. Its return should be significantly less (or more) than wellington, but it will be safer.

You also might want to look at the Motely Fool (www.fool.com), membership is free for 30 days, and they are the best resources on the internet for individual investors IMHO.

[Guest jbo]

I went to fool.com website and I keep reading everywhere I look about mutual funds to invest in index funds. Vanguard told me on the phone that they charge an extra 10 dollars annually for index funds. Why is that?

I was looking at Vanguard 500 Index Fund Investor Shares here

http://moneycentral.msn.com/detail/stock_quote?Symbol=VFINX and morning star ratings give it a 4 start out of 5, but the wellington has 5 out of 5

http://moneycentral.msn.com/detail/stock_quote?Symbol=VWELX

[John G]

Lets establish some key points:

1. You can not tell by looking in the rear mirror where you are driving. You can't predict next years performance by using prior year performance. Those 3,5 and 10 year histories may reflect somewhat on fund mgmt..... BUT, chasing recent winners is a disasterous approach to investing. "Hot" investments cool off. Interest in various sectors changes. Even the "experts" are unreliable at predicting the next 12 months.

2. Low mgmt fees is important, all things being equal you should prefer a fund with lower fees. BUT, it is also true that some modest and high fee funds do just fine, they just have a bigger hurtle to overcome. Since index funds have low overhead.... choose a low fee fund when selecting an index fund.

3. There is nothing at all wrong with throwing all of your initial assets into one general fund. A few thousand in any fund is better than waiting until you "understand" investing. You can change your choices later.

4. Expect to have some negative results. Markets go up and down. So do mutual funds and individual stocks. Think long term and don't worry about short term changes. You will learn a lot over your lifetime by watching the results.

Wellington, Vanguard 2035 and Vanguard's S&P Index 500 will work fine. All are broadly based stock funds. No one can tell you which will perform better over 1, 3 or 10 years.

Conservative vs aggressive? The bigger issue is probably your personal risk tolerance. If a 20% decline creates a panic and you go to cash in a mattress, you should not invest that fund. BUT, if you understand that good years out number bad years and that funds that go down 20% are also the kind that can be up 45% in a single year.... perhaps "aggressive" will work for you. You can moderate overall performance by increasing the bond component (like the 2035 type life cycle funds) but that also means you are giving up some of the upside.

Keep up with your readings. Money, Worth, and Kiplinger Financial are reasonable magazines to scan. Consumer Reports does a decent job covering general retirement investing in their March issue.

Post again with your questions.

[Guest jbo]

thanks so much for the helpful posts from you and everybody.