Choosing among Vanguard funds

[Guest Wedge1]

I have a 401K, opened less than a year ago. I chose to invest it in the Target 2035 Vanguard Retirement Fund. A year of employment is about to pass, which means my 401K will receive 40% of every dollar i contribute. I understand the value of free money, so i will maximizing this opportunity.

I'm also starting a Roth IRA with Vanguard. Does it behoove me to pour more money into the same Target 2035 Retirement fund by way of the Roth? Instead, should I consider another fund for the sake of diversity?

[John G]

I have posted before about the benefits and drawbacks of "target" funds. Vanguard is a great group, most noted for their low expense. But, target funds are basically a marketing gimic, designed to sell "no need to do a lot of thinking" or as Popeil likes to get the audience to say "set it and forget it".

You may do just fine in selecting a target fund - but don't assume that their assumptions about timing and shifting of investments best matches your needs. Worse yet, if you buy into this concept that you don't need to pay attention to your investments. You do. How much time have you spent reading the prospectus? What is the collection of funds used by this fund of funds? What are the expenses? What are the expenses of the sub-funds? What are their primary focus? Are they actively managed or index style funds? [i know the answers to these questions. The critical issue is do you?]

You can find more comments on "2035" or perhaps "target" fund by searching on that keyword. See this link:

http://benefitslink.com/boards/index.php?s...274&hl=2035

[Guest Wedge1]

Thanks John, appreciated.

I need to choose something to get started though. Since these are "no load" i'm assuming that investment in the Target 2035 now and maybe changing later (after i've gained a better understanding of the type of funds available) would involve no costs? I simply need to get started.

[John G]

I understand the importance of getting started, and with so many choices, a tax payer first addressing fund selection may just feel awful. Minimal info, too many unknowns.

What I want to emphasize that you don't buy the pitch without reading what is inside the deal. Many messages at this site have the theme "I didn't understand what I was buying"... with loaded funds, advisors, annuities, high expenses, exit charges, and various schemes.

Vanguard is a good company. They try to keep costs ultra low in many of their funds. You can usually switch funds in a fund family with a couple of exceptions: funds don't like frequent switches (like 90 day) and some fund choices may be closed to new investors.

Vanguard has a number of index funds representing the S&P500 and total market. These would also be good choices to get started.

The Vanguard 2035 is 90% stocks right now, and has a 0.2% expense ratio. The main holdings include a whole stock market index fund (70%), Euro fund (10%), Bonds (10%), Pacific fund (5%)... and misc + cash. Not a bad mix... but you can eventually do this yourself and control the shifts over time.

[joel]

Target Funds are great...it is what commissioned salespeople have been doing for years. Now the no-loads are saying let us do it for you for 20 bp. If you want a little more action simply make believe your 50 rather than 60. If more people 60+ had Target Date funds during the 38 month period ended on February 28, 2003, when the S&P 500 Index lost 49 percent of its value, they would be retired today as they planned rather than still catching the 7:02.

[John G]

Joel, lets not make some universal statement that ALL target funds are great.

I have no idea what you mean when you say its what "commissioned sales people have been doing for years". Commissioned sales people have been mostly selling loaded (commissioned) products - often biasing their recommendations towards products that produce the highest commissions, rather than those that might best serve their clients.

IRA owners still need to read the details: like annual expense percent, what is the underlying mix of funds, custodial fees, etc. The target packages vary between fund families.

Even at the best and most competitive mutual fund families, you pay a slight premium for simplicity. Perhaps that annual expense rate might have been 0.18 percent and now become 0.25. It is difficult to determine if you face expenses layered on top of expenses.

When "Target Fund" becomes some kind of mantra, then some operators are going to create products that have higher fees. Think of the products that banks market based upon safety or convenience - they rarely coincide with "best buy" products.

There is nothing magical about target funds. A fund family defines a specific Target product based upon an assumed retirement year. Then they define a cluster of perhaps 6 funds and set a beginning mix. As the years pass, the fund adjusts the percent mix. While this is very convenient to the beginner, anyone with a few years of Roth contributions could take their 20,000 and divided it amongst similiar funds.

Joel, you may like the simplicity or convenience. I raise the cautionary flag - don't buy anything that you don't understand. While this message board focuses mostly on IRA/Roth rules and administrative issues, we still get a lot of war stories about folks who got caught in bad situations. Loaded funds, annuities, surrender or exit charges, high expenses, poor performance... or some combination of these, either by there own choice or because of recommendations of an "advisor".

[Guest Wedge1]

Target Funds are great...it is what commissioned salespeople have been doing for years. Now the no-loads are saying let us do it for you for 20 bp. If you want a little more action simply make believe your 50 rather than 60. If more people 60+ had Target Date funds during the 38 month period ended on February 28, 2003, when the S&P 500 Index lost 49 percent of its value, they would be retired today as they planned rather than still catching the 7:02.

No offense joel, but i don't understand anything you said. I don't know what you're implying about people 60+ with Target Date funds and Feb. 28, 2003. Also, like John G., I don't understand the "commissioned salespeople" comment either.