Vanguard Target Retirement Funds

[Guest Gracey]

Hello,

I am 36 years old and a brand new investor considering opening a Roth at Vanguard. I have been thinking about putting $4,000. into the Vanguard Target Retirement 2035 Fund. The funds current target asset allocation among the underlying fund is: Total Stock Market Index Fund 71.8%, European Stock Index Fund 10.6%, Total Bond Market Index Fund 10.1%, Pacific Stock Index Fund 5.1%, and Emerging Markets Stock Index Fund 2.4%. The funds annual operating expenses are .21%. Does anybody out there have a strong opinion either way about whether this is a wise move or not? As of right now, I have no other retirement funds. I just want to make sure I've considered everything. I plan on making an initial investment of $4,000. and then have $333. automatically deducted from my checking account on a monthly basis. Any constructive criticism of my plan would be much appreciated, as I am a new investor, and a little nervous. Thanks for reading!

[JanetM]

Gracey few on this board will make a specific fund recomendation to someone with out full information. What is your risk tolerance for example.

Vanguard has good inepensive funds. The target 2035 has low fees and an average market rate of return. This fund is about 90% stock and 10% bond funds invested in 5 other Vanguard funds. That is why the question on risk is important. Next is volitility. This fund will have ups and downs that track the market. Can you sleet at night or will you worry?

[John G]

You need to understand that "target" funds are basically a marketing gimic aimed at exactly you - - the novice investor who does not feel comfortable making investment decisions. If you think you can buy an investment and then forget about it... well, "...are soon parted" a phrase that comes to mind. Investing requires thinking, monitoring, diligence and patience. There is nothing wrong with a target fund to get started... frankly any general purpose NO LOAD (and low annual expense) mutual fund will do initially.

You can search the word "target" and "2020" or similiar dates to see more that I have written on the marketing gimic aspects of these funds.

It's your money and if you want good results, you need to educate yourself about investing. I highly recommend that you subscribe to Kiplinger Financial magazine and spend 2 hours a month reading. After two years you will be miles ahead of your fellow workers. You will understand the difference between value and growth investing, and the benefits of index funds and ETFs. Part of this education process is to develop a better prospective on risk. Janet is right that it is a big part of your decision process, but an educated investor age 36 will better understand that you are investing for 3 to 6 decades (you don't spend your retirement money in 1 year, many of us will live to our 90s)! Investors are supposed to be nervous, but you don't want to be nervous because you don't understand concepts and terminology.

You don't want to chase last years performance, but educated thinking about trends may help you to bias your investments towards more successful areas. For example, I am not keen on carbon paper manufacturing. But things related to the growing Asian economies have been performing well for a few years. As your nest egg grows, you will eventually look to add other mutual funds. Some day you may decide that a part of your portfolio may be in individual stocks.

But, remember, its your money and YOU have the greatest and direct interest in seeing it grow. Don't look to target funds as an easy way out - that's dangerous.

[Guest allancoleman]

Keep in mind , Gracey , that you are accepting a gradual asset allocation shift to more fixed income as you get closer to your " target " retirement date of 2035 . " Target " funds are designed to provide that asset allocation shift for you whether you want it or not in the future . Most knowledgeable investors would rather make this investment decision themselves rather than accept a computer generated fund to do it for them .

It'll work and it's one of the latest new things in mutual funds , but I wouldn't ignore it cause the performance OVER TIME will change as the asset allocation changes as you get closer to the 2035 retirement target date when this particular fund will be mostly in fixed income and cash .

Different strokes for different folks .

[masteff]

So, once you've read the posts above, I'd add the following.... First, I'd re-emphasize what allan said about the asset allocation shifting over time (that's a key difference between this target fund and "regular" mutual funds). Second, I'd re-emphasize John's point that your ultimate target date isn't age 65, but rather a stretch of dates from 65 on. Third, I'd re-emphasize what Janet said about this fund will still have it's ups and downs (but since it's actually a blend of funds, it should be less volitile than any of the individuals funds by themselves).

Now, is this a bad choice? Absolutely not. Before I left my last job, we added targeted funds to our 401(k) plans. However, a few key points need to be understood about how targeted funds work. As discussed, they have a risk/allocation profile that moves from more aggressive to more conservative as you approach retirement. Don't pick a target fund just because it's performing well versus the other choices you have available right now. Don't treat this like "just another mutual fund"; you're not going to be trading in and out of this fund (so if you want to trade, look at "regular" funds). Every year or three, you'll want to compare this fund with other target funds with similar target dates (and as long as this fund is doing okay, you can stay w/ it, but don't be afraid to move to another if this one is underperforming).

Lastly, don't let nervousness or lack of investing experience keep you from making a positive move towards building your retirement nest egg. Get that money started growing and then go learn some more. Visit various mutual fund websites and look for their free investor education resources. Also go to financial sites like Motley Fool, which has a variety of articles for all levels of investors. As you become more knowledgable, you can always make a change in your investment choice in the future.

[John G]

Gracey, you got a lot of good input in the above comments although it took a few authors to cover the topic.

My question to you is: "were these responses helpful?" We try hard to give practical advice on this message board, but its always nice to get some feedback from the user.

Please post again. And, feel free to post additional questions.

[Guest jims]

Gracey, congratulations on making the decision to begin saving for retirement. You could do much worse than what you propose, so congratulations. Given that you are a brand new investor, overall your choice is very good, even though other say you can always do better. You need to pull the trigger to move beyond "brand new investor". After you make this investment, make sure you continue to monitor, understand, and educate yourself on retirement investing. This fund will have its ups and downs, but is expected to be generally UP decades from now. Everyone has a different tollerance for risk and the associated ups and down. I think you can only learn about your personal tollerance by being invested and then see how it feels. As you educate yourself, you'll learn what right for you.