Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

Hi guys,

I wanted to ask your opinion about my 401K allocation. I am 35 years old and 100% of my 401K was Vanguard Retire 2050 fund.
https://investor.vanguard.com/mutual-fu ... olio/vfifx

Recently I switched all of it to Vanguard SP500 index. I am comfortable having 100% stocks at my age as I do not plan to retire early.. I just want to be financially safe when I am retired. That means I have 25-30 years to recover any potential losses when the market goes down. I do not plan on touching or selling my assets during this long term.

Reason why I switched is because when I compare the performance of these two funds, SP500 by far exceeds the target 2050 fund. The diversification (54% Total US stocks. 36% Total International Stocks, 10% Bonds) doesn't look like it is protecting better or being safer, as when you compare the two graphs, they both go down and go up together in the same way. SP will drop more being all stocks, but will also bounce back higher...so at the end of day it is still better in my newbie eyes. Fund expenses are also lower for SP500 index (0.04% vs 0.15%)
https://personal.vanguard.com/us/funds/ ... tingFrom=6

I am new to investing and might not see the benefits of the target fund. Is it a good idea to keep just SP500 (as Warren Buffet suggests)? Should I do 50-50 between the two maybe?

Thanks for all opinions! Will appreciate any feedback.
Best,
Erald
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Marseille07 »

Erald wrote: Mon Jun 14, 2021 3:40 pm Hi guys,

I wanted to ask your opinion about my 401K allocation. I am 35 years old and 100% of my 401K was Vanguard Retire 2050 fund.
https://investor.vanguard.com/mutual-fu ... olio/vfifx

Recently I switched all of it to Vanguard SP500 index. I am comfortable having 100% stocks at my age as I do not plan to retire early.. I just want to be financially safe when I am retired. That means I have 25-30 years to recover any potential losses when the market goes down. I do not plan on touching or selling my assets during this long term.

Reason why I switched is because when I compare the performance of these two funds, SP500 by far exceeds the target 2050 fund. The diversification (54% Total US stocks. 36% Total International Stocks, 10% Bonds) also doesn't look like it is protecting better or being safer, as when you compare the two graphs, they both go down and go up together in the same way. SP will drop more being all stocks, but will also bounce back higher...so at the end of day it is still better in my newbie eyes.
https://personal.vanguard.com/us/funds/ ... tingFrom=6

I am new to investing, so is it a good idea to keep just SP500 (as Warren Buffet suggests)? Should I do 50-50 between the two maybe?

Thanks for all opinions! Will appreciate any feedback.
Best,
Erald
I chose the lowest ER funds tracking either S&P500 or the total US market. I'm doing this for over a decade and have no regrets.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by lakpr »

One characteristic between a Target Date 2050 fund and S&P 500 that you are missing is that the stock portion of the target date fund is a blend of 60% domestic stocks and 40% international stocks. As such, you should compare it to 54:36:10 blend, rather than S&P 500 index alone.

The large difference between the two that you are observing is due to the recent outperformance of the US equities compared to international equities. This may or may not last long.

I do believe in the diversification offered by the international equities, I invest in them, it is just that I disagree with the 40% allocation to them. I think 20% is enough. My portfolio is 55:15:30, a very slight overweight to international stocks than 20% (compared to the strict 56:14:30).

Whether your switch is a bad idea or a good idea can only be known in hindsight.
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

lakpr wrote: Mon Jun 14, 2021 3:50 pm The large difference between the two that you are observing is due to the recent outperformance of the US equities compared to international equities. This may or may not last long.
Agreed, US stocks has outperformed the international stock for quite some time. How has it been in the past 20-30 years? In my eyes if the US economy tanks, the international stock will follow too, as they are so dependent from each other. We live in a globalized world. And if that's the case, the international stock will not protect much my portfolio. This reasoning might be wrong though, just writing down my two cents...
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by lakpr »

Erald wrote: Mon Jun 14, 2021 3:58 pm
lakpr wrote: Mon Jun 14, 2021 3:50 pm The large difference between the two that you are observing is due to the recent outperformance of the US equities compared to international equities. This may or may not last long.
Agreed, US stocks has outperformed the international stock for quite some time. How has it been in the past 20-30 years? In my eyes if the US economy tanks, the international stock will follow too, as they are so dependent from each other. We live in a globalized world. And if that's the case, the international stock will not protect much my portfolio. This reasoning might be wrong though, just writing down my two cents...
Completely on board with your reasoning, but you know, old folks like me (I turned 50 last year) like to hedge our bets as we row our way into retirement ...

There was a Vanguard paper from 2012 that said you will capture 84% of the diversification benefit if your international stock allocation is 20%, and 99% of the diversification benefit if the international stock allocation is 30%. I thought capturing an S&P 500 sized diversification benefit with only 20% of the allocation is a good deal ... and I stuck to that ratio since around 2014 [ referring to the fact that S&P 500 is roughly 85% of the total US equity market ... ]
DangerDad
Posts: 47
Joined: Tue Apr 27, 2021 7:37 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by DangerDad »

You’re smart to seek advice from this community—however next time I’d urge you to check in *before* you make a big change such as the one you described. It seems you made the change to 100% SP500 index based solely on historical performance relative to the Target Date fund. I wonder what you would do if the SP500 fund underperforms the Target Date fund over the next 5 years. It’s certainly reasonable to go 100% SP500 index (or Total Stock index) at your age—many here are on board with that—however it’s best if such decisions are based on principle and conviction rather than just historical performance. Btw, I’ve made this mistake myself!

Cheers,
DangerDad
Last edited by DangerDad on Mon Jun 14, 2021 4:22 pm, edited 1 time in total.
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

DangerDad wrote: Mon Jun 14, 2021 4:11 pm You’re smart to seek advice from this community—however next time I’d urge you to check in *before* you make a big change such as the one you described. It seems you made the change to 100% SP500 index based solely on historical performance relative to the Target Date fund. I wonder what you would do if the SP500 fund underperforms the Target Date fund over the next 5 years. It’s certainly reasonable to go 100% SP500 index at your age—many here are on board with that—however it’s best if such decisions are based on principle and conviction rather than just historical performance. Btw, I’ve made this mistake myself!

Cheers,
DangerDad
I agree with you, and to be honest, I didn't do it on purpose right away. I did a mistake while trying to change future paycheck contributions...that changed allocations instead :oops: . Once It happened, I thought...okay, I can sell my shares and reverse back on how it was, do 50-50, or keep 100% S&P500.
To avoid selling and buying the other fund again, I have right now just the SP500.
DangerDad
Posts: 47
Joined: Tue Apr 27, 2021 7:37 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by DangerDad »

Do you have the option to invest in Total Stock index fund rather than SP500?
Most Bogleheads who go with 100% US stock favor the Total Stock index.

Cheers,
DangerDad
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

DangerDad wrote: Mon Jun 14, 2021 4:25 pm Do you have the option to invest in Total Stock index fund rather than SP500?
Most Bogleheads who go with 100% US stock favor the Total Stock index.

Cheers,
DangerDad
No, not at my job. I do that for my personal ROTH IRA. That one is 100% total US Stock.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by grabiner »

Erald wrote: Mon Jun 14, 2021 4:31 pm
DangerDad wrote: Mon Jun 14, 2021 4:25 pm Do you have the option to invest in Total Stock index fund rather than SP500?
Most Bogleheads who go with 100% US stock favor the Total Stock index.

Cheers,
DangerDad
No, not at my job. I do that for my personal ROTH IRA. That one is 100% total US Stock.
Then it makes sense to hold an overall allocation across all your accounts, rather than to look at your 401(k) in isolation. If the best option in your 401(k) is an S&P 500 fund, you can hold a small-cap fund and an international stock fund in your Roth IRA.

This is separate from the decision whether to go 100% stock. Mathematically, this is fine given your age. The question is psychological: can you stick with the allocation and sleep comfortably with such an allocation? If you were in the stock-heavy 2050 fund in March 2020, and considered buying more stock when the fund lost 1/3 of its value (and were happy that the fund rebalanced for you at the market bottom), you may have the risk tolerance for 100% stock
Wiki David Grabiner
Trader Joe
Posts: 2697
Joined: Fri Apr 25, 2014 6:38 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Trader Joe »

Erald wrote: Mon Jun 14, 2021 3:40 pm Hi guys,

I wanted to ask your opinion about my 401K allocation. I am 35 years old and 100% of my 401K was Vanguard Retire 2050 fund.
https://investor.vanguard.com/mutual-fu ... olio/vfifx

Recently I switched all of it to Vanguard SP500 index. I am comfortable having 100% stocks at my age as I do not plan to retire early.. I just want to be financially safe when I am retired. That means I have 25-30 years to recover any potential losses when the market goes down. I do not plan on touching or selling my assets during this long term.

Reason why I switched is because when I compare the performance of these two funds, SP500 by far exceeds the target 2050 fund. The diversification (54% Total US stocks. 36% Total International Stocks, 10% Bonds) doesn't look like it is protecting better or being safer, as when you compare the two graphs, they both go down and go up together in the same way. SP will drop more being all stocks, but will also bounce back higher...so at the end of day it is still better in my newbie eyes. Fund expenses are also lower for SP500 index (0.04% vs 0.15%)
https://personal.vanguard.com/us/funds/ ... tingFrom=6

I am new to investing and might not see the benefits of the target fund. Is it a good idea to keep just SP500 (as Warren Buffet suggests)? Should I do 50-50 between the two maybe?

Thanks for all opinions! Will appreciate any feedback.
Best,
Erald
100% Vanguard SP500 at your age is a great plan.
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by JBTX »

So if international outperforms, will you switch back, after the outperformance?
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

grabiner wrote: Mon Jun 14, 2021 6:02 pm This is separate from the decision whether to go 100% stock. Mathematically, this is fine given your age. The question is psychological: can you stick with the allocation and sleep comfortably with such an allocation? If you were in the stock-heavy 2050 fund in March 2020, and considered buying more stock when the fund lost 1/3 of its value (and were happy that the fund rebalanced for you at the market bottom), you may have the risk tolerance for 100% stock
Yep, I understand that having all stock if I planned to retire in March 2020 would be a crazy idea. But my date is 30 years from now. Thus I am planning to be aggressive between 35-45 years old and later introduce 10-20-30% bonds in my portfolio slowly slowly with age.
I was only comparing SP&500 with that 2050 target fund that seems it is slowing me down due to bonds and international stocks. I really struggle to see the benefits of internationals stocks. Please, can you educate me on this? I know in theory the more diversified the better, but real life examples have shown that when the USA economy goes down (both 2009 house bubble crises and Corona times) European and Asian markets did even worse! Their recovery was slower. Some European countries like Italy, Spain, France... have not yet fully recovered from 2008-2009. I am not sure if that diversification really helps.
miket29
Posts: 1065
Joined: Tue Jun 20, 2017 9:07 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by miket29 »

I am not sure if that diversification really helps.
It's a decision you need to make and probably live with for some years. I could give you some factoids (55% of the value of all stocks are outside the US, there have been periods where foreign significantly outperformed US, CAPE ratios predict higher returns abroad, etc) to argue for holding foreign but it is almost all beside the point.

The question I suggest you ask yourself is what might prompt you in the future to change your AA? You've likely already seen the arguments from above as well as the opposing arguments (US/foreign highly correlated these days, Bogle didn't see a need to hold foreign, etc). Those aren't going to change much, so the remaining factor seems to be performance. If foreign outperforms for 1 year would you then decide to hold a foreign index fund? For 3 years? For 5? There's a fine line between changing one's opinion about asset allocation and chasing performance. I'm not sure I know how to draw it. If the US continues to outperform you'll feel great. But if not, when and how might you decide to hold foreign after all? And what if you wait so long the lead switches back to the US not long after you finally change?
Vanguard User
Posts: 2191
Joined: Wed May 26, 2021 5:46 pm
Location: Sugar Land, Texas

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Vanguard User »

What passively managed index funds are available in your 401k to invest? Target funds aren’t 100% equity stocks and they will adjust based on the target year.
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

Vanguard User wrote: Mon Jun 14, 2021 10:31 pm What passively managed index funds are available in your 401k to invest? Target funds aren’t 100% equity stocks and they will adjust based on the target year.
My 401K is managed by VOYA and this is a list of all possible allocations. Nothing interesting beside target funds or SP500


BONDS
3223 DFA Inflat-Prot Securities Port Inst
6431 Voya Intermediate Bond Fund R6
6726 Eaton Vance Income Fund of Boston R6

ASSET ALLOCATION
0791 Vanguard Trgt Retire 2015 Fnd Inv
0793 Vanguard Trgt Retire 2035 Fnd Inv
0794 Vanguard Trgt Retire 2045 Fnd Inv
0795 Vanguard Trgt Retire Income Fnd Inv
0926 Vanguard Trgt Retire 2025 Fnd Inv
1296 Vanguard Trgt Retire 2020 Fnd Inv
1297 Vanguard Trgt Retire 2030 Fnd Inv
1298 Vanguard Trgt Retire 2040 Fnd Inv
1299 Vanguard Trgt Retire 2050 Fnd Inv
2473 Vanguard Trgt Retire 2055 Fnd Inv
3447 Vanguard Trgt Retire 2060 Fnd Inv
8995 Vanguard Trgt Retire 2065 Fnd Inv

BALANCED
3700 Invesco Equity & Income Fund R6

LARGE CAP VALUE
0899 Vanguard 500 Index Fund Adm
2323 American Funds Fundamental Inv R6
3697 Invesco Diversified Dividend Fund R6

LARGE CAP GROWTH
3860 ClrBrg Aggr Grwth Fnd IS

SMALL/MID/SPECIALTY
0756 Vanguard Mid-Cap Index Fund Adm
0757 Vanguard Small-Cap Index Fund Adm
1438 DFA Real Estate Securities Port Inst
2566 DFA U.S. Targeted Value Port Inst
3497 ClrBrg Sm Cp Growth Fnd IS
6595 Victory Sycmr Established Value F R6
9862 Voya MidCap Opportunities Port R6

GLOBAL/INTERNATIONAL
1723 American Funds EuroPacific Grw R6
1899 American Funds New Perspective R6
atdharris
Posts: 2091
Joined: Wed Jan 02, 2019 2:18 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by atdharris »

I'd at least allocate some to the EuroPacific Growth fund. That isn't a bad one for a managed fund. I tend to think you can find value in actively managed international funds over passive. Otherwise, go all into the S&P 500 and maybe add some small cap exposure. I dumped a target date fund in 2017 and have no regrets at all.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by lakpr »

If you do want international exposure, I would suggest that the Vanguard Target Retirement 2065 fund is a better fit than the Euro Pacific Growth. We know that the 2065 fund will maintain 90:10 stocks to bonds ratio for at least the next 15 years before it begins its glide path. We also know that it uses a 60% US equities and 40% international equities ratio for its stock portion.

An allocation of 50% to S&P 500 Index fund and another 50% to the Retirement 2065 fund will provide an 18% (= 50% allocation * 90% stocks * 40% international equities within the fund) exposure to international equities. You will also get a 5% allocation to bonds as a byproduct, but that is unlikely to make a big difference in the portfolio returns.

The question of exact international allocation in the portfolio can be revisited in 2035 when the glidepath begins.

Vary the allocation percentage to Retirement 2065 fund higher or lower depending on what you desire your international allocation should be. A 55% allocation to the Retirement 2065 fund, for example, would get you to 20% international equities. It is a cheaper way than paying 0.45% or higher ER to the Euro Pacific Growth fund. You will also get the advantage that you buy the ENTIRE international equities basket, since unlike the Euro-Pacific growth fund which invests in only developed markets and omits Canada + Mexico, the Retirement 2065 fund invests in VTIAX, the Vanguard Total International Index fund.
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

Thanks all for sharing your thoughts so far! I appreciate it!
ivgrivchuck
Posts: 1672
Joined: Sun Sep 27, 2020 6:20 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by ivgrivchuck »

For most people sticking with the target date fund makes the most sense.

It takes care of rebalancing automatically. Avoids behavioral errors.

If you want to make investing as your hobby and really spend time on planning and understanding things, by all means 100% in SP500 is a fine choice.

If you are more "set it and forget it" type of person, the target date fund is the best choice.

The worst thing you can do is to manage your portfolio yourself based on your feelings and incomplete understanding of the fundamentals.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by lakpr »

ivgrivchuck wrote: Tue Jun 15, 2021 12:37 pm For most people sticking with the target date fund makes the most sense.

It takes care of rebalancing automatically. Avoids behavioral errors.

If you want to make investing as your hobby and really spend time on planning and understanding things, by all means 100% in SP500 is a fine choice.

If you are more "set it and forget it" type of person, the target date fund is the best choice.

The worst thing you can do is to manage your portfolio yourself based on your feelings and incomplete understanding of the fundamentals.
What if you disagree with the exact percentage of international equities in the target date fund? Let's say you may want it to be only 20%, not 40%, for numbers sake.
asif408
Posts: 2616
Joined: Sun Mar 02, 2014 7:34 am
Location: Florida

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by asif408 »

Erald wrote: Mon Jun 14, 2021 6:34 pm I really struggle to see the benefits of internationals stocks. Please, can you educate me on this? I know in theory the more diversified the better, but real life examples have shown that when the USA economy goes down (both 2009 house bubble crises and Corona times) European and Asian markets did even worse! Their recovery was slower. Some European countries like Italy, Spain, France... have not yet fully recovered from 2008-2009. I am not sure if that diversification really helps.
So here is a question: how did international stocks do in the 2000-2002 bear market? The answer: developed markets fell about the same but recovered faster. Emerging markets had a shorter bear market and recovered much faster: https://www.portfoliovisualizer.com/bac ... ion3_3=100.

Here's a tougher question: how did international stocks do during the 1970s bear market and subsequent recovery?
ivgrivchuck
Posts: 1672
Joined: Sun Sep 27, 2020 6:20 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by ivgrivchuck »

lakpr wrote: Tue Jun 15, 2021 1:26 pm
ivgrivchuck wrote: Tue Jun 15, 2021 12:37 pm For most people sticking with the target date fund makes the most sense.

It takes care of rebalancing automatically. Avoids behavioral errors.

If you want to make investing as your hobby and really spend time on planning and understanding things, by all means 100% in SP500 is a fine choice.

If you are more "set it and forget it" type of person, the target date fund is the best choice.

The worst thing you can do is to manage your portfolio yourself based on your feelings and incomplete understanding of the fundamentals.
What if you disagree with the exact percentage of international equities in the target date fund? Let's say you may want it to be only 20%, not 40%, for numbers sake.
If you hold such a strong view, it already shows that investing is your hobby. 95%+ of people couldn't care less (and perhaps their shouldn't...)
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
LeslieSmiley
Posts: 828
Joined: Fri May 08, 2015 7:43 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by LeslieSmiley »

asif408 wrote: Tue Jun 15, 2021 1:28 pm
Erald wrote: Mon Jun 14, 2021 6:34 pm I really struggle to see the benefits of internationals stocks. Please, can you educate me on this? I know in theory the more diversified the better, but real life examples have shown that when the USA economy goes down (both 2009 house bubble crises and Corona times) European and Asian markets did even worse! Their recovery was slower. Some European countries like Italy, Spain, France... have not yet fully recovered from 2008-2009. I am not sure if that diversification really helps.
So here is a question: how did international stocks do in the 2000-2002 bear market? The answer: developed markets fell about the same but recovered faster. Emerging markets had a shorter bear market and recovered much faster: https://www.portfoliovisualizer.com/bac ... ion3_3=100.

Here's a tougher question: how did international stocks do during the 1970s bear market and subsequent recovery?
Since 2005, the S&P 500 has outperformed overseas stocks, posting a return of 176%. Meanwhile, emerging market stocks posted returns of 96%, and developed international stocks returned just 21% over the same time period.

Over the last decade, the S&P 500 has produced an annualized total return of 13.7%, nearly triple that of the 5.4% annualized total return of MSCI’s Europe, Australasia and Far East (EAFE) index.

Will international stocks outperform us stocks in the next decade? Totally possible.

So it depends on how you make decision. Historical data? Economic theories? Technical analysis? Instinct? Etc?

For those who have been holding all U.S. or mostly U.S. for a long time, their gain is substantial that even if international outperforms in the future, they will highly likely to be way ahead in terms of the size of their portfolio.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Northern Flicker »

If an S&P500 fund is superior to the portfolio of Target Retirement 2050 for someone retiring in 2050, perhaps you might contact Vanguard and let them know so that they can fix their product.
ddurrett896
Posts: 1712
Joined: Wed Nov 05, 2014 2:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by ddurrett896 »

Erald wrote: Mon Jun 14, 2021 3:40 pm Thanks for all opinions! Will appreciate any feedback.
Got a Roth IRA?

I'd keep the 401K in the Target Date fund and move the Roth IRA to a more aggressive SP500 fund.
User avatar
1789
Posts: 2223
Joined: Fri Aug 16, 2019 3:31 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by 1789 »

Erald wrote: Mon Jun 14, 2021 3:40 pm Hi guys,

I wanted to ask your opinion about my 401K allocation. I am 35 years old and 100% of my 401K was Vanguard Retire 2050 fund.
https://investor.vanguard.com/mutual-fu ... olio/vfifx

Recently I switched all of it to Vanguard SP500 index. I am comfortable having 100% stocks at my age as I do not plan to retire early.. I just want to be financially safe when I am retired. That means I have 25-30 years to recover any potential losses when the market goes down. I do not plan on touching or selling my assets during this long term.

Reason why I switched is because when I compare the performance of these two funds, SP500 by far exceeds the target 2050 fund. The diversification (54% Total US stocks. 36% Total International Stocks, 10% Bonds) doesn't look like it is protecting better or being safer, as when you compare the two graphs, they both go down and go up together in the same way. SP will drop more being all stocks, but will also bounce back higher...so at the end of day it is still better in my newbie eyes. Fund expenses are also lower for SP500 index (0.04% vs 0.15%)
https://personal.vanguard.com/us/funds/ ... tingFrom=6

I am new to investing and might not see the benefits of the target fund. Is it a good idea to keep just SP500 (as Warren Buffet suggests)? Should I do 50-50 between the two maybe?

Thanks for all opinions! Will appreciate any feedback.
Best,
Erald
A single fund like sP500 index fund, at age 35 is more than enough number of funds, imo. But please don't change your portfolio by looking at past performance. Later on as you get close to your FI number you can slowly start adding some bonds or increase your CASH amount.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
mwesty
Posts: 33
Joined: Fri Nov 06, 2020 7:38 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by mwesty »

lakpr wrote: Tue Jun 15, 2021 1:26 pm
ivgrivchuck wrote: Tue Jun 15, 2021 12:37 pm For most people sticking with the target date fund makes the most sense.

It takes care of rebalancing automatically. Avoids behavioral errors.

If you want to make investing as your hobby and really spend time on planning and understanding things, by all means 100% in SP500 is a fine choice.

If you are more "set it and forget it" type of person, the target date fund is the best choice.

The worst thing you can do is to manage your portfolio yourself based on your feelings and incomplete understanding of the fundamentals.
What if you disagree with the exact percentage of international equities in the target date fund? Let's say you may want it to be only 20%, not 40%, for numbers sake.
Great question. I love the simplicity of the target date fund, but think 35-40% intl is too high
User avatar
Brianmcg321
Posts: 1875
Joined: Mon Jul 15, 2019 8:23 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Brianmcg321 »

I think its a great idea. I hate target date funds. Given your age there's no reason for you not to be 100% equities.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
BirdsE
Posts: 12
Joined: Sat Dec 21, 2019 5:17 pm
Location: Salinas, CA

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by BirdsE »

It is not a bad idea to get out of the Target fund. While the target fund is fine for some people using a diversified set of funds would be a better idea if you are interested in having more control of your nest egg, Having the stock fund heavy because of your age is good but also have some bonds such as the Inflation proof fund , a money market fund , dividend stock fund, etc. As time goes by you can easily move more % of your diversified funds around to your best set up. At some moment in time you will feed confident about letting your choices just ride and let the markets flow without over reacting from a moment of down markets.
Just look at the market curve from 1920's to 2021 and you will note the line goes up as time moves on. Do not try to guess when the up times or down time are coming --just let it ride, (once you feel comfortable with your choices)
phantom0308
Posts: 493
Joined: Thu Aug 25, 2016 6:52 pm
Location: San Mateo, CA

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by phantom0308 »

Target funds are great from a behavioral PoV. Every rebalance is a chance to change your asset allocation and question whether you should be modifying it to chase performance or tilt one way or the other unless you’re fanatical in your devotion to your IPS.
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Northern Flicker »

phantom0308 wrote: Wed Jun 16, 2021 12:45 pm Target funds are great from a behavioral PoV. Every rebalance is a chance to change your asset allocation and question whether you should be modifying it to chase performance or tilt one way or the other unless you’re fanatical in your devotion to your IPS.
Yes, it can avoid the temptation of performance chasing, i.e. re-allocating to whatever has been hot recently, but only if the investor sticks with the target date fund. There is nothing to stop someone from moving from a TDF to the recent stock market segment winner(s) if that is their inclination.
Vanguard User
Posts: 2191
Joined: Wed May 26, 2021 5:46 pm
Location: Sugar Land, Texas

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Vanguard User »

Erald wrote: Tue Jun 15, 2021 10:02 am
Vanguard User wrote: Mon Jun 14, 2021 10:31 pm What passively managed index funds are available in your 401k to invest? Target funds aren’t 100% equity stocks and they will adjust based on the target year.
My 401K is managed by VOYA and this is a list of all possible allocations. Nothing interesting beside target funds or SP500


BONDS
3223 DFA Inflat-Prot Securities Port Inst
6431 Voya Intermediate Bond Fund R6
6726 Eaton Vance Income Fund of Boston R6

ASSET ALLOCATION
0791 Vanguard Trgt Retire 2015 Fnd Inv
0793 Vanguard Trgt Retire 2035 Fnd Inv
0794 Vanguard Trgt Retire 2045 Fnd Inv
0795 Vanguard Trgt Retire Income Fnd Inv
0926 Vanguard Trgt Retire 2025 Fnd Inv
1296 Vanguard Trgt Retire 2020 Fnd Inv
1297 Vanguard Trgt Retire 2030 Fnd Inv
1298 Vanguard Trgt Retire 2040 Fnd Inv
1299 Vanguard Trgt Retire 2050 Fnd Inv
2473 Vanguard Trgt Retire 2055 Fnd Inv
3447 Vanguard Trgt Retire 2060 Fnd Inv
8995 Vanguard Trgt Retire 2065 Fnd Inv

BALANCED
3700 Invesco Equity & Income Fund R6

LARGE CAP VALUE
0899 Vanguard 500 Index Fund Adm
2323 American Funds Fundamental Inv R6
3697 Invesco Diversified Dividend Fund R6

LARGE CAP GROWTH
3860 ClrBrg Aggr Grwth Fnd IS

SMALL/MID/SPECIALTY
0756 Vanguard Mid-Cap Index Fund Adm
0757 Vanguard Small-Cap Index Fund Adm
1438 DFA Real Estate Securities Port Inst
2566 DFA U.S. Targeted Value Port Inst
3497 ClrBrg Sm Cp Growth Fnd IS
6595 Victory Sycmr Established Value F R6
9862 Voya MidCap Opportunities Port R6

GLOBAL/INTERNATIONAL
1723 American Funds EuroPacific Grw R6
1899 American Funds New Perspective R6
0756 is VTSAX?
cjcerny
Posts: 605
Joined: Sat Sep 15, 2007 12:47 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by cjcerny »

History shows that you'll probably do a lot better performance wise, but also with a lot more volatility. If you can stick with 100% S&P500 through all the ups and downs that it will inevitably throw at you in the coming years, you'll be "good". If one of those dives causes you to panic and do something rash like sell a lot of S&P500 when it is way, way down, then that would be "bad". It will all just hinge on how you react to the volatility that you will face.
Topic Author
Investor1986
Posts: 78
Joined: Sun Jun 06, 2021 5:23 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Investor1986 »

cjcerny wrote: Thu Jun 17, 2021 5:11 pm History shows that you'll probably do a lot better performance wise, but also with a lot more volatility. If you can stick with 100% S&P500 through all the ups and downs that it will inevitably throw at you in the coming years, you'll be "good". If one of those dives causes you to panic and do something rash like sell a lot of S&P500 when it is way, way down, then that would be "bad". It will all just hinge on how you react to the volatility that you will face.
Yep, I learned that know after reading a lot books. Never sell, stay invested which what I plant to do. :sharebeer
etfan
Posts: 526
Joined: Sun May 16, 2021 4:22 pm

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by etfan »

Seems like many are agreeing that going 100% stocks at the OP's age (35) is a reasonable thing. At what age do you think that is no longer reasonable?
ivk5
Posts: 1348
Joined: Thu Sep 22, 2016 9:05 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by ivk5 »

Vanguard User wrote: Thu Jun 17, 2021 1:32 pm
Erald wrote: Tue Jun 15, 2021 10:02 am
Vanguard User wrote: Mon Jun 14, 2021 10:31 pm What passively managed index funds are available in your 401k to invest? Target funds aren’t 100% equity stocks and they will adjust based on the target year.
My 401K is managed by VOYA and this is a list of all possible allocations. Nothing interesting beside target funds or SP500


BONDS
3223 DFA Inflat-Prot Securities Port Inst
6431 Voya Intermediate Bond Fund R6
6726 Eaton Vance Income Fund of Boston R6

ASSET ALLOCATION
0791 Vanguard Trgt Retire 2015 Fnd Inv
0793 Vanguard Trgt Retire 2035 Fnd Inv
0794 Vanguard Trgt Retire 2045 Fnd Inv
0795 Vanguard Trgt Retire Income Fnd Inv
0926 Vanguard Trgt Retire 2025 Fnd Inv
1296 Vanguard Trgt Retire 2020 Fnd Inv
1297 Vanguard Trgt Retire 2030 Fnd Inv
1298 Vanguard Trgt Retire 2040 Fnd Inv
1299 Vanguard Trgt Retire 2050 Fnd Inv
2473 Vanguard Trgt Retire 2055 Fnd Inv
3447 Vanguard Trgt Retire 2060 Fnd Inv
8995 Vanguard Trgt Retire 2065 Fnd Inv

BALANCED
3700 Invesco Equity & Income Fund R6

LARGE CAP VALUE
0899 Vanguard 500 Index Fund Adm
2323 American Funds Fundamental Inv R6
3697 Invesco Diversified Dividend Fund R6

LARGE CAP GROWTH
3860 ClrBrg Aggr Grwth Fnd IS

SMALL/MID/SPECIALTY
0756 Vanguard Mid-Cap Index Fund Adm
0757 Vanguard Small-Cap Index Fund Adm
1438 DFA Real Estate Securities Port Inst
2566 DFA U.S. Targeted Value Port Inst
3497 ClrBrg Sm Cp Growth Fnd IS
6595 Victory Sycmr Established Value F R6
9862 Voya MidCap Opportunities Port R6

GLOBAL/INTERNATIONAL
1723 American Funds EuroPacific Grw R6
1899 American Funds New Perspective R6
0756 is VTSAX?
No, looks like VIMAX
Northern Flicker
Posts: 15363
Joined: Fri Apr 10, 2015 12:29 am

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by Northern Flicker »

Erald wrote: Tue Jun 15, 2021 10:02 am
Vanguard User wrote: Mon Jun 14, 2021 10:31 pm What passively managed index funds are available in your 401k to invest? Target funds aren’t 100% equity stocks and they will adjust based on the target year.
My 401K is managed by VOYA and this is a list of all possible allocations. Nothing interesting beside target funds or SP500.


BONDS
3223 DFA Inflat-Prot Securities Port Inst
6431 Voya Intermediate Bond Fund R6
6726 Eaton Vance Income Fund of Boston R6

ASSET ALLOCATION
0791 Vanguard Trgt Retire 2015 Fnd Inv
0793 Vanguard Trgt Retire 2035 Fnd Inv
0794 Vanguard Trgt Retire 2045 Fnd Inv
0795 Vanguard Trgt Retire Income Fnd Inv
0926 Vanguard Trgt Retire 2025 Fnd Inv
1296 Vanguard Trgt Retire 2020 Fnd Inv
1297 Vanguard Trgt Retire 2030 Fnd Inv
1298 Vanguard Trgt Retire 2040 Fnd Inv
1299 Vanguard Trgt Retire 2050 Fnd Inv
2473 Vanguard Trgt Retire 2055 Fnd Inv
3447 Vanguard Trgt Retire 2060 Fnd Inv
8995 Vanguard Trgt Retire 2065 Fnd Inv

BALANCED
3700 Invesco Equity & Income Fund R6

LARGE CAP VALUE
0899 Vanguard 500 Index Fund Adm
2323 American Funds Fundamental Inv R6
3697 Invesco Diversified Dividend Fund R6

LARGE CAP GROWTH
3860 ClrBrg Aggr Grwth Fnd IS

SMALL/MID/SPECIALTY
0756 Vanguard Mid-Cap Index Fund Adm
0757 Vanguard Small-Cap Index Fund Adm
1438 DFA Real Estate Securities Port Inst
2566 DFA U.S. Targeted Value Port Inst
3497 ClrBrg Sm Cp Growth Fnd IS
6595 Victory Sycmr Established Value F R6
9862 Voya MidCap Opportunities Port R6

GLOBAL/INTERNATIONAL
1723 American Funds EuroPacific Grw R6
1899 American Funds New Perspective R6
DFA Targeted Value is interesting. It is designed to pair with an S&P500 fund to implement a value tilt in mid and small caps. It can also be used with a total market index fund for a similar purpose.

I can only tell you what I would do if I had the same 401K available to me. I would combine DFA Targeted Value and the S&P500 fund with one of the Target Retirement funds.

I thus would hold something like 70% Target Retirement 2040, 15% S&P500 and 15% DFA Targeted Value. (You also could increase/decrease the value and size tilt to taste by increasing/decreasing the DFA fund and decreasing/increasing the S&P500 fund.) Target date funds are not designed to be used this way, but it would be the lowest cost implementation in the 401K of a portfolio I would want to hold if I were in the OP's situation. It brings int'l equities down to 25% of equities, which is my target. Others may prefer a higher int'l allocation and would just use a target date fund aligned with targeted retirement year.

I would be uncomfortable with the timing risk of moving to 100% S&P500 fund from a Target Retirement fund after a runup in the S&P500.

But to hold such a portfolio you have to be comfortable with the volatility of a value fund like the DFA fund and focus on overall portfolio volatility.

Again, this is what I would hold. You would have to be comfortable with a mild size and value tilt. The other alternative I would consider is 70% Target Retirement 2040 and 30% S&P500, which is a more neutral portfolio.
Last edited by Northern Flicker on Mon Jun 21, 2021 12:46 pm, edited 2 times in total.
phantom0308
Posts: 493
Joined: Thu Aug 25, 2016 6:52 pm
Location: San Mateo, CA

Re: Switching my 401K allocation from a target fund to 100% SP500. Bad idea?

Post by phantom0308 »

Northern Flicker wrote: Wed Jun 16, 2021 1:24 pm
phantom0308 wrote: Wed Jun 16, 2021 12:45 pm Target funds are great from a behavioral PoV. Every rebalance is a chance to change your asset allocation and question whether you should be modifying it to chase performance or tilt one way or the other unless you’re fanatical in your devotion to your IPS.
Yes, it can avoid the temptation of performance chasing, i.e. re-allocating to whatever has been hot recently, but only if the investor sticks with the target date fund. There is nothing to stop someone from moving from a TDF to the recent stock market segment winner(s) if that is their inclination.
It’s a good point. In my experience I only ever touch my investments when I’m rebalancing or tax loss harvesting. Everything else is automatic. I’m a bit more tempted to rebalance excessively into bonds when the stock market is cratering like last March, or into stocks when it’s shooting up. My wife has an account with a target retirement account auto invested and it’s never touched. Basically every rare interaction with my accounts is a chance to go off my plan.

In my case I never think about individual stocks, but I did increase my bond allocation by 5% last year. I rationalized it as age in bonds and I hadn’t updated in some time but really I think I was reacting to the market. It hurt my performance in an otherwise great year. Luckily that’s the extent of my emotional investing and I have a relatively inexpensive reminder by looking at how that account performed relative to mine.

Loss of tax loss harvesting is a downside in taxable now that I think of it.
Post Reply