Beginning to evaluate the holdings of Vanguard Target Retirement Funds

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Silence Dogood
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

vineviz wrote: Wed Apr 14, 2021 10:16 am ...Intentionally or not, Vanguard is effectively burying the cost of managing their Target Retirement and LifeStrategy funds within the cost of the underlying funds, and the amount isn't small. In fact, it's probably 5 or 6 bps of expenses being reported on the financial statements of the underlying funds which are actually being incurred at the fund-of-fund level.
Considering that the Target Retirement and LifeStrategy funds are the exclusive owners of the investor shares, wouldn't the cost of managing these funds be the difference between the investor shares and admiral shares of the underlying funds?

For example, for VFFVX:

Code: Select all

Fund:   Allocation:   Expense Ratio:
VTSMX     54.2%           0.14%
VGTSX     36.3%           0.17%
VTBIX      6.5%           0.09%
VTIBX*     3.0%           0.13%
0.542 * 0.14 + 0.363 * 0.17 + 0.065 * 0.09 + 0.03 * 0.13 = 0.14734

Replaced with the admiral shares of the underlying funds:

Code: Select all

Fund:   Allocation:   Expense Ratio:
VTSAX     54.2%           0.04%
VTIAX     36.3%           0.11%
VBTLX      6.5%           0.05%
VTABX      3.0%           0.11%
0.542 * 0.04 + 0.363 * 0.11 + 0.065 * 0.05 + 0.03 * 0.11 = 0.06816

Expenses incurred at the fund-of-fund level:

0.14734 - 0.06816 = 0.07918

Isn't that fairly straightforward? Or am I missing something?

*In the process of being replaced by VTILX.
000
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by 000 »

I still think Vanguard investor shares might still be available at some other brokers / plans. Or perhaps the rollout of Admiral shares everywhere has completed.
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hornet96
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by hornet96 »

alex_686 wrote: Wed Apr 14, 2021 4:33 pm There is a high bar to meet. Many firm jump far above the bar and get a A+. Vanguard just clears the bar and get a C.
The bar you are talking about is one you have constructed in your own mind, rather than the actual bar set forth by the regulators. You've already admitted that the regulatory bar is in fact set very high to begin with, and results in high quality information being disclosed to investors. If you wish that the regulatory bar was set higher, then you should say so. However, your arbitrary grading scale is meaningless as I've still yet to see you explain why knowing I paid my 15 cent fee in three nickels, rather than a with a single 15 cent check, makes any difference at all. For it to matter, you would have to demonstrate that the actual fee is higher than the reported 15 cents. Are you making that claim?
alex_686 wrote: Wed Apr 14, 2021 4:33 pm Vanguard seriously lags its peers in transparency, discourse, reporting, and their poor ownership structure.
This is quite a bold accusation without any substance provided to back it up. I'm getting the impression that you work for another fund company and are trying to figure out a way to compete by claiming some kind of holier-than-thou approach to reporting, as a marketing ploy. I get it, it's a tough, competitive landscape, with $ trillions flowing into Vanguard over the past several years.
Northern Flicker
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Northern Flicker »

Flashes1 wrote: Tue Apr 13, 2021 3:52 pm And I believe it was Alex who raised an interesting point, why the heck are the expense ratios on the Target Retirement funds more than their underlying funds?

Example: Target 2025 fee is 0.13%; TSM is approx. 0.04%, International Index is 0.11% and Total Bond is 0.05% - so HOW do they arrive at a 0.13% fee? Vanguard must be laughing at my ignorance!
The ERs are the aggregation of the underlying funds, which are investor share classes that just no longer are available individually for investment. But paying 6-7 bp to have the portfolio professionally managed is a bargain.
Grt2bOutdoors
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Grt2bOutdoors »

AlwaysLearningMore wrote: Tue Apr 13, 2021 7:26 pm
Grt2bOutdoors wrote: Tue Apr 13, 2021 2:23 pm The purpose of a target dated fund is:
1) professional management
2) all-in-one asset allocation based on investment managements foresight for the best risk adjusted expected returns over the investment horizon and the objectives of the fund itself
3) not to time the market (emphasis added)
Another opinion:
Alex Frakt wrote: Sat Jun 02, 2012 2:26 pm
Alex Frakt wrote:You can see the conventional wisdom in action in Vanguard's pre-target date all-in-one funds. The LifeStrategy funds had fixed allocations, you were meant to switch between them as you aged. They started with Growth at 20% bonds and ended up with Income at 80%. STAR is an all-in-one fund with a benchmark of 37.5% bonds. Wellington is Vanguard's original fund and has a benchmark of 35% bonds.
I know it's bad form to follow up on your own posts, but I remembered something over lunch.

You can even see age in bonds as conventional wisdom with the original allocations in the Target Retirement funds. When Vanguard launched the funds, they used a glideslope that started out somewhat below than age in bonds, but increased bonds at a rate greater than 1% a year to end up at 65% bonds at age 65. Why did they switch? The few other target funds available in the early 2000s, notably from Fidelity and T Rowe Price, had higher stock allocations and thus had outperformed Vanguard over the years of that bull market. They had two choices at that point. Stick to their guns and lose out on new investments or jump aboard the approximately age-15 in bonds bandwagon and rely on their cost advantage to eke out a small advantage going forward. In 2006, they chose the latter. Of course their investors paid the price in the ensuing crash.
https://tinyurl.com/ye583fep
A change in strategy based upon known and unknown factors is not "timing" the market. Investing is not a precise science and subject to fine tuning along the way. Competition is inevitable, especially with so much at stake but we can all agree that the low cost revolution has impacted the two above more than the target date retirement funds. The product is an important facet of collecting "sticky" money but so are other differentiators including service, quality, performance and cost.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
sycamore
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by sycamore »

Silence Dogood wrote: Wed Apr 14, 2021 5:25 pm
vineviz wrote: Wed Apr 14, 2021 10:16 am ...Intentionally or not, Vanguard is effectively burying the cost of managing their Target Retirement and LifeStrategy funds within the cost of the underlying funds, and the amount isn't small. In fact, it's probably 5 or 6 bps of expenses being reported on the financial statements of the underlying funds which are actually being incurred at the fund-of-fund level.
Considering that the Target Retirement and LifeStrategy funds are the exclusive owners of the investor shares, wouldn't the cost of managing these funds be the difference between the investor shares and admiral shares of the underlying funds?
...
Isn't that fairly straightforward? Or am I missing something?
I don't understand why the difference (between the investor shares and admiral shares) equates to the cost of managing the funds. What's the explanation for that?

The TR or LS funds have some cost that's "outside" of however the underlying funds are managed, and I don't see how that cost is necessarily related to the share class of the underlying funds. I may be missing something :)
Silence Dogood
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

AlwaysLearningMore wrote: Tue Apr 13, 2021 7:26 pm
Grt2bOutdoors wrote: Tue Apr 13, 2021 2:23 pm The purpose of a target dated fund is:
1) professional management
2) all-in-one asset allocation based on investment managements foresight for the best risk adjusted expected returns over the investment horizon and the objectives of the fund itself
3) not to time the market (emphasis added)
Another opinion:
Alex Frakt wrote: Sat Jun 02, 2012 2:26 pm You can even see age in bonds as conventional wisdom with the original allocations in the Target Retirement funds. When Vanguard launched the funds, they used a glideslope that started out somewhat below than age in bonds, but increased bonds at a rate greater than 1% a year to end up at 65% bonds at age 65. Why did they switch? The few other target funds available in the early 2000s, notably from Fidelity and T Rowe Price, had higher stock allocations and thus had outperformed Vanguard over the years of that bull market. They had two choices at that point. Stick to their guns and lose out on new investments or jump aboard the approximately age-15 in bonds bandwagon and rely on their cost advantage to eke out a small advantage going forward. In 2006, they chose the latter. Of course their investors paid the price in the ensuing crash.
[Emphasis added.]

I can understand why someone would be upset by this decision, but just to be clear, Vanguard introduced their Target Retirement funds on October 27, 2003 and they made the decision to switch to a higher stock allocation in March 2006 - approximately 28 months later.

Stocks did outperform bonds during this time period, but not in a particularly significant way.

The basic stock/bond allocation has remained the same since 2006.

Bogleheads wiki: History of Changes to the Vanguard Target Retirement Funds
Northern Flicker
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Northern Flicker »

sycamore wrote: Wed Apr 14, 2021 8:04 pm
Silence Dogood wrote: Wed Apr 14, 2021 5:25 pm
vineviz wrote: Wed Apr 14, 2021 10:16 am ...Intentionally or not, Vanguard is effectively burying the cost of managing their Target Retirement and LifeStrategy funds within the cost of the underlying funds, and the amount isn't small. In fact, it's probably 5 or 6 bps of expenses being reported on the financial statements of the underlying funds which are actually being incurred at the fund-of-fund level.
Considering that the Target Retirement and LifeStrategy funds are the exclusive owners of the investor shares, wouldn't the cost of managing these funds be the difference between the investor shares and admiral shares of the underlying funds?
...
Isn't that fairly straightforward? Or am I missing something?
I don't understand why the difference (between the investor shares and admiral shares) equates to the cost of managing the funds. What's the explanation for that?

The TR or LS funds have some cost that's "outside" of however the underlying funds are managed, and I don't see how that cost is necessarily related to the share class of the underlying funds. I may be missing something :)
Not long ago, admiral shares for Vanguard index funds had a $10K minimum and investor shares had a $3K mininum. There apparently are technical reasons why Vanguard cannot charge more than the underlying fund ERs for the LifeStrategy and Target Retirement funds, so they have always used the investor share class for the underlying funds as a mechanism for charging to cover portfolio management. This primarily is rebalancing, and they may have the monitoring of the fund automated and generating alerts when action is needed, but the extra fee is very low.

Not to long ago, they closed the index fund investor share classes to new investors, and lowered the minimum for admiral shares of index funds to $3000. Today, I believe that LifeStrategy and Target Retirement funds are the only source of funds in the investor share classes of Vanguard index funds.

And yes, it is a small amount-- 6-8 bp/yr higher than constructing the portfolio with individual funds. Some investment advisors charge 100 bp/yr to do what amounts to the same work.
donaldfair71
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by donaldfair71 »

alex_686 wrote: Wed Apr 14, 2021 12:45 pm
climber2020 wrote: Wed Apr 14, 2021 12:30 pm Not sure if this has been brought up yet, but I remember reading somewhere that the Target Date funds have gradually ramped up international equity exposure over the years. I think originally international was only 20% of equities and it has gone up every few years.

Is this because the US market has shrunk relative to the rest of the world? Going from 20 to 40% seems like a large change.
It is not because the US market has shrunk. Rather it is a change in attitude and market structure. The question is no longer "why international", but "why not international".

International markets have become more integrated with US markets. i.e. Accounting standards and market regulations have harmonized and have become roughly equivalent. Trading and the back office stuff have become cheaper. etc. Companies have become more international.
donaldfair71 wrote: Wed Apr 14, 2021 12:39 pm That active management believes that international has higher expected returns than it did previously when the allocation was lower.
I don't see this. When markets are not integrated or are inefficient that is a argument for active management. But the trend has been going in the opposite direction. Higher integration and higher market efficiency. This argues for passive investing. i.e., moving to the market weight.
I agree with you 100%. Not sure Vanguard does (or they do, but believe that offering TDFs and LS funds at global market cap weights would turn off investors)

I could have read the original question wrong, the question was why has Vanguard changed allocation over the years? It’s because it’s making active decisions in these allocations.
I’m hoping someday Vanguard simplifies an offering of VT+ BND and call it a day

Silence Dogood
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Silence Dogood »

donaldfair71 wrote: Thu Apr 15, 2021 4:48 am I agree with you 100%. Not sure Vanguard does (or they do, but believe that offering TDFs and LS funds at global market cap weights would turn off investors)
Current global stock market capitalization is (approximately) 56/44 US/ex-US.

The Vanguard Target Retirement/LifeStrategy funds have a 60/40 US/ex-US stock allocation.

That's an inconsequential difference.*

(Personally, I think a small amount of home bias is OK.)
donaldfair71 wrote: Thu Apr 15, 2021 4:48 am I could have read the original question wrong, the question was why has Vanguard changed allocation over the years? It’s because it’s making active decisions in these allocations.
I’m hoping someday Vanguard simplifies an offering of VT+ BND and call it a day[/size]
Hasn't Vanguard, in effect, done exactly what you are hoping for?

History of Changes to the Vanguard Target Retirement Funds

*Something else that's inconsequential: Vanguard Total Stock (3,722 holdings) + Vanguard Total International (7,487 holdings) is more diversified than Vanguard Total World (9,037 holdings). (A difference of 2,172 holdings.)
donaldfair71
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by donaldfair71 »

Silence Dogood wrote: Thu Apr 15, 2021 6:20 pm
donaldfair71 wrote: Thu Apr 15, 2021 4:48 am I agree with you 100%. Not sure Vanguard does (or they do, but believe that offering TDFs and LS funds at global market cap weights would turn off investors)
Current global stock market capitalization is (approximately) 56/44 US/ex-US.

The Vanguard Target Retirement/LifeStrategy funds have a 60/40 US/ex-US stock allocation.

That's an inconsequential difference.*

(Personally, I think a small amount of home bias is OK.)
donaldfair71 wrote: Thu Apr 15, 2021 4:48 am I could have read the original question wrong, the question was why has Vanguard changed allocation over the years? It’s because it’s making active decisions in these allocations.
I’m hoping someday Vanguard simplifies an offering of VT+ BND and call it a day[/size]
Hasn't Vanguard, in effect, done exactly what you are hoping for?

History of Changes to the Vanguard Target Retirement Funds

*Something else that's inconsequential: Vanguard Total Stock (3,722 holdings) + Vanguard Total International (7,487 holdings) is more diversified than Vanguard Total World (9,037 holdings). (A difference of 2,172 holdings.)
They are close to market weight right now, but this hasn’t always been the case in equities. It has changed over time, and if this is a new commitment to market cap weighting, good enough. But I don’t know that this is the case.

The bigger point at play I was making in my original reply in the thread is that all of these are active decisions by Vanguard, and that is what one is getting regardless of their philosophy being new/old/the like by investing in a TDF. You’re getting that decision, whatever that decision is, and paying very very little for it.
Northern Flicker
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Northern Flicker »

Vanguard is neither actively managing the allocation for these funds nor timing the markets with the allocation. They increased their int'l stock allocation and added int'l bonds in response to research they did on how it may reduce volatility. These were strategic changes. Strategic changes have timing risk, but they are not market timing, which is tactical asset asset allocation. Interestingly, Vanguard used to have a tactical asset allocation fund, vaapx. These were the hot idea of the mid-1980s. Vanguard shut theirs down eventually. This fund once upon a time was included in the LifeStrategy funds.

In general, TDFs throughout the industry have increased the stock percentages at a given age (i.e. implemented a glide path that is less steep over a large segment of life course. This has been motivated by observations about lifespan, length of retirement etc. that define a longer horizon than previously considered. There also was a bit of an arms race between fund providers where nobody wanted to be left in the dust by the providers with a high stock allocation.

American Century has been one of, if not the most conservative, while Fidelity has been the most aggressive.

Looking at 2040 funds, American Century is about 66% stock:

https://www.americancentury.com/content ... folio.html

T Rowe Price's 2040 fund is about 76% stock:

https://www.troweprice.com/literature/p ... rrency=USD

Vanguard's 2040 fund is about 81% stock:

https://investor.vanguard.com/mutual-fu ... olio/vforx

Blackrock Lifepath Index 2040 is about 86% stock:

https://www.blackrock.com/us/individual ... st-cl-fund

Fidelity Freedom Index 2040 is about 90% stock:

https://fundresearch.fidelity.com/mutua ... /315793885

Fidelity Freedom 2040 is 93% stock:

https://fundresearch.fidelity.com/mutua ... /315792101
Last edited by Northern Flicker on Fri Apr 16, 2021 8:10 pm, edited 1 time in total.
sycamore
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by sycamore »

Northern Flicker wrote: Fri Apr 16, 2021 2:39 pm Looking at 2040 funds...
T Rowe Price's 2040 fund is about 76% stock:

https://www.troweprice.com/literature/p ... rrency=USD
FWIW, T. Rowe Price has two series of target date funds. The above is one of the Target-branded funds. There's also the Retirement-branded funds, which basically have a higher stock exposure for the whole glide path, and also don't "level out" until 30 years into retirement.

The Retirement 2040 fund is about 90% stock:
https://www.troweprice.com/literature/p ... rrency=USD
AlwaysLearningMore
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by AlwaysLearningMore »

Grt2bOutdoors wrote: Wed Apr 14, 2021 6:05 pm
AlwaysLearningMore wrote: Tue Apr 13, 2021 7:26 pm
Grt2bOutdoors wrote: Tue Apr 13, 2021 2:23 pm The purpose of a target dated fund is:
1) professional management
2) all-in-one asset allocation based on investment managements foresight for the best risk adjusted expected returns over the investment horizon and the objectives of the fund itself
3) not to time the market (emphasis added)
Another opinion:
Alex Frakt wrote: Sat Jun 02, 2012 2:26 pm
Alex Frakt wrote:You can see the conventional wisdom in action in Vanguard's pre-target date all-in-one funds. The LifeStrategy funds had fixed allocations, you were meant to switch between them as you aged. They started with Growth at 20% bonds and ended up with Income at 80%. STAR is an all-in-one fund with a benchmark of 37.5% bonds. Wellington is Vanguard's original fund and has a benchmark of 35% bonds.
I know it's bad form to follow up on your own posts, but I remembered something over lunch.

You can even see age in bonds as conventional wisdom with the original allocations in the Target Retirement funds. When Vanguard launched the funds, they used a glideslope that started out somewhat below than age in bonds, but increased bonds at a rate greater than 1% a year to end up at 65% bonds at age 65. Why did they switch? The few other target funds available in the early 2000s, notably from Fidelity and T Rowe Price, had higher stock allocations and thus had outperformed Vanguard over the years of that bull market. They had two choices at that point. Stick to their guns and lose out on new investments or jump aboard the approximately age-15 in bonds bandwagon and rely on their cost advantage to eke out a small advantage going forward. In 2006, they chose the latter. Of course their investors paid the price in the ensuing crash.
https://tinyurl.com/ye583fep
... Competition is inevitable ....
Vanguard's apparent capitulation to raising the % equities in order to try and keep up with competitors is a stark contrast to the belief that these are "carefully constructed portfolios" (a phrase used by a senior member of this forum to describe the Vanguard Target Retirement Funds series) are hammered out with only financial input. As Mr. Frakt so clearly pointed out, that's clearly not the case.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
DB2
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by DB2 »

I'm a big fan of Vanguard's TDF and think they would work better than what most people would do whether trading individual stocks, or messing with sector funds based on recent performance from their 401K. I know someone who does this, but his 401K options are horrible.

With that said, I do think Paul Merriman makes an interesting point about these: it makes almost no sense for the 2060 TDF (presumably new, young investor in their 20s) to contain any bonds at the start. Vanguard's 2060 TDF starts with 10% bonds, but that will likely result in a reduction of returns given the compounding nature and likely returns of stocks within 40 years when that investor presumably reaches retirement. The numbers can be surprising. In one of his videos, Paul said he asked Jack Bogle at one point why they did this and he told them it was to help reduce just a little volatility in case an investor got a little wary along downturns, etc. These are also meant to lean a bit conservative in nature. There is a lot to be said about buying and holding under any condition and maybe a small allocation of bonds to start is good for investor behavior. Vanguard is surely looking at this from all perspectives. If someone is adamant about not holding bonds especially early on in their life, I think VT or VTWAX (Total World) makes the most sense presuming it's an option.
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PaFromFL
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by PaFromFL »

I sold off my target retirement funds in 2015 when Vanguard upped the percentage of foreign holdings and replaced them with the original mix of less-foreign individual funds. I traded all my bond funds for VDADX a few years ago (except for some tax-efficient high-yield leveraged munis). Now that interest rates are nearing zero, bonds provide very little reward considering the risk of default or rising interest rates. I suspect John Bogle would have adjusted his investing strategy for near-zero interest bonds.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by AlwaysLearningMore »

Duplicate
Last edited by AlwaysLearningMore on Fri Apr 16, 2021 4:28 pm, edited 1 time in total.
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AlwaysLearningMore
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by AlwaysLearningMore »

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vineviz
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

AlwaysLearningMore wrote: Fri Apr 16, 2021 3:49 pm Vanguard's apparent capitulation to raising the % equities in order to try and keep up with competitors is a stark contrast to the belief that these are "carefully constructed portfolios" (a phrase used by a senior member of this forum to describe the Vanguard Target Retirement Funds series) are hammered out with only financial input. As Mr. Frakt so clearly pointed out, that's clearly not the case.

There was no "capitulation", and the allegation that there was some sort of "arms race" has no basis in fact.

Several industry participants, not just Vanguard, have commented on how surprised they were that TDF investors have been far more open to optimal glide path construction than early entrants believed they would be. While there will always be some difference in approach, some of the first TDFs included lower stock allocations in general and ex-US allocations in particular than the lifecycle models suggested that they should.

As time has passed, evidence has grown with shows that TDF investors are incredibly (in all senses of that word) likely to "stay the course". So TDF providers have been able to revise the glide paths with that knowledge in mind.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
AlwaysLearningMore
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by AlwaysLearningMore »

vineviz wrote: Fri Apr 16, 2021 4:39 pm
AlwaysLearningMore wrote: Fri Apr 16, 2021 3:49 pm Vanguard's apparent capitulation to raising the % equities in order to try and keep up with competitors is a stark contrast to the belief that these are "carefully constructed portfolios" (a phrase used by a senior member of this forum to describe the Vanguard Target Retirement Funds series) are hammered out with only financial input. As Mr. Frakt so clearly pointed out, that's clearly not the case.

There was no "capitulation", and the allegation that there was some sort of "arms race" has no basis in fact.
Clearly you and Mr. Frakt (and others) have a difference of opinion.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
000
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by 000 »

vineviz wrote: Fri Apr 16, 2021 4:39 pm There was no "capitulation", and the allegation that there was some sort of "arms race" has no basis in fact.

Several industry participants, not just Vanguard, have commented on how surprised they were that TDF investors have been far more open to optimal glide path construction than early entrants believed they would be. While there will always be some difference in approach, some of the first TDFs included lower stock allocations in general and ex-US allocations in particular than the lifecycle models suggested that they should.

As time has passed, evidence has grown with shows that TDF investors are incredibly (in all senses of that word) likely to "stay the course". So TDF providers have been able to revise the glide paths with that knowledge in mind.
I think it has more to do with the widespread participation in the everything bubble. To most "age in bonds" now sounds like something grandpa would say.

All the research about TDF investors staying the course has been during the greatest secular bull market in history.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by alex_686 »

AlwaysLearningMore wrote: Fri Apr 16, 2021 4:51 pm
vineviz wrote: Fri Apr 16, 2021 4:39 pm
AlwaysLearningMore wrote: Fri Apr 16, 2021 3:49 pm Vanguard's apparent capitulation to raising the % equities in order to try and keep up with competitors is a stark contrast to the belief that these are "carefully constructed portfolios" (a phrase used by a senior member of this forum to describe the Vanguard Target Retirement Funds series) are hammered out with only financial input. As Mr. Frakt so clearly pointed out, that's clearly not the case.

There was no "capitulation", and the allegation that there was some sort of "arms race" has no basis in fact.
Clearly you and Mr. Frakt (and others) have a difference of opinion.
Define capitulation. For the past 30 years there has been a steady shifting of the tide - both in theory, practice, and the changing nature of the companies. Standing on principles is important. Rejecting reality and becoming a reactionary is not.

I can't classify Vangaurd's movement as capitulation nor pandering to the masses. Their moves have been slow, consistent, and in step with the rest of the industry.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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vineviz
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

DB2 wrote: Fri Apr 16, 2021 3:51 pm With that said, I do think Paul Merriman makes an interesting point about these: it makes almost no sense for the 2060 TDF (presumably new, young investor in their 20s) to contain any bonds at the start. Vanguard's 2060 TDF starts with 10% bonds, but that will likely result in a reduction of returns given the compounding nature and likely returns of stocks within 40 years when that investor presumably reaches retirement. The numbers can be surprising. In one of his videos, Paul said he asked Jack Bogle at one point why they did this and he told them it was to help reduce just a little volatility in case an investor got a little wary along downturns, etc.
Bogle retired from Vanguard long before the target date fund series was created.

Early guidance from the Department of Labor (DOL), which has authority over 401(k) plans, included a stipulation that only "balanced" funds could be used as default options..

In fact, the DOL describes target date funds this way: "TDFs offer a long-term investment strategy based on holding a mix of stocks, bonds and other investments (this mix is called an asset allocation) that automatically changes over time as the participant ages."

A key design goal for target date funds was that they could serve as the default investment (QDIA) in 401(k) plans, and at the time ONLY "balanced" funds could serve as the QDIA.

Ergo, all TDFs (even those designed for very young investors) include at least 1% in bonds.
Last edited by vineviz on Fri Apr 16, 2021 5:26 pm, edited 1 time in total.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

000 wrote: Fri Apr 16, 2021 4:55 pm All the research about TDF investors staying the course has been during the greatest secular bull market in history.
We've had three full bear markets (i.e. >20% drop in equities) since the introduction of TDFs, two of which took 3+ years to recover from, and three more corrections (i.e. >10% drop in equities). In fact, the last 20 years have been one of the lowest returning 20 year periods in recent history.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by 000 »

vineviz wrote: Fri Apr 16, 2021 5:25 pm
000 wrote: Fri Apr 16, 2021 4:55 pm All the research about TDF investors staying the course has been during the greatest secular bull market in history.
We've had three full bear markets (i.e. >20% drop in equities) since the introduction of TDFs, two of which took 3+ years to recover from, and three more corrections (i.e. >10% drop in equities). In fact, the last 20 years have been one of the lowest returning 20 year periods in recent history.
That doesn't change what I said. Stocks mostly went up and if you held on for just a little while you were rewarded. There are other possibilities (e.g. from history or other places) like a secular sideways or bear market.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by vineviz »

000 wrote: Fri Apr 16, 2021 5:33 pm
vineviz wrote: Fri Apr 16, 2021 5:25 pm
000 wrote: Fri Apr 16, 2021 4:55 pm All the research about TDF investors staying the course has been during the greatest secular bull market in history.
We've had three full bear markets (i.e. >20% drop in equities) since the introduction of TDFs, two of which took 3+ years to recover from, and three more corrections (i.e. >10% drop in equities). In fact, the last 20 years have been one of the lowest returning 20 year periods in recent history.
That doesn't change what I said. Stocks mostly went up and if you held on for just a little while you were rewarded. There are other possibilities (e.g. from history or other places) like a secular sideways or bear market.
Evidence that TDF investors had the ability to “hold on for just a little while” in the face of market turmoil is exactly what providers needed, and they got it.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Northern Flicker »

sycamore wrote: Fri Apr 16, 2021 3:37 pm
Northern Flicker wrote: Fri Apr 16, 2021 2:39 pm Looking at 2040 funds...
T Rowe Price's 2040 fund is about 76% stock:

https://www.troweprice.com/literature/p ... rrency=USD
FWIW, T. Rowe Price has two series of target date funds. The above is one of the Target-branded funds. There's also the Retirement-branded funds, which basically have a higher stock exposure for the whole glide path, and also don't "level out" until 30 years into retirement.

The Retirement 2040 fund is about 90% stock:
https://www.troweprice.com/literature/p ... rrency=USD
Thanks. I was surprised when I observed a less aggressive portfolio for TRP, but this explains why.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Northern Flicker »

I wrote: In general, TDFs throughout the industry have increased the stock percentages at a given age (i.e. implemented a glide path that is less steep over a large segment of life course. This has been motivated by observations about lifespan, length of retirement etc. that define a longer horizon than previously considered. There also was a bit of an arms race between fund providers where nobody wanted to be left in the dust by the providers with a high stock allocation.
There seems to have been some cherry-picking from my comment. I think I stated my belief about the motivation clearly, as noted in bold. I do recollect T Rowe Price being the first to become more aggressive along the glide path, followed by Fidelity. Vanguard subsequently followed suit. Perhaps arms race is the wrong term, but I've seen others use it. Nobody wants their TDF to be the underperformer.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Grt2bOutdoors »

AlwaysLearningMore wrote: Fri Apr 16, 2021 3:49 pm
Grt2bOutdoors wrote: Wed Apr 14, 2021 6:05 pm
AlwaysLearningMore wrote: Tue Apr 13, 2021 7:26 pm
Grt2bOutdoors wrote: Tue Apr 13, 2021 2:23 pm The purpose of a target dated fund is:
1) professional management
2) all-in-one asset allocation based on investment managements foresight for the best risk adjusted expected returns over the investment horizon and the objectives of the fund itself
3) not to time the market (emphasis added)
Another opinion:
Alex Frakt wrote: Sat Jun 02, 2012 2:26 pm
Alex Frakt wrote:You can see the conventional wisdom in action in Vanguard's pre-target date all-in-one funds. The LifeStrategy funds had fixed allocations, you were meant to switch between them as you aged. They started with Growth at 20% bonds and ended up with Income at 80%. STAR is an all-in-one fund with a benchmark of 37.5% bonds. Wellington is Vanguard's original fund and has a benchmark of 35% bonds.
I know it's bad form to follow up on your own posts, but I remembered something over lunch.

You can even see age in bonds as conventional wisdom with the original allocations in the Target Retirement funds. When Vanguard launched the funds, they used a glideslope that started out somewhat below than age in bonds, but increased bonds at a rate greater than 1% a year to end up at 65% bonds at age 65. Why did they switch? The few other target funds available in the early 2000s, notably from Fidelity and T Rowe Price, had higher stock allocations and thus had outperformed Vanguard over the years of that bull market. They had two choices at that point. Stick to their guns and lose out on new investments or jump aboard the approximately age-15 in bonds bandwagon and rely on their cost advantage to eke out a small advantage going forward. In 2006, they chose the latter. Of course their investors paid the price in the ensuing crash.
https://tinyurl.com/ye583fep
... Competition is inevitable ....
Vanguard's apparent capitulation to raising the % equities in order to try and keep up with competitors is a stark contrast to the belief that these are "carefully constructed portfolios" (a phrase used by a senior member of this forum to describe the Vanguard Target Retirement Funds series) are hammered out with only financial input. As Mr. Frakt so clearly pointed out, that's clearly not the case.
If you are going to quote me, then it’s best to use the entire text so readers can understand the context of the language.

Believe what you want, the change happened over 15 years ago. Do you also believe that once constructed there should be absolutely no maintenance performed when conditions change that warrant course correction? If you want perfection, it doesn’t exist.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by nedsaid »

Flashes1 wrote: Tue Apr 13, 2021 2:54 pm I suppose the most alarming thing is how high International equities comprise total equity exposure. I've been comfortable with International comprising 15-25% of total equity exposure - but International comprises approximately 41% of equities in the Target 2025 fund. That's out of my comfort zone.

International Bonds comprise 30% of total Bond exposure in the Target 2025 fund and it's not what I was expecting. It just seems very high. I believe foreign Government/Corporate bonds will decline materially worse than U.S. Government/Corporate bonds in a major depression/recession.

Lesson learned: Vanguard Target Retirement funds have a lot of International Bond and Equity exposure - just make sure you're comfortable with it before blindly plowing your life savings in it.

Lesson learned: Make sure you're okay with exactly how the Glide Path works - specifically are you comfortable with Bonds comprising 42% of your portfolio 5 years before you retire (Target 2025). I personally am comfortable with no more than 40% at retirement. It's just hard when you're choosing your 401k investments at 30-40 years old to know exactly how your bond exposure really ramps up 30 years later and is that what you want?
Successful investing has to do with making rational choices and not feelings of comfort. Vanguards choice of asset allocation is entirely rational. There are differences of opinion about the proper allocation of US vs International investments but those differences have to be more than feelings.

I have been rebalancing from stocks to bonds since July 2013. I don't feel comfortable doing this but rationally I realize that doing nothing would lead to a portfolio increasingly allocated to stocks while I continue to get older. I know that I need to reduce portfolio risk as I get older since I have less and less human capital as I get closer and closer to retirement. All this rebalancing has created discomfort because I realize that not only have I been controlling my risks but also sacrificing performance doing so. I suppose I feel regret knowing that I would have more money now if I had just let things ride.

The point is that successful saving and investing involves doing a whole lot of things that don't feel good at the time. Delayed gratification is not always fun and neither is trimming back on successful investments. It isn't fun to be disciplined and I have refused over the years to chase hot performance. It would be so much more comfortable and emotionally satisfying to be buying hot investments that everyone else is enthusiastic about. It is harder to stay the course with boring but profitable investments.

It is okay that you have differences of opinion with Vanguard regarding asset allocation and glide paths. But you make it sound like Vanguard is pulling the wool over people's eyes and they are not. Again you talk about feeling comfortable but successful investing involves doing a lot of uncomfortable things.

I don't feel comfortable riding out bear markets. Seeing stocks down 35% when you are 61 years old and nearing retirement isn't fun but I knew that I had to just ride the volatility out. The rebalancing described above did limit my losses a bit but I don't feel comfortable knowing that I missed out on the upside.

You sometimes need to do things that are uncomfortable and don't feel good to succeed at investing. Your rational self has to step in sometimes to override your emotional self. You also need to strike a balance between your rational self and your emotional self in order to stay invested in bad markets. Panic selling might provide emotional relief but its effect on long term wealth building is disastrous. Human emotion is powerful and investors should respect it but you have to not let it rule you.

Markets will do what markets will do regardless of my feelings of comfort or whatever I establish as my comfort zone. Sometimes you have to do the rational thing even if it doesn't feel right.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by watchnerd »

vineviz wrote: Fri Apr 16, 2021 5:25 pm In fact, the last 20 years have been one of the lowest returning 20 year periods in recent history.
And represent 87% of my investing history...

:( :( :(
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by watchnerd »

nedsaid wrote: Sat Apr 17, 2021 12:03 am Panic selling might provide emotional relief but its effect on long term wealth building is disastrous.
I never have the panic sell urge during market crashes.

I get the panic sell urge after huge gains.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Elric »

vineviz wrote: Tue Apr 13, 2021 2:50 pm
Flashes1 wrote: Tue Apr 13, 2021 2:15 pm * Just a fair warning to other Bogleheads who might have blindly signed-up for Vanguard Target Funds - the ignorant get fleeced!
It seems to me that Bogleheads who signed up for a target date fund got a much better portfolio than if they randomly followed advice from people on the forum.
I agree, but if they follow the general consensus on the forum, rather than random posts, they'd probably come out pretty close.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Adam Mundorf »

000 wrote: Wed Apr 14, 2021 5:32 pm I still think Vanguard investor shares might still be available at some other brokers / plans. Or perhaps the rollout of Admiral shares everywhere has completed.
I only have access to investor shares through my companies 401k. No admiral yet.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by Horton »

Despite all the criticism, Vanguard's TDF funds rank in the top quartile over the last 10 years. I'd be curious to know who on this forum outperformed the TDF for their target year over the last decade and who thinks they will outperform over the next decade (and is willing to track it and report back to the group). Personally, I tracked my performance against the Vanguard TDFs over the last 11 years and I performed slightly worse (although better than the custom TDF in my 401k). As such, I've decided to use TDFs for the majority of my retirement assets. The automated features of TDFs outweigh the headaches of rebalancing and trying to avoid behavioral errors, IMO.

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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by 000 »

Adam Mundorf wrote: Sat Apr 17, 2021 2:35 am
000 wrote: Wed Apr 14, 2021 5:32 pm I still think Vanguard investor shares might still be available at some other brokers / plans. Or perhaps the rollout of Admiral shares everywhere has completed.
I only have access to investor shares through my companies 401k. No admiral yet.
Thank you for confirming.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by reln »

Flashes1 wrote: Tue Apr 13, 2021 2:15 pm I began to really dig into the portfolio breakdown of my Vanguard Target Retirement funds and became very alarmed at what I found. SHAME ON ME FOR NOT KNOWING EXACTLY WHAT IS IN THEM - however I feel like they don't align with many of my personal investing philosophies:

* I know whoever constructed the Target Retirement Funds for Vanguard is a lot smarter with me - but the International exposure is a lot higher than I expected.
* As a long time follower of John Bogle, I figured International exposure would be relatively conservative for a U.S. investor.
* Specifically: Target 2035 U.S Bonds comprise 17.7% and International comprise 7.6% of the portfolio. Excuse me, but I'm not comfortable with that high of exposure to International Bonds - and Intl Bonds really ramp up as the glide path gets closer to retirement - I see a lot of articles discuss how U.S. bonds are far superior.
* The effects of the Glide Path really caught me off guard - I started Target 2025 about 15 years ago in my 401K and set it on auto-pilot. As of today, Bonds comprise 42% of the total and will likely be at 50% in the next 4 years. I'm hugely bearish on bonds, particularly long term bonds.
* International equities comprise 27% of Target 2025 vs. U.S. equities comprising 34% - this seems reckless to me, and caused me to miss out on a lot of gains over the years. :twisted: This level of International exposure seems terribly high.
* Again, shame on me for being ignorant of my portfolio's holdings but it's really caught me off guard.
* I'm now caught in the classic conundrum of trying to figure out when to move Target Funds to pure S&P 500, Extended Mrkt/Intl, and Bond funds.
* Just a fair warning to other Bogleheads who might have blindly signed-up for Vanguard Target Funds - the ignorant get fleeced!
This is some intense home country bias.
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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

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Re: Beginning to evaluate the holdings of Vanguard Target Retirement Funds

Post by pkcrafter »

Flashes, perhaps you are overthinking this. Target date funds hold world stock and bond allocations and many investors opt for them because of the auto rebalancing and increasing bond allocation. They are an optional choice. If you don't like the variable asset allocation, you can use Lifestrategy funds, but the international AA is the same as TD funds.

Another very popular option is the simple 3-fund portfolio. With this one you can set your own allocations, but you will have to do your own rebalancing. Just remember, asset allocation is a personal choice--some may like the world allocation, and some not.

Another option is to use a lower equity TD fund or LS fund to get some international, and then add total stock market to get to your desired AA. There are many ways to create a good, low-maintenance portfolio.


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