Do I need bonds and so much international stock? (Target Retirement Fund)

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tranceFusion
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Do I need bonds and so much international stock? (Target Retirement Fund)

Post by tranceFusion »

Hi all,

VTIVX (2045 target retirement fund) seems to rebalance to about 50% Total US Market, 40% International market, and 10% bonds. This was increased in about 2015 from about 30% international.

First, do I really need bonds if my goal is long term growth? Do they serve any purpose other than to cushion the blow mentally when the market falls?

Second, I'm wondering how these allocations are chosen? Even though the US has been outperforming for the past decade, I can understand an argument for maintaining a similar makeup of the actual global market. But, I can't really see any reason to overweight international.

Thanks!
Silk McCue
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by Silk McCue »

We have a vast trove of threads on this general US vs Intl threads. There is nothing new under the sun with these discussions.

For accuracy sake please note that the equity portion is not overweight to International. 60% of equities are US and 40% are ex-US. That is the same ratio in all Target Date Funds and Life Strategy Funds.

Vanguard Total Stock Market Index Fund Investor Shares 53.10%
Vanguard Total International Stock Index Fund Investor Shares 36.00%
Vanguard Total Bond Market II Index Fund Investor Shares** 7.70%
Vanguard Total International Bond Index Fund Investor Shares 1 3.20%

100.00%

The past decade(s) don't matter to you. What matters are the decades ahead leading up to 2045 and thereafter in retirement.

10% Bonds isn't going to make a significant difference in the long term performance and the fund could actually benefit from the rebalancing between equities and bonds over time.

Cheers
NiceUnparticularMan
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by NiceUnparticularMan »

Vanguard's Target allocations are informed by a combination of a more or less standard glide path model which is designed to account for various risks as retirement is approaching and during withdrawal (sometimes called a human capital theory), and a forward-looking asset model that they have developed. However, they only do what they call strategic asset allocation, and disclaim doing tactical asset allocation, which basically means they don't make a lot of rapid changes despite what their forward-looking model might be signaling at a given time.

I think one can argue that even 10% bonds is unnecessary until later in accumulation, and then maybe it should be a bit higher closer to retirement. As it turns out, though, the exact path tends not to matter much in most scenarios, so a relatively transparent and simple approach has its virtues.

As for the ex-U.S. percentage, if anything that is low given what their forward-looking model is saying these days, but again they disclaim using it tactically in that way.

To actually go lower would imply to me you implicitly believed you had some better forward-looking model that suggested a different allocation.
ckangas
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by ckangas »

NiceUnparticularMan wrote: Thu Jun 17, 2021 10:01 am Vanguard's Target allocations are informed by a combination of a more or less standard glide path model which is designed to account for various risks as retirement is approaching and during withdrawal (sometimes called a human capital theory), and a forward-looking asset model that they have developed. However, they only do what they call strategic asset allocation, and disclaim doing tactical asset allocation, which basically means they don't make a lot of rapid changes despite what their forward-looking model might be signaling at a given time.

I think one can argue that even 10% bonds is unnecessary until later in accumulation, and then maybe it should be a bit higher closer to retirement. As it turns out, though, the exact path tends not to matter much in most scenarios, so a relatively transparent and simple approach has its virtues.

As for the ex-U.S. percentage, if anything that is low given what their forward-looking model is saying these days, but again they disclaim using it tactically in that way.

To actually go lower would imply to me you implicitly believed you had some better forward-looking model that suggested a different allocation.
It's slightly off-topic, but the argument has been made that markets will eventually go up and down, or down and then up. And that the sequence that presents the most risk is a downturn around when someone retires, and the uptick coming later on. A heavy bond allocation during the start of retirement and then gradually decreasing bonds over a period of time does a better job of combating the down and then up scenario. It obviously performs much poorer in the up then down scenario, but ultimately that one is more friendly to investors anyways. It's an interesting question whether target date funds will ever be altered to take this into consideration.

And I don't have a source for it, but supposedly the 10% of bonds early on is to get people used to holding them; or at least Paul Merriman noted this regarding a conversation he had with Bogle. So it's behavioral, not based on performance.
NiceUnparticularMan
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by NiceUnparticularMan »

ckangas wrote: Thu Jun 17, 2021 10:44 am
NiceUnparticularMan wrote: Thu Jun 17, 2021 10:01 am Vanguard's Target allocations are informed by a combination of a more or less standard glide path model which is designed to account for various risks as retirement is approaching and during withdrawal (sometimes called a human capital theory), and a forward-looking asset model that they have developed. However, they only do what they call strategic asset allocation, and disclaim doing tactical asset allocation, which basically means they don't make a lot of rapid changes despite what their forward-looking model might be signaling at a given time.

I think one can argue that even 10% bonds is unnecessary until later in accumulation, and then maybe it should be a bit higher closer to retirement. As it turns out, though, the exact path tends not to matter much in most scenarios, so a relatively transparent and simple approach has its virtues.

As for the ex-U.S. percentage, if anything that is low given what their forward-looking model is saying these days, but again they disclaim using it tactically in that way.

To actually go lower would imply to me you implicitly believed you had some better forward-looking model that suggested a different allocation.
It's slightly off-topic, but the argument has been made that markets will eventually go up and down, or down and then up. And that the sequence that presents the most risk is a downturn around when someone retires, and the uptick coming later on. A heavy bond allocation during the start of retirement and then gradually decreasing bonds over a period of time does a better job of combating the down and then up scenario. It obviously performs much poorer in the up then down scenario, but ultimately that one is more friendly to investors anyways. It's an interesting question whether target date funds will ever be altered to take this into consideration.
That is sometimes known as the "bond tent" approach, and it does have some analytic appeal.

I suspect the main reason it id not used in typical Target approaches is: (a) it would be harder to explain/market/implement; and (b) in most scenarios it doesn't matter much.

Here is a recent discussion about that:

viewtopic.php?p=6010676
wolf359
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by wolf359 »

Personal finance is personal. What might make the perfect portfolio for you might not appeal to someone else.

Target Retirement funds are intended for people who don't want to deal with making the investment choices themselves, nor managing their funds. To that end, the fund uses the best industry consensus about the best theoretical approach for investing.

You're digging down into the weeds, and arguing intelligently on what you might or might not like in your investments. That leads me to believe that you may want to take the Boglehead approach, use a 3-fund portfolio, and tailor the portfolio to your whims. Any component of the 3-fund (US stock, International stock, and bond) allocations can be tweaked all the way from 0 to 100% of a given portfolio.

Target retirement funds will give reasonable results over long timeframes. But you might want to use them as guideposts for your own journey.
NiceUnparticularMan
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by NiceUnparticularMan »

wolf359 wrote: Thu Jun 17, 2021 11:25 am Personal finance is personal. What might make the perfect portfolio for you might not appeal to someone else.

Target Retirement funds are intended for people who don't want to deal with making the investment choices themselves, nor managing their funds. To that end, the fund uses the best industry consensus about the best theoretical approach for investing.

You're digging down into the weeds, and arguing intelligently on what you might or might not like in your investments. That leads me to believe that you may want to take the Boglehead approach, use a 3-fund portfolio, and tailor the portfolio to your whims. Any component of the 3-fund (US stock, International stock, and bond) allocations can be tweaked all the way from 0 to 100% of a given portfolio.

Target retirement funds will give reasonable results over long timeframes. But you might want to use them as guideposts for your own journey.
Just to be clear, there is research which suggests people who manage their own retirement portfolios tend to get much worse results on average due to a variety of behavioral risks. And I personally think these forums provide a lot of potential rationalizations for people to exhibit adverse behaviors in the name of optimizing their approach.

So, people who opt for something like a Target fund are not necessarily just avoiding the hassle of managing their own retirement portfolio. They may also be very smartly avoiding behavioral risks, and in fact risks that could be much more important in the end than any sort of optimality they could plausibly achieve by managing their portfolio themselves.
Dennisl
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by Dennisl »

NiceUnparticularMan wrote: Thu Jun 17, 2021 12:01 pm
wolf359 wrote: Thu Jun 17, 2021 11:25 am Personal finance is personal. What might make the perfect portfolio for you might not appeal to someone else.

Target Retirement funds are intended for people who don't want to deal with making the investment choices themselves, nor managing their funds. To that end, the fund uses the best industry consensus about the best theoretical approach for investing.

You're digging down into the weeds, and arguing intelligently on what you might or might not like in your investments. That leads me to believe that you may want to take the Boglehead approach, use a 3-fund portfolio, and tailor the portfolio to your whims. Any component of the 3-fund (US stock, International stock, and bond) allocations can be tweaked all the way from 0 to 100% of a given portfolio.

Target retirement funds will give reasonable results over long timeframes. But you might want to use them as guideposts for your own journey.
Just to be clear, there is research which suggests people who manage their own retirement portfolios tend to get much worse results on average due to a variety of behavioral risks. And I personally think these forums provide a lot of potential rationalizations for people to exhibit adverse behaviors in the name of optimizing their approach.

So, people who opt for something like a Target fund are not necessarily just avoiding the hassle of managing their own retirement portfolio. They may also be very smartly avoiding behavioral risks, and in fact risks that could be much more important in the end than any sort of optimality they could plausibly achieve by managing their portfolio themselves.
+1 this

:sharebeer
JBTX
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by JBTX »

tranceFusion wrote: Thu Jun 17, 2021 9:21 am Hi all,

VTIVX (2045 target retirement fund) seems to rebalance to about 50% Total US Market, 40% International market, and 10% bonds. This was increased in about 2015 from about 30% international.

First, do I really need bonds if my goal is long term growth? Do they serve any purpose other than to cushion the blow mentally when the market falls?

Second, I'm wondering how these allocations are chosen? Even though the US has been outperforming for the past decade, I can understand an argument for maintaining a similar makeup of the actual global market. But, I can't really see any reason to overweight international.

Thanks!
https://www.morningstar.com/funds/xnas/vtivx/portfolio

The fund is 36% total international which is 40% of equity in international. It isn't overweight. It's marginally underweight vs 43% market weight.
apex84
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by apex84 »

NiceUnparticularMan wrote: Thu Jun 17, 2021 12:01 pm Just to be clear, there is research which suggests people who manage their own retirement portfolios tend to get much worse results on average due to a variety of behavioral risks. And I personally think these forums provide a lot of potential rationalizations for people to exhibit adverse behaviors in the name of optimizing their approach.
This is critical. One can see the recency bias and chasing past outperformance as people constantly shift their portfolios. A solid long-term plan with broad diversification and implemented at low cost without errors is not just an excellent starting point but a great choice for one's investing career.

Over the past 5-10 years, we've had 100% small cap value, 100% US, 100% equities, etc. For a while, commodities were a major subject. Every few years, emerging markets and emerging market bonds seem to be in the spotlight. Of course, let's not forget about interest rates and inflation. If all of these are ok, then there's always factors to consider.
alex_686
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by alex_686 »

International is held at market cap weight. Do you have any better suggestions?

The international percentage has increased because international markets have become more efficient. As such, they moved from a underweight to a market weight.

Dm vs. International no longer makes much sense. There are better factors that describe performance.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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JoMoney
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by JoMoney »

I completely agree with the idea that the biggest enemy to your investments is your own behavior, and a well balanced, diversified, low-cost, all-in-one fund like a 'Target Retirement' fund is a good way to keep things simple and avoid the trappings that lead to tinkering.

That said, I believe your cash/bonds and international allocation is almost entirely a risk preference decision. There are some tax considerations with that as well, but largely there are unique risk profiles associated with bonds, stocks, and to some extent buying securities representing assets outside your home market present unique risks. People have varying opinions about how much exposure to each of these is right for them. Different people will be in different situations, different time horizons, different laws and tax impacts, different perspectives from which to view the risks and opportunities around them in their unique position.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
NiceUnparticularMan
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by NiceUnparticularMan »

apex84 wrote: Fri Jun 18, 2021 7:34 am
NiceUnparticularMan wrote: Thu Jun 17, 2021 12:01 pm Just to be clear, there is research which suggests people who manage their own retirement portfolios tend to get much worse results on average due to a variety of behavioral risks. And I personally think these forums provide a lot of potential rationalizations for people to exhibit adverse behaviors in the name of optimizing their approach.
This is critical. One can see the recency bias and chasing past outperformance as people constantly shift their portfolios. A solid long-term plan with broad diversification and implemented at low cost without errors is not just an excellent starting point but a great choice for one's investing career.

Over the past 5-10 years, we've had 100% small cap value, 100% US, 100% equities, etc. For a while, commodities were a major subject. Every few years, emerging markets and emerging market bonds seem to be in the spotlight. Of course, let's not forget about interest rates and inflation. If all of these are ok, then there's always factors to consider.
Absolutely.

I'll just toss in I now have a renewed awareness of how other unexpected things can create behavioral risk. We are supposed to rebalance every March or so (based on when certain stock/options vest and a bonus gets paid--we use the opportunity of those cash flows to help rebalance). That worked out really well in March of 2009. But we missed a great opportunity in March of 2020, because I was seriously ill at the time, including not exercising some stock/options that may have profitably been reinvested in other things.

Now I haven't tried to figure out how much that cost us. But the point is any plan which requires you personally to do important tasks makes you a potential failure point. And unexpected things can happen to you!

And as a final thought--I think there is very much a survivorship bias problem here, sometimes tragically literal, in that the long-term Bogleheads are disproportionately people for whom things went more or less as planned. Which is fine, but then we don't get people speaking about how they thought they had a solid plan, but then they passed away, or lost mental faculties, and their spouse didn't know what to do . . . and I know I thought of that as a problem for a later time, but then it showed up a lot sooner than I was expecting.
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by atdharris »

It's all up to you. I dumped my targeted fund in 2017 because of how much international was underperforming and as of now, it turned out to be a good idea. I still own ~15-20% in ex-US funds, but that's really as much as I want to have. I understand the divergence between the US and ex-US is close to historic highs, but it is a risk I am willing to take.
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by retired@50 »

tranceFusion wrote: Thu Jun 17, 2021 9:21 am I'm wondering how these allocations are chosen?
Vanguard wrote a paper to help answer this question.

See link for Vanguard's approach to target date funds.

Link: https://personal.vanguard.com/pdf/ISGTDF.pdf
Vanguard wrote: This paper provides an overview of Vanguard’s methodology in designing its TDFs. It outlines our view of glide-path construction, asset-class diversification, and the potential benefits of passively managed implementation.
Regards,
Last edited by retired@50 on Fri Jun 18, 2021 8:48 am, edited 1 time in total.
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NiceUnparticularMan
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by NiceUnparticularMan »

JoMoney wrote: Fri Jun 18, 2021 8:16 am I completely agree with the idea that the biggest enemy to your investments is your own behavior, and a well balanced, diversified, low-cost, all-in-one fund like a 'Target Retirement' fund is a good way to keep things simple and avoid the trappings that lead to tinkering.

That said, I believe your cash/bonds and international allocation is almost entirely a risk preference decision. There are some tax considerations with that as well, but largely there are unique risk profiles associated with bonds, stocks, and to some extent buying securities representing assets outside your home market present unique risks. People have varying opinions about how much exposure to each of these is right for them. Different people will be in different situations, different time horizons, different laws and tax impacts, different perspectives from which to view the risks and opportunities around them in their unique position.
I think you are right these are decisions about risk, but that is the most dangerous kind of decision from a behavioral economics perspective!

Turns out most of us are awful at properly evaluating long-term and short-term risks and balancing them against each other. Mostly this ends up with personal investors not taking enough short-term risk, which then increases their long-term risk, which is sometimes called Myopic Loss Aversion. But, I think what you might call the FOMO effect can also cause people to take way too much short-term risk in the midst of speculative asset bubbles. And some people can do both--first get burned on speculative investments, then swing all the way to taking too little short-term risk, and so on. And I think we very much see expressions of all these sorts of behavioral risk issues in our bond conversations, our ex-U.S. conversations, and so on, precisely because it is these risk issues that are so dangerous from a behavioral economics perspective.

OK, so something like a Target fund makes all these risk decisions for you in a rational way based on your approximate position in the work/retirement cycle. And while there might be some ways it could be rationally improved given your personal circumstances, I am skeptical that those incremental improvements are typically worth all the behavioral risk associated with making your own risk decisions.
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by Gaston »

NiceUnparticularMan wrote: Thu Jun 17, 2021 12:01 pm So, people who opt for something like a Target fund are not necessarily just avoiding the hassle of managing their own retirement portfolio. They may also be very smartly avoiding behavioral risks, and in fact risks that could be much more important in the end than any sort of optimality they could plausibly achieve by managing their portfolio themselves.
I couldn’t agree more. With several decades of investing now under my belt, I’ve learned (and still am learning) that behavioral risks are the #1 type of risk. Everything else (which fund to buy, which stock to buy, when to rebalance), while important, is secondary. If you can manage #1, chances are you have a good investing outlook ahead of you.
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tranceFusion
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by tranceFusion »

Thanks for all the replies. It’s clear that I did my math poorly regarding the international weighting.
Silk McCue wrote: Thu Jun 17, 2021 9:39 am
10% Bonds isn't going to make a significant difference in the long term performance and the fund could actually benefit from the rebalancing between equities and bonds over time.
Can you explain this? How do they not make a significant difference over a long time horizon? Is this because when equities are doing well that they would be sold off for bonds, and vice versa?

How often are these targeted retirement funds rebalanced?
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by Nathan Drake »

atdharris wrote: Fri Jun 18, 2021 8:31 am It's all up to you. I dumped my targeted fund in 2017 because of how much international was underperforming and as of now, it turned out to be a good idea. I still own ~15-20% in ex-US funds, but that's really as much as I want to have. I understand the divergence between the US and ex-US is close to historic highs, but it is a risk I am willing to take.
60% of world market cap isn’t enough. Let’s bet on 80% or more after a humongous level of outperformance mostly justified by speculation instead of fundamentals
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
atdharris
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by atdharris »

Nathan Drake wrote: Tue Jun 22, 2021 5:51 pm
atdharris wrote: Fri Jun 18, 2021 8:31 am It's all up to you. I dumped my targeted fund in 2017 because of how much international was underperforming and as of now, it turned out to be a good idea. I still own ~15-20% in ex-US funds, but that's really as much as I want to have. I understand the divergence between the US and ex-US is close to historic highs, but it is a risk I am willing to take.
60% of world market cap isn’t enough. Let’s bet on 80% or more after a humongous level of outperformance mostly justified by speculation instead of fundamentals
And you may be right and eventually we will revert to the mean, which is why I am not 100% US and still own VEA/VWO despite their underperformance. I'd love nothing more to see them do better, but like all of us, I know nothing.
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by Nathan Drake »

atdharris wrote: Wed Jun 23, 2021 8:48 am
Nathan Drake wrote: Tue Jun 22, 2021 5:51 pm
atdharris wrote: Fri Jun 18, 2021 8:31 am It's all up to you. I dumped my targeted fund in 2017 because of how much international was underperforming and as of now, it turned out to be a good idea. I still own ~15-20% in ex-US funds, but that's really as much as I want to have. I understand the divergence between the US and ex-US is close to historic highs, but it is a risk I am willing to take.
60% of world market cap isn’t enough. Let’s bet on 80% or more after a humongous level of outperformance mostly justified by speculation instead of fundamentals
And you may be right and eventually we will revert to the mean, which is why I am not 100% US and still own VEA/VWO despite their underperformance. I'd love nothing more to see them do better, but like all of us, I know nothing.
The issue I see is failure to stick to a plan. If exUS starts out performing will you dump your current allocation and just go back to something more in line with a target date fund?

If US continues to outperform will you dump the 15-20% exUS and go all in on US?

That’s why target date funds are a good idea, they prevent behavioral risks of investors that do things like chase performance
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by tibbitts »

Nathan Drake wrote: Wed Jun 23, 2021 9:04 am The issue I see is failure to stick to a plan. If exUS starts out performing will you dump your current allocation and just go back to something more in line with a target date fund?

If US continues to outperform will you dump the 15-20% exUS and go all in on US?

That’s why target date funds are a good idea, they prevent behavioral risks of investors that do things like chase performance
Well, sort of, except Vanguard itself didn't stick to its own domestic vs. international allocation plan for the target funds, as it substantially increased international allocations after only a short transition period. Obviously Vanguard wasn't performance-chasing, since that would have moved the allocation in the opposite direction (depending somewhat on the period, of course.) Still, not every fund owner was happy about the change.
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by Nathan Drake »

tibbitts wrote: Thu Jun 24, 2021 12:56 am
Nathan Drake wrote: Wed Jun 23, 2021 9:04 am The issue I see is failure to stick to a plan. If exUS starts out performing will you dump your current allocation and just go back to something more in line with a target date fund?

If US continues to outperform will you dump the 15-20% exUS and go all in on US?

That’s why target date funds are a good idea, they prevent behavioral risks of investors that do things like chase performance
Well, sort of, except Vanguard itself didn't stick to its own domestic vs. international allocation plan for the target funds, as it substantially increased international allocations after only a short transition period. Obviously Vanguard wasn't performance-chasing, since that would have moved the allocation in the opposite direction (depending somewhat on the period, of course.) Still, not every fund owner was happy about the change.
It was a decision based upon the research, not timing. Fund owners may not be “happy” if they think they know best (they likely don’t).
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by tibbitts »

Nathan Drake wrote: Thu Jun 24, 2021 1:12 am
tibbitts wrote: Thu Jun 24, 2021 12:56 am
Nathan Drake wrote: Wed Jun 23, 2021 9:04 am The issue I see is failure to stick to a plan. If exUS starts out performing will you dump your current allocation and just go back to something more in line with a target date fund?

If US continues to outperform will you dump the 15-20% exUS and go all in on US?

That’s why target date funds are a good idea, they prevent behavioral risks of investors that do things like chase performance
Well, sort of, except Vanguard itself didn't stick to its own domestic vs. international allocation plan for the target funds, as it substantially increased international allocations after only a short transition period. Obviously Vanguard wasn't performance-chasing, since that would have moved the allocation in the opposite direction (depending somewhat on the period, of course.) Still, not every fund owner was happy about the change.
It was a decision based upon the research, not timing. Fund owners may not be “happy” if they think they know best (they likely don’t).
That's true but it's the same problem that individuals have: sometimes research results change based on new data or analysis, but it's not clear that following that vs. what you'd decided in the beginning is the best idea. It might be for an investor just starting out, but it's the changing course for existing investors that I'm concerned about. Almost everything in investing is based on tiny amounts of data: studies done over 50 or 100 years. So adding in just another decade or two of data, or refining your analysis, or whatever, can affect the results significantly based on what's happened recently. If you change your plan based on that, it's really just another form of market timing, although one with "research" behind it. And we can all see examples in decisions made by Vanguard's own management and funds (and maybe ourselves with our own asset allocation) where that hasn't turned out to be the optimal timing for moving existing funds around.

My general suggestion would be to stay-the-course with existing funds, and move forward with new contributions based on new information if you choose.
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by Nathan Drake »

tibbitts wrote: Thu Jun 24, 2021 9:41 am
Nathan Drake wrote: Thu Jun 24, 2021 1:12 am
tibbitts wrote: Thu Jun 24, 2021 12:56 am
Nathan Drake wrote: Wed Jun 23, 2021 9:04 am The issue I see is failure to stick to a plan. If exUS starts out performing will you dump your current allocation and just go back to something more in line with a target date fund?

If US continues to outperform will you dump the 15-20% exUS and go all in on US?

That’s why target date funds are a good idea, they prevent behavioral risks of investors that do things like chase performance
Well, sort of, except Vanguard itself didn't stick to its own domestic vs. international allocation plan for the target funds, as it substantially increased international allocations after only a short transition period. Obviously Vanguard wasn't performance-chasing, since that would have moved the allocation in the opposite direction (depending somewhat on the period, of course.) Still, not every fund owner was happy about the change.
It was a decision based upon the research, not timing. Fund owners may not be “happy” if they think they know best (they likely don’t).
That's true but it's the same problem that individuals have: sometimes research results change based on new data or analysis, but it's not clear that following that vs. what you'd decided in the beginning is the best idea. It might be for an investor just starting out, but it's the changing course for existing investors that I'm concerned about. Almost everything in investing is based on tiny amounts of data: studies done over 50 or 100 years. So adding in just another decade or two of data, or refining your analysis, or whatever, can affect the results significantly based on what's happened recently. If you change your plan based on that, it's really just another form of market timing, although one with "research" behind it. And we can all see examples in decisions made by Vanguard's own management and funds (and maybe ourselves with our own asset allocation) where that hasn't turned out to be the optimal timing for moving existing funds around.

My general suggestion would be to stay-the-course with existing funds, and move forward with new contributions based on new information if you choose.
Vanguard is doing the opposite of performance chasing though. The recency data would include over performance of US. A move to 40% exUS seems like a prudent decision given the risks of a more heavily tilted US portfolio
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by delamer »

tranceFusion wrote: Tue Jun 22, 2021 5:29 pm Thanks for all the replies. It’s clear that I did my math poorly regarding the international weighting.
Silk McCue wrote: Thu Jun 17, 2021 9:39 am
10% Bonds isn't going to make a significant difference in the long term performance and the fund could actually benefit from the rebalancing between equities and bonds over time.
Can you explain this? How do they not make a significant difference over a long time horizon? Is this because when equities are doing well that they would be sold off for bonds, and vice versa?

How often are these targeted retirement funds rebalanced?
Here’s the long-term performance of various allocations of US stocks and bonds: https://investor.vanguard.com/investing ... allocation

The 10% in bonds apparently reduces annual returns by a couple tenths of a percentage point. (See 80% vs. 100% stocks.)

If you don’t want bonds, then go with the Total World Stock Index fund (or ETF). Or use a US stock fund and international fund in whatever portions you prefer.

All-in-one funds are a great product innovation for the behavioral reasons that others have mentioned. But if they aren’t for you, they aren’t for you.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
NiceUnparticularMan
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Re: Do I need bonds and so much international stock? (Target Retirement Fund)

Post by NiceUnparticularMan »

tibbitts wrote: Thu Jun 24, 2021 9:41 am
Nathan Drake wrote: Thu Jun 24, 2021 1:12 am
tibbitts wrote: Thu Jun 24, 2021 12:56 am
Nathan Drake wrote: Wed Jun 23, 2021 9:04 am The issue I see is failure to stick to a plan. If exUS starts out performing will you dump your current allocation and just go back to something more in line with a target date fund?

If US continues to outperform will you dump the 15-20% exUS and go all in on US?

That’s why target date funds are a good idea, they prevent behavioral risks of investors that do things like chase performance
Well, sort of, except Vanguard itself didn't stick to its own domestic vs. international allocation plan for the target funds, as it substantially increased international allocations after only a short transition period. Obviously Vanguard wasn't performance-chasing, since that would have moved the allocation in the opposite direction (depending somewhat on the period, of course.) Still, not every fund owner was happy about the change.
It was a decision based upon the research, not timing. Fund owners may not be “happy” if they think they know best (they likely don’t).
That's true but it's the same problem that individuals have: sometimes research results change based on new data or analysis, but it's not clear that following that vs. what you'd decided in the beginning is the best idea. It might be for an investor just starting out, but it's the changing course for existing investors that I'm concerned about. Almost everything in investing is based on tiny amounts of data: studies done over 50 or 100 years. So adding in just another decade or two of data, or refining your analysis, or whatever, can affect the results significantly based on what's happened recently. If you change your plan based on that, it's really just another form of market timing, although one with "research" behind it. And we can all see examples in decisions made by Vanguard's own management and funds (and maybe ourselves with our own asset allocation) where that hasn't turned out to be the optimal timing for moving existing funds around.

My general suggestion would be to stay-the-course with existing funds, and move forward with new contributions based on new information if you choose.
So it is true Vanguard has a forward-looking asset model that it has used to inform some changes to its Target funds. Very conservatively, but it did happen.

And I agree if an individual here came forward with such a model and plan, a lot of people here would say they were market timing, even if they were just as conservative.

So is there a difference if your Target fund company does that, versus you as an individual? Well, I'm not sure it is any more likely to work when Vanguard does it. But, I am more confident Vanguard won't do it often, won't do it much, and won't do it in ways that are just justifying some of the typical self-defeating behavioral patterns we tend to see with individual investors.

So I'd still say there is way less behavioral risk with Vanguard doing it, rather than an individual investor managing their own allocations.
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