Roth Vangaurd Target Fund to different index funds

[EMres123]

Hi all,

I'm about to start residency in July. I have about $13k in a Roth IRA-Vanguard Target Retirement Fund 2045 that was started for me when I was in high school. Now that I am about to start contributing to it again, I have been thinking about switching this to two or three Vanguard index funds. I was also just thinking about putting it all in one index fund such as Vanguard Total Stock Market since I wont be touching this money for 20-30 or so years. I could also just leave it in the all in one fund but not sure if there is a point to having bonds so early.

 

Appreciate thoughts on what best to do.

Thanks

[jfoxcpacfp]

You could do a lot worse than Vanguard TSM (like the TDF you're now in   ) I'm totally with you about using bonds at your age. For a really good explanation of why, read the 2013 version of Simple Wealth, Inevitable Wealth.

[PhysicianOnFIRE]

Sounds like a good plan.  Target Date funds are perfectly fine, but have expense ratios 3 to 4 times that of the simplest funds, like Total Stock Market.  I think that would be a reasonable move and you may want to add the Total International Fund when you have enough in the Roth to be in admiral funds for both ($10,000 minimum per fund).

When you are out of residency and have more money to invest, you'll want to come up with a plan for a diversified portfolio, but that can be as simple as a 3 or 4 fund portfolio, which it sounds like you've read up on.

Best -PoF

[TheGipper]

I'll give you my two flavors of Roth IRAs for young investors

1) 70/30 VTSAX (US TSM) / VTIAX (Int TSM)

2) 25/25/25/25 or whatever percentages you wish VTSAX/VTIAX/VGSLX(REIT)/VSIAX(small cap value)

For what its worth, I use #1 for my kids custodial Roths.

I agree target date funds are unecessary expenses and won't shift asset allocation much till you turn 40 anyway.

I like somewhat of a hedge against the US stock market.  We do afterall have somewhere between 19 and 60 trillion in debt and unfunded liabilities, depending how you add up the numbers.  Not totally out of the question that we experience a Greece-like reckoning at sometime in your investing future or a Japan like period of decades of zero return.

 

 

[Zaphod]

TheGipper wrote:

I’ll give you my two flavors of Roth IRAs for young investors

1) 70/30 VTSAX (US TSM) / VTIAX (Int TSM)

2) 25/25/25/25 or whatever percentages you wish VTSAX/VTIAX/VGSLX(REIT)/VSIAX(small cap value)

For what its worth, I use #1 for my kids custodial Roths.

I agree target date funds are unecessary expenses and won’t shift asset allocation much till you turn 40 anyway.

I like somewhat of a hedge against the US stock market.  We do afterall have somewhere between 19 and 60 trillion in debt and unfunded liabilities, depending how you add up the numbers.  Not totally out of the question that we experience a Greece-like reckoning at sometime in your investing future or a Japan like period of decades of zero return.

 

 

Click to expand...

Japan style stagnation? Possible.

Greece like reckoning? I dont see how that makes any sense whatsoever. Greece owes other countries debt, fwiw, the US debt is mostly intergovernmental and public, ie, we owe ourselves money. That is wholly different and an accounting issue. Further, a liability for one person is an asset to another, meaning someone (the public) owns that debt and is obviously that same dollar amount of assets. For there to be a greece like reckoning the USD would have to not be the worlds currency, the US military the most formidable on the planet, and our economy to not be top tier. Thats a lot of things to occur.

Further, it is wholly inaccurate to look at liabilities (especially something as nebulous and deceitfully calculated as the "unfunded" ones are) without considering the assets. Would you look solely at your liabilities without considering your assets as well? Of course you wouldnt, and when you start to consider the assets of the US and its people things become much more clear, especially if one were to make things up like "unearned assets" to counteract the "unfunded liabilities" rhetoric.

Dont confuse macro and microeconomics or view things only from one side, as its guaranteed to bring about faulty interpretations.

 

[Joseph]

EMRes123,  good idea to start thinking about this.  First, you need to come up with your investing plan.

The things you are realizing and thinking about do make sense.  There are many ways to invest and many vocal opinions on how to do it.  Find the way that you want to do it. Write it down.  Think about it some more.

Overall, all the suggestions above are good.  But you get to decide for yourself after coming up with a plan.

[TheGipper]

Wow Zaphod. Touched a nerve there I guess.

Don't want to get into a political pissing match here, but if you think our national debt is merely an accounting issue, you are simply wrong.

It is not just the US public that owns our country's debt. Furthermore, no matter the owner, the interest on our debt and our unfunded entitlement programs command a higher and higher percentage of our tax revenue each year, eventually squeezing out all other spending priorities. This can not continue forever. I am not smart enough to know if the day of reckoning will come in 5 years or 100 years, but it will come. I don't see the appetite among either major party (short of Rand Paul being elected president) to make much of a dent in the problem any time soon.

[jfoxcpacfp]

TheGipper wrote:

This can not continue forever. I am not smart enough to know if the day of reckoning will come in 5 years or 100 years, but it will come. I don’t see the appetite among either major party (short of Rand Paul being elected president) to make much of a dent in the problem any time soon.

Click to expand...

Say you are driving toward the Grand Canyon at 100 miles an hour and you're 200 miles away. Will you continue in a straight line for 2 hours, Stella and Louise style? Or will you adjust course? We don't know how or when the map will shift, but I am confident we will not go over the edge. Just because we don't know what we don't know today doesn't mean we won't adjust in the future. My grandfather was always citing some version of this same argument in 1990 as a reason never to invest in the stock market. As Roseanne Roseannadanna said, "It's always something."

[TheGipper]

jfoxcpacfp wrote:

TheGipper wrote:

This can not continue forever. I am not smart enough to know if the day of reckoning will come in 5 years or 100 years, but it will come. I don’t see the appetite among either major party (short of Rand Paul being elected president) to make much of a dent in the problem any time soon. 

Click to expand…

Say you are driving toward the Grand Canyon at 100 miles an hour and you’re 200 miles away. Will you continue in a straight line for 2 hours, Stella and Louise style? Or will you adjust course? We don’t know how or when the map will shift, but I am confident we will not go over the edge. Just because we don’t know what we don’t know today doesn’t mean we won’t adjust in the future. My grandfather was always citing some version of this same argument in 1990 as a reason never to invest in the stock market. As Roseanne Roseannadanna said, “It’s always something.”

Click to expand...

Certainly we all must take risk (ie invest in equities), I'm just saying why put all of one's eggs is in one (American) basket.  Sure, most other countries have similar or worse debt problems, but the extra diversification can't hurt.  The next American financial crisis may end up being something totally unrelated to debt, maybe something we can not even fathom right now.  It might last one year or god forbid 20 years and engulf much of my investing time frame.  The Bogle mantra of all one needs is the US stock market has never rung true to me.

 

BTW jfoxcpacfp, I philosophically agree with your position on young investors not holding any bonds with one minor exception.  And that is the miniscule chance of some type of historic collapse that leads to the permanent closure of American stock exchanges.  Seems far-fetched, but it has happened to other nation's stock exchanges over history, and if it happened here, that's when one would be happy to be eking out an existence off their cash, bonds, CDs, and the like.  Seems to me like a small hedge of 10-20% of portfolio towards fixed income is insurance well worth it without sacrificing too much risk adjusted return.  Now one could argue that if the US stock exchanges collapsed, all other asset classes and the dollar might too, but that is an argument for another day...

 

[jfoxcpacfp]

TheGipper wrote:

Now one could argue that if the US stock exchanges collapsed, all other asset classes and the dollar might too, but that is an argument for another day…

Click to expand...

Ahh, but that is my point exactly.

I can craft an achievable plan only upon the facts and analysis based upon history available to us, not upon every fear that man can dream up. The joint life expectancy of a couple retiring at age 62 is around 30 years. My job is to ensure that they meet their goals, of which the primary goal is not to run out of money in those 30 years. The best way to ensure that is first with a real plan that is kept current and second with a portfolio that is designed to serve the plan. A portfolio is not a plan; it is the servant of the plan.

[docnews]

To OP:
I think many people trash target funds while not understanding their purpose. See my post about Target funds. In summary...

The original rationale for index funds is that you are eliminating you guessing the market.

One problem with this is no one wants full equity risk for their whole life. When you start "winning" why risk it all? Hence having diversification beyond stocks is important.

The question is when do you add bonds? If you do not set this in a written plan, you are essentially timing the market. For example: if you start seeing great gains in the market you are less likely to add bonds even though this is not wise.

Why not simplify your life by having a fund that rebalances itself and has a reasonable glide plan that is out of your hands?

Read WCI's recent article on tax lost harvesting and will see that even someone who spends a lot of time learning finances can make costly errors.

[Zaphod]

This is not political, one mixes politics and investing to their great detriment. Your position stems from a misunderstanding of macroeconomics and how central banking works, as evidenced by your next couple statements. This is macroeconomic myths 101. That the great majority of people have very limited understanding of how the modern monetary system works is used very effectively to instill fear and float policies that dont make any sense without receiving much blow back. This problem is exacerbated by humans having difficulty with geometric thinking and being prone to viewing things linearly, as thats how we're wired.

For example.

TheGipper wrote:

Furthermore, no matter the owner, the interest on our debt and our unfunded entitlement programs command a higher and higher percentage of our tax revenue each year, eventually squeezing out all other spending priorities. This can not continue forever.

Click to expand...

The interest burden of the US is declining as a %GDP (for quite some time), and more importantly the effective rate is set and controlled by the fed, there is no rule saying they have to raise rates, ever, it is not set by the market. If the government wanted to decrease their interest payment burden even further, they simple would shift the maturity of their debt issued to shorter durations, moving it near to zero. There is simply no reason to do so out of a position of fear at this time. The nominal amount of interest is something like 250 billion, which comes out to necessitating a very paltry quarterly growth of gdp.

In a credit based monetary system debt in aggregate is never paid off. Remember that debt is also someone elses asset and the balance is zero. For example, US household assets as of Q42015 was 85 trillion after subtracting 15 trillion of debt. More than enough to crush the US debt right? You cannot view it out of context, or in the same manner as a household, as that literally makes zero sense whatsoever as they are not compatible structures.

Otoh, if something cannot go on forever, it obviously will not. There is no need to get doomsday prepper about a scenario that will obviously have to change in some material manner, either growth based or radical policy changes. Im sure they were worried about the national debt and interest burden 100 years ago, and will in the future as well.

The reality is much more nuanced and does not sell as many page views as the popular rantings you see everywhere else, nor does it make an obvious and relate-able to your personal life connection that is simply to understand. I think physicians would do themselves a huge favor to learn a little bit more about how the system actually works, instead of just repeating things that sound good or confirm your previously held biases.

[Zaphod]

TheGipper wrote:

jfoxcpacfp wrote:

TheGipper wrote:

This can not continue forever. I am not smart enough to know if the day of reckoning will come in 5 years or 100 years, but it will come. I don’t see the appetite among either major party (short of Rand Paul being elected president) to make much of a dent in the problem any time soon. 

Click to expand…

Say you are driving toward the Grand Canyon at 100 miles an hour and you’re 200 miles away. Will you continue in a straight line for 2 hours, Stella and Louise style? Or will you adjust course? We don’t know how or when the map will shift, but I am confident we will not go over the edge. Just because we don’t know what we don’t know today doesn’t mean we won’t adjust in the future. My grandfather was always citing some version of this same argument in 1990 as a reason never to invest in the stock market. As Roseanne Roseannadanna said, “It’s always something.”

Click to expand…

Certainly we all must take risk (ie invest in equities), I’m just saying why put all of one’s eggs is in one (American) basket.  Sure, most other countries have similar or worse debt problems, but the extra diversification can’t hurt.  The next American financial crisis may end up being something totally unrelated to debt, maybe something we can not even fathom right now.  It might last one year or god forbid 20 years and engulf much of my investing time frame.  The Bogle mantra of all one needs is the US stock market has never rung true to me.

 

BTW jfoxcpacfp, I philosophically agree with your position on young investors not holding any bonds with one minor exception.  And that is the miniscule chance of some type of historic collapse that leads to the permanent closure of American stock exchanges.  Seems far-fetched, but it has happened to other nation’s stock exchanges over history, and if it happened here, that’s when one would be happy to be eking out an existence off their cash, bonds, CDs, and the like.  Seems to me like a small hedge of 10-20% of portfolio towards fixed income is insurance well worth it without sacrificing too much risk adjusted return.  Now one could argue that if the US stock exchanges collapsed, all other asset classes and the dollar might too, but that is an argument for another day…

 

Click to expand...

The best part about a diversified portfolio is that it gives you a better more predictable SWR and reduces sequences of returns risks, etc...something to be said about that.

[LH]

I'm in the same boat. My company 401k offers a vanguard target date fund, but not the individual index funds I'd prefer to make my own portfolio. However, the ER of the target date fund is only .17. While this isn't the .05 you might get with a domestic stock index fund, the fund also includes international funds which have a higher ER. is it really that bad of an ER in that case?

[TheGipper]

Also worth noting that Vanguard now offers institutional pricing on their target date fund (ER 0.1%), even for small company 401ks, so there is not even much savings in doing it by component funds, particularly if you want to include the international bond fund.  If your group still has target date fund at 0.17% and you use Vanguard as the administrator, try calling them and asking for fee reduction.