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Question on Changing from Fidelity Target date 2040 to another fund

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  • Question on Changing from Fidelity Target date 2040 to another fund

    I have just started learning the basics and still doing so. My current retirement account has just 1 fund and that is fidelity target date 2040. However, it has a expense ratio of 0.73% and I am certainly not a big fan of it, seeing that it has never given me anywhere near what the s&p 500/ total US stock has done. So, the question is - would it be okay for me to change my investment to a 3 fund index portfolio?

    I see that the target date 2040 has fallen more than the one i am looking to buy and was wondering if i would be losing by making the switch now but considering the long term, would i be better off buying it now and stop paying the higher expense?

    Thanks a lot for the input

     

  • #2
    Comparing Fidelity Freedom 2040 to the S & P is apples to oranges.  Your Fidelity fund has almost 30% in International Equities not to mention the smaller effect from small cap stocks.  In the last few years, the S&P has outperformed these other categories.

    You may be well served by switching to to a different set of funds to lower expense ratio.  But you are right, that you are likely to lose if you drastically switch your asset allocation.

    If you were my brother, I would suggest you leave your money in the target date fund for the time being.  I would suggest that you continue your investing education.  Then, look towards taking charge of your portfolio.

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    • #3
      Rescuebot, I think it makes sense to switch if you think you want to continue your financial education and make investment decisions for yourself.  A Vanguard 3 fund portfolio could be had for much less than 0.73. Since you will not pay any capital gains selling is not an issue.  Of course if the fund is at a loss you will not get the tax loss harvest either. If personal finance is not your thing then a target date fund makes sense but the expense ratio is high.

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      • #4
        Your question has less to do with expense ratios than optimal long-term growth of your portfolio (and, by default, your wealth). I strongly disagree that having all of your investment in a single fund, TDF no less, is a wise investment strategy. And I do not believe you should base your decision upon timing short-term market fluctuations. The best time to diversify is now, not some time in the future when you may (or may not) psychicly intuit the it is a 'good time'. Continue your education and consider divesting into a portfolio that allocates your investments among funds (and managers) that focus on the basics: International, cap-weighted, and (optional) REITs.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5




          I have just started learning the basics and still doing so. My current retirement account has just 1 fund and that is fidelity target date 2040. However, it has a expense ratio of 0.73% and I am certainly not a big fan of it, seeing that it has never given me anywhere near what the s&p 500/ total US stock has done. So, the question is – would it be okay for me to change my investment to a 3 fund index portfolio?

          I see that the target date 2040 has fallen more than the one i am looking to buy and was wondering if i would be losing by making the switch now but considering the long term, would i be better off buying it now and stop paying the higher expense?

          Thanks a lot for the input

           
          Click to expand...


          A target-date fund might be fine when you are just starting out, but it is not appropriate if you have sizable assets.  For one thing, you have no control over the asset allocation.  The timing of the sale of stocks along the glide path might coincide with a recession.  Also, target date funds are rarely well diversified.   I would suggest a multi-asset class portfolio, and here's why (attached).  The top chart is for a 3-fund portfolio.  The bottom one is for a 12 asset class one.  Which one is better diversified?

          Here's some more reading on investment management that might be helpful:

          http://litovskymanagement.com/2014/05/five-principles/

          I think you are on the right track.  Inside a retirement plan there are rarely many options available, but if you do have access to Spartan funds or any Vanguard index funds, I'd use these instead of using target date funds.

           

           
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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          • #6
            I would stick with the fidelity target fund but instead of the high ER version, why not switch to the Index 2040 Fund. It is essentially a 3 fund index portfolio with a 0.16% ER! That's the same ER as vanguard. If you don't have that option at work just open a brokerage account...get the heck out of the fidelity freedom

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            • #7
              Thanks a lot for that  

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