﻿Are you looking for an easy, yet a smart investment option?
Welcome to Vanguard Target Retirement Funds. With this one fund, you literally will never need to
think about investing again until you are ready to retire. Hi, if you are new to the channel,
my name is Tae from Financial Tortoise. Where we learn to grow our wealth, slow and steady. One of
the most common investing questions I get is, what should I invest in? Just the other day, I had a
friend who wanted to open up his first retirement account but wasn’t sure where to start. Ofcourse,
being the investment nerd that I am, I started to explain to him the importance of diversification,
asset allocation and risk tolerance. And how he needed to incorporate all that into
his investment strategy. Little did I know I lost him even before I started my explanation.
All he really wanted to know was what he should invest in so he didn’t have to think about all
the mumbo jumbo stuff I was talking about. And it got me thinking. If I had to narrow
it down to just one advice. What would be the simplest, yet the best investment advice I can
give to him? One that would allow him to gain all the benefit of investing in the market,
without all the overwhelming complexity it comes with. And I realized it would be the Target
Retirement Fund. And for me, specifically Vanguard Target Retirement fund. So in this video we are
going to deep dive into Target Retirement Funds. I’ve broken this video into three sections, so
feel free to skip around. First, we’ll break down the fundamentals of the Target Retirement Fund.
What it is, what it tries to accomplish and why you should consider it as your investment vehicle.
Second, we’ll play the devil’s advocate and delve into why a Target Retirement Fund might not be for
you, so you can hear both sides of the argument. And Third, we’ll jump into Vanguard’s website
and look under the hood of a few of the specific Vanguard Target Retirement Funds and identify a
few funds that would be ideal for you. Alright, let’s begin with some fundamentals. What is a
Target Retirement Fund? They are sometimes called Target Date Funds or sometimes Lifecycle Funds.
Simply, target retirement funds are funds that not only invest in well diversified funds for you,
but also rebalance its asset allocation with time as you get closer to your retirement age. If you
want to make good investment decisions, but don’t have any desire to learn about portfolio design or
investment strategy. This one fund would literally be all you need for the rest of your life.
A Target Retirement Fund holds several other funds within it and thus is most often called “fund of
funds.” For example, a target retirement fund would likely include a stock market index fund,
an international index fund and an index bond fund. And these funds would own its own share of
stocks and bonds based on the index that it is following. And this is where we have our first
major benefit of investing in target retirement funds. Automatically built-in-diversification.
Diversification is one of the most important concepts to investing because it is the key to
reducing investment risk. The fastest way to get rich overnight is to own the next
Netflix. But the fastest way to lose all your money is to own the next Blockbusters. Unless
you are a professional investor who studies stocks and companies for a living, to know what companies
will do well or not do well is nearly impossible. And even the majority of professionals don’t do a
great job of it. However, you don’t need to have a magic ball in order to get healthy returns on
your investment. If you buy a well diversified index fund like a S&P 500 or Total Stock Market
Index Fund, your investment is highly diversified. And you are tapping into the growth of the stock
market while at the same time protecting yourself from single stock risks. An index fund like a S&P
500 Index fund is great because instead of holding a few stocks, you are holding onto essentially a
share of all 500 companies within that one fund. Companies like Apple, Microsoft, Amazon and even
smaller companies like Gap, Under Armour and News Corp. And Target Retirement Funds automatically
have this built in diversification because they hold index funds as its core holdings. But in
order to manage risk, you just don’t want diversification, you also want good asset
allocation. Which leads us to the second major benefit of investing in Target Retirement Funds.
Holding a S&P 500 index fund or a total market index fund is a smart investing move,
however, stocks represent just one asset category against other types of asset categories out there.
Bonds, Real Estate, Commodities and even Cash represent different asset
classes. In order to minimize risk. Especially as you get older, you want other asset classes
within your investment portfolio to help offset or augment your equities holdings. For example,
you might want bonds to help smooth your stock volatility. Or you might want international funds
to gain exposure to the market outside the United States. And not only do you want these other asset
classes in your portfolio, you want to adjust the amount you have of each asset class as you
get closer to your retirement age. Making your portfolio more conservative versus aggressive
using different asset classes. A general rule of thumb is that as you get closer to your retirement
age, you want to hold more stable assets like bonds and cash versus stocks in your portfolio.
And this is where investing becomes a lot more of an art than science. And especially because past
returns don’t guarantee future returns, you as an individual investor will need to make adjustments
to your portfolio based on your risk tolerance and your comfort level with different types of assets.
But when you invest in Target Retirement Fund, all this is done for you. Automatically. What a target
retirement fund will do is it will automatically select a blend of investments for you based on
your age or target retirement date. All in well diversified index funds, across different asset
classes. And it will start out with more aggressive allocation when you are young,
and then automatically shift to more conservative allocation as you get older. You don’t have to
worry about anything except to just regularly deposit money into your target date retirement
fund. And this sums up to the third major benefit of investing in a target retirement fund.
It is just so darn simple. Jack Bogle likes to say, “Simplicity is the master key to financial
success.” Do not discount the amazing power of simplicity. By investing in this one single fund,
you get a built in diversified portfolio that you don’t have to rebalance or adjust.
The fund formula automatically reallocates the fund’s asset mix to fewer stocks and more bonds
as you get closer to your retirement year. And when it comes to cost, Vanguard recently made
adjustments to its expense ratio making it even more attractive. The average expense ratio for
Vanguard Target Retirement is now 0.08%. It used to range from 0.11% to 0.15%. This means that if
you invest $10,000 into a Target Retirement Fund, you are essentially paying $8 for all the services
of built-in-diversification and automatic asset allocation adjustment. I would say that’s a pretty
good deal for $8. But, of course I can’t leave you here. Let’s play the devil’s advocate. To be
honest, Target Retirement Fund isn’t for everyone. Despite how much I advocate for Target Retirement
Fund, I actually stopped investing in them a while back and let me tell you a few reasons why. What
makes target retirement funds so great is also its greatest disadvantage. You are not in control.
When you choose to invest in target retirement funds, you can’t select the specific index funds.
You can’t select the asset allocation. And you can’t reallocate the way you see
fit. The fund does it all for you. What if you prefer the S&P 500 index fund versus the total
market index fund? Or what if you prefer exposure to a specific international market versus the
total international market? Unfortunately, you can’t make those customized changes. And if
you are the type that likes specific control in those areas, a Target Retirement Fund may not be
for you. And tied to the lack of customization is the lack of personal risk tolerance incorporated
in these funds. The willingness to take on more or less risk is a very personal preference. You
could be a type that loves taking risks. Or you could be the complete opposite. Completely fine,
not taking any risks. We are all very different individuals when it comes to our risk tolerance,
and when you invest in Target Retirement Funds, you can’t factor in those personal preferences.
The fund has a risk profile formula it follows and you can’t change that. And you have to live with
the consequence of that asset allocation. If you know your risk tolerance well and like the idea of
managing your risk with different asset allocation models, the target retirement fund most likely is
not for you. And for me, that has been the case. When I first started out in my investing journey
I had no idea what I was doing. I made the mistake of investing in actively managed
mutual funds because that was what professionals told me to do. I got wiser and started to look
into index funds later, but I still had a very limited understanding of different asset classes
and different types of index funds. So, I made the decision to just invest in Target Retirement
Fund because I still wanted to invest. It was only many years later when I had increased my investing
knowledge and had a good idea of my personal asset allocation, did I move away from target retirement
funds. But to this day, a good chunk of my money is still in the target retirement fund and I don’t
plan on moving them any time soon. It was the best investment decision I made at the time.
And that is the decision that you must make for yourself. For my friend who isn’t interested
in learning more about investing, Target Retirement Funds is a perfect choice. Ofcourse,
he isn’t growing his investing knowledge and that is a downside. But I have learned that most people
are actually in this boat. They have careers they need to manage. Families to take care of.
And other endeavors they want to pursue. And if this is you, I say the best investing decision
you can make for yourself is to buy yourself a Target Retirement Fund and invest for life. But
if you are at a point where you want to grow your investing knowledge and also manage your portfolio
more hands on, check out my video here on a 3-fund portfolio you might find useful. But let’s say you
are interested in the Target Retirement Fund. My recommendation is to invest in Vanguard Target
Retirement Fund. Now, let’s take a look at a few specific funds that would be ideal for you. Below
in the description I have a link to a website that lists Vanguard's 12 target retirement funds.
When you go to the website, you’ll find target retirement funds ranging from 2015 to 2065,
plus one for those already retired. Vanguard makes identifying your Target Retirement super easy.
You just need to look at the birth year column. For me, given I was born between 1978-1982,
my fund would be Target Retirement Fund 2045. VTIVX. It’s making the assumption that I would
be retiring when I’m close to 65 years of age, 25 years from now. Now if you are much younger
and have 40 years to retirement, then your fund would be Target Retirement Fund 2060,
VTTSX. And if you are a bit older and have 10 years to retirement, then your fund would
be Target Retirement Fund 2030, VTHRX. Let’s take a look at what’s within this fund. As I
mentioned earlier, these Target Retirement Funds are “Fund of Funds.” So as you can see here, this
Target Retirement Fund 2045 is holding several other funds within it. Four funds specifically.
The Vanguard Total Stock Market Index Fund The Vanguard Total International Stock Index Fund
The Vanguard Total Bond Market II Index Fund The Vanguard Total International Bond Index Fund
They are all low-cost index funds and each fund is for different investment objectives.
You can also see how much of the total Target Retirement Fund is allocated to each underlying
fund as of this time, here to the right. What this fund will do as you get older and
your retirement year gets closer, the underlying funds will automatically adjust their allocation.
It will steadily become more conservative by allocating more to the Bond Index Funds.
You don’t even have to login to your account. All this will happen automatically. The expense ratio
here is 0.08%. Compared to a basic index fund like VTSAX which has an expense ratio of 0.04% it is
slightly higher. But you are getting additional services for that additional 0.04% which many
people find well worth the money. In addition, to put that to scale, if you have $10,000 invested in
this fund, we are talking about a difference of only $4. If you are looking to make one,
best investment decision in your life, invest in Target Retirement Fund. And if you can, Vanguard
Target Retirement Fund. The only action you need to take is to identify the specific fund based on
your retirement year and just invest regularly. By choosing to go with a Target Retirement Fund,
you will certainly outperform the majority of actively managed funds out there and you will set
you and your family up for success. If you like to learn more about specific asset allocation models,
check out a few of my videos here. Thank you guys for watching, and until next time. All the best.