Fund names:
Vanguard Target Retirement Funds, 2005 - 2050Objective: Each fund invests in a combination of six Vanguard index funds and a money market fund. The funds’ composition is unchanging until 25 years before the fund’s target date; from that point on, the fund becomes more conservative at five-year intervals. At 5-10 years after its target date, the fund rolls over into Vanguard’s Retirement Income fund.
Adviser: The Vanguard Group. Vanguard was founded in 1975 by John Bogle. It manages about a trillion dollars in 130 US and 40 non-US mutual funds.
Manager: Duane Kelley, a Principal with Vanguard.
Opening dates: The "original" series on October 27, 2003, the added funds in May 2006.
Minimum investment: $3000 for both regular accounts and IRAs, $2000 for Coverdell Education Savings Accounts.
Expense ratio: Around 0.22%.
Comments: Vanguard is making two moves at once. They doubled the number of their Target Retirement (TR) funds, and they changed the asset allocation for their existing Target Retirement funds.
On whole, this is a pretty straightforward asset allocation story. Each of these funds invests, in varying degrees, in seven other Vanguard funds. They are:
The funds’ asset allocations change based on a simple countdown to their target date.
|
Years before the "target date" |
Years after the target |
|||||||
|
25-50 |
20 |
15 |
10 |
5 |
0 |
-5 |
-10 |
|
| Stocks |
90 |
82.5 |
75 |
66.8 |
60 |
50 |
30 |
30 |
|
Bonds |
10 |
17.5 |
25 |
33.3 |
40 |
50 |
65 |
65 |
Here’s a simple illustration: If you invest in Target Retirement 2025, then 2010 will be 15 years before the "target date." In 2010, your fund will invest 75% of its assets in stocks. In 2015, just 10 years before the target, stocks drop to 66.8%, and so on.
At their most aggressive, the funds will have 72% of their assets in US stocks and 18% in foreign stocks. The foreign stock exposure will include 2.4% in the larger emerging markets.
Two things to know about these funds:
| (1) This allocation is a lot more aggressive than Vanguard's traditional allocations. TR 2035 is an example of their most aggressive allocation. Under the old model, TR 2035 had 61% in US stocks and 15% in foreign stocks, with no emerging markets exposure. Under the new model, TR 2035 has 72% in US stocks, 18% in foreign stocks, including 2.4% in emerging markets.
(2) This is still a pretty cautious bunch. Compared to T. Rowe Price’s Retirement 2035, Vanguard TR 2035 has less foreign stock exposure, more bonds, fewer "junk" bonds, a slightly higher market cap, and no immediate prospect for alternative investments (such as commodities or real estate). |
Bottom line: Marketing spin aside, Target Retirement funds are not purely "invest and forget" funds. Not Vanguard’s version, not anybody’s. "Invest and forget" risks turning into "invest and get screwed." That said, these funds combine caution, predictability and low expenses. They make a fine core holding in a long-term portfolio.
Website: http://flagship3.vanguard.com/VGApp/hnw/FundsByName