I always keep track of the Vanguard Target Retirement 20XX Funds because:
- They are a low-cost, broadly-diversified, “all-in-one” fund that I think are a good starting point for both beginning investors and those desiring simplicity.
- I have recommended them to my own immediate family, and they hold them in their retirement portfolios.
- I view them as an indicator of what the big wigs at Vanguard think is the “right” mix for most people.
So I was interested to see that Vanguard is again tweaking the asset allocation of their Vanguard Target Retirement Funds and Vanguard LifeStrategy® Funds. The claimed goal is “enhanced global diversification”. In practical terms:
- International stocks as percentage of total stock allocation will be increased from 30% to 40%.
- International bonds as percentage of total bond allocation will be increased from 20% to 30%.
Portfolio changes are expected to occur gradually and be completed by the end of 2015. Expense ratios are not expected to change.
For some perspective, here is a history of the major tweaks to Vanguard Target Retirement funds:
- 2003: Target Retirement 20XX Funds are first introduced.
- 2006: Overall total stock exposure is increased slightly for various Target dates. Emerging markets stocks are added to certain Target dates with longer time horizons.
- 2010: International stocks as percentage of total stock allocation is increased from 20% to 30%. Three of the underlying funds (European Stock Index, Pacific Stock Index, and Emerging Markets Stock Index) were replaced by a single fund, Vanguard Total International Stock Index Fund.
- 2013: International bonds are added as 20% of the total bond allocation. Vanguard Short-Term Inflation-Protected Securities Index Fund replaced the Vanguard Inflation-Protected Securities Fund for certain Target dates with shorter time horizons.
- 2015: International stocks as percentage of total stock allocation will be increased from 30% to 40%. International bonds as percentage of total bond allocation will be increased from 20% to 30%.
I’m not exactly sure how I feel about all this. On one hand, I think Vanguard tweaks their formula too often. Their asset allocation today looks rather different from 10 years ago. Has the historical investment data really changed that much? What is going to happen over the next 10 years? I would argue that none of the recent changes are absolutely necessary. On the other hand, taken individually each change is a relatively small tweak and can be supported by historical data. The funds remain low-cost and broadly-diversified, and that is probably the most important thing to consider. I would still recommend them to my family (who primarily invest in tax-deferred accounts).
My personal portfolio still looks pretty similar as a Target fund with big holdings in Vanguard Total US and Total International. But as a self-directed investor that prefers having control of the ship, unexpected changes like this remind me why I not longer hold these auto-pilot funds.