Vanguard Target Date Retirement Funds Nudge Younger Investors To Own More Stocks

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Vanguard has a blog post about their Target Retirement 20XX funds (TDFs) with a few interesting stats (via Abnormal Returns):

  • 97% of all Vanguard retirement plan participants had a target-date fund as an available investment option.
  • 77% of all Vanguard retirement plan participants owned a target-date fund.
  • 52% of all Vanguard retirement plan participants owned a target-date fund as their sole investment.

These all-in-one funds are getting more and more popular. So what is the effect of owning these TDFs as compared to the old method where you had to do your own mixing and matching of various funds? In general, the effect was to nudge younger investors to own more stocks. Here’s their chart comparing asset allocation holdings by age in 2004 and 2018. (The earliest TDFs were born in 2003 and still had a small percentage of assets in 2004.)

I find the 2004 “hump” curve to be interesting. The average young investor in 2014 was risk-averse and increased their stock holding up until the peak at about age 40, gradually going back to owning more bonds after that. The youngest investors (under 25) used to only hold 55% stocks on average, as opposed to 88% stocks today (90% stocks is the what the current Vanguard target-date funds own at that age). On an individual level, did most of them hold a 50/50 split or were half of them 100% stocks and the other half 100% cash?

I have recommended the Vanguard Target Retirement Funds to my own family members for its low costs and broad diversification. Vanguard obviously thinks this modern glide path is an improvement, but I hope that young people will keep holding onto the fund during the next bear market. That’s the true test of whether this new system is better.

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  1. 2004 was also just a few years after the tech crash of 2001. For many young people it was their first taste of a crash and got (myself included) got badly burned during that period.

    Be interesting to see what the profile for 2010 looks like and whether the millennials had the same issue.

  2. I don’t know Jonathan….as the housing bubble proved…nothing goes up forever….and destroying the lives of 5 million people who lost their homes between 2008 and 2016 or so was hardly a lament for Wall Street.
    Though nothing seems safe anymore I’d still rather take a gamble on 3%-4% yield in fixed income, long term bond funds, preferreds and CDs then bet on the stock market being where I need it to be 30 years from now.

    • I know the future as poorly as anyone else, but nothing comes without its own form of risk. The risk with bonds is that inflation and any taxes will eat close to 100% of your return, leaving you with little volatility but also little growth. If you made me bet 30 years from now the SP 500 vs. 30-year Treasury, I’d take the SP 500 without hesitation. However, in real life you can own some of both, so I am 2/3rds businesses and 1/3rd top quality debt.

    • While the housing bubble certainly hurt many people badly, the reality is, only 10 years later housing prices have allready recovered.

      I think the lesson to take away is dont invest money if you cant handle a short-term loss… not to give up on any one asset entirely

  3. Jason Boxman says

    I tend to imagine 2 possible outcomes to a bear market:

    1) Civil society is going to disintegrate — I don’t care what happens to my stock investments at this point
    2) Civil society continues — A broadly diversified portfolio will ultimately recover

    As long as I don’t need the money in less than 7 to 10 years, I don’t care either way.

  4. Coincidentally, I have been thinking of migrating away from Betterment to a Vanguard TDF because the time-weighted performance of Betterment is crap compared to the appropriate Vanguard TDF.

    Question is, should I go with the Vanguard TDF or simulate one on M1 Finance?

    The latter would use essentially the same total market Vanguard ETFs that the TDF uses and in the same proportions. Annual adjustment would be a manual process, however.

    One argument for the Vanguard TDF option is that Vanguard has their patented process to make their mutual funds more tax-efficient by using ETFs on the back-end.

    • Well, the M1 Finance way would still own the same ETFs and thus both would have the same tax-efficiency.

      I think it all comes down to your level of hands-off-the-wheel comfort. Vanguard TDF is easy. It’s fully autonomous. You can’t panic sell just the stock portion, so you are more likely just to leave it be. There is one fund and one number to look up in your account statement. However, the TDF may also change its asset allocation without telling you and without your input. For example, I don’t want to own international bonds.

      M1 Finance is just a commission-free broker with some nice semi-autonomous features. It will guide you back into your lane, but if you really want to break free it won’t hinder you. You can still tweak with a few clicks. You can stay the same even if the TDF version you are tracking changes. You can easily move your ETFs to other brokers. I just put some of my 2019 IRA contribution in an M1 Finance account to try it out because I really like the thought behind it, but I also know I can always swap out later tax-free if I don’t like it.

      • I concur about aversion to international exposure. That is why, IMHO, Betterment returns are so low. They have a significant exposure to international equities and bonds, including very high risk emerging markets.

  5. The “97% of retirement plans have a Vanguard TDF option” line interested me. Last I looked (over a year ago) I don’t recall seeing a Vanguard TDF in my employer’s retirement plan.

    I looked last night and sure enough there they were. Don’t know if they are a new addition or if they were there but I wasn’t looking for them.

    Since the Vanguard TDF has a higher return than my self-selected funds, I will be moving my retirement assets into there and ignoring it for a while.

    • Interesting, I should clarify that it is 97% of plans where Vanguard is the administrator and thus has all the data on them. I will edit the original post to be more clear.

  6. So I’m not a quant and have never done a Monte Carlo simulation but my sense remains that the best guide path is to regularly invest in a passive, cheap diversified 100% equity portfolio until you have reached your target date to be 15 years from retirement. Until that date, never read a financial article or worry about markets or whatever. A few months prior to Retirement Minus 15, read everything you can to see if you think we are in a downturn, and if we are, you keep buying into that same pot until equities have rebounded from their last high point, at which point you should rebalance into CDs/US government bonds around 40-60% (ideally in your tax advantaged space). The idea is that rebound date should be in less than 15 years of course. If we are not in a downturn, same thing on the Retirement Minus 15 date. Glide path feels sensible but seems to me inferior to this plan.

    I can’t bring my self to do this quite yet as I’d have to give up reading MMB!

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