Vanguard Target Retirement Fund Changes 2015

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vanguardinvI 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).

(Also see: Do You Need International Bonds In Your Portfolio?)

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.

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Comments

  1. I agree that they seem to tweak these too frequently. This smells almost like active management to me. I wonder how much of this is driven by their research and due diligence, and how much is a reaction to ‘fads’ in the industry and wanting their funds to more closely match competitors?

  2. Matthew Heaney says:

    This really is just a tweak. Vanguard’s position (as described in a white paper by them) states that the optimal mix of US stocks and International stocks is somewhere in the range 20-40%. The other issue is that International Stock index fund used to be a fund-of-funds, but its charter changed.

  3. Maury McCoy says:

    Does feel a bit like active management… U.S. has been on quite a run and international has been beat down for a while. GMO (Jeremy Grantham) has been saying for a long time that 2015 still has some steam behind the U.S., but expect International/Emerging to perform better over the next 7 years or so.

    https://www.gmo.com/America/CMSAttachmentDownload?target=JUBRxi51IICIG%2BO0Gg3j2%2Bw0vFw%2BLzVDWyqQBq%2FpmM07TlbxJZxFFC2YIf2X9hXxVAhRW8BNj%2F5vy5uynHscy5MCDqgox4ODc25dr69F6PXOlXqd6TzasQ%3D%3D

    You could find a million talking heads to give you a million opinions, but the GMO letter is always a fascinating and entertaining read. Grantham is pretty respected in the institutional community.

  4. Italiangirl2020 says:

    I am wondering if expense ratios will go up because of these frequent changes. I have the 2025 Fund and I thought it was a good idea. Now I think maybe I should buy the individual funds inside the Target Fund instead.

  5. I also agree that changes seem to occur too frequently for a company whose founder preaches “Stay the course.” However, as Jonathan noted, the individual tweaks are small, and I would also argue the net change isn’t that significant either. Some changes can be excused by new vehicles becoming available (addition of int’l bonds, replacement of three funds with total international, etc) and some can be excused because the mix only started in 2003 and you have to expect them to find some things customers want changed after the first few years.

    I also “roll my own” with a mix of funds that isn’t too different from what a Target fund would do for me. But I enjoy keeping track of my allocation and also like that my average ER is lower than a Target fund. My wife does not share these interests and prefers the simplicity of a target fund, and these changes don’t alarm me in such a way that I’d ask her to consider other options. Vanguard’s Target funds are still my go-to recommendation for those desiring simplicity.

  6. I used to work at Vanguard, so I can add some insider perspective to this thread. There is absolutely no “active” mgmt. element to this decision, quite the opposite actually. It’s a purely evidence, research, and, as always with VG, a cost-based decision. As Matthew points out above, VG has consistently recommended an international equity weighting of 20-40% of your total stock allocation over the years, depending on your personal risk tolerance. Being a conservative money manager, VG has tended to lean towards the lower end of the scale in its allocation funds like the target or lifestrategy series of funds. So what’s changed? Well, previously, investing internationally was in some markets sharply more costly (bid-ask spreads, low liquidity), and low daily trade volume in some countries, particularly emerging markets, but these issues have largely disappeared in recent years. Ditto int’l bonds. Remember, in building their int’l index funds, VG trades in the tens of millions of shares sometimes for a particular security, and is managing incredible daily cash flows. Just last year alone, VG took in $200 billion plus in net new assets, a mind-boggling sum. To put that in perspective, that’s more than Merrill, Morgan Stanley, TD Ameritrade, and E*Trade took in COMBINED. So, a business decision was made over the years, rightly IMHO, to focus on keeping fund costs low. This is also the main reason why VG funds are occasionally combined or merged.

    But back to that active mgmt. point someone made. If anything, I’d argue it’s active mgmt. to restrict your int’l stock allocation as low as 20-40%, as the market cap of U.S stocks is only 40-50% of global market capitalization. Behavior finance calls this home country bias. Yes, it’s riskier to have a bigger allocation to int’l stocks. In fact, Bogle would straight out tell you it’s not worth it, and you get all the int’l diversification you need by owning U.S multi-national behemoths via the S&P 500, e.g Coca-Cola. But if you’re going to be a true and pure market cap indexer, have a look at how VG’s Total World Stock fund is allocated for insight.

    More on this topic via VG whitepaper you can read here:

    https://pressroom.vanguard.com/content/nonindexed/6.26.2012_The_Role_of_Home_Bias.pdf

    Hope you all find this post helpful. Great blog, Jonathan, I really enjoy it!

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