No Comparison
TARGET-DATE FUNDS from Vanguard Group are, I believe, fantastic products. My first investment was a $3,000 purchase of Vanguard Target Date 2045 Fund (symbol: VTIVX) in late December 2005, shortly after I turned age 18. That was also my first Roth IRA contribution.
A target-date fund is an off-the-shelf globally diversified portfolio that automatically becomes more conservative over time. You don���t have to do any fiddling with the allocation, such as rebalancing or adjusting down your portfolio���s risk level. It���s a terrific, hands-off investment vehicle for building long-term wealth.
I���m concerned at the moment, however. Last year featured monster gains in the S&P 500 and Nasdaq 100. Even the broad Vanguard Total Stock Market ETF (VTI) returned almost 26% in 2021. By contrast, Vanguard Target Retirement 2060 Fund (VTTSX) was up ���just��� 16%. While that gain is nothing to sniff at, relative return differences can be powerful. And dangerous.
I fear that 401(k) plan participants will see 2021 returns early this year and simply allocate to the biggest winners. That might be fine���owning a low-cost S&P 500 index fund will probably work out okay over the decades ahead. Still, a large-cap U.S. index fund misses out on the diversification benefits that come with owning other stock market segments, such as U.S. small-cap stocks and foreign shares.
Recency bias plagues us as investors. If we aren���t careful, we can pick the hot index fund one year, and then ditch it when it has the inevitable stretch of sour returns compared to other index funds. Target-date funds help keep that kind of performance chasing in check.
My tip: As you review your portfolio, don���t get lulled into thinking that what worked over the past few years will keep winning. A diversified, low-cost approach that doesn���t require tinkering is a solid strategy for long-term investment success.
A target-date fund is an off-the-shelf globally diversified portfolio that automatically becomes more conservative over time. You don���t have to do any fiddling with the allocation, such as rebalancing or adjusting down your portfolio���s risk level. It���s a terrific, hands-off investment vehicle for building long-term wealth.
I���m concerned at the moment, however. Last year featured monster gains in the S&P 500 and Nasdaq 100. Even the broad Vanguard Total Stock Market ETF (VTI) returned almost 26% in 2021. By contrast, Vanguard Target Retirement 2060 Fund (VTTSX) was up ���just��� 16%. While that gain is nothing to sniff at, relative return differences can be powerful. And dangerous.
I fear that 401(k) plan participants will see 2021 returns early this year and simply allocate to the biggest winners. That might be fine���owning a low-cost S&P 500 index fund will probably work out okay over the decades ahead. Still, a large-cap U.S. index fund misses out on the diversification benefits that come with owning other stock market segments, such as U.S. small-cap stocks and foreign shares.
Recency bias plagues us as investors. If we aren���t careful, we can pick the hot index fund one year, and then ditch it when it has the inevitable stretch of sour returns compared to other index funds. Target-date funds help keep that kind of performance chasing in check.
My tip: As you review your portfolio, don���t get lulled into thinking that what worked over the past few years will keep winning. A diversified, low-cost approach that doesn���t require tinkering is a solid strategy for long-term investment success.
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