Vanguard offers several different life-cycle funds: the five original STAR funds, which include STAR and the four STAR LifeStrategy funds, plus 11 so-called Target Retirement funds.
Diversified Equity (VDEQX), a fund of equity funds, could also fit into this category, but it’s truly an equity-only offering with no logical connection to these other life-cycle funds.
All of these life-cycle funds are “funds of funds,” meaning they are funds that invest in other mutual funds, and, except for the original STAR, are all invested predominately in index funds.
Only the three most conservative Target Retirement funds, Target Retirement 2005 (VTOVX), Target Retirement 2010 (VTENX) and Target Retirement 2015 (VTXVX), currently use the actively managed Inflation-Protected Securities (VIPSX).
Although within something less than 10 years, we can expect to see Target Retirement 2020 (VTWNX) and Target Retirement 2025 (VTTVX) begin to allocate some assets to the inflation fund as well.
Don’t Fall Into the “Set It and Forget It” Trap
It turns out that investors in retirement plans such as 401(k)s have increasingly been sinking their money into targeted-maturity funds rather than fixed-allocation funds.
These are people who don’t want to think about their investments at all — who really do just want to “put it away and forget about it.” Obviously, if you simply tell someone to pick the fund whose date most closely matches their expected year of retirement, you’ve made things ultra simple.
This is lowest-common-denominator investing — and Vanguard loves it! For one thing, it’s attractive to folks who just aren’t interested in their investments. And once those investments are made, they stick. All fund companies like “sticky” assets.
Why Target Retirement Funds
Are NOT a Good Idea
For one thing, the investing assumptions you had at age 20 are probably not the same as the ones you’ll have at age 30 or 40.
Second, there’s nothing “safe” about investing in these retirement-oriented funds. Mindless, yes. Safe, no.
I calculated the risks these funds would have experienced invested at their initial allocations over the past 20 years and compared them to the original STAR and its offspring.
Target Retirement 2045 (VTIVX) is a mighty risky offering, with almost 90% of assets allocated to stocks, and the bulk of that in Total Stock Market (VTSMX), which is overwhelmingly large-cap in nature and has vastly underperformed many of Vanguard’s other equity funds.
No wonder it lost almost 40% during the most recent bear market, and is still working to recover the loss today.
No, people investing for retirement should ignore these gimmicky Vanguard funds. Instead, they should invest in the very best funds that Vanguard has to offer, dividing their portfolio allocation according to their financial goals and risk tolerance.
It isn’t enough to pick the right funds to achieve the retirement you want… you also have to put them together in a sound strategy that meets your goals for growth, income and safety.
And knowing which Vanguard funds to choose and which to avoid requires investors to really dig out the facts hidden beneath the hype. You can learn to ferret out the plain unvarnished facts — if you have the time, energy and inclination. OR you can put Dan Wiener’s 18 years of experience to work for you…
