Comments on: Stock Allocation Rule: 120 Minus Age

By: Will

Will — Tue, 09 Jan 2007 03:45:59 +0000

It’s worth noting that as you approach retirement the Vanguard Target Retirement Funds hold an increasing proportion of funds in inflation-protected bonds (specifically, TIPS). If you argue that TIPS are somewhat stock-like, because they both provide some protection against inflation, then the Vanguard Funds look less “conservative” near retirement.

By: Miller

Miller — Tue, 09 Jan 2007 02:00:44 +0000

As I suggested in my above comment and with Jim’s permission, here is a plot of the data.

http://www.mypocketchange.com/2007/01/08/bfp-follow-up-120-minus-age-stock-allocation-rule/

I think it’s a little easier to compare the numbers. For example, clearly T. Rowe Price is the most aggressive. Also, the rule seems pretty accurate, except at the edges. In retirement, allocations appear more conservative than the rule suggests, and in the early years, the rule is too aggressive…

By: Miller

Miller — Mon, 08 Jan 2007 14:50:29 +0000

Very interesting post. My question is… how do we really interpret this? What’s the pull away?

I’d suggest this. I think it says more about the accuracy of the rule than the target retirement funds. For example, while I don’t claim to be an expert with data to back up ANYTHING, from what I’ve heard, anything about 85% stock is maybe riskier than should ever be taken. And that’s where this rule seems to break down across the board, right? For the retirement year of 2045, the rule says 94% stock… but none of the funds have above 88.6%.

Jim, why not through these percentages into a simple excel spread sheet? I think that would convey the data the best! I’ll do it if you want because I’m actually interested! =)

Also, something caught my eye… T. Rowe Price 2035 is HIGHER stock than T. Rowe Price 2045… Who’s charging me ridiculous expense ratios to run these funds anyway??? =P (maybe the international stock exposure explains this seeming consistency…)

Good article!

By: TMT

TMT — Thu, 04 Jan 2007 22:03:33 +0000

Beware of multiple layers of fees with target and/or lifestyle funds.

Fortunately, it looks like the SEC is keeping an eye on this per my recent post:
http://www.moneytortoise.com/more-transparency-for-funds-of-funds/

Also, while I think its very controversial and have gotten into heated debates with clients over this, I would argue that you should always have most if not all of your money in a diversified portfolio of stocks, regardless of your age.

Bonds reduce short-term volatility, but they also dampen long-term returns. If you’re truly a long-term investor, and especially if you want to leave a legacy behind to your children/grandchildren/charity, I think bonds do more harm than good.

By: Matt

Matt — Thu, 04 Jan 2007 06:50:42 +0000

This is exactly what I’d expect. The rule of thumb isn’t universally applicable, and someone already retired or imminently retiring will rationally have a lower risk tolerance with their retirement savings than 120-age implies. The rule is more applicable to the younger years than these breakdowns would imply, but following it strictly, in a single fund targeted at people in their 20s would still result in underdiversification of that fund.

Moreover, it makes demographic sense. People in their 20s and 30s are generally laid-back about retirement, and unlikely to be worried about about a point or two here or there on their return rate. People in their 60s and up are beyond the point where greater returns will help them much. It’s the 40s and 50s folks that are (in many cases, justifiably) panicking about how much they’ve under-saved, and feeling a desperate need for higher returns to help their late-coming contributions make up for lost time. A fund targeted at people in this age bracket will sell better if it overinvests in stocks, relative to the conventional wisdom.

By: jim

jim — Thu, 04 Jan 2007 02:55:53 +0000

I just added the Fidelity Freedom 2040 Fund. I think that a target retirement fund is a good idea, I think it’s a tossup between a target retirement and an index fund but I’m also very young so I should have a lot in stocks anyway. I think that a target fund is better than picking your own mix because you get automatic rebalancing and you can be confident in that you have a pretty good mix (since they’re picking it).

A target retirement fund is generally a fund of funds – though you don’t pay more than if you picked the funds yourself.

By: doogan

doogan — Thu, 04 Jan 2007 02:35:07 +0000

you missed the fidelity 2040. could you add that? my wife and i are both 30 and both have roth iras. i have fidelity 2040 and she has t rowe 2040. i’m always concerned whether we are doing the right thing or not. does anyone have any thoughts on if the target funds are worth it compared to just picking your own diverse set of funds? does anyone have any opinions on the 3 funds listed?