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We Liquidated Our Target Retirement 2050 Fund

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Stock MarketMy fiancee and I put a portion of our savings, that is those funds aren’t earmarked for future taxes, weddings, or other purposes; in a Vanguard mutual fund account that is fully invested in the Vanguard Target Retirement 2050 fund (and a high yield savings account). The latest rattlings of the stock market have unnerved me and while my brain is telling me “think long term,” my heart is telling me to sit out the next month or so and let everything settle down. I know a lot of you will probably respond by saying “you should be thinking long term! why are you trying to time the market!?!?” and a less open blogger would’ve probably never mentioned it, but I feel that it would be remiss if I didn’t share with you my decision and why I did it.

1. The Fund Isn’t Long Term

I’m still in the target retirement funds via my SEP-IRA and my Rollover IRA and we haven’t touched our 401k allocations, we’ve sold the fund in this particular account because it’s not a long term account. The purpose of the fund was to get some stock market exposure instead of putting it all in a high yield savings accounts.

2. We’re Not Panicking

Panicking would’ve been pulling out a little over a week ago when the first rumblings really started, with Bear Stearns telling everyone two of their hedge funds basically went bankrupt. More panicking would’ve coincided with American Home Mortgage firing 90% of its employees and filing for bankruptcy. You would’ve had yet another opportunity to panic if you sold it yesterday because BNP Paribas, France’s largest bank, froze the assets to three of its sub-prime funds. Today? The Federal Reserve pumped $38 billion dollars of liquidity into the banking system… so we should be good right? Now is exactly the least panicky time to liquidate, so it’s not panic causing our decision.

3. The Climate Looks Awful

Dollar at historic lows, China pushing us around with all the dollars they hold, slow housing market, jumbo loan rate hikes, liquidity crunches… I don’t know how many warning signs you really need to start acting when thinking short term. Take this very simple scenario… in October, $50 billion in adjustable rate mortgages will reset. Let’s say 10% of those folks will not be able to make their payments – that’s $5 billion in inflated property value that will be foreclosed. How much will the banks be able to get for them? Mortgages will be harder to come by, they’ll have higher rates, and so if you assume that they get 90% value on that $5 billion, that’s $500 million dollars up in smoke on the bank’s balance sheets. I might not be a banker, but those percentages sounded rosy to me and that analysis, again I’m not a bank, makes my stomach turn.

What do you think? Was this a mistake? If so, please explain why because I think this issue is on the minds of quite a few people.

(Photo: thewalkingirony)

{ 28 comments, please add your thoughts now! }

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28 Responses to “We Liquidated Our Target Retirement 2050 Fund”

  1. plonkee says:

    Well, I think it was either a mistake to hold the money there in the first place or to withdraw it. What were the goals for this money? Or more plainly, when were you planning on spending it? If not for the next ten years, who cares if it goes down now, if you were planning on spending it shortly, what was it doing 100% in stocks anyway?

  2. The Div Guy says:

    You need to come up with a plan for the money before you invest! That said selling when stocks are down is not how you make money in the market. Go over your goals for the money and your asset allocation before you put money in the market. I have been buying stocks the past few weeks, they may go lower but I am buying the same great companies at a lower price. Good luck.

  3. Brian says:

    It has certainly been unnerving for the past couple of weeks to watch my investments bounce around like a yo-yo. What’s even more unnerving is that many analysts are predicting that we haven’t yet hit bottom.

    That being said, I wouldn’t make a habit of selling when things go sour (you’ve probably lost a bit over the past week or two) and buying when the market is exuberant (since you will probably be overpaying).

    That being said, if you really feel the market will continue to decline, then it is your prerogative to pull the money out to where you are more comfortable.

    Good luck!

  4. Josh says:

    I recently opened a Roth IRA and am sort of kicking myself that I didn’t wait, but that’s how things fell into place. I hate watching my account go down and down and down. I’m trying to weather the storm though. I just hope the drop isn’t more substantial than I can bare.

  5. Fas says:

    I work in real estate and remember that the subprime loans are only a sliver of the total good residential mortgage market and only a fractional percentage of the overall mortgage dollar amount in the entire real estate spectrum (commercial and residential). These credit worries are real but a doomsday scenario that the media and market pundits would have you to believe. Panic increases ratings. Remember that the economy (U.S. and worldwide) is pretty dang good and just because the stock market is volatile doesn’t mean the economy is going to tank into recession. If anything, this short term volatility will be good because it has already served to steer the major credit players and investors in the direction they should have been going over the past year with more prudent credit standards and underwriting. Things were very frothy for a long time and this wakeup call is good. Of course there will be some people that get burned and some people will lose alot of money but where money is lost, money is made. I think it is healthy to take a wait and see approach and have some money in cash accounts. I think you are smart. Just watch closely and if you see the world economic (the economy not the markets) fundamentals start to fall, then you can start the worry machine.

  6. V says:

    It really depends on how much have you lost which made you uneasy. I think the markets might go up and down next week, so it would have been better to sell it (if you really want to do that) on the day market goes up.

    However, as others pointed out, it would be prudent to invest for long terms in such a market.

  7. Hey BluePrint

    The mistake I feel is that your actions indicate that you do not have a plan. if you really had a plan, you would know your risk profile. That means you would know your risk tolerance and what type of investor you are. Are you an income and growth investor, growth investor and aggressive growth investor?

    Secondly, do you know what are your retirement goals? How much you have to save a month to reach them?

    You will only know the answer to the second question if you know your risk profile and an asset allocation that fits your profile.

    The problem with target date retirement fund is that if you are long way from retirement, it is 100% invested in equity. That may not be the right allocation for you based on your risk profile. The fact that you bailed out shows that you should not be in 100% equity portfolio.

    Also, if you have a truly diversified portfolio that is rebalanced automatically, you shouldn’t be worried about china, the dollar and all other stuff.

  8. the baglady says:

    I’ve held the target retirement 2045 fund for more than 2 years now, and I’m not selling it because it’s an easy balanced fund that I don’t even look at much, and even with the recent market upheaval, it’s still doing pretty well. Vanguard also has this policy where if you liquidated a fund completely you can’t buy into it for 6 months. Also, the target retirement funds aren’t made up of all US stocks, it’s at least 20% international so I am not too worried about it. I don’t think you made a mistake if you need the money right away, but in general you probably should look at your mutual funds less than you look at your stocks so you don’t feel like you’re losing buttloads of money.

  9. Lord says:

    I think you did the right thing for you. It could have been worse if you insisted on holding out only to yield later at lower values when you can’t sleep. Investing can be tough when our heads tell us one thing and our emotions tell us the opposite. It is a learning process where we learn both about investing and about ourselves. You have already started to analyze why you were in it in the first place and why you got out. Review your decision later to confirm or dispel your feelings and actions and be prepared for them next time.

  10. I must say I am surprised by your decision. On the contrary, the lower the prices get, the more I want to buy. By selling now, you’re only guaranteeing to sell low, which is the opposite of what you want to do. Sure, it may not be the bottom, but it’s nowhere near the top.

  11. jim says:

    My plan with the account was to just have a place to put funds that weren’t earmarked for something else. We both currently max out our Roths and 401ks (and I have a SEP) so I think we are set for retirement. While I may have been affected be the news, only one of you has addressed the reasons I pulled out. (I think, I’m currently in LAX reading these comments on my fiancee’s blackberry)

  12. Mike K. says:

    Why Invest Now?

    Over any given five-year period in the 70+ year history of the U.S. stock market, 97% of all mutual funds have made money.

    In any given ten-year period in the 70+ year history of the U.S. stock market, 100% of all mutual funds have made money.

    Not only that, but the stock market has averaged a growth rate of 12% per year over the last 70+ years.

    IF YOU ARE AT LEAST FIVE YEARS AWAY FROM RETIREMENT, THE SMART INVESTOR HAS HIS / HER MONEY IN MUTUAL FUNDS THAT ARE TRADED ON THE U.S STOCK EXCHANGE. Don’t panic and lose based on media hype!

    We are a strong resillient nation and a financial powerhouse! My best example to back up that statement follows:

    Lets go back to one of the darkest days in the history of our country – September 11, 2001 (AKA 9/11). The largest orchestrated terrorist attack in world history and the first & only one on U.S. soil. Media predictions forecasted an iminent World War 3. ‘Doomsday’ was on television and every other media outlet around the clock!

    Here was Wall Street’s reaction…………..

    Sep. 11, 2001 – Markets closed because of terrorist attacks in New York and Washington, D.C. Markets will re-open September 17, 2001 after being closed for 4 trading days.

    Sep. 17, 2001 – Market Falls 684.81 to close at 8,920.70, largest dollar loss in the history of the U.S. Stock Market, down 7.13%.

    The market lumbers along over the next ten months…………………

    Jul. 23, 2002 – Market falls 82.24 to close at 7,702.34. The market has declined 4,020.64, or 34%, since January 14, 2000.

    The next day…………………

    Jul. 24, 2002 – Market rises 488.95 to close at 8,191.29, second largest dollar gain in history, up 6.35%.

    Jul. 29, 2002 – Market rises 447.49 to close at 8,711.88, third largest dollar gain in history, up 5.41%.

    Oct. 09, 2002 – Market falls 215.22 to close at 7,286.27. The market has declined 4,436.71, or 38%, since January 14, 2000.

    Dec. 11, 2003 – Market rises 86.30 to close at 10,008.16, first close above 10,000 since May 27, 2002.

    Jan. 09, 2004 – Market rises 52.59 to close at 11,011.90, first close above 11,000 since June 7, 2001.

    Oct. 19, 2006 – Market rises 19.05 to close at 12,011.73, first close above 12,000. (The DJIA has risen 65% during the 4 year period since October 09, 2002).

    Feb. 27, 2007 – Market loses 416.02 to close at 12,216.24 – declines 3.29%.

    Apr. 25, 2007 – Market rises 135.95 to close at 13,089.89, first close above 13,000.

    Jul. 19, 2007 – Market rises 82.19 to close at 14,000.41, first close above 14,000 – All time high. (The DJIA has risen 6,714 points, or 92%, since the low point of Oct 9, 2002, 4 years 10 months ago).

    THE TAKE HOME MESSAGE:
    Don’t panic and lose during market cycles based on media hype. History will repeat itself!

    Mike K.

  13. Eric says:

    Your $500 Million estimate of losses across all the sub-prime lenders in a $10 Trillion economy just makes me grin. Yes, to the poor guys like you and I a half-billion bucks sounds like a lot, but realistically the impact on the economy will be minimal.

  14. Scott says:

    I transferred 1/3 of my retirement funds into “safe” holdings out of stocks (particularly US stocks) about one week ago. I saw enough signs that I’d seen before that this market is going down. For all those doubters and statisticians here, please explain how the market can gain 15-20% so far this year and not get corrected back towards historical averages of 7-8%? When the first half of the year was this unexpectedly good you have to know that the second half is going to stink. And we’re not even to horrible September yet…

  15. Pinyo says:

    Personally, I sold a few things in the past days myself, but not to get out of market. I was moving money to what I believe are better investments.

    Anyway, I never like target retirement fund because they tend to be (1) more expensive, (2) does not have the exact asset allocation that I like (i.e., I think most are too conservative), and (3) does not give the sense of control (i.e., I like to reallocate when allocation percentage shift by a few points).

    I hope you can find another investment to keep your money in play. I would not keep it as cash right now. May be you can look into some small value ETFs. Just make sure what you buy is not overweighted in financial — divesify, diversify, diversify!

  16. The Div Guy says:

    Scott,

    Since you can tell when the market is going to drop, can you tell me when it’s going back up again so I can be ready? Many thanks.

    The Div Guy

  17. MoneyNing says:

    In the long run, this is a mistake because you can’t tell when the market will go up or go down in the short term. You can increase the odds of being right in predicting short term up or downside if you are constantly analyzing the market etc etc but even then most people who do that end up being wrong half the time.

    I don’t believe the market is going to tank because valuations are not extremely high right now and we are only 5-8% down from a year of a virtually unstoppable bull run up.

    In a week, you could be right because the market could have tanked and you would look like a genius. Since most of us can’t tell whether it will go up or go down (whatever CNBC says btw) though, it is not advisable to time the market as that usually means selling low and buying high.

  18. Dustin says:

    I’m with you on this one. I am in cash now too.

  19. Jim Lippard says:

    Fas: You’re fooling yourself if you think that only subprime loans are a problem. American Home Mortgage Investment Company (AHM), which just went under (and has been de-listed), doesn’t even originate subprime loans–their business was Alt-A and prime loans.

  20. dong says:

    I’m with the others who echoed a need for plan. I don’t think there’s anything wrong with liquidating as long as you know when and how you’re going to get back in. Personally, my strategy through this is to buy some puts on the indexes….
    I firmly do believe we’ve got more pain to feel. I’m naturally very bullish on the stock market, but there are things like the overall credit markets that need to be sorted out in the near term…

  21. Miller says:

    Quick question… when did you buy (or perhaps you’ve bought multiple times)? Have you calculated your average annual return?

    I bought ~10k of an index last summer kind of similar to you (“let’s just see what happens… probably a non-long term thing, but nothing really in mind either”). Even with the current drops, I am up ~10% annualized. Sure, I don’t get the greedy 20% I would have a month ago. But let’s keep perspective… 20% is greedy (its bad to be greedy!), and 10% is just fine.

    With that said, I might follow suit and sell. But not because of the market, but because my time line on this money might be sooner rather than later, and it probably shouldn’t have been in the market to begin with! That said, I consider my 10% as lucky, not sad.

  22. Scott says:

    Div Guy – look for the rebound sometime around Christmas :-) That’s when I plan to reinvest my $239487239482347.16 back into the market.

  23. Mike says:

    It was a mistake. The market had a short term correction, and is about to bounce right back and hit new highs in the next few months. Mark my words…

  24. newbie investor says:

    hello all,
    i’m new to investing for retirement. what
    is the difference b/w roth ira and a target retirement fund?
    are they the same thing? if someone can give me a
    brief outline, it would be greatly appreciated.
    thanks

  25. Aaron says:

    I certainly have to question the timing of selling the fund now. It certainly seems like a panic sell. I agree with some of the others that say it seems that the problem was either a. you shouldn’t have bought into this fund in the first place or b. you sold at a bad time. The market experiences these problems, if it bothers you then this fund isn’t right for you, but selling on huge down days isn’t the best usually. Corporate profits are still very strong, consumer spending has held up fairly well considering all the economic problems, and valuations are not high currently in the market.


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