Target 2045 Retirement
As part of my 401(k), I'm invested in a "target retirement" fund. The general idea is rather than worrying about what to be invested in, just choose when you'd like to retire and the fund management takes care of the rest. Sounds nice, right?
Well, if 2045 is 38 years away, why are they investing in:
And here's what I'd do if I were managing a Target 2012 Retirement fund:
What am I missing?
Well, if 2045 is 38 years away, why are they investing in:
- Vanguard Total Stock Market Index Fund (71.9%)
- Vanguard European Stock Index Fund (10.4%)
- Vanguard Total Bond Market Index Fund (10.2%)
- Vanguard Pacific Stock Index Fund (4.8%)
- Vanguard Emerging markets Stock Index Fund (2.7%)
- Stem-cell research start-ups (20%)
- Software start-ups (20%)
- Nanotechnology start-ups (20%)
- Cancer research start-ups (20%)
- International small-cap growth fund (20%)
And here's what I'd do if I were managing a Target 2012 Retirement fund:
- Vanguard Total Stock Market Index Fund (71.9%)
- Vanguard European Stock Index Fund (10.4%)
- Vanguard Total Bond Market Index Fund (10.2%)
- Vanguard Pacific Stock Index Fund (4.8%)
- Vanguard Emerging markets Stock Index Fund (2.7%)
What am I missing?
Labels: 401(k), finance, mutual funds, retirement, stock market, stocks, vanguard
posted by Ian Sefferman at 10:08 PM
8 Comments:
I think you should read some of the finance books published by your fellow UofC grads and faculty.
i think you should invest all of your money in romulan ale...
Your 2012 portfolio still includes almost 90% stocks! At 5 years out you should have very little in stocks at all (which over short periods can and do often lose money). At 5 years out, you should be almost all in vehicles that are gaurenteed to at least hold their value.
At 40 years out, yes you can be more agressive, but also with the fact in mind that what you put in has a lot more chance for the effect of growth over time. So the dollars you put in early, are the most valuable you can put in. You want to be more aggressive (thus have a high percentage of stocks) but you do not want to have a high percentage of speculative, as while you might get lucky, chances are you are going to lose money.
And while that seems like "no big deal" it in fact becomes very hard to "make up" as the years progress. In fact, assuming you were planning on contributing to your retirement all along, you'll never make it up.
In my case for a variety of reasons due to unexpected career turns I ended up having to liquidate the majority of the retirement savings I had built up from 1994 to 2004. The amount I lost is NOT the amount I had to liquidate (effectively the same as taking a loss in a bad investment) but is rather that amount times the amount it would have gained in the time period from 2004 to my likely retirement around 2040.
I'm going to put as much as I can afford into retirement today and going forward, but I *would have done that anyway*. So I'm not saving more than I would have if I hadn't had to liquidate those funds. So I'm never going to "make back" the loss.
Investment that is completely speculative should always be done with the "extra money" that you don't *need*. That you can afford to go away and go poof if you guess wrong. Retirement money does not fit into that category. It may not be something that seems real if it is far away, but in the end it is.
So the 401K stuff even if agressive makes more sense in "safer" things like index funds (which can still lose a significant amount in the short term) rather than the speculative.
If after putting aside the retirement money, paying the bills, and other basic normal life stuff that you want, you have extra cash and feel like it, put THAT in 80% starts ups. :-)
Oh yeah, and in case it isn't obvious, money you put in your 401k today is more valuable than money you put in a year or a decade later since it that future money has less time to work for you. So the money you put in early in your career is the most important money you'll ever put in.
why would someone post anonymously?
There's a book I'm reading now which argues that nobody can pick winning stocks consistently over a long period of time, and recommends index funds as the best option.
BO-RING... but interesting advice.
Don't spend so much time worrying about retiring on time that you forget to live your life.
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