The Vanguard Group has announced plans to launch a target-date fund aimed at people retiring in 2055. That’s right, 45 years from now.
“The firm has filed a registration statement with the U.S. Securities and Exchange Commission for Vanguard Target Retirement 2055 Fund, a broadly diversified fund that gradually shifts to more conservative investments over the life of the fund,” the announcement said. “Vanguard anticipates that the fund, aimed at investors 18 to 22 years old, will be available for investment in the third quarter of 2010.”
If you’re in that 18-22 age group, no need to chomp at the bit until the third quarter. You could easily wait another few months to invest, or even a year, and not suffer any ill effects. In fact, you could wait a decade or two and it probably wouldn’t matter.
That’s because an investor doesn’t start enjoying the biggest benefits of a target-date fund until middle age, when funds’ changes in asset allocation start coming more often.
That’s not to say target funds have nothing to offer young investors. These are fire-and-forget funds, meant to serve for a lifetime. As time passes, the fund automatically shifts assets from risky mix favoring stocks to a more conservative one heavier on bonds.
Because target funds take this asset allocation chore off the investor’s shoulders, they have become favorites in workplace retirement plans like 401(k)s, where money is tied up for many years.
All target fund investors, including young ones, benefit from the fund’s automatic annual rebalancing. If stocks have a big run, they are likely to exceed the investor’s target allocation. If so, the target fund sells some stocks and buys bonds to keep to the intended mix. Many small investors neglect this task when left on their own.
But target funds’ biggest benefit is the changing weight of various assets over the years. That benefit isn’t significant until the investor is over 40.
A 25-year-old, for instance, could buy Vanguard’s 2050 fund, to serve a retirement beginning in 40 years. That fund would have 72% of its assets in U.S. Stocks, and nearly 18% in foreign stocks, with the rest in bonds. That 90% stock allocation would be virtually unchanged for the next 15 years, until the investor was 40.
At that point, the stock allocation would be gradually reduced, falling to about 83% when the investor hit 45, then 75% at 50. The change would continue until at age 65 the fund would have about 50% in stocks, 40% in bonds and 10% in Treasury Inflation-Protected Securities. It would get even more conservative after that.
Young investors should look carefully at target funds before buying, with special attention to fees, since some companies (though not Vanguard) add a layer of fees on top of those charged by the underlying funds.
It makes no sense to pay additional fees if it will be 15 or 20 years before you start to benefit from the shift in asset allocation that is target funds’ chief attraction.
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