I have a sort of love/hate relationship with target date mutual funds. In case you’re not familiar with the term, these are funds that automatically track a target asset allocation that changes over time. They start out quite aggressive and become more conservative over time.
While these funds are incredibly convenient (that’s the love part), they’re not always appropriate… The allocations might not be right for your needs, the fund family may arbitrarily change the target allocations with little to no warning, the “glide path” (i.e., the progression from aggressive to conservative) might not be appropriate for your situation, they’re not particularly tax efficient, and so forth.
While I wouldn’t go so far as to call them a terrible investment idea, one size doesn’t necessarily fit all, and there are some really bad target date funds out there. Nonetheless, as long as you’re careful to choose a low cost fund from a reputable company, target date funds can be a great way to get your feet wet in the world of investing – especially if you hold them in a retirement account.
In my view, the best funds in this category are the Vanguard Target Retirement Funds. In fact, we’ve used these ourselves in the past. Unfortunately, these Vanguard funds have historically had a high barrier to entry in the form of a $3000 minimum investment. Since several of their Target Retirement offerings are clearly aimed at young investors, this has never made sense to me.
Well, guess what? Vanguard has reduced the minimum on these funds to $1000. This is great news for the “little guy, ” as it allows people to start investing even earlier than they otherwise might have. Yes, $1000 is still a decent chunk of change for many people, but it’s hardly insurmountable.
If you don’t have $1000 in investable assets, then here’s my advice:
While it’s possible to get started with even less with certain other mutual fund families, I wouldn’t bother. Instead, stash your money in your savings account and then hit the library. While you’re building toward that $1000 minimum, spend your time reading a few good books about investing.
Here are some ideas to get your started:
- Eleven Great Books About Money
- Sixteen Books About Money
- Pre-Retirement Reading: Three Great Books About Investing
- The Bogleheads’ Favorite Books
And if you don’t want to dig through all of those recommendations, then I’d recommend starting this one, followed by this one.
Thanks so much for the great news!
I’ve been saving up money to open an account there and I didn’t know they had dropped the opening deposit. I’ll be able to open the account in July since its extra paycheck month for me. Thanks!!!!!!!!!!
Good lead! I passed this along to my son, who lost his Roth when he used the money, as allowed, to buy a house that’s now worth $100,000 less than he paid for it. He hasn’t been able to start a new Roth because three grand has been more than he was able to accumulate in the present depressed economy. But with a thousand-dollar minimum, he probably can buy in again.
Thanks for the info! I just opened my Roth at Vanguard 2 weeks ago with the Star fund ($1,000 minimum) so I’m glad to see I have other options now. Maybe this will get younger people to start saving for retirement?
Thanks for this update about Vanguard. I hadn’t heard the news. I think target date funds make sense for a lot of investors. Very few people even know what asset allocation is, so the fact that these funds do the asset allocation work for you and automatically change the allocation as you get older is a big help for a lot of folks.
I also agree with your thoughts that Vanguard offers some of the best target date funds. It’s what Morningstar says as well.
I have been with Vanguard since the 1970’s. In 1983, I moved to Canada to live and work in my field. Vanguard encouraged me to accumulate all my IRA’s with them. There was no problem until a few years ago. Americans should be free to live anywhere they wish remaining American citizens and taxpayers. We are even allowd dual citizenshp. Only Americans residing in Canada have been so treated by Vanguard, which was always touted as an Investor Owned Mutual Fund Family,and FREELY accepted my IRA contributions until my retirement. This is speaking with forked tongue.
I think ETF’s are great for novice to intermediate investors. More experienced investors are often against them because it allows someone with little knowledge to have a balanced AA. I understand their angst that someone with no knowledge can have just as balanced of a portfolio without doing all the research. They can complain all they want about fees, bid/spread, that is all bs to me. As long as you buy an ETF from a large firm, ie TD-AM, Vanguard, etc. the fees are low since it is not an actively traded fund.
Btw, do they use money in Canada now? I thought they still bartered for everything??? whats that all aboot?
“…A fixed asset allocation, even if it does change as it moves closer to the target date, still subjects investors to heavy losses in bear markets…”
Sounds like you are a champion of actively managed mutual funds (versus the indexed mutual funds that made Vanguard famous). The biggest draw-back of actively managed mutual funds are the high expenses / management fees / sales-loads that go along with them. Their managers must beat the index funds by at least the cost of the fees for the investor to just break even.
The other draw-back of actively managed mutual funds is that there are more of them than companies even traded. So, if you don’t want to be a ‘stock-picker’, now you have to be an ‘actively managed mutual fund picker’. Not sure how picking funds is much better than picking stocks.
Index funds, on the other hand, have ridiculously low management fees (because they are not actively traded), keep you properly diversified, and ensure you will get the ‘market-average’: be that up or down.
Both styles of funds have their pros/cons, and there is a market for both types.
I think its great that Vangaurd is lowering the minimum investment. This helps the small saver get started. However only small investors should invest in target date mutual funds. Most of these funds surprised investors with heavy losses in the latest bear market. A fixed aset allocation, even if it does change as it moves closer to the target date, still subjects investors to heavy losses in bear markets.
Ken Faulkenberry
http://AAAMPblog.com
#1 Silva) Blame your country of residence, not Vanguard:
http://independentinvestor.info/content/view/959/236/
“… As a result of Canadian securities commission restrictions that are supposed to protect Canadian investors but in this case are a source of harm, Canadian individual investors can’t directly buy Vanguard’s US-based mutual funds…”
VANGUARD also penalizes American retirees living in Canada. Ex-pats are not allowed to make transactions of any sort except SELL. Vanguard’s grateful response for past loyalty. Vanguard is not for Americans who decide to live in Canada.