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I currently have a Roth IRA with 10k invested in the Vanguard Target Retirement Fund 2050 (VFIFX). The Target Retirement Fund consists of the following:

  • 63.0% - Vanguard Total Stock Market Index Fund Investor Shares
  • 26.8% - Vanguard Total International Stock Index Fund Investor Shares
  • 8.1% - Vanguard Total Bond Market II Index Fund Investor Shares
  • 2.1% - Vanguard Total International Bond Index Fund

with an expense ratio of 0.18%.


I'm thinking of "trading" my VFIFX for a similar distribution, with a twist:

  • 65% - Vanguard Total Stock Market ETF (VTI) - ER .05%
  • 15% - Vanguard Total Intl Stock ETF (VXUS) - ER .14%
  • 10% - Vanguard REIT ETF (VNQ) - ER .10%
  • 08% - Vanguard Total Bond Market ETF (BND) - ER .08%
  • 02% - Vanguard Total International Bond ETF (BNDX) - ER 0.20%

with an expensive ratio of .65 * .0005 +.15 * .0014 + .10 * .0010 + .08 * .0008 + .02 * .0020 = .07%

I'd like to diversify my portfolio with the addition of the REITs by substituting Intl. stocks. To make up for the low Intl. Stock percentage in my tax-advantaged account, I plan on boosting the percentage in my taxable brokerage account since they have tax benefits versus Bonds/REITS.


Advantages of this approach:

  • Addition of REITs (diversification)
  • Lower Expense Ratio
  • More control

Disadvantages of this approach:

  • Effort (minimal) to adjust the distributions as I age.
  • No longer in an actively managed mutual fund.

Is this a bad idea, now? Is this a bad approach as I "age"? Should I just keep it simple and stick with the retirement fund? Is there an advantage to the Target Retirement Funds that I am missing?

Thanks in advance!

  • Have you considered that for the ETF you'd likely have to use whole share numbers that may change your asset allocation? – JB King Jan 2 '15 at 19:09
  • I have! I'm not to worried about the exact percentage numbers. – MoneyStack Jan 2 '15 at 21:39
  • What are the tax advantages of an International ETF owned in the U.S. in a taxable account? – DukeLuke Feb 26 '16 at 18:38
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Target Date Funds automatically change their diversification balance over time, rebalancing and reassigning new contributions to become progressively more protective of what you've already earned. (As opposed to other funds which continue to maintain the same balance of investments until you explicitly move the money around.)

You can certainly make that same evolution manually; we all used to do that before target funds were made available, and many of us still do so. I'm still handling the relative allocations by hand. But I'm also close to my retirement target, so a target fund wouldn't be changing that much more anyway, and since I'm already tracking the curve...

Note that if you feel a bit braver, or a bit more cautious, than the "average investor" the target fund was designed for, you can tweak the risk/benefit curve of a Target Date Fund by selecting a fund with a target date a bit later or earlier, respectively, than the date at which you intend to start pulling money back out of the fund.

  • Yes, I am aware that their diversification changes over time. I feel if I'm going to be "tweaking" the Target Date Fund, why not just do my own with similar ETFs for a lower expense ratio? In addition, I can tweak it however I see fit. – MoneyStack Jan 2 '15 at 21:41
  • You can. TDF simply saves you the trouble, if you don't enjoy micromanaging your money and don't suffer from the illusion that you'll beat the market without doing a lot more work and/or taking a lot more risk. – keshlam Jan 2 '15 at 22:14
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It looks like an improvement to me, if for no other reason than lowering the expenses. But if you are around 35 years away from retirement you could consider eliminating all bond funds for now. They will pay better in a few years. And the stock market(s) will definitely go up more than bonds over the next 35 years.

  • You wouldn't even consider having 10% bonds just for diversification/stability? – MoneyStack Jan 2 '15 at 21:42
  • 2
    Bonds are not at present a source of stability. The Federal Reserve has made it clear they expect to begin raising bond rates next year. That will make the price of existing bonds decline. Don't fight the Fed. – ScottMcP-MVP Jan 2 '15 at 22:11
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Your approach sounds solid to me. Alternatively, if (as appears to be the case)

  • you're a fan of indexing and diversification
  • you care about tax efficiency
  • you have investments beyond your tax-advantaged accounts

then you might want to consider devoting your tax-advantaged accounts to tax-inefficient investments, such as REITs and high-yield bond funds. That way your investments that generate non-capital-gain (i.e. tax-expensive) income are safe from the IRS until retirement (or forever). And your investments that generate only capital gains income are safe until you sell them (and then they're tax-cheap anyway).

Of course, since there aren't really that many tax-expensive investment vehicles (especially not for a young person), you may still have room in your retirement accounts after allocating all the money you feel comfortable putting into REITs and junk bonds. In that case, the article I linked above ranks investment types by tax-efficiency so you can figure out the next best thing to put into your IRA, then the next, etc.

  • I've definitely considered devoting m tax-advantaged accounts for REITs/Bonds. However, I didn't want to lose out on the potential gains of the stock indexes. As I get closer to retirement, I'll start to merge them towards more REITs/Bonds. – MoneyStack Jan 2 '15 at 21:43

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