One Fund to Rule them All - Targeted Retirement Funds
Lately I've been finding that doing my taxes is becoming a big chore. Tracking of individual stock transactions and mutual fund transactions is a big pain! For non-retirement accounts, if you are trying to build a diversified portfolio of stocks, mutual funds, bonds, and ETFs, doing dollar cost averaging every month, and doing occasional rebalancing, it generates a LOT of transactions. That's why I've lately been thinking about simplifying my life, to get just ONE FUND that provides total diversification and simplicity. Well, I'm too much of a do-it-yourselfer to totally commit to one fund, but, perhaps for, say, 66+% of my non-retirement assets, it might be something I'd consider.
There are a couple of choices I've come across, each with its own merits. First, there are the "life cycle" or "target retirement" funds, and second, there are global allocation funds (those will be the subject of a future article). With life cycle funds, you pick your retirement date, and the fund that most closely targets that date, and the fund has a diversified portfolio targeted for your age that gradually changes from risky to conservative as you approach your retirement age. My target retirement date is about 2035. The three top contenders I found are:
TRRJX - T. Rowe Price Retirement 2035
0.84% Expense Ratio
Returns: 2006 5.9%, 2005 8.1%
VTTHX - Vanguard Target Retirement 2035
0.2% Expense Ratio
Returns: 2006 5.6%, 2005 6.3%, 2004 12.0%
FFTHX - Fidelity Freedom 2035
0.75% Expense Ratio
Returns: 2006 4.3%, 2005 9.0%, 2004 10.9%
TRRJX is a bit more aggressively allocated (89% stocks) than FFTHX (81.7% stocks) or VTTHX (75.6% stocks). Also, TRRJX has a higher weight of foreign stocks (20.7%) vs. FFTHX (19.9%) or VTTHX (14.8%), but the tradeoff is, TRRJX has higher expenses. Although none of these target retirements fund is my perfect choice, I'd give a slight edge to TRRJX. I can always augment the core fund with other assets of my choice to round out my overall portfolio. Personally, I prefer a bit higher weighting in foreign markets, and exposure to some more alternative investments such as real estate, emerging markets, and commodities.
I think these new lifestyle allocation funds are superior to the fixed allocation retirement funds of the past (aggressive, moderate, conservative) because they gradually change their allocations over time. The simplicity of one core portfolio fund is definitely tempting. For many people, especially those that don't like to think about asset allocations and investing, it's an easy way to invest (hopefully regularly) in a diversified portfolio. And even for the do-it-yourselfer, it can help reduce the number of investments to keep track of and simplify tax reporting and record keeping in the future.
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