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Hi,

I'm 45 and have 26K in a Roth IRA that I'd like to rollover to Vanguard Funds. I've just recently started paying attention to investing and feel like I'm way behind. (I also have 50K in my employer's 401k plan.)

I'm looking at the Target Retirement funds, but the 2025 Fund is 60:40 stocks:bonds which sounds a bit too conservative to me. The 2035 Fund is 80:20 stocks:bonds which almost sounds too risky! Why not a 70:30 mix? or is that splitting hairs - does it make that much difference?

I've also considered Armchair Millionaire investing (equal parts large cap US, small cap US and large cap Intnl), and Couch Potato investing (75:25 stock index:bond index), but then I'd run into a $10 annual fee for at least one of the funds since the balance would be below 10K. Would that be worth it anyway?

Any suggestions are greatly appreciated!
Thanks a lot.

D. - whose brain is starting to hurt......
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"I'm looking at the Target Retirement funds, but the 2025 Fund is 60:40 stocks:bonds which sounds a bit too conservative to me. The 2035 Fund is 80:20 stocks:bonds which almost sounds too risky! Why not a 70:30 mix? or is that splitting hairs - does it make that much difference?

Hi D,

So how about half in each fund, doesn't that get you the 70/30 split???

Regards, Ken ("As Tim McGraw sings, 'Live like you were dying.'")
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It is too late for me to ponder your specific investment options, but I did want to point out that you are not really rolling over in your Roth but re-evaluating your investment allocations. At 45 youhave 20+ years until retirement so if you are willing you should be able to handle the risk that comes with agressive growth as well as value investing.

I would put about 20% in more conservative but high yield bond funds. They may not do much right now with an economic recovery around the corner but they help soften the blow for later stock market dips. I would put 10% in international stocks that also tend to peak when the domestic market is down. These mutual funds, if picked correctly, can help shepard a portfolio through both bad times and good.

As for the good times, I have a soft spot for small cap value funds and equities (companies that are worth more than they are currently being given credit for) that will grow into their own in the next 3-5 years. I also have a large portion in large cap, again focusing on value over growth given the current market. And I round out the middle with some mid-cap growth and value funds.

Some mutual funds focus on growth while others focus on dividend-paying income. Some are tied to indexes while some are more actively managed. All my mutual funds carry low expense ratios, proven management and demonstrated ability to provide returns in different market environments. I do have some individual equities, and some have done better than others. Most importantly, I do not dwell on the daily returns but instead focus on the long term, rebalancing once a year if my choices do not live up to my expectations, and my belief in their futures have changed.

Fuskie
Who suggests you do not get too caught up in the minute details and create an overall investment strategy first...
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So how about half in each fund, doesn't that get you the 70/30 split???


Ohmygosh - that is brilliant! :) I never thought of that. That's a good idea.
Thanks so much!

(How do you get your reply to show up in italics? Or does it do that automatically?)

D.
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Wow, Fuskie, thanks for all your insight. I'm so new to this, at least now I recognize the words, even if the concepts are still a bit fuzzy. :) But I'm studying as fast as I can!

I'm going to print out your reply so I can figure it out over time. I think meanwhile I'll use the Target Retirement funds. I can always re-allocate things next year after I've learned more. I just want to move the IRA now, because I finally noticed they've been charging me a $20 annual fee all these years (Primerica Shareholder Services). It's all the ex-husband's fault. :O

Thanks for all your help. These discussion boards are so useful!

D.
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"(How do you get your reply to show up in italics? Or does it do that automatically?)

Hi D,

Here's the URL that will take you to the Fool page gor doing italics, bold and other stuff...

http://www.fool.com/help/index.htm?display=community02#Styling

Regards, Ken "Spend like there's no tomorrow, because there may not be, but save some just in case there is..."
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So how about half in each fund, doesn't that get you the 70/30 split???
---------

The problem I see with this approach is that it requires way too much duplication.

1) Each of the two Target Retirement funds (2025 & 2035) hold the same funds only in slightly different percentages. You would be doubling up without the advantage of increased diversification.

2) Doubling of expenses (Each carries an expense ratio of 0.23%). Not bad, but why double it if it isn't really necessary? In the long run, expenses can make a significant difference in what you will have to draw on in your retirement.

If it were my decision, I would opt for the slightly more aggressive fund to start with. I would assume that you are planning to test the retirement waters in about 20 years if you are 45 now. Someone correct me if I'm wrong, but I think that these funds modify their percentages as the fund gets closer to it's target date. Meaning, a lessening on the equities side and an increasing on the bond side.

Later on down the road, when you feel a little more comfortable with your decisions, you could always add a REIT Fund and/or a Small Cap Value to tweak your allocation as you see fit. Or...maybe the one fund would do it for you. It's a start.

Regards,
Bill

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So how about half in each fund, doesn't that get you the 70/30 split???

As an alternate possibility, you could put the bulk of the funds into the 2035 fund and add another fund such as the Total Stock Market to “adjust” the stock/bond ratio. This approach could also permit the future addition of other segments not represented by the 2035 such as REIT or to overweight certain segments like small value.

2) Doubling of expenses (Each carries an expense ratio of 0.23%). Not bad, but why double it if it isn't really necessary?

Not really. Since the expenses are a percentage of the assets, they don't really change the total expenses paid. Of course, if there are any low balance fees involved they may have an impact.

Bob
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The problem I see with this approach is that it requires way too much duplication.

1) Each of the two Target Retirement funds (2025 & 2035) hold the same funds only in slightly different percentages. You would be doubling up without the advantage of increased diversification.


Regardless of how you reach the 70/30 mix, you will end up with exactly the same level of diversification.


2) Doubling of expenses (Each carries an expense ratio of 0.23%). Not bad, but why double it if it isn't really necessary? In the long run, expenses can make a significant difference in what you will have to draw on in your retirement.

If I put $20K into one fund with a 0.23% fee, my expenses are the exact same as someone that puts $10K into each of two funds with 0.23% fees.

ACME
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"2) Doubling of expenses (Each carries an expense ratio of 0.23%). Not bad, but why double it if it isn't really necessary? In the long run, expenses can make a significant difference in what you will have to draw on in your retirement.

Hi Bill,

One or two funds, either way it's 0.23% of the same total dollars... would be different if it were a fixed amound for each fund independent of the $ value of the fund..

As to what funds to invest in I make no recommendation... splitting the money as noted would get the desired ratio. I was only addressing that question. Diversification is a different concern, one worth considering as you note.

Regards, Ken
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1) Each of the two Target Retirement funds (2025 & 2035) hold the same funds only in slightly different percentages. You would be doubling up without the advantage of increased diversification.

They already start pretty diversified and, as you observed, the holdings are the same except for the precentages, so two funds instead of one wouldn't improve diversification, but it would fine tune the asset allocation at no additional expense.

Going with one of the two target funds with the majority of the money and getting a second fund to bring the stock/bond ratio back to one's personal target is also an option and may even be used to further diversify one's portfolio (e.g., if one wants to add additional REIT exposure, or high yield bond exposure). That would add a little more attention than letting two target-retirement funds do their own rebalancing, but probably not enough to argue against it if one is comfortable with ratios or simple spreadsheets. (Actually, a spreadsheet may be overkill in this situation.)

2) Doubling of expenses (Each carries an expense ratio of 0.23%). Not bad, but why double it if it isn't really necessary?

What doubling of expenses? The expense ratio is based on what one has invested in that fund. If one holds $100,000 in one fund at an expense ratio of 0.23%/yr, costs would be roughly $230/yr. If one held $50,000 in each of two funds, both with an expense ratio of 0.23%/yr, the expenses would be roughly $115/yr each, or $230/yr total. Of course, actual expenses may be higher or lower if the amount invested in the fund(s) appreciates or depreciates during the year, but the point remains: one fund for all of the assets or two finds each holding half is expense-neutral. (It wouldn't be expense-neutral if one or both funds drops below certain threasholds where low-balance fees or custodial fees start being charged.)

Usually I hear the argument on the growth side, the claim being that one pile of money grows faster than two piles of half the size, given the same growth rate. It is equally fallacious.
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… At 45 you have 20+ years until retirement…

And you may live to be 95, so some of your money may be invested for another 50 years!

With a 20 to 50 year investment horizon even 20% in bonds sounds very conservative to me given that the interest rates are so low now. In addition to the expected higher(but more volatile) returns of stocks vs bonds, any future contributions invested in bonds will loose most of the advantages of “dollar cost averaging”.


Greg
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Thanks everyone - there's so much to consider. My flawed usual course of action is to do nothing until I figure out the ONE best thing to do. Which is why I've done nothing. So for now, I'm going to use the Retirement 2035 fund. and re-evaluate as I learn more. Besides - I've got another 50 years to go.... :)

D.
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