Is target date funds for 401k bad?
I’ve always used the target date funds for my 401k but recently i’ve seen people manually just buy VTI etc. Can someone help me on this? New to the US and the 401k system.
Low fee percentage index funds are what you want. Look at the wiki of the personalfinance subreddit for a detailed guide.
VTI, VOO, or VUG?
There’s a management fee for the target date funds. Over the course of 30-50 years you’ll effectively be paying hundred of thousands of USD to for effectively a few dozen hours of work. The target funds don’t do active investment, they balance between bonds stock and some other things. It literally takes 6 hours once a year to rebalance your portfolio.
It’s probably worth it since most people like to speculate and overestimate their ability to time the market. If you are a passive investor though and have some fucking self-control, it’s a scam.
Depends on the broker. Some have target funds with negligible (<0.05%) expense ratios like Fidelity and Vanguard
So i can just change this to some low fee index funds? Thinking of VXSAX or VTI+VXUS Those are what i have in my IRA
If you intend to just have full stock allocation, yeah you can just do this.
My first 401k defaulted to a target date fund, I moved off if it when I saw it was underperforming VTI, etc.
depends on your age and risk tolerance
It's not bad, just that it manages the asset allocation for you instead of you doing it yourself. Most are built on low-cost index funds anyway so the fees shouldn't be that different The question is what asset allocation do you want, and do you want to manage it yourself or not have to think about it. In a simplistic sense, these target funds are solid / well thought out / using consensus from the low-cost & index investing philosophies Many on blind will push for more aggressive (higher risk, possibly higher reward) allocations, like all equities or even all in US equities. Nothing wrong with that either especially if young, but just depends on how you want to deal with asset allocation Finally, there are some more 'advanced topics' that make a target fund worse, but these are really at the margins and only when the $$ becomes high enough. For example, optimizing asset allocation across the individual, trad IRA/401k & roths. Rebalancing or tax loss harvesting in a custom way. Asset allocation tailored to your unique situation. But most of the time, target funds are just fine and work most of the time for most people
Target funds have an expense ratio of .5-1.5% on top of the individual funds. Your post is correct in everything but the most important part.
Not all are that bad. Fidelity’s target date funds are like 0.08%
Nothing wrong with them as long as the fees are comparable. Vanguard’s aren’t bad.
Yeah, TDFs kinda suck. Too expensive and usually too conservative. You’re better off just buying the underlying funds yourself.
Thanks for posting this I just changed all my investments from target date to index fund
what did you buy?
FXAIX is what’s available through work’s 401k
Yes they are overly conservative