Tag Archives: conservative

Summary The Vanguard Target Retirement 2015 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2015 Fund Inv (MUTF: VTXVX ). This is the kind of fund I would suggest for using in a 401K account in planning out a safe retirement strategy . What do funds like VTXVX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VTXVX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VTXVX. Expense Ratio The expense ratio of Vanguard Target Retirement 2015 Fund is .16%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Bonds or Stocks The Vanguard Target Retirement 2015 fund is currently using a fairly equal allocation between bonds and stock. Over time that allocation will shift to hold more bonds and fewer stocks. The next section breaks it down further. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2015 Fund: (click to enlarge) This is a fairly simple portfolio. Only five total tickers are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The funds included are the kind of funds you would expect from Vanguard. The top 4 which create most of the returns are very solidly diversified passive index funds. The Vanguard Total Stock Market Index Fund (NYSEARCA: VTI ) is also available as an ETF. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTXVX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTXVX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some large bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. The chart above used returns since 2003 so it included a fairly solid fall in 2007. As you can see, the worst drop was significantly less damaging than what the S&P 500 incurred. However, this fund is being regularly rebalanced towards a more conservative weighting and the current portfolio is more conservative than the weightings would have been in 2007. The following chart isolates the last 5 years. (click to enlarge) The volatility has dropped down even further and the beta has fallen from .57 to .52. Within a few years that beta will probably fall under .50. The worst drawdown in the last 5 years was substantially less damaging for VTXVX than it was for the broad equity market. Opinions Warren Buffet has suggested that investors would be wise to simply buy the S&P 500 because many will underperform the market after adjusting for trading costs. To be fair, many will underperform the S&P 500 even before trading costs. For investors that can take on the risk of pure equity positions, that is fine. For investors that don’t have that luxury, this is a remarkably complete fund that works incredibly well as the core of a portfolio. For the investor nearing retirement with this as an option in their employer sponsored account, it should receive extremely strong consideration. Conclusion VTXVX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to walk out the employer door for the last time in the very near future. Vanguard doesn’t create target retirement date funds for every year, so the next option after this one is the 2020 fund. There is one thing I’d still like to see Vanguard do with this fund. I’d love to see them make an ETF version for easier use in taxable accounts and for investors with different brokerages.