Vanguard Target Retirement Funds

While continuing my research in alternative investments I encountered some discussions about target date mutual funds, specifically Vanguard’s offerings. Both Betterment and WealthFront make extensive use of Vanguard’s ETF’s. Vanguard also uses these in their Target Retirement mutual funds. There are different funds spaced about every five years. So if you plan on retiring in 2040 you would invest in the Vanguard Target Retirement 2040 mutual fund which then holds Vanguards ETF’s in stocks and bonds. Initially it is weighted more to stocks and gradually moves the allocation towards bonds.

So I looked at this fund in particular. Had we invested $100,000 in this fund in 2008 we would have suffered almost a 50% loss in 2008, but now recovered to about $127,000 today. This is better than both of our Betterment and WealthFront scenarios.

So, we might ask why not just use this target fund approach? WealthFront addresses this on their web site in an FAQ, “How does the WealthFront service compare to a target date fund?”  In summary, they make four points. First they argue that they are more efficient at tax loss harvesting (a way of reducing taxes). Since I do my investing primarily in IRAs, this doesn’t apply to me. Also, they only do this for accounts with balances greater than $100,000 which probably doesn’t apply to most of my friends and family.

WealthFront also argues that they might achieve higher expected returns because they deal with about twice as many asset classes. They also argue that with more specific tailoring, they can do a better job at risk tolerance. Finally they argue that while their costs are higher than Vanguard’s, these costs would be offset by better performance.

So do the performance results make Vanguard a better choice than Betterment and WealthFront? Not necessarily. You can find individual components in the ETF’s used that outperform all of these. Just once again, hindsight is a wonderful in investing.

I am going to continue the analysis with two goals in mind. First, how will I modify my personal investment strategy? Second, what should I recommend to someone else?