Happy anniversary!

Posted by on October 28, 2013 @ 9:00 am in investing

October marks the 10th anniversary of Vanguard’s target retirement funds. What began as the next generation of balanced funds, following Wellington and the LifeStrategy Funds, has grown to represent over $200 billion of shareholder assets.

While increasingly being used as default options in corporate defined contribution plans, many individuals have invested in them as well. It appears as though the funds are owned across the full spectrum of investors, retirees to young accumulators. As of September 30, the Target Retirement 2060 Fund had roughly to $196 million in assets. Are these 20- somethings thinking ahead ? Are well-intentioned parents and grandparents investing on behalf of the younger generation? If so, bravo! In any event, it’s clear the concept has broad appeal.

Having been a member of the original team charged with constructing the funds, I remember debating  the key issues: Active or passive? A mix of both? What’s the “right” glide path, or asset allocation through time? What asset classes should make up the funds? Eventually, we landed on an all indexed approach with four “stages” to the glidepath. It should come as no surprise that the funds are the reflection of Vanguard’s investment principles:

  • Create clear, appropriate investment goals.
  • Develop a suitable asset allocation using broadly diversified funds.
  • Minimize cost.
  • Maintain perspective and long-term discipline.

We did underestimate one thing, though – the target audience. We originally thought the funds would appeal to the “unengaged” – those investors who, for whatever reason, couldn’t or wouldn’t take the time to construct their own portfolios . Survey results from a few years later revealed that while there were some target retirement shareholders in this category, 45% indicated that while they were highly confident in their financial situation and highly knowledgeable and personally involved in finances, they felt comfortable delegating the portfolio decision to their target retirement fund selection *. Why? While they recognized the value of broad diversification with a long-term, low cost focus, they had other priorities and interests. I suspect that continues to be the case with many target retirement fund investors today.

*Vanguard Target Retirement Fund Survey, March 2006

Notes:

  • Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Diversification does not ensure a profit or protect against a loss.
  • Mutual funds, like all investments, are subject to risks. Each LifeStrategy Fund invests in four broadly diversified Vanguard funds and is subject to the risks associated with those underlying funds.
  • Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.