brad wrote:Sometimes I think that's what I should do too, as it's so much simpler, especially since you can get target date fund from Vanguard with an MER of 0.18%. But if you don't have access to Vanguard you have to be careful because most other firms' target date funds are a lot more expensive. If you have $500,000 in a target date fund with an MER of 0.75%, you're paying $3,770 every year in management fees, compared with just $900/year with Vanguard. Over 20 years that difference adds up to more than $57,000 and that's assuming zero growth in your portfolio.
I am not a fan of target date funds for several reasons.
I admit that the most significant reason might be that they just were not around when I started investing so they are not something I learned about and got comfortable with early.
Another issue I have is that you lose a lot of control. A 2030 fund for example...what does that mean? Does that mean that it is allocated to have optimal value on January 1, 2030? Does it mean it is targeted to be allocated for beginning 3% annual withdrawals on that date to last 30 years? While those questions can be answered through personal research, I question whether most people bother.
There is also the issue of taxes. If these are held in a taxable account then tax management of trading and allocation activity is important. But the expense related to that effort is an extra and unnecessary cost in an IRA. This is probably a minor point.
DO they invest in foreign securities? If so then it would be better to hold outside of IRAs to preserve the foreign tax credits. If they don't hold foreign securities then they are missing a crucial part of diversification and allocation.
If you have $5000 to put in a fund then most of this hardly matters. But then almost nothing matters. Even a 5% load is only $250 and if you hold for 25 years that's less than Vanguard might charge you in annual fees. But if you accumulate brad's $500,000 after a couple of decades, all those little issues about start to matter a lot. And in the meantime you have left your money alone, ignored it, and let someone else learn about all those issues so you are not in a good position to make decisions when they start to matter.
Instead I like to be a little more active. I don't trade very often and most of my money is in index ETFs. But I do consciously research issues like those mentioned and make decisions every years. I've made mistakes along the way of course but after 20+ years I think I am pretty knowledgeable about investing, tax issues, and so forth.