Bichon Frise wrote:
I also suggest a target date fund. Do NOT pick your target date based on the actual date you think you will need the money. Pick it based on your preferred asset allocation. You can hop from fund to fund later, but get an asset allocation you are comfortable with. This may line up with your "date". If you are at a loss for which asset allocation you want, there are some general rules of thumb like your age - 10 for bond allocation. It is difficult to understand what is best for you without knowing your goals, your stomach for volatility etc.
As someone noted in another Roth-related thread, that is not how target date funds work. All target date funds at a given company past a certain year have exactly the same allocation. They even have the same "glide path" which is the transition from stocks to bonds and eventually some fixed income/cash equivalents. The only difference is what year they enter that glide path.
Different fund companies have different allocations. But then it's a bit harder to compare them.
If you're just going to use a simplistic rule of thumb like "age minus 10 in bonds" you might as well just let a reasonably reputable fund company do it for you.
Understood. But, if you were age 25 in 2012 and planning to retire in 40 years do you invest in the 2050 fund? What if you want more bond allocation? What if the allocation of the 2035 fund is more to your liking? And then, to keep things more or less constant, you can hop to the 2040 fund? That is what I meant when I said to pick on the allocation you like now and you can always "hop" to another fund. I apologize if that wasn't clear.
Bichon Frise wrote:
... there are some general rules of thumb like your age - 10 for bond allocation...
I really don't like those rules of thumb. How does the guy who made up that rule know anything about your goals?
He doesn't - he is assuming everything. And even if he had perfectly assumed your risk tolerance, when you will need the money, whether or not you have a pension, when and how much Social Security you will get, and everything else about you, it seems highly unlikely that the underlying statistics of the market will result in a nice round number like that being optimum.
Until you are 10 years or so from needing income from your investments, bonds don't make much sense.
And I would not bother with the Target Date fund. There are minor problems with them (doubled fees) but I don't worry so much about that as I do that, by having other investments besides the target fund, you are defeating the asset allocation that you are presumably paying for.
Sorry for the vain move here, but I think you took some context out of what I said, so I think it deserves to be put back into context by me quoting myself.
Bichon Frise wrote:
It is difficult to understand what is best for you without knowing your goals, your stomach for volatility etc.
Rules of thumb have their place. Ideally we'd all be as educated as Le DoingHomework and wouldn't need them. But until we can all reach that highest step on the retirement planning taxonomy and join DoingHomework, maybe, just maybe, rules of thumb have their place. So you don't like bond allocation = age -10? But it's ok to recommend no bonds ("Until you are 10 years or so from needing income from your investments, bonds don't make much sense.")? I could go into efficient frontiers and point out that bonds do make sense for people who like to sacrifice small & marginal return for huge reductions in volatility, but that would require going into modern portfolio theory, which we would then have to discuss efficient market theory so on and so forth. But how does this help the poor guy who asked a simple question? So yes, pick your rule of thumb. If you don't like the one I offered up pick another one. But, please, OP, educate yourself.
Unfortunately, the OP is now stuck in a pissing match. With only $5000 to invest in an IRA, he has been recommended to invest in a target date fund and not to. DoingHomework dislikes them. I dislike them as well. But, I also believe they have their place. And the place is for people like the OP. Unfortunately, because of fund minimums, if the OP decides a target date fund isn't for them, they will have to decide which single fund to put All $5000 into. I would much rather see a target date fund than just Vanguard's total stock market fund. While you can do much worse than the total stock market fund, I would rather be diversified. You'll be missing out on the international sector and bonds. The price of diversifying with a small amount of money at Vanguard is an expense ratio of 0.19%. You can also do much, much worse ER wise. and if you had more money, you can do better as well.