Why You Should Avoid Target Date Retirement Funds

Let me show you in one image why it’s better to manage your retirement accounts on your own. 

Here is a chart of the Vanguard Target Retirement 2025 Fund (VTTVX) over the past ten years. 

Vanguard Target Retirement 2025 Fund (VTTVX) over the past ten years.

Vanguard describes this fund as “a diversified portfolio within a single fund that adjusts its underlying asset mix over time” and tells readers of the fund’s webpage that they “may wish to consider this fund if you’re planning to retire between 2023 and 2027.”

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Planning is the key word there as anyone who depended on this fund to retire starting this year — like a nurse, teacher, or fireman — has seen 26.78% of their nest egg erased since October 2021. That means the value of their retirement account hasn’t risen since 2014, giving them a lost decade of gains right as they head into their golden years. And they’ve paid a 0.08% management fee for the privilege. 

By way of comparison, here is that fund’s last five years of returns stacked next to the closed gain of this letter’s portfolio from the same year. 

Vanguard Target Retirement Fund compared to Foundational Profits Closed Portfolio.

Needless to say this “target date” retirement fund isn’t hitting the mark amid what Bank of America strategists last month called “the greatest bond bear market of all time.”

And when viewed through an all-time prism, the common parlance of ‘year-to-date’ returns seems myopic. It’s one’s ability to outperform the market over time and across cycles that matters when compounding long-term wealth. 

That means riding up markets for all they’re worth to be sure. But it also means avoiding down markets as best you can — no matter how long they last. Through that lens, I’d gladly trade being four points behind that fund so far this year if it means avoiding the -15.55% drawdown it had last year. Because that is what it means. Not having a “lost decade” of wealth is the most important thing when we’re talking about the bottom line for my family and yours. 

And unfortunately for those “target daters” who entrust their bottom line to the invisible hands of Mr. Market, there are more drawdowns yet to come. I cover why in the November issue of Foundational Profits. 

Why You Should Avoid Target Date Retirement Funds

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Portfolios are living and breathing. 

But for years, Wall Street and its army of financial advisors have been fans of pie chart investing. At its core, it’s a two-slice pie composed of 60% equities and 40% bonds. Inside of those slices are sub-slices that also get sub-percentages. You expect a certain percentage of tech or energy. Or maybe a certain percentage of international exposure. 

It’s my belief that Wall Street had had too much pie. And the results are clear as we endure 22 months of stocks in a bear market. 

We are beating the market using only a handful of stocks and funds. In fact, 75% of my long-term safe capital is in five positions as we head into a stagflationary environment for the end of the year and early next. 

I outline exactly what they are and how much I own of each in the November issue of Foundational Profits

You can access a better way to invest here. 

Call it like you see it,

Nick Hodge

Nick Hodge
Publisher, Daily Profit Cycle