A friend recently texted me the following question:
I currently have 100% (of my retirement account) in a Vanguard target retirement 2050 (expense ratio .15%). I’m not getting much from it, in fact it looks like for August my rate of return was -1.58%, July was .11% and June was 5.47%. Do you think this is the right investment or should I do something like “Vanguard small cap index admiral” (expense ratio .05%)?
Here are her questions paraphrased:
- Should she switch to a different fund because during the past 3-months her fund has not been performing well (in her opinion)?
- Should she switch her retirement fund to a Vanguard Small Cap Index Fund?
- A fund’s performance during the short-term (three months) should have little or no bearing on whether or not the fund is a good investment for the long-haul (30 years). Most retirement funds are invested in the stock market, and over the short-term stock prices fluctuate like crazy which is normal and expected. Ignore the short-term fluctuations. Here is a chart of Vanguard’s 2050 Target Fund:My friend is concerned about this little dip. She should not be. This dip was caused by the stock market decreasing in value — not by poor fund management.
- Vanguards Small Cap Index Fund Admiral invests in a basket of 1,406 “small” publicly traded companies. By small, their median market cap is $4.5 billion which may sound large, but these companies are much smaller and therefore may be riskier investments than larger, more mature companies. Therefore, it may be good for my friend to consider investing a portion, such as 5%, 10%, or maybe 15% of her total retirement into this fund.
Which brings me to another key point of this write-up. What criteria should you use when selecting retirement investments? Here are six suggestions.
- Choosing funds that have low expense ratios because over the long-haul expenses have a large impact on how much money you’ll have during retirement. My friend has smartly done this, already. Bravo!
- Depending upon your age and propensity for risk, maintain the right balance within various types of investments. Types of investments may include stocks (equities), bonds, international, cash, and others. An advantage of the Vanguard 2050 Target Fund is that it automatically adjusts your asset allocation the closer you get to retirement. For example, the closer you get to retirement the more it invests into more conservative assets such as bonds.
- Understand what you’re investing in. For example, the Vanguard 2050 Target Fund’s symbol is VFIFX. If you search that symbol on the Internet you can get a plethora of information about the fund including details about its investments, performance over the long haul, expenses, management philosophies, and much more. What’s great is that you can read about the fund on Vanguard’s website, but also get other perspectives from firms such as Morningstar that also analyze the fund.
- When selecting investments, pay close attention to tax rules. The tax rules may have a huge effect on how fast your money can grow. Don’t screw up those confusing details. If you don’t understand — ask someone who knows.
- If available, leverage the knowledge of the investment professionals assigned to your retirement account. Almost all 401-k plans have a free advisor connected to them. Some are helpful, others are a bit suspect in terms of their guidance because they don’t know your entire financial situation. But they know a lot about investing in general.
- Remember the most important factor, which is that investing is a highly personal endeavor. Therefore, use your common sense but also invest according to your own feelings about money and savings.
I hope this helps!