Friday, June 17, 2011

Vanguard Target Retirement Funds Minimum Investment Now $1,000

Vanguard recently lowered the minimum investment for its Target Retirement Funds from $3,000 to $1,000. I discussed these funds in my blog post A Single Fund Solution. The lower minimum investment makes these funds an even better way to get started investing. Now instead of having to save $3,000 to start investing in a single, well-diversified, low-cost index fund, you can get started with only $1,000.

There are ways to get started investing in stocks and bonds (using low-cost index funds) with even less than $1,000, for example using Schwab’s index funds, with their $100 minimums. However, the Vanguard Target Retirement Funds provide such a great way to invest in a broadly diversified portfolio of stocks and bonds using only one low-cost mutual fund, that you might want to wait until you have $1,000 saved, then open a Vanguard IRA or Roth IRA account and get started with one of the Target Retirement funds.

Afraid of investing much in stocks? Then consider the Vanguard Target Retirement Income Fund, which invests about 30% in stocks and 70% in fixed income (bonds and cash). Vanguard considers this appropriate for someone in retirement, but you could invest in this fund at a younger age if your risk tolerance is low. This is the only Vanguard Target Retirement Fund that maintains a constant allocation between stocks and fixed income. The other Target Retirement funds gradually reduce the allocation to stocks and increase the allocation to fixed income.

If you feel it makes sense for you to take a bit more risk for higher potential returns, consider the Vanguard Target Retirement 2010 Fund, which invests about 50% in stocks and 50% in fixed income.

The Target Retirement funds are available in increments of 5 years up to 2055. The higher the year in the fund name, the higher the percentage of stocks, up to the 2035 fund; the 2035 through 2055 funds all have about 90% stocks, but the funds with the earlier years in their names will start decreasing the percentage of stocks and increasing the percentage of fixed income sooner. A 90% allocation to stocks is very aggressive, so the Target Retirement 2020 or Target Retirement 2025 funds with stock allocations of about 65% and 75% respectively would be appropriate for investors with moderately high risk tolerance.

Perhaps you took the advice in my blog post 2010 IRA Contribution: It’s Not Too Late, and put your 2010 IRA contribution into the Vanguard Prime Money Market fund in a Vanguard IRA account, giving you some time to think about how to invest it later. You probably don’t want to let all of that money sit in a money market fund for too long, since the interest rate is not much more than 0%. With the lower minimums for the Target Retirement funds, you can now get your feet wet in stocks and bonds with only $1,000, so consider exchanging at least that much from your money market fund into a Target Retirement fund soon.

Nervous about about the pessimistic financial news and the minor downturn in the market since the end of April? Step back and take a broader perspective. The Target Retirement Income Fund (most conservative) is up 2.83% so far in 2011, and up 12.36% over the last year. The most aggressive Target Retirement funds are up 1.2% to 1.3% in 2011, and up more than 25% over the last year. What better time to start buying than when the market is down a bit?

Think stocks might go lower? Sure they might, but no one can time the market just right, so invest some now, wait a few months, and if the value goes down, you get to buy more at a lower price. If the market goes up, you will have made more than you would’ve made if you had left everything in the money market fund.

Although theoretically you are likely to get a higher return exchanging everything from the money market fund to the Target Retirement Fund today, emotionally this is very difficult for many people to do (including me). Here’s an approach to consider, assuming you have a few thousand dollars in the money market fund. Exchange $1,000 from the money market fund into whichever Target Retirement fund has the asset allocation that best matches your risk tolerance, then don’t look at your account for 3 months. In 3 months, exchange enough from the money market fund into the Target Retirement fund so that you’ll have $2,000 in the Target Retirement fund. For example, if the value of the Target Retirement fund has dropped 10% to $900, add $1,100; if it has increased 10% to $1,100, add $900. This way you add extra to the fund if the value has decreased, and less if it has increased. Repeat every 3 months, increasing your target value by $1,000, until you’ve exchanged everything from the money market fund to the Target Retirement fund.

An approach like this helps you gradually get accustomed to seeing the value of your portfolio go up and down, and encourages you to do the opposite of what your emotions are likely to lead you to do. Maybe it will even get you hoping for the market do go down so you get to buy more shares at lower prices.

If you haven’t started investing yet, the lower minimum investment for the Vanguard Target Retirement Funds makes it easier to get started, and gives you one of the best options to start building a simple, low-cost, highly diversified investment portfolio.

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