Submitted by athminbri t3_zzugg9 in personalfinance
biondablonde t1_j2dqo84 wrote
Some mutual funds are designed to provide complete diversification in a single fund - most target date retirement funds are designed this way. This means that by buying just one fund, you are getting the full spectrum of the stock market (i.e. large and small companies, international and domestic companies) as well as bonds (usually short, medium and long term) in a proportion that provides appropriate risk for your age. When you have one of these funds, buying others doesn't really provide extra diversification because the underlying stocks are just duplicates. You can use other mutual funds to "tilt" your investments (e.g. invest more heavily in a certain sector, like small caps or precious metals, etc.) but there is really no need to do this.
Other funds are designed to track a certain sector of the market and as such are not meant to be a one-stop fund. Among the ones you listed, the Vanguard Small Cap index and the American EuroPacific fund are two such. If you wanted to create a diversified portfolio using those two funds, you would also need to add a large cap fund, a bond fund and probably a couple of others to make sure you were properly diversified across all sectors.
Since you are just getting started, the target date retirement funds are perfect for you. Choose the one that comes closest to your estimated retirement date (or one a little farther out if you want to be a bit more aggressive) and put all of your money in it. Instant diversification and appropriate asset allocation.
BTW- fees on mutual funds vary wildly and can REALLY eat into your returns. IMO, there is no reason on earth to pay a higher ER than that of the target retirement funds, especially since you are not a sophisticated investor (yet!). I'm guessing that the Dodge, Harbor and American options have ERs north of .5 while the Vanguard funds are all under .2? Stay away from those! You don't need anything beyond the target date anyway.
athminbri OP t1_j2dsbp7 wrote
Thank you for the very informative response!
I may just be getting paranoid in putting all my money into one fund because I see that one is down while another is up. I'm worried about picking the wrong one. I thought maybe if I spread it out, one or two could lose money but the other 3 (or whatever) would make money. Again though, since I am new at this and don't understand it, I realize my thoughts could be way off.
Citryphus t1_j2dt0hj wrote
The target date fund is really a bundle 4 or 5 different diversified funds. You can be comfortable making it your only fund. Vanguard Target date funds are good and the expense ratio should be low, but you should check. If you want to be more aggressive you can choose a later retirement date than you ordinarily would.
athminbri OP t1_j2dty7m wrote
Thank you!
biondablonde t1_j2dzmh4 wrote
Well, yes - that's the point of diversification. Sometimes the small cap sector of the market will be up while the large cap sector is down, which is why you'll see small cap funds outperforming large caps. If you own two separate funds, you'd have to "average" your results to see the true picture of how your investments are doing. With a target date fund, all of those separate funds are already inside and they do the "averaging" for you (that's why target date funds are sometimes known as "funds of funds"). On paper, the overall performance of target date funds will never be as high as a pure stock fund, but it also won't dip as low when the market is down.
Because you can't really compare apples to apples with these fund choices, I would suggest that you ignore returns and focus mostly on expenses, diversification and asset allocation. The target date fund is BY FAR the best way for you to get appropriate diversification and asset allocation at a reasonable cost.
athminbri OP t1_j2e3ijt wrote
>focus mostly on expenses, diversification and asset allocation
Thank you! This was especially helpful for my brain to comprehend.
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