I need some clarification on "diversifying" investments

Submitted by athminbri t3_zzugg9 in personalfinance

First, a little backstory. I am 48 and with years of being horrible with money and a divorce, I am broke. No savings, retirement, investments, etc. I am starting to learn about finance but have a long way to go. I now have my first "big girl job" that has a 100% match on investments up to 5% of my pay into a 403B. I can barely pay my bills every month but am investing the full 5%.

I have always heard about the need to diversify and that is why investments like index and mutual funds are supposed to be good because that diversification is built in. My question is, wouldn't it be even better to spread my investment out over a few of the different options available? My options are 11 different Vanguard Target date funds, Dodge & Cox Retirement Fund, Harbor Capital Appreciation Retirement Fund, Vanguard 500 Index Admiral Fund, Vanguard Small Cap Index Admiral Fund, and American Funds EuroPacific Growth R6 Fund. The target date funds seem like the safe option with low return. I need to be a little more aggressive since I am 48. Would you spread your investments out across the other options? Or put it into one? Why or why not?

Also, I've noticed the fees have a bit of a range on them. What is considered a high fee in this case?

Sorry if my questions are dumb. I am trying to learn and these specific questions aren't discussed in my books or youtube videos.

Thank you all in advance!

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sch8209 t1_j2dmcaj wrote

Good questions. The target date funds will provide ample diversification and you have access to really good target date funds. If you want to be more aggressive you can select a target date that is 10 years beyond your actual desired retirement date.

Ideally you want fees that are at 0.10 or lower. I'd recommend not going above 0.50 for any funds.

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athminbri OP t1_j2dokc7 wrote

Thank you! Since I only have a few hundred invested right now, the fees don't seem that high but I know it will add up over time. This helps! Plus, I'm still not clear on how those fees are calculated, the frequency, etc. But that's a question for later, when I know more about all of this stuff.

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JamminOnTheOne t1_j2ete0y wrote

You don't see the fees directly (it's not like you get billed or have it deducted from your balance). The fees are paid out of the fund's assets, and so they're an invisible drag on your returns. If the fees are 0.10, that means that 0.10% of the fund's total assets are paid out as fees every year, and from your standpoint it will look like the return on the fund is 0.10% worse than the underlying investments.

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gk802 t1_j2dsjcj wrote

"Diversification" has several dimensions. The first is really asset allocation. You'll want to spread your investments across different asset classes...some in stocks, some in bonds, some in cash. How you do that depends on your comfort level (risk tolerance). Generally, the younger you are, the more aggressive you can be (more in stocks). This diversification mitigates the risk you'll take losses when whole markets decline. It also depends on your time horizon as stocks may decline in value for several years and a longer time horizon gives you the time to weather those periods, stay invested and not take permanent losses when you need the money. Target date funds will attempt to do this for you, but your risk tolerance may or may not be well represented by their composition. The second is diversification within asset classes. Even if you're buying in a specific asset class, you will always want to be diversified in this dimension. Your stock investments should be in many companies (stock mutual funds or ETFs will do this for you by their nature). Your bonds should be from many issuers. This reduces your risk that you will take excessive losses if a company or bond issuer goes bankrupt (e.g. Enron or Lehman Brothers).

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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.

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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.

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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.

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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.

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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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93195 t1_j2dtien wrote

Target date funds are a “basket” of a funds designed for your age. You would want a 2040 fund. At your age, most experts would recommend about 50% in US stocks, 35% to 40% in world stocks and 10% to 15% in bonds.

A 2040 fund will be made up of about three to five mutual funds at those percentages. As you age, the percentages of each will adjust with you.

The Vanguard 2040 fund would be my recommendation for you. Because it’s already three to five funds, it’s all you need.

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BastidChimp t1_j2ejvhy wrote

Go with the Vanguard 500 Index Admiral fund since tracks the SP500. Just set it and forget it even during market corrections until you retire.

There is a book you can borrow from your local library. The Little Book of Common Sense Investing by John Bogle. This book was written for beginner investors emphasizing investing in broad market exchange traded funds (ETFs) like VTI or VOO for their simplicity. Just set it and forget it. Broad market ETFs for the win. VOO is basically the ETF version of the Vanguard 500 Index Admiral fund.

Expense ratios indicate what you are paying your fund manager to maintain your investments annually. The lower the expense ration the better.

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athminbri OP t1_j2epdfz wrote

>The Little Book of Common Sense Investing by John Bogle

This is actually on my to read list. Thank you!

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