With the Vanguard Target Retirement 2045, for example, the expense ratio is only 0.19%, with no other fees (though they have a $20 annual account fee below $10,000 if you don’t use their website or electronic statements/notices).

Thanks, guys!

It looks like your plan is to fund the different sectors in order of importance. For at least those sectors of equal importance (the three to which you want to contribute 10%), you could determine the order by which is doing worst at the time.

Find a tool that graphs the prices on these over many years on the same graph (I use Yahoo). These graphs have all the lines starting at the same point so you can see how the increases and drops would compare if you had spent the same money on each of them. So my advice is to fund whichever one is doing worst right now, because that means you’re getting a better price.

The nice part about the target fund though is you don’t HAVE to do all that work. Right now at least, it’s exactly what you want, at an extremely low cost (the fees are very reasonable), and requires no effort on your part. Plus, until you have the $30,000 built up, you’ll already be diversified.

The most obvious thing that will begin to happen to the market in the coming years is for emerging and European markets to outperform the domestic market. The whole point of diversifying is that you need to be ready when that kind of shift comes: if all you’ve got to start with is the total market, you’re at a lot more risk than you realize, and you won’t be able to catch up easily.

1) There is no ‘other layer in fees’ that you’re saving yourself. The Target Retirement expense ratios are simply the weighted expense ratios of all the funds they invest in. In fact, with Vanguard charging a $10 yearly fee for index funds with balances of less than $10,000(?), you’d be giving yourself more fees doing it that way.

2) You lose diversification, waiting years to invest in important asset classes such as emerging markets and bonds.

3) Since you’re investing in a Roth IRA, even if you wanted to eventually have exactly the same proportion of funds as the TR fund, you could easily just contribute to the TR fund until you have $30,000, then diversify the way you want to. It’s incredibly easy to exchange funds at Vanguard, no costs whatsoever, and it’s not a taxable event since you’re in a Roth IRA.

I’m not saying there’s no value to investing in funds other than the TR fund. If your target allocation is different than theirs, if you have several accounts and only want to use your Roth for one asset class, if you qualify for admiral shares in several of the funds that offer them, sure. But for many people (including myself), they’re the superior choice, at least until you have enough money in your accounts to diversify the way you want.

If I were in your situation (and I once was) I would simply hold the TR2045 fund and not worry about having to rebalance or contribute to the right fund all the time or anything like that. I went through the same thought process at one point in time as you are going through now. Then I was taught that investing should be simple and I shouldn’t try complicate it. Set it and forget it and get on with life!

-Bram

You wrote “wouldn’t it make sense to approximate their holdings and just balance the whole thing myself, saving myself another layer in fees?”

The Target Retirement Funds do *not* have an extra layer of fees. The expense ratio on the Target Retirement Funds is a pass-through from the component funds. Investing directly in a Target Retirement Fund is a lot easier than trying to construct your own using its allocations.