WHAT'S NEW? Our Latest Updates!

Ask MAX: What does MAX think of the Vanguard Target Retirement Fund?

March 16, 2007

Dear MAX,

I am 26 and am staring an investment portfolio with $6,000. What do you think about Vanguard's Target Retirement 2045 Fund?

St. Louis, MO

Dear Ken,

Despite the fact that it sounds to us more like the title of Arnold Schwarzenegger's last movie than a mutual fund (YOU'RE TERMINATED AARP!), for a guy in your footloose-and-fancy-free shoes, we think Vanguard's Target Retirement 2045 Fund (VTIVX) is not a half-bad way to go.

Vanguard currently has six Target Retirement funds, ranging from the Target 2045 for investors who aren't planning on hanging it up for forty years or so, to the Vanguard Target Retirement Income Fund Summary, which is for those who are currently retired.

The idea behind the Target Retirement funds is that the funds adjust their allocation as you grow older. A young whippersnapper like you buys the fund today and your money is invested in a decidedly growth-focused 88% stocks and 12% bonds. In the next forty years, the fund's manager slowly lowers your equity allocation and increases your bond allocation. If you stuck with the fund for the long haul, by the time you reach your 'target retirement' date your investment’s allocation would flip to an income-focused 30% stocks and 70% bonds. A few years after retirement, the fund will resemble the Vanguard Target Retirement Income.

We like the idea of a set-it-and-forget-it fund for young Turks like you for a couple of reasons:

Twenty-somethings are notoriously negligent investors. They’re either so busy that they forget to invest altogether, or they sink all their money into stocks that are so risky that they may as well be plunking down their cash on a six-team parlay in Vegas.

Investing in the Vanguard Target 2045 Retirement fund on a regular basis is such an easy way to put your money to work that even Paris Hilton could do it. You don't need to spend any time researching or determining how much of your money should go into what type of fund. You write one check and you don't have to give your investment another thought until you want to. Better yet, enroll in Vanguards automatic investment plan and have a set amount deducted from your checking account and invested into the fund each month, automatically.

Vanguard's managers allocate your money in a risk-appropriate way, and adjust as time goes by. While some young people think that their investment portfolio literally can't be risky enough, even people in their twenties should have a well-diversified portfolio with some bond exposure. The Vanguard Target Retirement 2045 fund, like all the Vanguard Target Retirement funds, is a fund of funds, meaning it is a mutual fund that invests in other mutual funds. Like many fund of funds, the fund invests in funds from the same family only. The current 2045 fund allocation looks like this:

1. Vanguard Total Stock Market Index Fund 70.3%
2. Vanguard Total Bond Market Index Fund 11.9%
3. Vanguard European Stock Index Fund 11.9%
4. Vanguard Pacific Stock Index Fund 5.9%

As you can see, even the riskiest of Target funds has a full 12% of its allocation to bonds, and the equity portion is nicely diversified into U.S. and foreign markets. It’s an easy, instant, well-diversified portfolio, and with an expense ratio of just 0.21%, the price is right, too.

That said, we aren't as keen on the Vanguard Target funds, or fund of funds in general, for more experienced investors. Fund of funds can be expensive. The worst thing about mutual funds is that expenses are taken out of your investment returns, and a fund of funds adds an additional layer of expenses on top of those associated with the individual funds in its portfolio. While Vanguard's funds of funds are just about the cheapest around, others (usually the kind that buy funds from several fund families) have significant double-layer fees – the fund of funds itself, and the expenses of the underlying funds. Single-family fund of funds tend to be cheaper because they are happy making money on the underlying funds and are merely using the fund of funds as a conduit to their other funds.

The diversification decisions are, obviously, quite broad, and are not geared toward each investor’s individual situation. While most 35 year-old investors might be comfortable with a growth-focused portfolio, one who is planning to buy a house in the next few years should be a lot more careful with their money.

So, while the Vanguard Total Retirement 2045 fund might be a great place for a young investor to get started, in a few years we'd recommend you think about a more do-it-yourself solution.

Thanks for the question.


Want to ask MAX a question of your own? Send him an email by clicking here. Please include your name and where you live.

Fickle Fund Investors

March 14, 2007

An unsurprising new study says that investors' loyalty to their mutual funds extends about as far as those fund's latest performance numbers:

Affluent investors say they're increasingly dissatisfied with their mutual funds' long-term performance and inconsistent returns.

In fact, only 11 of 38 top fund families managed to create meaningful customer loyalty, according to a new report released Wednesday by Cogent Research LLC.

The Cambridge, Mass.-based market researcher surveyed 4,000 wealthy mutual-fund investors. It specializes in conducting independent studies of markets such as financial services, health and consumer goods.

'The findings show it's difficult for fund companies to produce consistent returns that investors can be pleased with,' Chris Brown, managing director of Cogent, said.

But some do, he added. 'There's a small group of firms that has been able to generate sufficient long-term returns to build strong investor loyalty,' Brown said.

The study showed Vanguard Group with a wide lead over its rivals in terms of investor loyalty. 'Some firms might want to please advisers rather than the end-investor,' Brown said."


Dumping a fund because of a short-term performance stumble in favor of the latest chart-topper is, of course, a recipe for financial disaster. The best performing funds this year actually have less of a chance of beating their peers next year than do funds that performed less well (to find out why, read about the MAXadvisor Powerfund Portfolios).

What Would Jesus Invest In?

March 13, 2007

Religious funds, a subset of socially responsible mutual funds that invest in accordance with the tenants of a particular faith, are gaining in popularity. Here's a rundown of prominent religious funds, courtesy of Morningstar:

Catholic Funds

Protestant Funds

Islamic Funds


While investing in the religious funds listed in the article might expedite your entry into the hereafter, don't count on them to produce heavenly returns; as a group these funds have a MAXrating of just 39. As the article points out, one of the biggest negatives associated with these funds is their cost. Almost all have above-average expense ratios compared to their secular peers.

Mutual Fund March Madness

March 12, 2007

Chuck Jaffe at Marketwatch gives investors something to do during lulls in this year's NCAA Tournament:

See if your holdings have earned their way to your personal "Big Dance." When you find a fund that is "on the bubble" -- meaning it's not an obvious choice to buy again today -- you'll have a "watch list" of funds that may, in time, deserve the boot.

The conference the fund plays in. In hoops, there are "power conferences" -- where a 6th-place team might make the tournament -- and "midmajor conferences," where only the tournament champion goes. In mutual funds, there are asset classes. Your search for a fund should start by deciding the type of assets you want to own.

Conference record. In basketball, it's important to be in the top half of your league. In mutual funds, it's about being consistently in the top half of the fund's peer group, and being in the top one-third over longer time periods.

Quality wins. This is the NCAA's way of saying that you beat good opponents, and a mutual fund's way of showing that it performed well in tough times.

Strength of schedule. In basketball, you want to play tough opponents rather than cupcakes. In mutual funds, it's not a bad idea to favor a fund that has results over a lot of time periods so that you can judge it based on everything from the last quarter to the last decade or more.

Power rankings. In basketball, this is the computer's attempt to suggest that one team is better than another; in mutual funds, it's star ratings, numerical rankings and more."


Best Recession-Proof Fund

March 11, 2007

What kind of mutual funds or ETFs will do well if we have an economic recession? Will interest rates fall, or has the Federal Reserve already played that hand? What about the U.S. dollar? MAXfunds co-founder Jonas Ferris gives his pick for the best fund to own during a recession in this FOX News video. Note: You'll have to click the 'Click here to view your video, "Cashin' In"' link on the page you'll see if you click the clickable 'LINK' link below.


Where to Start

March 9, 2007

Hey young person, we know you have much cooler things on your mind than mutual funds: your MySpace page, Bradjelina, Britney Spears' hair. But you're never too young to start investing, and acting now means that you have years upon years of compounding returns coming your way. Smartmoney.com drops some knowledge on how to start an investment-izzle portfolio-shizzle with as little as $20:

If you are just beginning to save for retirement there are a few basic rules to follow. First off, you want to contribute the same percentage of your salary to your account as the company match. So if your employer pitches in 6% you should, too, regardless of how much belt tightening you have to do. If you don't, you're just throwing away a cash gift from your firm. And it's always smart to increase your payments every year in stride with whatever annual salary increase you get. Financial advisors like to see clients contributing 10% of their annual salaries.

The simplest investment to start with is a low-cost index fund. These no-frill options — found in every 401(k) plan — will track the returns of a benchmark like the Standard & Poor's 500 index. If you're saving in a brokerage account, make sure the index fund has an expense ratio around 0.2% a year, or about $20 for every $1,000 you invest. Anything over 0.5% is too expensive. If you think you need a big wad of cash to get started... well, you don't. Some firms like T. Rowe Price will waive their minimum-investment requirements on a wide selection of funds if savers agree to invest, say, $50 a month. Under the "Fund Quicklist" section on its web site, the Mutual Fund Education Alliance lists 1,800 funds that have these low minimums. We would suggest coupling an S&P 500 index fund with one that tracks international stocks, at least until you become more comfortable with investing.


See also:
Ask MAX: Can I build a fund portfolio with just $17,000?
Ask MAX: Investing $20 a month?
Ask MAX: Where do I start?

Over the Hedge

March 8, 2007

The risk checklist for hedge fund investors keeps growing:

  • Fabricated performance – check
  • Manager runs off with fund capital – check
  • Leveraged bets blow up because something that normally doesn’t happen in the market does – check
  • Market neutral strategy turns out to be market spiral – check
  • Buy on weakness philosophy turns out to be double down – check
  • Manager turns out to be a complete nut – gulp!

According to regulators, a successful hedge fund manager tried to draw a slightly more disturbed individual out of the internet woodwork to attack his ex-girlfriend.

A wealthy New Canaan hedge fund manager posed as his former mistress and posted an Internet ad seeking someone to rape and abduct her, authorities said.

Albert Hsu, 43, who was arrested Friday, pretended he was the woman in an Internet ad that indicated she was a willing participant in a sexual fantasy, prosecutors said Monday.

The ad included the woman’s photograph, her home and work address, license plate number, which train she takes to work and which car she usually sits in, authorities said."


Live a Little

March 7, 2007

A new study says that the Wall Street Industrial Complex is effectively scaring investors into saving more than they need for retirement, because the more money suckers like us invest, the more money mutual funds, brokers, and financial advisers make in fees.

The leader of this counterintuitive challenge is Larry Kotlikoff, a Boston University economics professor and co-author of "The Coming Generational Storm," an analysis of dire solutions necessary to cover future unfunded Social Security and Medicare benefits. His co-author is financial columnist Scott Burns of the Dallas Morning News. Kotlikoff's research says investors should focus on income while working to figure out retirement needs.

Saving too much? You bet. A New York Times review of Kotlikoff's numbers "showed that Fidelity's online calculators typically set the target of assets needed to cover spending in retirement 36.4% too high. Vanguard's was 53.1% too high. A calculator offered by TIAA-CREF, one of the largest managers of retirement savings, was 78%" higher than the calculations generated by Kotlikoff's ESPlanner.

As expected, they were quite defensive about this challenge. The Times says: "The financial-planning industry prefers to characterize itself as cautious. William Ebsworth, chief investment officer of Fidelity Investments' Strategic Advisers division, which runs retirement programs, said, 'We take a very conservative approach,' preferring to err on the side of having money left over at death rather than risk running out before then."

While their reaction is understandable, it's a diversion: They fail to deal with their own conflict of interest and motives in overstating assets needed in retirement.

So let's repeat it again: You are unnecessarily investing too much of your hard-earned money into too many assets for retirement. As a result, you're sacrificing too much of the present, under the highly questionable and misleading assumptions about piling up excessive savings for an uncertain future."


New Fund For Kids

March 7, 2007

Amazingly enough, some children would rather play Xbox 360 than learn about investing. The Monetta Family of Mutual Funds hopes to change that with the Young Investor Fund (MYIFX), a new no-loader geared toward the under-four-feet set.

When a child or teenager joins the fund, they are given an investment kit, which for children eight years old and younger includes an activity book, a CD with songs about money and a copy of the kid-friendly newsletter chock-full of jokes and other information that is intended to make it interesting to them.

Teenagers are offered a more sophisticated version of the kit and have the chance to enroll in a stock market game, in which they each receive $100,000 in "Monetta Bucks" that they have to use to construct a portfolio with any combination of stocks from the Dow Jones Industrial Average.

At the end of six weeks the first-prize winner gets to choose either a certificate for one share of stock or a $75 gift card to Best Buy. There are smaller gifts for other winners."


It would be great to get young people interested in money management, but from what I can remember about being a kid, I'd be interested in the 'CD with songs about money' and the activity book for all of 15 seconds before I turned my attention back to Viva Piñata.

MAX on Fox News

March 6, 2007

MAXfunds co-founder Jonas Ferris chats with Neil Cavuto about the recent market turmoil. Not seen in this video is the off-camera high jinks where said co-founder debates who invented the ETF with a representative of the American Stock Exchange. Maybe somebody caught the scuffle on their cell phone camera and it will show up on YouTube. Ok probably not..