New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 21,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

Vanguard Increases International Allocation to Target Retirement and LifeStrategy Funds

A few readers have asked what I think about the recent announcement that Vanguard will be increasing the international allocation in the Target Retirement and LifeStrategy funds. (In case you missed the announcement: The international equity allocation will increase from 30% to 40%, and the international bond allocation will increase from 20% of nominal fixed-income to 30% of nominal fixed income.)

Is Increasing International Allocation a Good Idea?

The most important part of the answer is that I don’t have any strong opinion about the merits of the change itself. We’re talking about 10% of the portfolio (or less, in some cases). And the change isn’t even from stocks to bonds or vice versa. It’s just from domestic to international. In other words, I don’t expect it to have a particularly large effect.

I’m not thrilled about the bond change, because I’m not especially enamored with the Total International Bond Index Fund. It has a higher expense ratio than the Total Bond Market II Index Fund (0.23% rather than 0.12%). And, despite having more interest rate risk (due to an average duration of 7.3 years rather than 5.6) and more credit risk, it has a significantly lower yield (as of this writing, 0.81% as opposed to 1.94%).

As far as the stock change, it doesn’t bother me. Back when I used a DIY allocation, I used a 55/45 domestic/international split. Also, while I am not the type to make tactical asset allocation changes, with Vanguard Total International Stock Index Fund having underperformed Vanguard Total Stock Market Index Fund so heavily over the last 5 years (6.53% annualized return as opposed to 16.26%), if there was ever a time to move more heavily to international stocks, now would seem to be it.

In other words, I’m slightly happy about one aspect of the change and slightly unhappy about the other aspect of the change. But, again, I wouldn’t expect the overall effect to be a big deal. It’s a modest change to a small part of the portfolio.

But I Wish They’d Stop Tinkering

The thing that I most dislike about the change is simply the fact that it’s a change. A big part of the reason that I hold a LifeStrategy fund is to counteract my temptation to tinker — to make it easy to buy and hold a given asset allocation. But, unfortunately, the portfolio is being tinkered with, even if I’m not the one doing it.

That said, to Vanguard’s credit, they’re open about that fact. For example, back in 2012, in an interview for Oblivious Investor readers, Vanguard’s John Ameriks made the following statement:

In terms of changes to target date, it’s important to say that we do expect these portfolios to evolve over time. We are going to continue to do research. We are looking at these things on an ongoing basis and doing formal updates of our analysis around the glide path. We look at it a lot. But that doesn’t mean we’re going to change it.

[…]

At this point, there are no specific plans to make changes to the target date funds. But I would make sure that everyone understands that it is not something that we set and forget. We’re constantly looking for ways to either improve diversification or reduce costs or provide a better fit for the shareholders. So people should expect some evolution over time.

What will not change is the philosophy: that it should be easy for every investor to understand what’s going on in those funds.

In other words, I do not love the fact that Vanguard changes the Target Retirement and LifeStrategy portfolios from time to time, but I can’t claim to be surprised that it happens.

New to Investing? See My Related Book:

Book6FrontCoverTiltedBlue

Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2019 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My new Social Security calculator: Open Social Security