Comment by patio11 | Hacker News Reader

Comment by patio11 | Hacker News Reader

This is a question to which there is a Right Answer. That answer is low-cost index funds.

Your options:

1) Invest in a Vanguard target retirement date fund. They will manage a portfolio comprised of ETFs for you, and also change the mix over time, in return for a fee.

2) Invest in Wealthfront or a similar "robo advisor" (Charles Schwab also has one), who will manage a portfolio of low-cost ETFs for you, in return for a fee.

3) Self-manage a portfolio of low-cost ETFs. You should probably not do this. Your decisionmaking for it will be strictly worse than a machine's.

If you feel the need to know why index funds are the Right Answer, read A Random Walk Down Wall Street. This is the canonical answer among Bogleheads, a group of devotees of the guy who invented low-cost index funds. (He made Vanguard from the ground up.) If you want other book recommendations, they have several: http://www.bogleheads.org/wiki/Books:_recommendations_and_re...

Most of the consequential decisions for you are not going to be in what to invest in (because you will, being rational and aware that you cannot out-compete the market with any degree of predictability, choose low-cost index funds) but rather a) saving a generous amount every year, b) making especially sure to max out tax-beneficial retirement contributions, and c) not panicking and selling your low-cost index funds on a day like today.

If you enjoy playing the stock market not because you want to maximize your return (again, low-cost index funds) but because that sounds like a source of fun, ask me again in, oh, 2 weeks.

Completely agree with all of your answers but would add a nitpicky option 4;

4) Self-manage a portfolio of 2-4 index funds across the spectrum of equities and bonds, starting with a standard allocation rate (80-95% equities, the remainder in bonds) and rebalancing yearly, while adjusting the rate as you approach retirement age.

This is slightly different than the options you mention (though largely the same formula). The reason you might do this is that it can be much cheaper than the other choices (except for 3) and requires not much more savvy than items 1 or 2.

Further, sometimes you get lucky with a 401k plan that will boost you into higher fund categories (Flagshipt etc) and thus lower fees at much lower investment points than an open market fund would require.

The stakes are high, so I'm going to be blunt: This is terrible advice. [1]

The amount you're trying to save with "option 4" can be estimated fairly accurately; it's about 0.09% per year. [2] Over forty years, this savings will compound and you'll make 3% more money, if you never screw up the rebalancing, and if you're at least as talented as a Vanguard analyst, and if you remain so even as you grow older.

But the US market has gained more than 5% per year on average, so you could make the same money by just investing for six extra months. Or, looking at it the other way: If it costs you six additional months to get started with option 4, you've just thrown away all your potential gains from option 4.

And option 4 has a much harder conversion funnel. You have to:

  1. surf to Amazon
  2. get the free Kindle version of William Bernstein's *If You Can* [3]
  3. read it
  4. Contemplate the inevitability of your own death.
  5. build a spreadsheet
  6. Make some strategic decisions
  7. open a Vanguard account before noon tomorrow
  8. Carry out at least four trades.
  9. Set up an automatic investment plan.
  10. Repeat steps 4 and 7 every year without fail for the rest of your career.

DON'T DO THIS. You are going to put this off for months. And every year you put it off will cost you in the end.

patio11's advice converts better:

  1. Open a Vanguard account before noon tomorrow.
  2. Visit this page:

https://investor.vanguard.com/mutual-funds/target-retirement...

  ... and pick the fund that matches your age.

  3. Buy some of that fund.
  4. Set up an automatic investment plan to buy more of that fund.

DO THIS TODAY, I BEG YOU, YOUR KIDS WILL THANK ME ONE DAY.

---

[1] I should know; I have followed this terrible advice for years. Writing this essay may be the best investment I've ever made.

[2] Vanguard's Target Retirement Fund for 2055 (VFFVX) has an expense ratio of 0.18% and would be managed for me.

Or I can follow Vanguard's strategy on my own. At the moment, Vanguard's VFFVX consists of:

  54%  VG Total Stock Market index (expense ratio 0.05%)
  36%  VG Total International Stock index (expenses 0.14%)
  7%   VG Total Bond Market II index (expenses 0.07%)
  3%   VG Total International Bond index (expenses 0.19%)

Weighting all those expense ratios by their fraction of the portfolio, I compute that I can achieve an overall expense ratio of 0.09%. So I'm saving 0.09% compared to letting Vanguard do the work.

[3] Technically the book I read back in the day was Bernstein's Four Pillars of Investing, but I'm assuming that Bernstein has diligently refined his teaching over the years and I can safely recommend his latest.

Like I said, this is nitpicky to the nth degree (and in full disclosure I advised my wife to do a target fund when she started investing). You can do much, much worse than a target fund and hardly better.

That said, I've encountered many 401k plans over the years where the target funds have very bad expense ratios (.35 or higher). Meanwhile there will be a total market fund and a bond fund sitting closer to .08 or .09.

I personally, had a 401k plan that had the choice of a target fund at .28 expense ratio or a fidelity spartan class total market with NO initial investment requirements. I was able to invest at 0.07 expense ratios when I had less than $500 in a retirement account.

So, if you have the choice at a Vanguard target fund, yeah you aren't going to do much better than that. But especially when someone else is limiting what you can invest in, it can be advantageous to go with bare index funds.

I don't know OP's country of residence, but I believe Vanguard mutual funds are not available in the US - they're not available in Canada at least. Even if one has access to the Vanguard retirement funds, it's still useful to understand why a portfolio works over the long term (or not). This can be particularly useful when the markets plunge, as they did very recently.

I've read both Four Pillars and Random Walk; I refer back to the former much more often than the latter. But both are great books.

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