Question

It is April 9, 2020, and your boss has asked your opinion on the asset allocation associated with the “Vanguard Target Retirement 2030 Fund.” This is a life cycle fund for investors with about 10 years to retirement (born between 1963 and 1967).

The fund’s current asset allocation is:               

Vanguard Total Stock Market Index Fund Investor Shares                         40.50%

Vanguard Total International Stock Index Fund Investor Shares 27.00%

Vanguard Total Bond Market II Index Fund Investor Shares† 22.70%

Vanguard Total International Bond Index Fund Investor Shares 9.80%

Sum: 100.00%

Evaluate the fund's asset allocation, critically.

Answer 1

The fund’s asset allocation has been done in an optimal manner. We can see from the numbers provided that the “Vanguard Target Retirement 2030 Fund” has a healthy mix of stocks and bonds. As it is a target date fund its asset allocations will ensure that the fund is able to provide investors with a simple choice for retirement investing.

Investment in stock based funds = 40.5% + 27% = 67.5% and investment in bond funds = 22.7% + 9.8% = 32.5%.

We know that stock-based funds have a high long-term return potential. However they also have a higher amount of volatility. In contrast bond funds are more stable. This is especially with regards to income. However bond funds lack the long-term potential of stocks.

What “Vanguard Target Retirement 2030 Fund” does is that it automates the process of allocation mix. Younger investors invest a large part of their corpus in stocks and thy gradually shift to bonds when they come closer to retirement. This process of shifting from stocks to bonds is automated by the “Vanguard Target Retirement 2030 Fund”.

Thus I am of the opinion that the fund’s asset allocation is optimal and makes sense. 67.5% in stocks and 32.5% in bonds makes sense. This is because as the fund’s target investors are getting close to retirement growth remains a desired priority and so large stock allocation makes sense. The 32.5% investment in bonds reduces overall volatility levels.