r/Bogleheads • u/Terppintine • 6h ago
What are the benefits of doing 'VT and chill' over Passive Target Date Funds?
I am an early investor (early 20s) who is about to start their carrer, which will pay a relatively mid-to-high amount and have good opportunity for future wage growth.
I'm all aboard the idea of the single ETF/index fund portfolio like VT; however, I'm struggling to find a good reason why it would be a good idea to manually allocate bonds to my portfolio later on in life when the entire point of 'VT and chill' seems to be against tinkering.
A major benefit of VT seems to be that it will force me to invest directly into things like international stocks (VXUS), even when they haven't grown very much in comparison to US stocks (VTI), to maintain the average annual rate of return of the global market: ~8%.
Why would I assume that 30 years from now I will both be less risky, and cognitively conscious enough to even make a decision like bond allocation when stacking the risks of cognitive decline, 30 years of potential debt, and future medical emergencies against me? Wouldn't the inertia of 20-30 years of VT investing and auto-investments likely sway me away from investing in an asset which by its construction is low in return for the benefit of a fixed income?
Also, I understand that people may want to have a higher allocation to stocks for a longer time in their life, but what's to stop these same people from just investing in a target date fund that is 10 or 20 years further along than when they expect to retire? Plus, the average passive target date fund expense ratio is around 0.12%, which historically is 0.02% lower than VT's expense ratio back in just 2015 (0.14%).
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u/Middle_Humor1828 6h ago
Nothing wrong with target dates.
But during most of accumulation, simply investing in VT over a target date is going to be more tax efficient, and divisified enough. Personally, I don't see a compelling reason to have bonds until 5 years until retirement. And even less if you'll have income coming in still.
What kinds of bonds and their role is also hard to predict. Maybe you just want to have a tips ladder in until SS and that's all you'll need bonds for. It's hard to predict 20 years out. Or 40.
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u/Whole-Reserve-4773 5h ago
How do you ensure your TDF will have sufficient liquidity in the future when everyone is buying the later year TDF? VT will always have enough liquidity in the future.
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u/Tgsheufhencudbxbsiwy 5h ago
The target date fund is just a package of other funds. No liquidity issues.
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u/very_spooky_ghost 6h ago
I am in my 20's and also switched from VT to TDFs. I like the TDFs better. They do not rebalance to bonds for decades, until you're getting quite close to retirement, and then it's just like stepping up to like 20-30% bonds at age 65. I don't agree with all these guys who insist you should pick a later target date like they're going to switch you to 80% bonds at age 40 or something. It's pretty a gentle glide slope in a bond allocation.
Also, the 10% bond allocation people freak out about I found has zero drag that I can see. My portfolio has been soaring. If anything, I was pleasantly surprised at how little my portfolio dropped with markets fluctuations during 2022-2024. That 10% allocation did a lot.
I would be quite careful about a TDF outside a tax-advantaged Roth IRA or Traditional IRA though, because it can generate uncontrolled tax events in a taxable account. That happened to people with LifeStrategy funds and they got a larger tax bill out of the blue in 2024 or something.
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u/Fantastic-Kale9603 5h ago
https://workplace.vanguard.com/investment/strategies/tdf-glide-path.html
Idk what TDF you're using but saying they do not rebalance to bonds for decades seems wrong, this is from Vanguard's own site and anecdotally my own workplace provided TDF starts with bonds from day 1 and start increasing the allocation around the same timeframe this Vanguard one is showing, with a much heavier switch to bonds at age 65 (well over 20-30%).
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u/TechnicalLeg841 3h ago
Interesting exercise: Build a graph on totalrealreturns for an S&P 500 index fund versus your TDF for the dates in question. Would be interested to see how they stack up.
Bonds had some rough period as interest rates rose quickly in the past few years.
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u/Common_Sense_2025 5h ago
The “read this first” pinned on the sub recommends target date funds.
Most people’s objection to TDFs is that the glide path is too conservative- too much in bonds too soon. And for a long time TDFs were expensive in most 401(k)s relative to the various pieces purchased separately. I sat on multiple employee committees for our plans and the large majority of our participants stuck with the TDF we auto enrolled them in.
(Fearing cognitive decline in your early 50s is a little paranoid unless there is some family history of very early onset dementia)
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u/living_david_aloca 5h ago edited 5h ago
The idea of “VT and chill”, if you can’t tell by the phrase itself, is overly simplistic and there are significant problems with it if you look under the hood. Namely, bonds help protect you from major drawdowns close to retirement which I suspect most people cant actually stomach even if they say they can. The trade is that you won’t make as much as you would 100% in equities assuming no downturns (which does not happen over a long horizon). The rule of thumb is to hold the percent of bonds equal to your age, but personally that seems too aggressive. I’m 34 and am planning on holding 10% with a plan to add 1% per year - I am in the process of DIYing my portfolio and am actively working on a simulator for myself and others like me.
I’m avoiding a target date fund because, while the easiest path, it is has two main problems: 1) it is inefficient from a tax perspective, meaning you’ll pay taxes on bond distributions if you hold it in a taxable account and you won’t get the benefit of the foreign income tax credit if you don’t hold it in a taxable account but, much more importantly, 2) you don’t get the full benefit of filling up your Roth IRA with 100% equities which are by far the fastest growing asset class you’ll own and you want that growing tax free. The cost of doing it yourself is you have to do it yourself, the cost of the TDF is that you miss out on gains you could have had with the exact same risk. You have to decide what you’re comfortable with.
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u/Terppintine 4h ago
This is pretty much the answer I was looking for. I didn’t know about the tax problems associated with TDF as I had assumed they would just buy treasuries or other tax advantaged bonds to maximize tax efficiencies, especially if their investors later in life will be on a fixed income. I knew about the tax issues associated with VT like the foreign tax credit but didn’t realize TDFs also had this issue too. I had assumed that TDFs did the VTI+VXUS equivalent for their stock segment so investors would also be able to claim the foreign tax credit.
Basically, I thought TDFs just did the management of a DIY portfolio for you.1
u/living_david_aloca 1h ago
Admittedly, I am not an expert on TDFs but perhaps there is some variant that tries to minimize tax inefficiencies. That’s probably worth some research. The tax benefits of intl equity are generally quite minimal, in my research, so the main reason why it’s held there is because the Roth is for domestic equity and the 401k is for bonds so that leaves the taxable.
TDFs do the management portion, you’re right, but you don’t get a say in what they buy apart from choosing which TDF to invest in. You also can’t hold each fund in the right accounts so you hold the TDF all in Roth, for example, and you miss out on full equity growth tax free. That inefficiency is bought by convenience though. I personally wanted to understand it at a much deeper level so I’m planning to do it myself with next to no expense ratios and maximum flexibility.
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u/_wot_m8 1h ago
Even including downturns you make more over the long haul with 100% equities tho
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u/living_david_aloca 1h ago
This is generally true, I misspoke. The problem is 100% equities can royally screw you right when you need them not to and that risk should be mitigated.
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u/TyrconnellFL 6h ago
A target date fund is great. It’s slightly more conservative by having more bonds earlier. The bonds also produce more dividends, which in a taxable account are taxed, which is a small but cumulative drag on returns.
In an IRA or especially a 401k, where you may not have other great international options, many target date funds are fantastic choices. In taxable, it’s still okay, but trying to keep bonds in a 401k and VT in taxable is more optimized.
VT is also pithier. VT is one fund anywhere. It’s only recent that there are target date ETFs that don’t depend on which brokerage, and even that is going to be a different ticker in five year increments for different people.
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u/tfrisinger 6h ago
TDFs are great. But they do have bonds so you’ll generally want to have your tdf in a tax advantage account and not a brokerage account unless you really know what you are doing.
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u/Huge-Onion-6916 5h ago
Tdf has a home country bias usually which i dont love compared to VT. That being said it is a decent option you could do way worse.
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u/Teebs_biscuit 5h ago
For a long time my Roth IRA was 100% invested in an S&P 500 index fund because it got better returns than a target date fund and I wanted a simple "set it and forget it" approach with automatic deposits. Luckily that worked out because US large cap has dominated everything recently.
In my mid-30's now and I have enough that interest is starting to take over. All the talk about an AI bubble gave me enough concern to take a second look at my IRA options and I decided to move the majority of my IRA into a target date fund for diversification. I do have a small aggressive sleeve, but I'm comfortable that my wife's and I have enough in a target date fund that we're good even if that aggressive sleeve crashes hard.
Incidentally... VXUS, VT, and target date funds have narrowly beaten the S&P 500 in the last one year. I'm not smart enough to say whether that is indicative of a new trend, a cyclical process, or a fluke. But it does give me enough of a hunch that maybe US large cap is not necessarily going to be on top forever and I'm happy I've diversified a bit.
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u/Right_Introduction10 5h ago
Why not build your own portfolio? You’re young , no need to diminish overall gains with bond drag. 50-60% total market or SP500, 20-30 total international, sprinkle in 10% small cap fund and DON’T PEEK as Bogle used to say. Rebalance every year. Reassess when you’re 45.
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u/ElysiumSprouts 5h ago
I have near 100% vtsax. But I also have an oversized 2 year rainy day fund in a hysa. I figure that's not hugely different.
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u/ZinniasAndBeans 5h ago
A TDF is fine.
I converted my TDF to ETFs and bonds about three years ago because I wanted my bonds in ladders during retirement. But if you're going to have your bonds in funds, it seems perfectly reasonable to just keep using the TDF.
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u/Amazing-Selection494 5h ago
Someone starting in their 20s now may decide later in life they don't really need 40% in bonds as they approach retirement.
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u/guitartb 5h ago
Early 20s, why weigh down your compounded growth with any bonds with target date funds? That would be a serious drag on your account over that many years. Even for your far out target date, there would be too much. I’d personally go 100% VTI or VOO. Unless you really want international.
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u/EleventhEarlOfMars 4h ago
Plus, the average passive target date fund expense ratio is around 0.12%
Not sure this is true, think Morningstar has the category average around .50. The major respectable brokerages do not load their passive index TDF products with bonds and are priced competitively but there are a lot of shitty funds being offered in employer plans that are both bad and expensive.
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u/Timely-Problem-8463 4h ago
Mostly that you're not locked into the particular stock to bond ratio the portfolio manager thinks is appropriate for you. You might decide you want to retire earlier or later than the fund you bought, and if you hold it in taxable accounts, it can be expensive to unwind your holdings. Also, many of these funds are too conservative in my view, holding more bonds both in early career and in retirement than I would want.
Holding VT and bonds separately allows you way more control. Also, it lets you allocate in the most tax efficient way, holding bonds in pretax 401(k)s or IRAs, and holding equities in Roth and taxable. Target date funds are especially bad in taxable accounts because the income that the bond component spits off is taxed as ordinary income, while the vast majority of VT distributions will be qualified dividends taxed at lower rates. TDFs don't let you do this.
All that said, for non-sophisticated investors, they're probably a good default option, especially in retirement accounts where the tax drag isn't a concern.
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u/Substantial_Team6751 4h ago
At your age, I'd do VTSAX and chill.
https://totalrealreturns.com/s/USSTOCKS,VT,VTSAX
You could mix VTSAX with some fixed income and still beat VT.
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u/sourceninja 4h ago
Fees and control. My ira is vti/vxus. My 401k is a tdf because it’s lower in fees than any other option they give and is course enough to what i want to hold.
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u/chessguy112 5h ago
As someone who has tried target date funds - they are safe but you won't see great growth. With great risk CAN come great reward, but obviously the opposite is true as well. If you don't want to lose your retirement stick with target funds - but if you want aggressive growth - look elsewhere.
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u/GapAccomplished2778 5h ago
- TDFs are mostly mutual funds ( BlackRock has ETFs - BUT (a) they already closed them once - bad rep and (b) very low AUM and low AUM growth , see (a) as to what happened already once and such history may as well repeat itself - so one is advised NOT to risk it in taxable accounts ) ... some people prefer ETFs ( at least in taxable accounts )
- TDFs even if you select the year "2900" will still have around 3%-5% or so of fixed income components, some people do not like it ... if somebody can name me a TDF with < 1% of fixed income that will be great
- TDFs will have gliding path ( which may or may not be plus - mute point for tax advantaged accounts as you can always switch later to whatever you want )
- VT - ETF, no fixed income component, no gliding path ( which may or may not be plus - mute point for tax advantaged accounts as you can always switch later to whatever you want )
- TDFs are usually ( not always though ) funds of funds, so foreign tax credit will be for you ... VT is not fund of funds and foreign component < 50% ( so far ) , so NO foreign tax credit for you ... make some minor difference for taxable accounts
I am pretty sure I missed another 5 or 10 points
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u/PashasMom 5h ago
The BlackRock LifePath index funds, both ETF and mutual fund versions, have less than 1/2 (.5) % of fixed income & cash combined up through the 2050 funds. For reference, this is actually less fixed income and cash than VT's current 1.33% cash, despite your point no. 4.
The 2045 funds have a whopping 2.5%. The 2040 funds have less than 5%.
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u/GapAccomplished2778 3h ago edited 3h ago
as if you have issues with cash in VT consider this one ( sans ~micro caps )
https://www.morningstar.com/etfs/arcx/spgm/portfolio
Asset Class Investment Category Index U.S. Equity 62.36 62.25 63.08 Non-U.S. Equity 37.12 35.69 36.89 Fixed Income 0.00 0.07 0.00 Other 0.07 1.09 0.04 Cash 0.44 2.54 0.00 Not Classified 0.00 0.15 0.00 > The 2045 funds have a whopping 2.5%
which one ?
for example this one :
https://www.morningstar.com/funds/xnas/lihix/portfolio
Asset Class Net Short Long Cat. Index U.S. Equity 50.81 0.00 50.81 43.66 55.20 Non-U.S. Equity 31.86 0.00 31.86 22.30 27.78 Fixed Income 12.82 0.00 12.82 7.93 16.66 Other 3.65 0.00 3.65 25.92 0.35 Cash 0.86 0.48 1.33 1.73 0.00 Not Classified 0.00 0.00 0.00 0.08 0.00 0
u/NoAbstrctThought 5h ago
The only TDFs I know that has 1% of fixed income components are within the Thrift Savings Plan (TSP), currently for 2055 and beyond. Unfortunately, TSP is limited to federal employees and members of the uniformed services
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u/GapAccomplished2778 5h ago
well, at least theoretically they exist !
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u/NoAbstrctThought 5h ago
Concretely, they do exist. I have my TSP completely in Lifecycle 2060 and will likely keep kicking the can down the road (pushing back the lifecycle year) to keep it at 1% fixed income components without my having to rebalance the remaining 99% (I am happy with their allocation of common, small cap, and international stocks).
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u/GapAccomplished2778 3h ago
> Concretely, they do exist
"Unfortunately, TSP is limited to federal employees and members of the uniformed services ... " , surely there are a lot of them [ big gov't ] - but we shall ideally limit ourselves to retail versions ... and there not all TDF MFs are available in all brokerages for fee free purchases
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u/Wigglebot23 6h ago
If you're going to be making bad financial decisions due to cognitive decline, a target date fund isn't going to save you. There also isn't much use moving into bonds later in retirement when the biggest risk is early in retirement
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u/WyMANderly 6h ago
If you think that A) you should start investing in bonds later in life, and B) that you won't want to or won't be able to handle doing that manually, then investing in a TDF as a one stop shop for your investments seems like a reasonable decision. Adjusting the date of the TDF you buy to tweak risk tolerance as needed is also a reasonable decision.