by Dan Wiener | January 23, 2012 10:21 am
Growth investors, value investors, income investors, index investors and — saddest of all — investors in retirement are all vulnerable here.
The saddest part is Vanguard’s three worst funds are targeted to investors who can least afford to lose money. Here’s a look:
Say you’re looking for the safety of diversification, thinking this is how you’ll lower risk as you go for growth. You’d immediately think Vanguard Diversified Equity (MUTF:VDEQX) must be the fund for you. Right?
This fund stinks, at best. At worst, it’s a dream crusher. You’re promised growth and income in an all-in-one, actively managed fund. But all you get is a fund so watered down you’re doomed from day one.
Diversified Equity is made up of eight mutual funds. Most of these funds are just average, and one of them is Vanguard’s worst, U.S. Growth (MUTF:VWUSX).
This fund-of-funds doesn’t hold any PRIMECAP Management-run funds, which happen to be the best funds in the entire Vanguard stable.
But it gets worse.
Diversified Equity’s eight-fund portfolio has almost 20 management teams. And none of them is on the short-list of funds to build your portfolio from.
Diversified Equity has been around for only a few years, but that’s a few years too long if you ask me. If you own it, sell it. And if you don’t own it, stay away. It would be a tragedy to put even a dime into this dog. But perhaps even more tragic is this doomed fund:
Vanguard knows many investors — especially retirees — just want their capital to be safe as it generates income. So, Vanguard created a fund that aimed to please with a name that would seem to be right on target: Vanguard Managed Payout Growth Focus (MUTF:VPGFX).
The fund sounds great, but the fund fails to “put out” as promised. Here’s what’s going on:
Managed Payout Growth Focus seeks to give investors a modest initial “payout” of 3% a year with the goal of increasing the returns over time to provide a long-term, inflation-beating income stream.
But the only thing the fund is doing is giving people their own investment capital back and calling it income. For instance, in 2008, 100% of this fund’s distributions were a return of capital. Lately it’s been a more moderate 58% — but that’s still money not being earned. It’s simply being returned to you.
Vanguard has outstanding funds throwing off income left and right. But this “payout” fund is not one of them. In fact, stay away from all three of Vanguard’s “payout” funds.
Not only are they dogs, but all three require a hefty $25,000 initial deposit, and plopping down that kind of money would be a terrible mistake that could haunt you for the rest of your life.
With an attractive name, Vanguard Target Retirement 2055 (MUTF:VFFVX) aims to be an all-in-one solution for those retiring in 2055, or thereabouts. Just pick the date and you’re done.
Let’s get the only good stuff about this fund out of the way early: It’s diversified, with exposure to domestic and international stocks, as well as bonds. I like a diversified portfolio — when it works.
Target Retirement 2055 invests in three index funds: Vanguard Total Stock Market (MUTF:VITSX), Vanguard Total Bond Market II (MUTF:VTBIX) and Vanguard Total International Stock ETF (NASDAQ:VXUS). Sounds like it puts the whole world into one easy initial investment of just $1,000, right?
Convenience has its downside — a downside of 47.7%, to be exact. That’s how much I estimate it would have lost if it had existed during the last bear market.
This is a super-long-term fund, and Vanguard is putting its investors into index funds when there are better active funds available to them. Don’t forget that when you index all of the market, you get all of the dogs. Virtually any of the active international managers has outperformed Total International, which replaces three regional international funds that were initially part of the target fund’s portfolio.
This brings up another point. The fund’s new allocation actually raises its risk. Instead of 17.8% of assets in foreign stocks, it now has 27%. Based on the new allocation, your loss in the last bear market would have been even worse: A $10,000 investment would have declined to $5,160.
So what’s the value in a target fund? Simple: It makes decisions easier for 401(k) benefits managers … but at the expense of retirement savers.
Hopefully, with this knowledge now in your possession, you’ll better equipped to profit with Vanguard than you were five minutes ago.
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