Sound Investing For Every Stage of Life
FAQ's about the Merriman Target Date Portfolios
answered by Chris Pedersen,
our expert on the new target date portfolios
Why are the Target Date Portfolios using a 70% US and 30% International when Paul normally recommends a 50:50 split?
We chose 70/30 US/International split because there are lower-cost, more diversified small-cap-value US funds, and we thought many investors would be more comfortable with that split and able to stick with it through difficult market conditions.
What if I want to follow Paul’s Target Date glide path, but use a different US/International split, or have a different ending percentage of equities and fixed income at age retirement. Is that available as an easy adjustment in the Google Sheet?
Based on your requests, we’ve added the ability to customize both the US/International split and age 65 Equity/Fixed-Income proportions in the Glide Path Asset Allocations.
Why is the glide path asset allocation fixed and unchanging after age 65?
We feel strongly that someone entering retirement should talk to an adviser, and that different situations will necessitate different approaches throughout retirement. There’s no one-size fits all solution. DIY investors may chose to switch to one of Paul’s Ultimate Buy and Hold portfolios with the equity/fixed-income percentage they think is right for them.
For the Monte Carlo simulations in the Achieving Success with Target Date Funds article, do the $10,000/year contributions remain constant, or do they increase each year with inflation? The analysis assumes the $10,000/year contributions increase each year with inflation.
What if I can only save $2,000/year? How would I adjust the resulting end-balances in the article?
They scale one-for-one, so since $2,000 is one fifth of $10,000, you’d divide the final median balances by five.
Paul’s Ultimate Buy-and-Hold portfolio recommends a very balanced and broadly diversified approach, whereas the Target Date Portfolio is heavily tilted toward small cap value and emerging markets. Is the Target Date Portfolio allocation the new Ultimate Buy and Hold recommendation?
No. The article lays out four options ranging from conservative (Vanguard-like), to moderate (adding 10% to 20% SCV) to aggressive, which is the new Target Date glide path at Motif. The new Target Date recommendation takes more risk by investing in the more volatile small-cap-value and emerging markets asset classes early on, but history suggests that leads to significantly higher returns over a 20 to 40 year time frame which is what a young investor has ahead of them. In the end, you need to decide which is right for you. That’s why Paul has the fine tuning tables for Ultimate Buy & Hold and All Value. You could also use the comparison table in the TDF article to make a similar choice.
In the article, Achieving Success with Target Date Funds, it says that adding an investment of $3,000 at birth adds only about $10M to the end balance. I thought Paul said I could turn $3,000 into $50M across a lifetime. Why is it only $10M?
Paul’s article about turning $3,000 (or $365 for 21 years) into $50M assumed it was invested all in small-cap value for 95 years. It also assumed a 12% compound annual return. The analysis in the “Achieving Success with Target Date Funds” article assumes the same kind of early investment(s), but uses Monte Carlo simulated returns in a portfolio of all small-cap value plus emerging markets then diversifies adding the rest of the Ultimate Buy and Hold asset classes as well as fixed income in the later years. It also only runs to age 65. Even so, the initial $3,000 investment at birth more than doubles the end balance for someone who contributes $10k/year (increasing with inflation) throughout their working years.
Why do the Target Date Portfolios not use RZV for US Small-Cap Value?
In preparation for the Target Date Portfolios release, we reexamined the US Small-Cap Value options and found that a combination of SLYV and VBR reduced the expense ratio, increased the number of equities in this category from <150 to >1,000, and provided index diversity (CRSP and S&P 600 Small Cap Value indices). We will be updating the Best-in-Class ETF recommendations and funds in the rest of Paul’s Motifs soon.
Paul recently did a podcast in which he made a case for VIOV being a better choice than VBR for US small-cap value. Why are you recommending VBR as part of the Target Date Portfolio?
In that podcast, Paul was only considering Vanguard funds. When we take a broader look at all ETFs, we feel that SLYV (or IJS for taxable accouts) is a better choice of fund for the S&P Small-Cap 600 Value index. VBR is based on the CRSP US Small Cap Value index which also complements SLYV nicely. VBR holds 842 stocks, of which only 236 overlap with SLYV’s 442, so together they provide exposure to 1048 stocks, and the overlap is only 16% by market capitalization weighting.
Have you changed the selection criteria for best-in-class ETFs?
Yes. We have expanded our analysis to include additional factors shown by academics to influence returns. The primary factors are still size and value, but we added momentum and quality since these can help or hurt getting the expected premiums from size and value. All of this is covered in the updated article found here.
When the Motifs are updated with the new small-cap value funds, are there reasons to not adopt or accept the update?
There is a fee to rebalance, so if you plan to rebalance once per year, you could wait and do it then to avoid the additional fee. In a taxable account, there may also be capital gains associated with selling the old fund to pick up the new one. Lastly, you may prefer the smaller, more value-oriented RZV original fund even though it’s less diversified and has exhibited negative momentum in the past. The choice is yours.