Wednesday, August 18, 2010

Gen Y Rejoice: Vanguard Opens 2055 Target Retirement Fund

I woke up to some very interesting news this morning on - the mutual fund giant is launching a 2055 Target Retirement Fund. Yes, that's 45 years away! This fund is designed for the youngest Gen Y investors, those between the ages of 18-22. The goal behind this offering is for the fund to be a one stop shop for young investors who want much-needed diversification in their portfolios, but are unsure of how to get there. The fund doesn't own individual stocks outright. Instead, as a "fund of funds", it owns five other Vanguard index funds with the largest percentage of fund assets allocated to the Vanguard Total Stock Market Index (VTSMX) at 71.8%. The fund also has bond and international exposure.

As the "Target Retirement" date of 2055 nears, the fund continues to lessen exposure to riskier assets like international equities and moves a higher percentage of assets into relatively safer areas like bonds. Vanguard states that  the fund, "begins annually reducing stocks and increasing bonds around 2031." This should make the fund a favorite among many younger investors who would like to diversify, but aren't quite sure where to start because most of the work of diversification and rebalancing is done for them. This new offering signals the first time that a "Life-Cycle" fund has been marketed to 18-22 year old investors by a fund company as large as Vanguard.

While I'm not specifically endorsing this fund, I think its creation is an outstanding development for two reasons: 1). The largest financial players are now recognizing the importance of marketing their offerings to Generation Y - in this case, the youngest Gen Y's out there 2). The 0.19% expense ratio of the fund is very low and will certainly draw other Gen Y's into indexing as they realize it's the most cost effective way to build wealth over the long-term

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