Thursday, May 12, 2011

Opening the Door to New Investors

I was excited to hear news out of Vanguard yesterday that they've lowered their minimum initial investments for their Target Retirement funds to $1,000 from $3,000. This is encouraging news as many young investors find it difficult to invest large amounts of cash at one time. This reduction in initial investment will open up some of Vanguard's most interesting offerings to new investors. 

At their core, target retirement funds set a specified retirement year - 2040 for example - and invest the fund's assets for an investor planning to retire in or around that year. Right now, the 2040 fund has 89.96% of assets invested in stocks, 9.98% in bonds and 0.06% in short-term reserves.

Ultimately, as 2040 approaches, the fund's managers will decrease the amount of equities in the portfolio in order to lower the fund's risk profile. Even better, the Target Retirement funds are funds of funds which own index funds and not individual stocks. This news is a welcome development for investors for another reason: as Vanguard attracts more assets, they benefit from economies of scale and will continue to lower fund expense ratios which benefits all investors.

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