The Wrong Fund, Right Date
Not because the funds are bad investments. Because they are the wrong investment for the investor who owns them.
Here is how it happens. You pick the year you think you'll retire. You buy the fund with that year in its name. 2040? Buy the 2040 fund. Set it. Forget it.
It sounds sensible. It is, in fact, one of the more expensive mistakes an investor can make — and most of them will never know it happened.
Understand what a target date fund actually knows about you: your retirement year. That's all.
It doesn't know what you'll need from your portfolio in year one of retirement, or year five, or year twenty. It doesn't know your other assets, your spending, your family, your temperament. It knows a number on a calendar. And it builds your entire portfolio around that single number.
This is not financial planning. It's a Jedi mind trick dressed up as one: buy me, because I'm easy.
Consider Mike. Forty-five years old, an engineer, planning to retire at sixty — fifteen years to go before he touches a dollar of this money. He has $1 million invested in the Vanguard 2040 Target Date Fund, a fund that today holds 25% of his money in bonds.
Since July 2021, that portfolio has grown to roughly $1.49 million — an annualized return of about 8.4%.
Had Mike instead owned a low-cost, globally diversified equity fund — DGEIX — that same million would be worth closer to $1.7 million today. An annualized return of about 10.8%.
Same investor. Same fifteen years. Two hundred thousand dollars apart — and counting — because of one decision made by a fund manager who has never met Mike and never will.
Now, someone will tell you the target date fund is "less risky" because it owns bonds. I want you to look hard at that word — risk — because everything here turns on what you mean by it.
If risk means the permanent loss of capital, ask yourself this: what would have to happen for five hundred of the largest, most productive companies on earth to go to zero — permanently? Not decline. Not fall out of favor for a decade. Go to zero, permanently, all five hundred, together.
And if you can imagine that scenario — truly imagine it — ask the next question. What happens to your cash, sitting at your local bank, in that same scenario? What happens to the bonds in your "safe" portfolio, issued by companies now worth nothing?
There is no version of that story where stocks go to zero and your cash and bonds do not.
A single company can go to zero. Enron did. Lehman Brothers did. Kodak did. Five hundred of the world's best businesses, together, permanently? That is not a risk. That is fiction.
What can happen — what does happen, regularly — is that a well-diversified portfolio of great businesses declines sharply and temporarily. That is not the same thing as loss. It only becomes loss the moment you sell.
And that is the actual risk in Mike's target date fund — not the bonds, not the stocks, but the illusion that a temporary decline in value is something to be defended against fifteen years before he needs the money.
Ask yourself the only question that matters: does your lifestyle change, in any way, the day your account drops 20%?
If the money is not needed for fifteen years, the honest answer is no. Uncomfortable, yes. Consequential, no.
There is a second danger here, and it shows up later — in retirement itself, not before it. A target date fund is sold as a single unit. When you take money out of it, you sell a little of everything — stocks and bonds, U.S. and international — all in the same proportion, whether the market wants you to or not.
That means in a bear market, withdrawing from the fund forces you to sell stocks at exactly the moment you should be holding them — and to sell bonds and cash, precisely what you'd want to preserve, only after the market has already recovered. You lose the one advantage a properly built retirement portfolio is supposed to give you: the ability to choose what you sell, and when.
None of this is an argument against stocks, or against bonds, or even against Vanguard. A recent Vanguard research paper makes the same essential point: asset allocation, not fund selection, is the primary driver of long-term returns.
It is an argument against outsourcing one of the most consequential decisions of your financial life to a calendar.
The antidote is not complicated. It is a portfolio built around your circumstances — your income needs, your time horizon, your other resources — rather than the year printed on a fund's label. And it is an advisor, ideally a fiduciary, ideally a CFP®, who takes the time to understand those circumstances before recommending anything at all.
Fifteen years is a long time. Don't let one number on a calendar decide how those fifteen years are invested.
Source material
- Total Real Returns — totalrealreturns.com/n/VFORX — annual total returns (dividends reinvested), 5-year rolling return, YTD/1-year snapshots
- Yahoo Finance (UK) — uk.finance.yahoo.com/quote/VFORX/performance — quarterly total return breakdown for 2021 (Q1–Q4), used to estimate the Jul 17–Dec 31, 2021 partial-year return
- Dividend.com — dividend.com/funds/vforx-vanguard-target-retirement-2040-inv — YTD/1yr/3yr/5yr total return snapshot
- Vanguard Investor site — investor.vanguard.com/investment-products/mutual-funds/profile/vforx — NAV/price context
- Vanguard Research. When and How Asset Allocation Matters. 2026.
The information presented in this article is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Thompson Wealth Solutions, LLC; an investment adviser registered with the Securities and Exchange Commission.