Perspectives : Investment | August 30, 2023

How investor behavior factors into our TDF portfolio plan 

Read time: 14 minutes

How does Vanguard construct target-date funds? What are most target-date fund investors looking for, and how does Vanguard help them get there? Roger Aliaga-Díaz, chief economist for the Americas and head of portfolio construction, and Michael Roach, senior manager and head of multiasset portfolio management, answer these questions and more as they discuss their newest roles at Vanguard. 
Aliaga-Díaz and Michael Roach are co-managers on several Vanguard multiasset strategies, including the $1.19 trillion* Vanguard Target Retirement series.
*As of June 30, 2023.

What is Vanguard’s approach to constructing target-date funds? What differentiates Vanguard Target Retirement Funds from their competitors?

Aliaga-Díaz: We use a simple, straightforward approach to portfolio construction, blending behavioral insights with well-established portfolio and life-cycle investment theories. We’ve spent years studying client behavior, and the insights gleaned have led us to take a more transparent approach to the development and management of target-date funds. At the same time, this knowledge of investor behavior has given us the tools needed to enhance our Vanguard Life-Cycle Investing Model (VLCM), which provides a rigorous framework for evaluating our glide-path decisions and ensuring they remain appropriate for investors.

Roach: Furthering Roger’s point, we use the years of research he mentioned to build a suite of portfolios that fit our clients’ needs. Our clients are largely saving for retirement, many through their employer’s retirement plan, so we want to ensure that from a fiduciary standpoint, our target-date funds check the necessary boxes.

In general, what are fiduciaries looking for? First, there’s cost—and not just an investment that is low cost, but a commitment to lowering the cost of investing over time. We’ve been able to demonstrate consistent cost reduction since we launched these portfolios more than 20 years ago. Second is consistent performance, which we’ve shown over multiple different market cycles. Third is broad market exposure, which we obtain through an allocation to several very broad, very deep index-tracking building blocks, which provide exposure to the total domestic and international stock and bond markets. And finally, there’s the massive wealth of expertise that our team brings to managing these portfolios. Our Equity Index Group has been managing passive portfolios for more than four decades, and the average tenure for our group is more than 13 years. We couple this with portfolio construction and asset allocation expertise from Roger’s team in our Investment Strategy Group. All of this means that Vanguard’s best ideas find their way into these portfolios. 

There have been some recent changes to the named portfolio managers on Vanguard’s multiasset funds of funds, including Target Retirement Funds. These changes include the addition of your roles. Tell us about your backgrounds—how you came to Vanguard, the experiences you’ve had here, and, finally, your expectations for how these changes could enhance investor outcomes.

Aliaga-Díaz: I’ve been at Vanguard for 16 years, and I’ve spent that time in the Investment Strategy Group. I originally joined as an economist—and to this day, I still spend time on economic analysis—but I’ve since expanded into research and efforts related to portfolio construction. I’ve been involved in developing some of our proprietary simulation models, including the Vanguard Life-Cycle Investing Model, which we use to evaluate and analyze our target-date funds. Currently, I lead the portfolio construction research function within the Investment Strategy Group, which is a global team of about 20 people across the U.K., Australia, and the U.S. The team is dedicated to researching and constructing our target-date funds, including the development of the glide path that these portfolios are built upon.

Then there’s this newest collaboration with Mike, which is a really exciting opportunity to enhance the partnership across our departments. The multiasset space has long operated with input from many teams, but this new organizational structure really formalizes that. Together we’re looking over the asset allocation lineup, conducting annual revisions, and working with Vanguard’s Strategic Asset Allocation Committee (SAAC) to ensure that these portfolios continue to meet the needs of our investors. The new structure makes our process more rigorous but also easier to understand from the point of view of our external stakeholders.

Roach: I just hit my 25-year Vanguard anniversary on June 1. I came here right after I finished my undergraduate degree, and my first role was as a customer service representative on the retail phone line. I talked to our clients every day, which is an experience that sticks with me today, especially as I’m managing money.

From there, my ambitions led me to a role in our Portfolio Review Department, where I was responsible for the oversight of our money managers, which included the search for potential new managers. That experience helped me hone my own investment philosophy, which was helpful when I later moved into a portfolio manager role in the Quantitative Equity Group, which is Vanguard’s internal actively managed equity team. In between those roles, I ran the equity risk management team, which offers independent oversight of our equity investment processes. The skills that I developed through my career at Vanguard are directly applicable to my new role here as the head of multiasset portfolio management.

What criteria do you consider when constructing an asset allocation strategy? Are there particular investment types best suited for these portfolios? Are there investments you aim to avoid?

Roach: From a high level, there are several key questions we ask ourselves when developing a product or an asset allocation. The first question is this: What’s the long-term, enduring investment merit of a particular strategy? And then, can we implement it in a scalable fashion? Is it relatively simple to explain? And finally, can we provide it at a reasonable cost? These are the four initial filters that any idea needs to pass through.

Aliaga-Díaz: Another key consideration for target-date funds is the glide path. We design our glide path so that it’s appropriate for the risk profile of the portfolio’s typical investor. We serve an extremely diverse population. They have the common goal of retirement, but beyond that, there are many risk profiles represented. That’s why, when developing our glide path, we consider the most conservative investors. We don’t design for the middle of the road. Retirement savings decisions are highly consequential for a large part of the population, which makes designing a glide path that represents age-appropriate levels of risk a primary goal. 

Target-date funds can be seemingly complex by nature, developed to carry an investor through the asset accumulation, protection, and ultimately distribution phases of a wealth journey. What steps does Vanguard take to develop, monitor, and update a glide path aimed at balancing risk and return through various life phases?

Aliaga-Díaz: We view our Target Retirement Funds as outwardly simple yet inwardly sophisticated. There are so many dimensions that need to be considered: What are an investor’s retirement goals? How much will cover their basic expenses? How much might they want for discretionary spending? Is there a desire to leave a financial legacy? We as managers must consider all of the investors and the spectrum of circumstances, contribution rates, retirement ages. Then there are the impacts of assets outside of the retirement plan, an investor’s attitude toward risk, and concerns about loss aversion. There are so many facets to consider, which is why we think a formal framework, or model, is necessary. It’s impossible to solve for all these dimensions without one.

Our Vanguard Life-Cycle Model was developed in response to these questions and considerations. The framework was built from a blend of science, behavioral insights, and the many years of experience we bring to the investment management table. Any new ideas—or changes to existing ones—are stress-tested by our Strategic Asset Allocation Committee, which is composed of global investment leaders from across Vanguard. The committee also annually reviews current allocations to make sure they remain appropriate for our target-date fund investors. 

The VLCM framework

Source: Vanguard.

Roach: From a monitoring perspective—and this is very important—Roger and his team are focused on the long-term success of the portfolios. They’re looking at the strategic asset allocation, thinking about the glide path, and considering the long-term design that best meets the needs of retirement savers. And then my team, from a day-to-day implementation standpoint, ensures we adhere to that strategic asset allocation. We strive to stay as close to the glide path as possible while also trying to limit transaction costs that can be associated with portfolio rebalancing.

In addition, robust, independent oversight of these processes is provided through our Investment Management and Finance Risk function and Portfolio Review Department. These teams monitor everything from our daily risk exposure to the overall health of our products to ensure they are functioning as intended. 

How do target-date funds—and Vanguard Target Retirement Funds in particular—perform during different market environments? Do you make changes to asset allocation as market conditions change? Why or why not?

Roach: These portfolios are designed to weather all types of market conditions, specifically over the long term. They’re coming up on their 20th anniversary in October, and in that time have weathered many so-called once-in-a-lifetime financial events, including the global financial crisis of 2008 and the post-COVID downturn in 2022. We have a strong belief in diversification as a key to risk mitigation, and these portfolios provide exposure to roughly 90% of the global liquid investable market. That said, we do take a less aggressive posture when positioning these portfolios compared with many of our peers. Our hope is that we’ll see less of the downside during market downturns but still be able to achieve meaningful upside participation, which should maximize the likelihood of investors meeting their goals.

Importantly, we don’t make tactical changes to try to capture short-term wins. For us, it’s really about the consistency of performance year in, year out that tends to lead to top-tier performance over the long term.

Aliaga-Díaz: That’s right. The investment horizon for target-date funds can be very long, possibly decades. Market volatility tends to be short-lived and much shorter than the time horizon of these portfolios. We change allocations based on investor characteristics and long-term return projections, not short-term market conditions. This allows us to play the long game, which we believe is the way to build retirement wealth.

Vanguard as a company was built upon the idea that cost savings can dramatically increase an investor’s overall chance of success. In what ways do Vanguard Target Retirement Funds help return value to shareholders?

Aliaga-Díaz: We’ve proactively lowered the cost of investing in our Target Retirement series by more than 70% since inception.* And what’s more incredible, the industry has followed our lead, which is a great thing for our investors—they can keep more of their hard-earned money.

How Vanguard returns value to shareholders by lowering costs and reinvesting in the business

Source: Vanguard data from December 31, 2003, through December 31, 2022. Franchise assets include Vanguard Target Retirement Funds and Trusts.
Roach: In addition to directly returning value to investors through expense ratio reductions, we also return value indirectly through enhancements to our trading strategies, portfolio rebalancing optimization, and shareholder-friendly securities lending. All of these can add back basis points of value each year, and that can compound over time, leading to real added return for our investors.

*Average Vanguard Target Retirement Fund expense ratio as of December 31, 2003: 0.23%. Average Vanguard Target Retirement Fund expense ratio as of December 31, 2022: 0.07%.

Note: This interview was edited for length and clarity. 


  • For more information about Vanguard funds, visit to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
  • Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Fund has a fixed investment allocation and is designed for investors who are already retired. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
  • The Vanguard Life-Cycle Investing Model (VLCM) is designed to identify the product design that represents the best investment solution for a theoretical, representative investor who uses the target-date funds to accumulate wealth for retirement. The VLCM generates an optimal custom glide path for a participant population by assessing the trade-offs between the expected (median) wealth accumulation and the uncertainty about that wealth outcome for thousands of potential glide paths. The VLCM does this by combining two set of inputs: the asset class return projections from the VCMM and the average characteristics of the participant population. Along with the optimal custom glide path, the VLCM generates a wide range of portfolio metrics such as a distribution of potential wealth accumulation outcomes, risk and return distributions for the asset allocation, and probability of ruin, such as the odds of participants depleting their wealth by age 95.
  • The VLCM inherits the distributional forecasting framework of the VCMM and applies to it the calculation of wealth outcomes from any given portfolio.
  • The most impactful drivers of glide path changes within the VLCM tend to be risk aversion, the presence of a defined benefit plan, retirement age, savings rate and starting compensation. The VLCM chooses among glide paths by scoring them according to the utility function described and choosing the one with the highest score. The VLCM does not optimize the levels of spending and contribution rates. Rather, the VLCM optimizes the glide path for a given customizable level of spending, growth rate of contributions and other plan sponsor characteristics.
  • A full dynamic stochastic life-cycle model, including optimization of a savings strategy and dynamic spending in retirement, is beyond the scope of this framework.
Roger Aliaga-Díaz, Ph.D.

Global Head of Portfolio Construction and Chief Economist, Americas

Michael Roach, CFA

Senior Manager, Head of Multi-Asset Portfolio Management