To date, I haven’t written much about Vanguard’s LifeStrategy funds. That’s because I’ve never liked them very much.
But that’s about to change. Vanguard recently announced that over the next few months they’ll be lowering the expense ratios on the LifeStrategy funds (to an estimated range of 0.14% to 0.18%) and eliminating the Asset Allocation Fund from the LifeStrategy portfolios.
Background information: Vanguard’s Asset Allocation Fund is basically their market timing fund. It’s allowed to be 100% in stocks, 100% in bonds, or 100% in cash. Because the LifeStrategy funds included this fund, you could never predict exactly how any of the LifeStrategy funds would be allocated. Personally, I saw that as a significant drawback.
However, once the changes go into effect, each of the LifeStrategy funds will hold a static asset allocation made up of three different funds:
- Vanguard Total Stock Market Index Fund
- Vanguard Total International Stock Index Fund, and
- Vanguard Total Bond Market Index Fund.
The allocations will be as follows:
- LifeStrategy Growth Fund: 80% stocks, 20% bonds,
- LifeStrategy Moderate Growth Fund : 60% stocks, 40% bonds,
- LifeStrategy Conservative Growth Fund: 40% stocks, 60% bonds, and
- LifeStrategy Income Fund : 20% stocks, 80% bonds
Each of the funds will allocate 70% of the stock portion of the portfolio to the Total Stock Market Index Fund and 30% to the Total International Stock Index Fund.
LifeStrategy vs. Target Retirement Funds
Given that the three funds included in the LifeStrategy portfolios are the same three included in Vanguard’s Target Retirement funds, it’s natural to compare and contrast the two fund groups.
One difference is that the most conservative target retirement funds include an allocation to Vanguard’s TIPS fund, while TIPS are not included in any of the LifeStrategy funds. As someone who finds TIPS to be an especially useful tool for retirees, I think this is an advantage for the target retirement funds.
On the other hand, one thing I like about the LifeStrategy funds is that, under their new construction, they’ll be less likely to be misused than target retirement funds.
With target retirement funds, people often (quite understandably) choose which fund to use based entirely on the date in the name. This can be problematic because there’s more to an investor’s risk tolerance than simply his/her age. For example, a conservative investor who expects to retire in 2050 may well be better served by the 2030 fund than the 2050 fund.
In contrast, the names of the LifeStrategy funds are much more intuitive, and I think this will be helpful for many investors.
The biggest difference between the target retirement funds and the LifeStrategy funds is that the LifeStrategy funds have a static allocation rather than one that changes over time. Shifting to a more conservative allocation over time is the conventional approach, but my understanding is that the jury is still out on whether or not that’s actually any better than a static allocation.
LifeStrategy vs. Vanguard Balanced Index Fund
There’s also an easy comparison to draw between the LifeStrategy Moderate Growth Fund and the Vanguard Balanced Index Fund, as they each hold a static 60% stock, 40% bond allocation.
The primary difference between the two is that the LifeStrategy fund has an international allocation, while the Vanguard Balanced Index Fund does not. Personally, I see this additional diversification as a distinct advantage of the LifeStrategy fund.
The Balanced Index Fund has an advantage in that it offers Admiral shares, which allow for lower costs. But we’re talking about a difference of a few hundredths of a percent — not exactly a huge amount.
LifeStrategy vs. DIY Allocation
As compared to a do-it-yourself portfolio of individual Vanguard index funds, the costs of the LifeStrategy funds are likely to be slightly higher as a result of not offering Admiral shares. But again, the difference is quite slim.
A more important point is that, if you’re investing in a taxable account, the LifeStrategy funds are going to be less tax-efficient than a do-it-yourself approach for a few reasons:
- They’re “fund of funds,” which means they’re ineligible for the foreign tax credit,
- There’s less ability to tax-loss harvest than there would be with a DIY portfolio of the three underlying funds,
- They use taxable bonds, while tax-exempt muni bonds would be a better choice for high-tax-bracket investors, and
- They get in the way of an asset location strategy.
If you’re looking for a specific allocation that’s not provided by any of the LifeStrategy funds, then you’ll obviously have to craft that allocation on your own. And if you’re investing in a taxable account, you could save some money on taxes with a DIY, fund-by-fund portfolio rather than an all-in-one fund.
But for investors looking for a low-cost, low-maintenance way to implement a diversified portfolio in a tax-sheltered account (401(k), IRA, etc.), Vanguard’s improved LifeStrategy Funds look like they’ll be an appealing choice.