Last Monday’s article caused a bit of a hullabaloo. Many readers were surprised to hear that my wife and I had elected to swap our old portfolio in exchange for Vanguard’s LifeStrategy Growth Fund. Today I wanted to take one more crack at explaining the reasoning and answer some related questions.
Why We Did It
If you look at the logo at the top of this site, you’ll notice that the site’s tagline is, “Simple, Low-Maintenance Investing.”
In short, the purpose of the change was to make our portfolio simpler and lower-maintenance — both of which I value for their own sake and for their assistance in preventing mistakes.
But I Am Not You
Some readers were (understandably) confused as to how to apply the article to their own portfolio. The truth is, I hadn’t really meant for anyone to do that.
The point of the article was simply to share a change that my wife and I had made and to explain our reasoning — because I know many readers find that sort of information interesting. There was no intention to suggest that you should be using an “all-in-one” fund for your own portfolio.
In other words, while I value a portfolio that is simple and low-maintenance, that doesn’t necessarily mean that you should. Perhaps you don’t mind rebalancing between several funds. And perhaps you are never tempted (as I am) to make changes that are likely influenced by recency bias.
Smart People Make Mistakes (Sometimes)
Some readers were surprised to hear me say that I worry that I’ll make a big investment mistake someday. To be clear, I’m not worried that I’ll suddenly pull everything out of our index funds and invest it in a single stock or anything along those lines. I’m far more worried about the smallish, performance-chasing, “tinkering” type of mistakes (which can add up over time).
Still, I’ve seen very smart, financially-educated people do some obviously-stupid things when it comes to their own money. This perplexes me. I do not have a satisfactory explanation for it. And I’m therefore reluctant to assume that I am — and always will be — totally immune to it. So anything I can do to automate success seems advantageous to me, especially when the cost is so little.
…which brings us to my next point:
Asset Allocation Is Not a Precise Tool
Some readers wanted to know why I was happy to change to an allocation other than the one I’d hand-selected before.
For reference, our old allocation was:
- 40% Vanguard Total Stock Market Index Fund,
- 40% Vanguard Total International Stock Index Fund,
- 10% Vanguard REIT Index Fund, and
- 10% Vanguard Intermediate-Term Treasury Fund.
But I would have been happy with any of several different bond funds for the bond allocation (e.g., Vanguard’s TIPS fund, their Short-Term Treasury fund, their Short-Term Federal fund, their Short-Term Bond Index fund, their Total Bond Market fund, or their Intermediate-Term Bond Index fund).
Similarly, I would have been happy without a specific allocation to overweight REITs. Or with an allocation to overweight small-cap/value stocks. Or with Vanguard’s Total World Stock Stock ETF for the entire stock portion of the portfolio.
You get the idea.
In other words, the LifeStrategy Growth Fund’s allocation is not the allocation I would have used if I’d been put in charge of building the LifeStrategy funds. I am, however, satisfied with it — as I would be satisfied with any of a hundred other allocations. (Note: This view that numerous different allocations would be acceptable is a part of what leads to my temptation to tinker.)
Asset allocation is not a particularly precise instrument, and I’m skeptical of attempts to treat it as such. (The only way to give it precision is to use specific assumptions about asset class returns — that they will look like historical returns, for instance. Of course, most assumptions we make will be wrong in one direction or the other.)
I Cannot Predict the Future
Other readers were puzzled about how I plan to use this fund — which doesn’t change its allocation at all — as a part of a long-term plan that shifts to become more conservative with age.
The first part of the answer is that I don’t expect to change our allocation any time soon. While I think rules of thumb like “have your age in bonds” can be useful as a starting point for planning, I certainly don’t think there’s any need to stick to them so rigidly that you move precisely 1% of your portfolio from stocks to bonds every year.
The second part of the answer is that, while I plan for our allocation to become more conservative as we move toward retirement, I don’t know the specifics. I can’t know them.
I can’t know, because:
- I don’t know what investment products will be available over the next few decades (e.g., will the Treasury continue to issue TIPS? Will insurance companies continue to offer inflation-adjusted lifetime annuities?), and
- I don’t know how our circumstances will change over the next few decades (e.g., what portion of our portfolio will be in taxable accounts as compared to retirement accounts?).
Without knowing those things, there’s no way I can say precisely what allocation I’ll want to use many years from now. I’m happy to say, “this is good enough for now, and I’ll reevaluate the decision as things change.”
Hi. I'm Mike Piper, the author of this blog. I'm 
Wow, I hadn’t looked back at the previous post–nice discussion! I think I’m going to take your quote: “As to embracing simplicity for simplicity’s sake, you bet I do,” and put it up on my wall.
My retirement savings are split fairly equally between Vanguard and my wife’s employer plan, which has no good all-in-one funds. If and when she rolls that money over, I’d be happy using the LifeStrategy funds, too. In fact, very similar funds have been available for a while inside Vanguard’s 529, and we do own one of those funds there.
Hehe. I’m glad you liked that quote. 🙂
And yes, it’s been quite a discussion. Based on the level of surprise that some readers exhibited (for a change that was, in my mind, perfectly in keeping with the overall philosophy of this blog), I can’t tell to what extent I did a poor job with the initial explanation as opposed to doing a poor job in the past by misrepresenting my views.
I should also note that, while they didn’t merit the same level of reply (because they had no questions that needed answering), approximately 2/3 of the total responses were similar to what you just said above — that they use an all-in-one fund in some way, or that they would do so if circumstances allowed.
Mike
Many thanks for posting this important message! I’m going to work these ideas in particular into our Investment Policy Statement:
“Asset allocation is not a particularly precise instrument, and I’m skeptical of attempts to treat it as such.”
“…don’t think there’s any need to stick to them so rigidly that you move precisely 1% of your portfolio from stocks to bonds every year…”
I have rebalanced our accounts yearly, including [by luck and sticking to our IPS] in March 2009, and even after recent market history and volatility have come to believe that in most cases yearly rebalancing is mostly “nibbling the edges” and mostly good discipline [over 5, 10 years or longer accounts could be expected to get far more out of balance].
There are many different low cost roads [i.e. asset allocations] to a successful retirement. As you point out, various passive investing strategies [such as a slight small and/or value and/or REIT tilt] which have worked in the past, are not “sure things” for the future, but are perfectly reasonable – there is no single perfect allocation for anyone let alone for everyone.
Single all-in-one-funds are usually mentioned for novices, but they are OK for experts like you, as well for folks who do not want to spend time or energy on investing. If anything happens to me, an interested investor, I have instructed my [investing adverse] wife to transfer everything to one of these all-in-one funds [but only at Vanguard 😉 ]. Also, I am currently in my early 60s, but if I ever lose interest in managing our investment portfolios, for example when I am 70 or 80 or whatever, one of these choices would be a great option for our 100% tax sheltered accounts.
Best wishes for a healthy and happy and prosperous New Year to you and your family!
Jim
Happy and prosperous New Year to you and your family as well, Jim. 🙂
Thanks for reading.
Mike
Why did you move only your retirement funds into the LifeStrategy Growth Fund? What do you think of the fund (or one similar) for one’s taxable portfolio?
Thanks.
Nancy,
For us, all of our retirement savings are in retirement accounts. (Because both my wife and I are self-employed, we’d be eligible to contribute approximately $50,000 per year to retirement accounts — more than we have the cash flow to do.)
In general, if you have taxable accounts, I’d suggest avoiding the LifeStrategy Funds (as opposed to a DIY-allocation using a few index funds) for a few reasons:
Mike,
I all to well understand your need to ‘Tinker’ with your AA. It’s a compulsion that I also have problem with.
Mike,
About 8 weeks ago, you wrote a column about Avoiding Big Investment Mistakes. If one has the option of an all-in-one, auto-rebalancing fund of ultralow cost index funds for one’s 401-K or IRA retirement savings, that seems like a simple and easy to avoid the big mistakes.
Your case for a rational fear of “tinkering” is what I don’t really get. Still.
Since most 401ks don’t provide access to all-in-one funds as low cost as the LifeStrategy funds, at some level tinkering remains a valuable DIY skill so many of us can — with both confidence and realism — allocate assets and rebalance. As you mentioned, a DIY mix of a few index funds also tends to be clearly preferably to an all-in-one fund when investing money outside of tax-advantaged accounts. Even if we distinguish managing a handful of simple index funds to achieve a fixed asset allocation from tinkering, I don’t understand why you’d fear tinkering so much — except as a time sink!
Even Vanguard tinkers with their all-in-one funds, as the history of target asset allocations / trajectories for their LifeStrategy or Target Retirement funds reveals. Those of us who are prone to tilt 5% towards the hot investment each year are rolling the dice just the same as any contrarians who tilt 5% away from the hot investment each year. Sometimes momentum wins, sometimes reversion to the mean wins. Those who stand pat, with or without rebalancing, still have to live with the dice roll each year. When you recently switched to an all-in-one fund with 15% less exposure to struggling international equities than your prior allocation, that quite possibly was more substantial tinkering than you had done in years, and you were locking in a loss relative to what the updated asset allocation would have provided. We each pay our money and take our chances on such modest tinkering decisions. Such small bets shouldn’t change the probable risk-return characteristics of our still well-diversified portfolios greatly, no?
Over the long-term, would you not agree that tinkering mostly tends towards a zero-sum game (exclusive of tax and trading costs if any, and exclusive of any real cost savings we find like Admiral shares)? The time we spend tinkering is lost forever — but if tinkering is a hobby or a source of education, then it is not time wasted.
Hi Mike,
One thing that hasn’t been discussed is how often these funds rebalance, and how it affects an investor’s tax situation. Can you provide any information about this?
I am not a tax expert, but I think that if I rebalance my own portfolio more frequently than once every 365 days then the resulting proceeds would be considered ordinary income, and taxed at a potentially higher rate than if I held off rebalancing to at most once a year (where the proceeds would be taxed at the capital gains rate).
Are investors taxed the same way when investing in funds of funds? If so, does Vanguard have a rebalancing strategy that aims to take advantage of this fact? Do they even state what their rebalancing timing strategy is?
Thanks.
Anon,
Yes, you have hit on one of the disadvantages of “funds of funds” in taxable accounts. Most are not managed with tax consequences in mind, so no point is made to avoid short-term capital gains.
With regard to the LifeStrategy Funds and Vanguard’s Target Retirement Funds, they’re rebalanced daily, which is clearly not ideal in a taxable account.
Mike,
I think you and/or others in one of your blogs recommended VBLTX. Any thoughts on why Vanguard only gives it 3 stars and Morningstar’s Take is: “This fund’s high-flying returns can’t continue forever” ?
Thanks.
Hi Mike!
First of all, a belated Happy Holidays to you! For the last few months, I have really struggled with learning, analyzing, and applying the vast amounts of information out there on investing. Every day, I read a ton of personal finance articles from a multitude of sources and blogs. And every day, I get more and more exasperated with how much information is out there.
I freely admit that I am an investing novice. I have learned quite a bit in these few short months, but I know now I will never be as knowledgeable and confident about this topic as I thought I would. I thought ideally I would devour all of this information and magically become some kind of guru that can pinpoint the exact percentages of my hypothetically successful portfolio.
However, what I’m left most confident about is that all I really desire is a K.I.S.S approach. Keep It Simple, Stupid. Your post has really resonated with me regarding this. I don’t want to monitor stock charts and dig through Google for contradicting investing information just so I can become even more paralyzed at the thought of choosing a mutual fund or an ETF. All I want is what you’ve been saying loud and clear: simple, low-maintenance investing.
I am now relieved to say that the last few months of restlessness is now coming to an end. I have just now moved my portfolio to a Vanguard all in one fund and washed my hands of what was seemingly an impossible task for me. I know you said that your post wasn’t meant to influence anybody but rest assured all it did was give me the motivation to do what I should have done from the beginning.
Thanks for saving at least one brain from a total meltdown. I think I’ll finally get a good night’s sleep. 🙂
Nancy,
As to the Morningstar rating, I wouldn’t really put much stock in that. As discussed here, even Morningstar doesn’t intend for star ratings to be a predictor of performance.
That said, I’d say it’s true that Vanguard Long-Term Bond Index Fund’s “high flying returns can’t continue forever.” A large part of the fund’s return in recent years has been due to bond price increases resulting from falling interest rates.
As discussed here, the fact that VBLTX has a long duration (~14 years) means that it will move a great deal in response to interest rate changes. If market rates were to rise dramatically (please understand that I’m not saying they necessarily will — I have no idea), this fund’s price would fall rather sharply.
Eric,
Thank you for taking the time to write that comment. It’s great to read about it when people find the blog helpful. 🙂
Mike, what evidence have you seen that the V Target Retirement funds are rebalanced daily? Their composite TR benchmarks seem to only be updated monthly, and their target allocations are only updated yearly, so I don’t see any incentive for the funds to rebalance more than monthly at most. [The Bogleheads forum didn’t find a better answer to this than per Vanguard’s undocumented discretion.]
William J. Berstein has concluded that monthly rebalancing is too frequent for optimal returns, even when ignoring transactional costs.
Dale,
I asked exactly the same question on the Bogleheads forum recently. The answer from Vanguard, relayed by Mel Lindauer, was that yes they do rebalance daily.
And I agree that that’s probably not an advantage.
Thanks, Mike, I missed that you had reopened that Bogleheads thread recently. I crunched the available 2011 numbers from Vanguard and they surprised me.
Apparently due to their daily rebalancing, the Vanguard Target Retirement Funds AND their composite TR indices are outperforming what a typical lazy portfolio investor would have achieved by using the component Vanguard funds at their target asset ratio to start 2011. The TRF indices (through 11/30/2011) increased by up to 0.60% for TR2020 or 0.44% for TR2030 (which approximates the new LifeStrategy Growth fund) when compared to the simple statically weighted sum of YTD performances for the underlying 3 very broad indices.
This free lunch due to daily rebalancing might be a 2011 exception rather than the rule. Regardless, it confirms that the ~0.06% annual ER extra cost of the Vanguard all-in-one funds compared to DIY implementation with Admiral shares or ETFs tends to get lost in the noise. Simplicity wins.
Mike
I am UK resident who often reads your posts along with those of Monevator (based in UK). Between the two of you I am kept up to date and informed. I thought I would let you know that I have recently moved all my retirement funds into the Vanguard UK LifeStrategy 60% Equity fund for the very same reasons expressed by your good self. My decision/move coincided with your posts. Your actions have confirmed my decision and reassured me that I have reached a sound conclusion for my family’s finances. Also I wish to commend you on your excellent books which I purchased from Amazon and often refer to when discussing finances with friends and colleagues. Finally, keep up the sterling blog and best wishes from the other side of the pond for 2012.
Dale,
With regard to rebalancing frequency, the arguments (and historical data) are across the board as far as I can tell.
Otar’s data shows that rebalancing every 4 years on presidential election cycles is best. And that seems to roughly agree with Bernstein’s observation that returns tend to exhibit positive autocorrelation over periods of less than one year, and negative over periods of greater than one year.
On the other hand, I think a great argument can be made in favor of the rebalancing bands method. And I’ve seen one study that shows that, when using bands, checking (though not necessarily rebalancing) daily works best.
Personally, I’m not particularly confident in any one particular method’s likelihood of outperforming the other methods over any particular period in the future.
William,
I hope that the LifeStrategy selection works out well for both of us. 🙂
Monevator is one of my favorite blogs. He and I don’t see exactly eye-to-eye with regard to investing (though the posts by his co-writer, “The Accumulator,” do seem very in-line with my general philosophy). But he writes well, and I enjoy the variety of opinion. Also, I know from email correspondence with him that he’s a very kind/helpful person.
Daily rebalancing is an interesting feature of Vanguard’s new LifeStrategy and Target Retirement funds. I’m guessing that it’s going to allow TR2020 to achieve a small gain for 2011 while a Lazy Portfolio investor who copied the TR2020’s target allocation using the three underlying index funds just before the year started and then did nothing will end up with a small loss for 2011.
2011 happened to be a good year for daily rebalancing because there was a strong negative correlation between stocks and bonds, AND because US Equities reverted to the mean after modest excursions in both directions. In retrospect, it only took about a 70 trading day lag for the autocorrelation in the broad US equity index to turn negative for 2011, while I’m guessing many if not most individual years show consistently positive autocorrelations for US Equities regardless of the lag chosen.
For Oblivious Investors, if markets are going to show high volatility but not particularly go anywhere, daily rebalancing tends to improve returns.
As far as I know, the Vanguard funds of index funds are the only ones around that include that simple feature.