Last week, my wife and I made a big change to our retirement portfolio — one that we’ve been discussing for a little over two months now.
Background: In September, Vanguard announced significant changes to their LifeStrategy funds (specifically, lower expense ratios and a change to fixed, all-indexed allocations). Those changes have now gone into effect.
The change my wife and I made was to move every dollar of our retirement savings over to Vanguard’s LifeStrategy Growth Fund. It’s now the only fund in our individual 401(k) and our IRAs — with the exception of a portion of my Roth, which, as mentioned before, is in Vanguard’s Short-Term Treasury fund because we use it as part of our emergency fund rather than as retirement savings.
For reference, the underlying allocation for Vanguard’s LifeStrategy Growth fund is as follows:
- 56% Vanguard Total Stock Market Index Fund,
- 24% Vanguard Total International Stock Index Fund, and
- 20% Vanguard Total Bond Market II Index Fund.
Why We Made the Change
The primary reason we made the change was to defend against what I’ve come to see as the biggest threat to our investment success: me.
To be more specific, it’s my temptation to tinker that scares me.
Because of my work, I’m constantly reading about different investing strategies. Most, of course, are nonsense — nothing more than methods of using the stock and bond markets as a lottery. But there are still countless ways to invest that are reasonable.
And when I go to rebalance our portfolio, I’m often tempted to make little changes. Most such changes would probably be fairly benign, like the one we discussed here. But my fears are that:
- One day I’ll do something truly stupid, or
- I’ll bounce back and forth between reasonable allocations, but do so at exactly the wrong times (for instance, choosing to overweight small-cap and value stocks, then bailing out after a period of relative underperformance).
My hope is that this automatically-rebalanced, everything-in-one-fund sort of portfolio will keep me from such temptations — both because I won’t have to execute any transactions other than buying more of the same fund and because that fund is an explicit reminder to myself that I’m not supposed to mess with anything.
I see two other benefits as well:
- It’s less work, and
- It puts my money where my mouth is, given that the whole point of this blog is to show that investing in a simple, hands-off way really can be quite prudent.
A Slightly Different Allocation
Obviously this change adjusts our asset allocation somewhat. Relative to our old allocation:
- We now have 10% less in REITs and approximately 10% more in non-Treasury bonds (mostly government mortgage-backed bonds and investment-grade corporate bonds), and
- We now have 16% less in Total International Stock Market and 16% more in Total (U.S.) Stock Market.
Overall, I think the effect of these changes will be rather minimal. As I’ve said before, asset allocation is a sloppy science. Small shifts one way or the other between asset classes don’t usually make much difference in an investor’s long-term success.
Still, the decrease in international allocation did give me some pause. (In fact, it was really the only thing that made me hesitant about the switch at all.) In general, I’m somewhat more comfortable with a higher international allocation rather than significantly overweighting U.S. stocks relative to their market weight.
In the end, I decided that I’m more worried about a Mike-messing-something-up scenario than I am about a scenario in which the U.S. stock market significantly underperforms the total world market for an extended period.
One potential drawback is that Vanguard could change the allocation of the fund at some point in the future in a way that I don’t like. Because I follow Vanguard-related news fairly closely though, I’m confident I’d hear about any upcoming changes in plenty of time to move out of the fund if we decide the changes don’t make sense for our needs.
Overall Conclusion
As with any change, it has its pros and cons. It’s not perfect. But I like it. I like that it’s simple. I like that it’s easy. And I like that it will (hopefully) keep my meddling hands off our portfolio.
Hi. I'm Mike Piper, the author of this blog. I'm 
Would it not be wise to just construct your own portfolio using the same allocations and take advantage of savings associated with Admiral shares ? The difference in expense ratio is .24! True you would have to rebalance but is the time required once a year not worth the amount saved ?
Tom,
The expense ratio of the LifeStrategy Growth Fund is 0.17%. If we were to implement the same allocation via Admiral shares of individual index funds in our IRAs, the cost would be just 0.11%.
On the other hand, we achieve some cost savings by using the LifeStrategy fund in our individual 401(k) because Vanguard individual 401(k) plans don’t allow for Admiral shares, and the cost of creating the same allocation using Investor shares would be 0.21% per year.
In other words, for us, the overall difference in costs is close to zero. For other investors, the cost difference could be more substantial.
Edited to add: We could use the LifeStrategy fund in the 401(k) and individual index funds in the IRAs, to achieve the lowest cost in both cases. But when measured in actual dollars, 0.06% of our IRA balances is a price I’m willing to pay annually for the additional simplicity. That might change over time as the dollar cost grows.
Tom
It would probably a mistake if not an oversight not to invest in small cap as equal weight as Large cap. And the REIT asset class is a very important diversifies and it match S&P return in the long run if not beat it, should have the weighting between 5 to 20% [ Unconventional success ]. Also total bond lack of TIPS .
Well, Mike, I’m surprised that you of all people would fear doing “something truly stupid.” I suspect that what you’ve done, in practical terms, will have little effect if your overall s/b split is still the same as previously. And you can always “add on” a REIT or small-cap fund later if you feel they have sufficient diversifier effect.
My own feeling is that if you invest in an all-in-one fund, you’re really taking someone else’s (here Vanguard’s) opinion as to what funds you should be in. Whereas if you pick your own, you have greater flexibility. That’s why I’m sticking with 6-7 Vanguard funds that essentially mirror its target funds structure, but let me add on REIT, TIPs, and small-cap funds to round things out. And I try not to touch the allocation other than to add more fixed income as I grow older.
One thing I’d like your comment on is holding bonds at a young age. I know some younger investor who refuse to have any bonds because they feel they can afford to be more aggressive. Maybe so, but in my opinion they lose some diversification benefit as well as, in a tax-deferred account, some funds to buy more stock when the market declines.
Larry,
I think I agree with everything you said.
I agree that the effect of the actual change in allocation will probably be slim.
I agree that all-in-one funds give up the allocation choice to somebody else. As mentioned above, I’m OK with that for now, given that I think Vanguard’s choice within this fund is reasonable for our circumstances. If Vanguard makes a significant change (depending on the change), I’ll go back to individual funds.
And I agree with what you said regarding bonds for young investors. For particularly brave young investors, I think a 100% stock allocation isn’t a crazy thing. But yes, in addition to taking on more risk, they also give up some degree of diversification benefit by lumping everything into one asset class.
Are you allowed to purchase Vanguard equivalent ETFs of your VASGX fund?
Sun,
You can see all the Vanguard ETF options (at least those available in the US) here. There aren’t any equivalent ETF-versions of the LifeStrategy funds or the Target-Date funds. You could, of course, recreate the underlying allocation using ETFs — VTI, VXUS, and BND.
Would you mind taking a stab at recommending/suggesting Vanguard Funds & a suggested asset allocation for someone who is about 5 years from retirement? Would you give the ticker symbols for the funds you suggest, since when I look at various Vanguard Funds I’m often confused by many funds with similar names? And thoughts about what to do over time as retirement approaches and then once in retirement would be helpful. Thanks.
Why not invest in Vanguard’s target retiremen funds instead? That way the asset allocation will automatically become more conservative as you get closer to retirement.
That looks like a fine all-in-one fund, Mike, but I wonder if you are sending the message that you intend with your explanation.
The financial services industry must be very grateful for the tens of millions of Americans who fear tinkering with their own investments, and thus seek their professional but expensive help.
I would suggest that those who are tempted to tinker with their asset allocation should be encouraged to tinker . . . but safely. After all, investing isn’t rocket science. More or less stay the course with a sensible diversified asset allocation [ or trajectory], and keep expenses really low.
As a reward for saving themselves the expenses of active management, I would think DIY investors should feel free to experiment with ~5-10% of their portfolio — depending on how mad they feel like being with their mad money. Unless they invest in something like cattle futures [without great political connections], they will probably still come out ahead in the game.
BTW, did you notice that the Target Retirement 2030 fund currently has almost exactly the same asset allocation and costs as the LifeStrategy Growth fund?
Anon and Dale,
The reason I didn’t use a target retirement fund is that I don’t particularly want our allocation to shift toward a Total Bond fund as we get closer to retirement. More specifically, I’d like to shift a large portion of our net worth to TIPS and inflation-adjusted lifetime annuities.
Of course, that assumes that both of those products will be available 30-40 years from now when my wife and I get close to retirement, which they very well may not be.
Mike, while I am glad to hear that you expect to mature past your youthful fears of tinkering a bit with allocation ratios . . . I interpret what you are really proclaiming is that an all-in-one fund of index funds is a marvelously effective and simple solution for those in the early phases of asset accumulation for retirement.
Nancy,
Without knowing a good deal more information (e.g., your risk tolerance, your tax bracket, how much you have saved in each type of account, the funds available in your retirement plan at work if applicable, etc.) there’s no way to make a suggestion that will necessarily be a good fit for your personal situation.
Personally, I think that a good starting point for most investors is simply to pick how much they want in US stocks, how much in international stocks, and how much in bonds. Then you can put together a simple portfolio using just three index funds. For instance:
Vanguard Total Stock Market Index Fund (VTSAX),
Vanguard Total International Stock Index Fund (VTIAX), and
Vanguard Total Bond Market Index Fund (VBLTX) — or a Treasury fund of your choice.
As discussed in this post, I think a decent way to begin to answer the question of what allocation makes sense for you is to think about how much you can afford to lose. That is, how much would your portfolio be able to decline without you losing sleep?
Then limit your stock allocation to twice that amount.
But again, this is a very, very rough rule of thumb. It’s different from person to person.
My best suggestion would be to stop by the Bogleheads Forum and post your question in the “Help with Personal Investments” section. If you follow the prescribed format, you should be able to get several people providing input on a proposed portfolio.
That fund sounds pretty good. I love the simplicity of your portfolio.
Unfortunately, nothing like that is available in Canada.
Mike,
I got to admit that I am shocked, after reading your blog for some time, that you’d make this move specifically for the reasons you state. At first, I thought this article was an excerpt from one of your readers. LifeStrategy Funds are perfectly fine for those who know little about investing, asset allocation, MPT, and the history of how markets can behave. Most of these people also have little interest in learning about such matters – thus the simplicity and ease of such an all-in-one fund is perfect for their situation, and in many ways protects them for more expensive options that are no doubt thrust upon them by predatory salespeople who target such financially illiterate people.
However, YOU are not among those people! I think the mere fact that someone who writes a financial blog (about doing the right things) would need to “protect himself from himself” against doing something stupid undermines their credibility as a knowledge base. If you don’t trust yourself to stay the course and stick to a specific asset allocation/rebalancing plan, why should your readers trust you to offer advice on how to do just that? Discipline is one of the most important tenets to any good financial plan – admitting that you lack enough of it to stick to a plan is severely discrediting yourself as an advice giver and author. Simplicity is fine, but it rarely is the most effective if you have the knowledge of MPT, and most people embrace simplicity simply for simplicity’s sake.
For the record, I like your blog and we share similar Boglehead philosophies – which is what makes this move somewhat disappointing. You are better than an all-in-one fund – you have the knowledge and background to slice and dice a portfolio to how you see fit (including the REITS ,TIPS, and short-term bonds that are lacking in LifeStrategy), to raise your int’l allocation to a level you are comfortable with, to place each asset class in a tax-effecient location, to tax-loss harvest in taxable accounts, to take advantage of the rebalancing bonus, and to gradually shift to more bonds as you age. All of which you somewhat give up with a LifeStrategy fund. More importantly, you have the discipline to stick with a plan and follow through with it and not constantly tinker with your AA. Because if you don’t, then why again am I reading your blog/book?
It’s always a great idea to tailor your investments to your particular needs, instead of blindly following somebody else’s advice. Thanks for your transparency.
It is a wise man that knows his weaknesses. That’s a quote I try to live with myself. Not sure where I first came across it, but it sure fits a lot of situations.
Brian,
First, as to why you’re reading my blog, that’s up to you. If you no longer find value in it, don’t read it. To be clear, I don’t say this sarcastically or resentfully. I think it’s entirely natural for many readers to eventually move on.
I disagree, of course, that this change undermines my credibility. I’ll try to address your points one by one.
All of our retirement savings are in retirement accounts — and will be for the foreseeable future — so tax-efficient location and tax loss harvesting are not applicable in this case.
As to shifting more to bonds at a later date, I intend to do that. This one fund is clearly not the only fund I ever intend to own. It wouldn’t make sense as the whole portfolio for someone in or near retirement. That said, I hope to be satisfied with this allocation for at least the next several years.
As to embracing simplicity for simplicity’s sake, you bet I do. And I make no apologies about it. I’m happy to give up some returns in exchange for simplicity and have said so several times both on this blog and on the Bogleheads forum.
As to “slicing and dicing how I see fit,” as I said above, I’m satisfied with this fund’s allocation — as I would be satisfied with any of a hundred other allocations. I don’t think that asset allocation is the precise instrument that it’s sometimes made out to be. And I feel no particular need to slice and dice.
As to the topic of discipline, I agree that discipline is an important part of a plan. My natural discipline isn’t perfect. I have no qualms about admitting that.
I anticipate that this change will help me to stay disciplined. That’s precisely the point.
Mike,
I appreciate you taking the time to address my comments. To be clear, anyone certainly has the prerogative to embrace simplicity and construct their portfolio with their own unique weaknesses/strengths in mind. I don’t begrudge someone for utilizing all-in-one funds or TSM/TBM funds. Sure there are several cons in doing so, but sometimes the pros of simplicity and ease can outweigh those.
My main point was that I was surprised that you, as a well-respected financial blogger, had your own issues with discipline, staying the course and staying out of his own way – since these were things you espouse daily on your own blog. I appreciate your candor and honesty in admitting your weakness in this area, but its just not something I expected to hear from someone like you. Personally, having adopted the Boglehead philosophy has helped me stay the course and rebalance my slice and diced portfolio when necessary, no matter how counter-intuitive it seems. An educated investor, which you certainly are, should have the ability and discipline to approach investing in this manner.
Like I said, I enjoy your blog and wish you the best of luck in staying out of your own way.
This decision is no worse than that of financial bloggers who refuse to use credit cards, even rewards cards, because they have learned they cannot trust themselves. That’s not being stupid–that’s having the guts to realize how the numbers would be if they trusted themselves with credit cards. Yes, people SHOULD have perfect discipline in all areas of their life every day, but we are not perfect. Why not give yourself a break in some areas where your continued vigilance would make little difference?
Mike,
What Brian has said is a stronger (much stronger) version of what I said several comments back – when I wrote, “Well, Mike, I’m surprised that you of all people would fear doing ‘something truly stupid.’”
But I find this comment perhaps even more surprising: “I’m happy to give up some returns in exchange for simplicity.” This is something I really don’t get. After all, we choose index funds to increase returns, we diversify to increase returns, etc., and I hardly think having a few index funds as you once had is pushing complexity to an extreme degree. If, for example, holding 5% in an REIT creates a likelihood of greater returns, why not go for it?
How does the Wellesley Income fund compare to the approach in LifeStrategy funds? It has a great track record with returns better than many other funds with (I think) less risk involved. I don’t see much about VWINX, but it looks good to me. (I’m about 5 years out from retirement.)
Mike,
The Wellesley Income fund would be most comparable to the LifeStrategy Conservative Growth fund (with Wellesley having ~37% in stocks and the Conservative Growth fund having 40%).
Wellesley is an active fund, so its results will depend somewhat on the stock-picking success of the fund managers, whereas the LifeStrategy funds are entirely composed of index funds. Historically, the fund has had good success in that regard. I have no idea what the future holds though.
Assuming Admiral shares for Wellesley, the difference in expenses isn’t particularly large (0.06%).
In terms of differences in allocation:
Personally, I’d be more comfortable with the more broadly diversified, indexed approach of the LifeStrategy funds. At the same time, I’d include the Wellesley fund in the category of options I’d consider reasonable, provided that its allocation matches your needs.
Larry,
With regard to my previous portfolio, I agree it was not “pushing complexity to an extreme degree” by any means. And if I had believed that adding one more fund to the portfolio would have likely improved results, I probably would have done so.
But I really like not having to bother with rebalancing. That’s why I’ve explicitly requested such a service from Vanguard multiple times — via email, blog post, and finally in person. When I asked in person, I got a rather blunt, “No, that’s not on our list of things we’re considering.” Not even a hint of interest.
Now, as I’ve said to a few readers via email now, this article wasn’t intended in any way to be an implicit recommendation for other investors. It’s just what I believe makes sense for us.
I really am happy to pay a bit of extra money (in costs, and possibly in decreased returns) in exchange for simplicity. I’m not suggesting that such a decision is appropriate for any other particular investor.
Mike,
I have also asked for Vanguard to improve its rebalancing mechanism. But actually I have found that Vanguard has made rebalancing easier of late. It’s not as simple as Fidelity’s, where you can simply type in the percentages you want, but now instead of having to submit multiple rebalancing transactions, you get a table where you can type all the dollar amounts you want and submit it with one click.
I myself tend to go for “moderate simplicity,” and to rebalance no more than once a year, even less frequently if the percentages don’t drift too much. I checked and found I have 9 Vanguard funds – too complex? but I don’t think unreasonable. Within bonds, I have the Total, TIPS, and short-term funds, for a total of 50% of my portfolio in a 2/2/1 ratio. Within stocks, I mostly have the Total Stock and Total International, which add up to just under 40% of my holdings in a 3/1 ratio, but also small-cap domestic and international funds, 5% in the REIT, and a small percentage in Precious Metals.
I don’t think that’s too bad an approach, but if you see any red flags or unnecessary duplications please let me know. (For a time I had the GNMA fund, but I got out of it because Total Bond has a fair amount of GNMA within it.)
Larry,
I don’t see any red flags or unnecessary duplication. (There is some duplication via the REITs and small-cap funds of course, but I’m confident that your goal is to intentionally tilt toward these slightly.)
And I agree that such a portfolio is reasonable. I wouldn’t want to manage it. But that doesn’t make it unreasonable.
In fact, part of the problem (for me) is just that: For any given investor, there are countless allocations that would be reasonable. For me, that results in a temptation to move between them from time to time — which I’m not confident is at all helpful. For other people, there is no such temptation.
Mike, The part of this post that fascinates me is your description that you cannot trust yourself. I find that inconguent with how you come across in person. I even wrote about your self mistrust last month in Investing Rule #1; Know Thyself. The fund sounds quite tempting!! Although I would probably include a REIT etf as well.
I also think it’s pretty humbling that you of all people can’t trust yourself. (You should take a drive by my portfolio someday — you’d have a field day. Happily it’s up, at least for now… 😉 In a similar moment of self-clarity to yours, this is why I recruited my passive-only cost-obsessed co-blogger!)
Are you not at all worried about having all your money with one company, though? I don’t think that risk can be discounted, whatever regulatory or compensation facilities are in place, and even when the company is the mighty and mightily well-regarded Vanguard.
If there’s a similar alternative where you can hold say 25% of your portfolio with a totally different company/provider, buying different underlying funds, then I would personally.
Obviously we’re talking long tail risks here.
But trust and diversify is my mantra. 🙂
Monevator,
No, I’m not really worried about having all of my money with one company. My understanding is that neither the demise of Vanguard, nor the demise of JPMorgan Chase (the fund’s custodian) would have a particularly detrimental effect on my holdings.
There’s a possibility that JPM would engage in some sort of fraud (e.g., reporting that they have all the assets they’re supposed to have, when really they’ve siphoned some off in some way) and that the fund’s auditor (PWC) wouldn’t catch it. But I don’t think that type of risk is necessarily mitigated by using multiple fund companies.
Similarly, there’s the possibility of fraud at the Vanguard level (e.g., accepting my cash and my buy order, then never relaying that order to JPM) and that PWC would miss it. But again, I’m not really sure that that risk would be meaningfully reduced by using multiple fund companies.
That said, I think rational well-informed people could come to the opposite conclusion as well.