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Evaluating Vanguard’s New LifeStrategy Funds

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:

  1. There’s less ability to tax-loss harvest than there would be with a DIY portfolio of the three underlying funds,
  2. They use taxable bonds, while tax-exempt muni bonds would be a better choice for high-tax-bracket investors, and
  3. They get in the way of an asset location strategy.

The Verdict?

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.

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  1. Good to see Vanguard is finally doing the sensible thing and getting rid of the asset allocation fund. Before, the Lifestrategy funds were just weird and I couldn’t quite bring myself to recommend them. Now, they are decidedly above-average. I would recommend these funds to a family member or close friend now.

  2. “I would recommend these funds to a family member or close friend now.”

    Ditto. In fact I’m quite close to “recommending” the LifeStrategy Growth fund for myself. I’m eager to see exactly where the expense ratio ends up.

  3. Mike we chose the LifeStrategy Income (VASIX) fund for our HSA account with HSA Administrators. That was before the change, so now it looks like it maybe getting better. 🙂
    Happy trails, Mike

  4. These funds do indeed sound quite attractive now. They would fit in well with the asset allocation model I’m starting to consider. Currently my plan says something like:

    * 80/20 until age 35
    * 75/25 until age 40
    * 70/30 until age 45
    * etc

    I must say, I am quite tempted by the simplicity of replacing that with:

    * LifeStrategy Growth Fund until retirement
    * LifeStrategy Conservative Growth Fund after retirement

  5. My Wife’s Roth has Life Strategy Growth fund. Your article is a good timing ‘coz I recently got a message from vanguard regarding this fund changes and I kinda ignored it, only to see an article about it from this blog.

    Well, atleast now I know that her Roth is all set, especially with Mike and Co’s rubber stamp 🙂 .

  6. I’ve only had my Target Retirement Account for a month now. I’m a new investor and it seemed like an easy way to diversify without knowing much. I chose one that’s a little past my target retirement date because of my high risk tolerance. All things being equal, does the new Life Strategies Growth Fund mean potential for higher growth? Is this because of a higher allocation of stocks? I don’t quite get the difference between the two.

  7. Hi Josh.

    The differences between the two are slim (or, they will be in a few months once the changes have gone into effect).

    The primary difference is that the target date funds change their allocation over time, whereas the LifeStrategy funds will keep the same allocation over time.

    As to which one has a higher potential for growth, yes, the fund with the higher stock allocation should have higher expected returns. But those expected returns might not show up — that’s why stocks are risky.

    You can see the allocation of any given fund by looking it up on Vanguard’s site, then clicking the “Portfolio and Management” tab. Doing that, we can see that the Target Retirement 2050 fund, for instance, has a ~90% stock allocation. This is higher than the proposed 80% stock allocation of the LifeStrategies Growth Fund.

    However, the stock allocation of the 2050 fund will decline over time (eventually all the way down to 30%), whereas the allocation of the LS Growth Fund is expected to stay at a constant 80%.

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