Vanguard LifeStrategy Funds

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Vanguard LifeStrategy Funds
Company: Vanguard
Fund category: Balanced
Benchmark: Various
Start date: 09/30/1994
Expense ratio: 0.21% ~ 0.22%

The Vanguard LifeStrategy Funds are lifecycle offerings, providing investors with a variety of highly diversified all-in-one portfolios. The products are structured as funds-of-funds, charging only weighted averages of the expense ratios associated with the underlying holdings, which are primarily indexed. LifeStrategy funds are cheap by any reasonable standard. Other mutual fund companies' Target Risk Fund expense ratios may include an additional expense ratio on the Target Risk Fund itself, in addition to the expense ratios of the underlying funds. Investors using Target Risk Funds in their workplace plan from another mutual fund company should look in the prospectus for this possible extra expense.

While the Funds are ostensibly designed for investors having a certain level of risk tolerance (approximately), they may be used for other goals, depending on a particular shareholder's objectives.

There are four LifeStrategy funds:

Each of the Funds targets a level of risk tolerance. Unlike Vanguard Target Retirement Funds, the LifeStrategy Funds do not become more conservative over time. Both LifeStrategy funds and Target Retirement funds can be used as a one-stop-shopping portfolio. For more information on comparing LifeStrategy funds with Target Retirement funds, see LifeStrategy Funds vs Target Retirement Funds.

Contents

Fund Allocations

The LifeStrategy funds have the following target asset mix, implemented with these Vanguard fund portfolios:

  • Vanguard Total Stock Market Index Fund
  • Vanguard Total International Stock Index Fund
  • Vanguard Asset Allocation Fund
  • Vanguard Total Bond Market II Index Fund
  • Vanguard Short-Term Investment Grade Bond Fund

The portfolio links in the table provide current asset allocations for the respective LifeStrategy Fund portfolio.

LifeStrategy Funds Target Asset Mix
Holding Growth Moderate Growth Conservative Growth Income
US Stocks 65% 50% 35% 20%
International Stocks 15% 10% 05% 00%
US Bonds - Intermediate Term 20% 40% 40% 60%
US Bonds - Short Term 00% 00% 20% 20%

Drawbacks

While LifeStrategy Funds provide very simple diversification for their shareholders, such uniform solutions will necessarily be subject to reasonable criticisms.

Tax Inefficiency

Because the LifeStrategy Funds all have a significant allocation to taxable bonds, they are most suitable for investors holding their entire portfolios in tax-advantaged accounts. In addition, the Asset Allocation fund generates capital gains as it switches between stocks and bonds, so the LifeStrategy Funds should be less tax-efficient than the Target Retirement Funds or other balanced index funds. Individuals with entirely taxable portfolios who expect to be in a low tax bracket for the intended holding period would thus be better off with Target Retirement Income rather than LifeStrategy Income. Investors having both taxable and tax-advantaged accounts are generally better served by splitting their equity and fixed income allocations, concentrating on tax-efficient asset location. The tax distribution history of the Lifestrategy Funds is available in Vanguard LifeStrategy Fund Tax Distributions.

Allocation Choices

Depending on an investor's personal preferences, the LifeStrategy Funds' asset allocations could be unsatisfactory. Some example reasons follow.

  • Certain asset classes are not represented. Inflation-protected securities, foreign bonds, foreign small cap stocks, Canadian stocks, and commodities are entirely absent.
  • The Funds' asset class weightings do not suit all tastes. More than 80% of equities are domestic, far above the U.S. share by world market capitalization. There is no "tilt" to the U.S. stock holdings; for instance, REITs are represented only to the extent they appear in Total Stock Market Index.

Inclusion of Asset Allocation Fund

All LifeStrategy funds include a ~25% allocation to Vanguard Asset Allocation Fund. Vanguard Asset Allocation Fund changes its stocks/bonds ratio based on proprietary quantitative models. This introduces asset allocation swings to the LifeStrategy funds. Investors cannot be sure what their stocks/bonds allocation is at any point of time.

See also

History

Vanguard's launched all four LifeStrategy Funds on 09/30/1994.


Managing Your IRA
Managing Investments Investment Policy Statement • Principles of Tax-Efficient Fund Placement • Target Date Retirement Funds • Vanguard LifeStrategy Funds
IRA Transfers IRA Rollovers and Transfers • IRA recharacterization • Net Unrealized Appreciation - NUA • Inheriting an IRA • Inheriting a Roth IRA
IRA Withdrawals Required Minimum Distribution • IRA Distribution Tables • SEPP:Substantially Equal Periodic Payments

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