Vanguard LifeStrategy funds

From Bogleheads
(Redirected from LifeStrategy)

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 index funds.[1]

LifeStrategy funds are cheap by any reasonable standard. In contrast to the Vanguard series of similar one fund diversified portfolios, target retirement funds, which utilize a gradual shifting strategic asset allocation over time, the LifeStrategy funds have a fixed target asset allocation.

Vanguard considers the LifeStrategy funds to be target risk funds, in contrast to target date target retirement funds.

Four portfolios

While the funds are ostensibly designed for investors having a certain level of risk tolerance (approximately), and are typically considered to be retirement accumulation or retirement decumulation vehicles, they may be used for other goals, depending on a particular shareholder's objectives. For example, the LifeStrategy funds are often investment options in many state run 529 plans designed for funding college education expenses.

There are four LifeStrategy funds:

Fund Symbol Vanguard link Morningstar link
Vanguard LifeStrategy Income Fund VASIX link link
Vanguard LifeStrategy Conservative Growth Fund VSCGX link link
Vanguard LifeStrategy Moderate Growth Fund VSMGX link link
Vanguard LifeStrategy Growth Fund VASGX link link

Fund allocations

On February 26, 2015, Vanguard announced an increase in the funds' international equity allocation from 30% to 40% of equity exposure, and an increase in the international fixed income allocation from 20% to 30% of nominal fixed income exposure.[2]

The tables below show allocations of the funds after the 2015 reset. The reallocation of fund assets was completed by the end of 2015.[3]

LifeStrategy funds target asset mix
Holding Growth LSGrowth2015.png Moderate growth LSModerate2015.png Conservative growth LSconservative2015.png Income LSincome2015.png
US stocks 48% 36% 24% 12%
International stocks 32% 24% 16% 8%
US Bonds - Intermediate term 14% 28% 42% 56%
International bonds - intermediate term 6% 12% 18% 24%

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. 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. Investors are well advised to consider the following tax considerations:

  • Held in a tax-advantaged account, stocks will lose the special benefits they possess in a taxable account.[note 1]
  • In a taxable account the bond dividends will get taxed annually at ordinary income rates; when held in tax advantaged accounts this tax can be deferred.
  • By holding a balanced fund in a taxable account the investor losses the option to harvest losses of individual asset classes.
  • The fund has a history of changing asset allocation and targeted asset classes. Should a taxable investor disapprove of any future changes and wish to liquidate the investment, the capital gains tax, if applicable upon sale, might prove costly.

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. For example, inflation-protected securities and commodities are entirely absent.
  • The funds' asset class weightings do not suit all tastes. For investors seeking to match global asset allocations, 60% of equities are domestic, which is above the U.S. share by world market capitalization. The portfolios employ asset class funds that are market cap weighted, so the funds are not appropriate for investors desiring to value "tilt" the equity allocation of the U.S. stock holdings. For investors who wish to hold equity REITs in proportion to the weighting of commercial property in the economy, the funds' REITs allocations are represented only to the extent they appear in Total Stock Market Index.

History

Vanguard launched all four LifeStrategy Funds on 09/30/1994. Since then the fund has made numerous changes in asset class selections and portfolio allocations.

Changes in 2011

Vanguard announced a change in the funds' investment policy on September 30, 2011.[note 2] The funds adopted an all-index fund portfolio and implemented the change across several months following September 2011.[4] The portfolio allocation of the funds after the adoption of the all-index fund approach is shown in the following table:

Changes in 2013

On February 6, 2013, Vanguard announced the addition of a fourth asset class, international bonds, to the LifeStrategy fund asset allocation matrix.[5]. The new asset allocation changes were completed on May 31, 2013.

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

  • Vanguard Total Stock Market Index Fund
  • Vanguard Total International Stock Index Fund
  • Vanguard Total Bond Market II Index Fund
  • Vanguard Total International Bond Index Fund

Changes in 2015

See the Fund allocations section.

Notes

  1. Potential advantages for holding stocks in a taxable account include:
    • Tax-deferred accounts convert long-term capital gains into ordinary income upon distribution; long-term capital gains have, at most times, been taxed at a lower rate than ordinary income.
    • Qualified dividends are currently taxed at a lower rate.
    • Long-term capital gains are only due when realized, which offers an additional means of deferring taxes.
    • Ability to harvest losses.
    • Ability to donate appreciated shares to charity, avoiding all taxes.
    • Estate planning; there is a potential for stepped-up cost basis upon death.
  2. From 1994-2011 the LifeStrategy funds asset allocations were 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

See also

References

External links

  • LifeStrategy "Ladder" thread in Bogleheads.org forum, showing how to create a glide path from LifeStrategy Growth to LifeStrategy Income, in 5% shifts in asset allocation. 31 May 2014.