Vanguard LifeStrategy Funds

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The Vanguard LifeStrategy Funds (link) 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.

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. For more information on comparing LifeStrategy funds with target retirement funds, see Vanguard funds: life strategy funds vs target retirement funds.

Four portfolios

There are four LifeStrategy funds:

  • Vanguard LifeStrategy Income Fund (link)
  • Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund (link)
  • Vanguard LifeStrategy Moderate Growth Fund (link)
  • Vanguard LifeStrategy Growth Fund (link)

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.

Fund allocations

The LifeStrategy funds have the following target asset mix, implemented with these Vanguard fund portfolios: [note 1]

  • 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

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

LifeStrategy Funds Target Asset Mix
Holding GrowthChart 1(16).png Moderate GrowthChart 2(1).png Conservative GrowthChart 3(1).png IncomeChart 4(1).png
US
Stocks
56% 42% 28% 14%
International Stocks 24% 18% 12% 6%
US Bonds - Intermediate Term 16% 32% 48% 64%
International Bonds - Intermediate Term 4% 8% 12% 16%

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 2]
  • 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 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 and commodities are entirely absent.
  • The Funds' asset class weightings do not suit all tastes. 70% of equities are domestic, far above the U.S. share by world market capitalization. There is no "tilt" to the U.S. stock holdings; REITs are represented only to the extent they appear in Total Stock Market Index.

History

  • Vanguard's launched all four LifeStrategy Funds on 09/30/1994.
  • Vanguard announced a change in the funds' investment policy on 09/30/2011. The funds adopted an all-index fund portfolio and implemented the change across several months following September 2011. [1]

The portfolio allocation of the funds after the adoption of the all-index fund approach is shown in the following table:

LifeStrategy Funds Target Asset Mix
Holding GrowthLifeStrategy Growth Fund.png Moderate GrowthLifeStrategy Moderate Growth Fund.png Conservative GrowthLifeStrategy Conservative Growth Fund.png IncomeLifeStrategy Income Fund.png
US
Stocks
56% 42% 28% 14%
International Stocks 24% 18% 12% 6%
US Bonds - Intermediate Term 20% 40% 60% 80%
  • Vanguard announced the addition of a fourth asset class, international bonds, to the LifeStrategy fund asset allocation matrix on February 6, 2013 [2]. The new asset allocation changes were completed on May 31, 2013.

2015 changes

On February 26, 2015, Vanguard announced "the international equity allocation for both types of funds [target retirement funds and LifeStrategy funds] will increase from 30% to 40% of equity exposure, and the international fixed income allocation will rise from 20% to 30% of nominal fixed income exposure."[3]

The allocations of the funds after the 2015 resetting are set forth in the table below. The reallocation of fund assets will begin in July and be completed by the end of 2015.[4]

LifeStrategy Funds Target Asset Mix
Holding GrowthLSGrowth2015.png Moderate GrowthLSModerate2015.png Conservative GrowthLSconservative2015.png IncomeLSincome2015.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%

Notes

  1. 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
  2. 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.

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.


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