Vanguard LifeStrategy Funds
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. 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 LifeStrategy Funds vs Target Retirement Funds.
There are four LifeStrategy funds:
- Vanguard LifeStrategy Income Fund
- Vanguard LifeStrategy Conservative Growth Fund
- Vanguard LifeStrategy Moderate Growth Fund
- Vanguard LifeStrategy Growth Fund
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.
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Fund Allocations
The LifeStrategy funds have the following target asset mix, implemented with these Vanguard fund portfolios: [1]
- Vanguard Total Stock Market Index Fund
- Vanguard Total International Stock Index Fund
- Vanguard Total Bond Market II Index Fund
The portfolio links in the table provide current asset allocations for the respective LifeStrategy Fund portfolio.
| Holding | Growth |
Moderate Growth |
Conservative Growth |
Income
|
|---|---|---|---|---|
| US Stocks |
56% | 42% | 28% | 14% |
| International Stocks | 24% | 18% | 12% | 6% |
| US Bonds - Intermediate Term | 20% | 40% | 60% | 80% |
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. [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.
- As a fund of funds, the Lifestrategy Funds are not eligible for the foreign tax credit.
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, 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 will adopt an all-index fund portfolio in the months following September 2011.[3]
See also
- LifeStrategy Funds vs Target Retirement Funds
- Fund of funds
- Vanguard LifeStrategy Fund Tax Distributions
- Vanguard Statistical Data Spreadsheets for individual fund statistical data.
References
- ↑ 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
- ↑ 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.
- ↑ LifeStrategy Funds to adopt all-index approach, September 30, 2011.
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