Vanguard LifeStrategy funds

Introduction
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. 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:
 * Vanguard LifeStrategy Income Fund
 * Vanguard LifeStrategy Conservative Growth Fund
 * Vanguard LifeStrategy Moderate Growth Fund
 * Vanguard LifeStrategy Growth Fund

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.

Fund Allocations
The LifeStrategy funds have the following target asset mix.

As of April 2008, the LifeStrategy Funds' equity allocations varied from 30% (LifeStrategy Income) to 90% (LifeStrategy Growth). The discrepancy between the target allocation and the actual allocation is caused by the inclusion of Vanguard Asset Allocation Fund, whose asset allocation can vary between 0% equity and 100% equity. More detailed allocation information is provided in the following table and pie charts.

Note: need correct pie charts

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.

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.

Expenses
LifeStrategy funds are cheap by any reasonable standard, with Vanguard LifeStrategy Fund expense ratios varying from 0.23% to 0.24%. 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. Vanguard does not charge this type of fee, but investors using Target Risk Funds in their workplace plan from another mutual fund company should look in the prospectus for this possible extra expense.

Despite the already low expense ratios, Vanguard could create even cheaper versions. The underlying holdings are presently all Investor Class, but all the funds utilized already have Admiral and Institutional share classes. Admiral Class LifeStrategy Funds would serve individual shareholders with substantial balances, whereas Institutional Class LifeStrategy Funds would serve workplace retirement plans. On the other hand, Vanguard incurs substantial costs in creating and maintaining the LifeStrategy vehicles. These costs are not passed on directly to their shareholders, and the absence of additional share classes could be viewed as a sort of reimbursement.

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