Vanguard funds: life strategy funds vs target retirement funds

Both Vanguard Target Retirement Funds and Vanguard LifeStrategy Funds can be used as all-in-one portfolios. This article addresses the similarities and differences between the two series of funds.

Vanguard has an article about comparing Vanguard LifeStrategy Funds and Vanguard Target Retirement Funds. In addition to what Vanguard already mentioned, you may consider the following.

Minimum investment
The Target retirement funds have a minimum investment of $1,000 for opening an account; this makes it easier for small investors, just beginning their investment careers, to begin an investment program. The LifeStrategy funds have a higher $3,000 minimum investment requirement.

Control Over Asset Allocation
If you selected a Target Retirement fund based on its current asset allocation, not the target year, you may find that the fund shifts its asset allocation either too soon or too late. For example, suppose you plan to retire in 2030, but you think the 85% stocks 15% allocation in Vanguard Target Retirement 2030 Fund is too aggressive for your need, ability and willingness to take risk. Instead, you like the allocation in Vanguard Target Retirement 2015 Fund, which currently invests approximately 65% in stocks and 35% in bonds. If you invest in Target Retirement 2015, however, at some time close to 2015, the fund will shift its allocation more conservatively, while you are still at least 15 years away from your planned retirement. On the opposite, if you'd like to be more aggressive and invest in Target Retirement 2035 while you plan to retire in 2015, you may find the allocation in Target Retirement 2035 not shifting when you need a less aggressive allocation.

If you invest in a LifeStrategy fund, this problem can be mitigated. You pick an allocation and change your allocation only when you want to. Alternatively, you can still invest in a Target Retirement fund but you have to watch for the allocation changes every year or every few years. If the allocation no longer suits you, switch to a different Target Retirement fund. This is best implemented in a tax deferred or tax free (Roth) account because there are no tax implications for switching. It somewhat defeats the "set it and forget it" appeal of a Target Retirement fund, but it's a good compromise between simplicity and maintaining your desired asset allocation.

Short-Term Asset Allocation Swings
All LifeStrategy funds have a 25% allocation to Vanguard Asset Allocation Fund. The underlying asset allocation in Vanguard Asset Allocation Fund changes frequently in the short-term. This causes swings to the asset allocation of LifeStrategy funds. For example, when Vanguard Asset Allocation Fund changes from 60% in stocks to 100% in stocks, LifeStrategy Moderate Growth Fund's allocation also changes from 60% in stocks to 70% in stocks.

Target Retirement funds do not invest in Vanguard Asset Allocation Fund. Their asset allocations remain stable in the short-term.

Taxes
If you hold the fund in a taxable account (not normally recommended for either one, but the simplicity may be worth the tax costs), the Target Retirement funds are better. The LifeStrategy funds hold the Vanguard Asset Allocation Fund, which frequently realizes capital gains as it changes its allocation. In addition, the Target Retirement funds grow more conservative over time, and thus may be appropriate funds for your entire investing lifespan; the LifeStrategy funds do not change allocations, so if you have LifeStrategy Growth, you will probably need to sell it as you approach retirement.

International Allocation
All target Retirement funds have approximately 20% of the equity allocation in international. LifeStrategy funds allocate less than 20% of equity to international. LifeStrategy Income Fund has no allocation to international at all.

TIPS
Some Target Retirement funds (2010, 2005, and Income) include TIPS while none of the LifeStrategy funds includes TIPS.

Cost
Target Retirement funds are slightly cheaper (as measured in expense ratios) than LifeStrategy funds, although the expense ratios on both series of funds are low. For example as of November 2008 the expense ratio of Target Retirement 2015 Fund is 0.19%. The expense ratio of LifeStrategy Moderate Growth Fund is 0.23%.

History
LifeStrategy funds have longer history. They were launched on 09/30/1994. Target Retirement funds were launched on 10/27/2003 or later.