Vanguard funds: life strategy funds vs target retirement funds

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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.

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. Or 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

From inception in 1994 through the fourth quarter of 2011, all LifeStrategy funds had an allocation to Vanguard Asset Allocation Fund. The underlying asset allocation in Vanguard Asset Allocation Fund changed frequently in the short-term. This caused swings to the asset allocation of LifeStrategy funds. For example, when Vanguard Asset Allocation Fund changed from 60% in stocks to 100% in stocks, LifeStrategy Moderate Growth Fund's allocation also changed from 60% in stocks to 70% in stock.

Vanguard announced a revision in the LifeStragegy funds allocations in a September 30, 2011 web posting [1] and instituted an additional change in 2013, adding international bonds to the portfolios.The new allocations consist of four broad-based index funds:

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

Taxes

Historical data indicate that if you held the funds in a taxable account (not normally recommended for either one, but the simplicity may be worth the tax costs), the target retirement funds were slightly better options. [2] The LifeStrategy funds [3] held the Vanguard Asset Allocation Fund, which can realize capital gains as it changes its allocation.[4] The revised post 2011 fund choices for the LifeStrategy funds will mean that the LifeStrategy funds can be expected to realize fewer short term and long term gains going forward.

International allocation

All target retirement funds and LifeStrategy funds have 30% of the fund's equity allocation in international stocks. The actual portfolio weighting of international stocks will depend on the overall strategic equity allocation of the fund (the range will fall between 9% and 27% international stock for target retirement funds; and fall between 6% and 24% for the LifeStrategy funds. The international bond fund represents 20% of the fixed income allocation of both LifeStrategy and target retirement funds.

TIPs

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

Cost

The target retirement funds and LifeStrategy funds have similar expense ratios.

History

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

References