Vanguard LifeStrategy portfolio diversification in cartoon form

The Vanguard LifeStrategy funds are ideal for anyone who wants to invest their money but not a huge amount of their time.

These funds are straightforward, effective, and do not demand a great deal of investing knowledge or DIY management.

If you think that sounds too good to be true – or that the trade-off must be these funds are sub-standard – then you’re dead wrong.

The truth about investing is you can achieve life-changing results just by getting the basics right:

  • Diversify across the global equity markets.
  • Mix your risky equities with high-quality bonds for additional diversification.
  • Choose a low-cost fund so your money fattens your bank balance not some fund manager’s.
  • Use a passive investing strategy that offers a great balance of results, simplicity, and best practice.

The Vanguard LifeStrategy funds answer this need and while they have been imitated, they are yet to be bettered as a one-stop solution.

Who are Vanguard LifeStrategy funds for?

Vanguard LifeStrategy funds are for inevestors who need to invest their money to achieve a major financial objective like retirement, financial independence, or sending the kids to Uni in a decade or two.

Cash earns pitiful rates, and the State Pension is not enough to live on, so most people realise they must invest to safeguard their financial future.

Most people also don’t know where to start. And they can’t afford to pay or trust a financial advisor to do it on their behalf.

That’s the gap in the market the LifeStrategy funds fill – along with sister product the Vanguard Target Retirement funds.

We should also point out that Vanguard didn’t pay us to say these nice things.

We write about these funds because our passion is helping others to look after their investments.

The LifeStrategy funds are one of the best ways to do that.

Who is Vanguard?

Vanguard has grown to become one of the biggest asset managers in the world. It is famous for index funds and driving down investment costs on behalf of consumers.

Vanguard was founded in 1975 by the late John Bogle. Bogle was a visionary on a mission to offer a better deal to investors and disrupt the fund industry.

It took decades but Bogle ultimately won the argument. Vanguard’s success forced competitors to respond with their own ranges of cheap index funds and ETFs.

Vanguard repeated the trick when it arrived in the UK from the US in 2009.

UK investors have enjoyed a cheaper and wider range of investment products ever since, and index tracking funds continue to take market share from the traditional fund industry.

How to choose your Vanguard LifeStrategy fund

The best thing about Vanguard LifeStrategy funds is you don’t need to spend much time building a complicated portfolio with lots of moving parts.

You can pick one fund and you’re done because they’re diversified across thousands of shares (aka equities) plus government bonds to boot.

You can then automate your investing using a monthly direct debit and leave the fund alone while your wealth compounds.

Still, there are five LifeStrategy funds in the range. How do you pick one?

The funds differ by their allocation to global stock markets.

At one end is LifeStrategy 100%, which is purely invested in equities.

LifeStrategy 20%, at the other end, is 20% allocated to equities, with the rest in bonds.

Your fund choice depends on your attitude to risk and need for growth. (More on that below).

Here’s the full LifeStrategy range, and the all-important equity/bond split:

Fund name Equity allocation Bond allocation
LifeStrategy 20% Equity Fund 20% 80%
LifeStrategy 40% Equity Fund 40% 60%
LifeStrategy 60% Equity Fund 60% 40%
LifeStrategy 80% Equity Fund 80% 20%
LifeStrategy 100% Equity Fund 100% 0%

Each fund’s equity allocation is an indicator of its risk vs reward trade-off.

  • An aggressive investor prepared to bear much stock-market-related pain might pick the LifeStrategy 80% Equity Fund in the pursuit of higher expected returns over time.
  • A more cautious person would pick LifeStrategy 40%. Most of their assets would be in less volatile bonds. They would accept lower expected returns as a consequence.

The financial advice industry uses metrics such as risk tolerance to help people understand how much risk they can take.

It’s best to choose a fund that aligns with your risk tolerance. Even seasoned investors can find stock market crashes very hard to handle.

Risky business

Ideally you’d know your risk tolerance and create an investment plan based on your personal circumstances.

Realistically, many people can’t find the time, or discover it’d be easier to nail jelly to a wall.

Some substitute rules of thumb for a proper plan, just to get started.

It’s all too easy to lose years, even decades, to inertia. I know because that happened to me – though you can turn it around.

One of the best known rules of thumb suggests you choose your equity allocation like this:

110 minus your age = your equity holding

You can then round up or down to the nearest Vanguard LifeStrategy fund.

Potentially you can even blend Vanguard LifeStrategy funds so that your equity allocation is 50% or 70% or whatever you prefer.

The rule of thumb above assumes that young people can afford to take more risk than older investors.

That’s because young ‘uns have more working years to recover from a stock market crash. And they’ve less wealth on the line in the first place.

While that’s broadly true, investing features more exceptions than English grammar. Read up about risk tolerance to gain a deeper perspective.

If that’s too much then know that the industry default position is a 60:40 equity:bond asset allocation. That equates to the LifeStrategy 60% fund.

As you close in on your goal, you can mitigate the damage from a stock market crash by transferring from riskier funds into the less volatile LifeStrategy 40% or 20% fund.

It’s definitely time to consider this move once a big financial objective (such as retirement) lies within seven years.

Best way to buy Vanguard LifeStrategy funds

You can buy and sell Vanguard LifeStrategy funds through Vanguard or through other financial platforms. See our broker comparison table.

Currently, investing directly with Vanguard is the cheapest option if you’re just starting out:

Investing in a Stocks and Shares ISA

  • Use Vanguard if your fund portfolio is worth less than around £40,000.
  • Check out Lloyds Bank Share Dealing if your fund portfolio is worth more than £40,000.

Investing in a SIPP

  • Use Vanguard if your fund portfolio is worth less than around £170,000.
  • Check out Halifax / Bank Of Scotland Share Dealing if your fund portfolio is worth more than £170,000.

Choose your platform, set up a direct debit, and then employ your platform’s regular investment tools to automate your investing.

Vanguard LifeStrategy: performance

As a passive investing product, Vanguard’s LifeStrategy funds should deliver profits in line with stock market returns and your bond allocation.

Over the last ten years, you’d have been very happy with this choice.

However I’m not including any performance charts in this piece for one good reason. Performance charts are a bad way to choose between funds.

That is a hard fact for new (and indeed old) investors to accept. But it is true:

  • You do not have the ability to predict which investments will outperform in the future.
  • Past performance charts do not contain predictive data. This is clearly stated in any fund literature you care to read.
  • You can pay someone else to predict the future but they will probably either overestimate their ability, or charge you so dearly for the privilege that you’re actually worse off.
  • In many cases they will overestimate their ability and charge you dearly. This will eat up your profits.

Passive investing products have surged in popularity over the past decade because the evidence is overwhelming that most people are better off with a passive strategy.

The following three articles are our best attempts to explain why you should dismiss past performance as a variable, and also be wary of anyone’s claims about investing skill:

Though past fund performance is not relevant, historic asset class returns do matter.

You can expect a highly-diversified portfolio of equities to outperform bonds and bonds to outperform cash over the long term, because otherwise investors would not invest in riskier assets.

Equity returns are your reward for taking the risk that for some years – even decades in extreme cases – equities underperform bonds and cash.

Vanguard LifeStrategy: the good

You get a low-cost, globally diversified, passive investment product in one simple package. It’s an off-the-shelf portfolio that’s extremely low maintenance.

The Ongoing Charge Figure (OCF) of the Vanguard LifeStrategy range is currently 0.22%.

What does that mean? Essentially, you pay Vanguard £2.20 to manage your fund for every £1,000 worth you own, per year.

That’s highly competitive. You can compare it against other funds by scanning their OCFs.

Some managers refer to the Total Expense Ratio (TER), which is comparable with the OCF. Ignore references to Annual Management Charges (AMCs). These miss important costs and are misleading.

Vanguard automatically rebalances your holdings. This helps control risk and saves you the time and cost of maintaining the portfolio yourself.

Each LifeStrategy fund’s asset allocation is clearly fixed between equities and bonds.

Rival multi-asset funds typically allow asset class exposure to float over a wide range, so you don’t really know what you’re getting.

Vanguard is FCA-authorised. The LifeStrategy funds are UK domiciled, so they benefit from the UK’s FSCS investor compensation scheme.

Vanguard LifeStrategy: the bad

The funds hold more UK equities than investing theory suggests is optimal. This skew is called ‘home bias’ and it exists because people like holding shares in firms from their own country.

The LifeStrategy prospectus states that the UK stock market typically accounts for 25% of each fund’s equity allocation. You’d expect to hold around 4% UK in a global index fund that was free of home bias.

Taken to extremes, this tendency can leave investors under diversified. But Vanguard hasn’t overdone it, so it’s more of wrinkle than a wrankle.

If your fund is more than 60% invested in bonds and cash at any point during its accounting year then its distributions count as interest payments – not as dividends.

Interest payments are taxed at a higher rate than dividends, so beware if you hold LifeStrategy 20% (and potentially LifeStrategy 40%) outside of your ISA and SIPP tax shelters.

Note: This is a general issue with bond fund taxation. It’s not Vanguard-specific.

Vanguard LifeStrategy: the indifferent

LifeStrategy funds do not invest directly in other asset classes like property and commodities.

However, they do hold equities with exposure to these markets (for example, mining companies). And you can always add other asset class funds to your portfolio later by using specialist index trackers.

Multi-asset funds like LifeStrategy work by holding individual funds within a single ‘fund-of-funds’ wrapper. It is slightly cheaper to hold the underlying funds separately; with LifeStrategy you pay a small OCF premium for the convenience of buying in bulk.

That said, your overall costs may still be cheaper with an all-in-one fund as you’re not paying dealing fees for trading and rebalancing multiple funds.

Either way, the time-savings are well worth it.


See how rival funds-of-funds stack up.

Read more on the best global trackers.

The big win

For my money, the best thing about the Vanguard LifeStrategy funds is the convenience at low-cost.

You get an entire portfolio in a one-er and you aren’t sacrificing much of anything to get it.

Investing is about as much fun as slopping out for many people. If that’s you then you could do much worse and by investing in a Vanguard LifeStrategy fund and getting on with your life.

Take it steady,

The Accumulator

The post Vanguard LifeStrategy funds review appeared first on Monevator.

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