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Vanguard LifeStrategy funds turn passive investing catatonic

There is plenty of evidence to suggest that investors are into self-harm: taking wrong-headed decisions that tear chunks out of the returns they might have earned if they weren’t so busy chasing performance.

So how good would it be to own a diversified portfolio that takes most of the decision-making out of your hands, without diverting cash into the pocket of some shark-eyed advisor?

Enter the Vanguard LifeStrategy funds. Each fund is a passive investing wrapper that contains a selection of Vanguard’s low-cost index funds.

Buy an instant portfolio with a Vanguard LifeStrategy fund

With each LifeStrategy fund you get:

  • An off-the-shelf portfolio that’s ridiculously low maintenance.
  • A way to drip-feed low monthly contributions into multiple Vanguard funds (at last!)

The funds are categorised according to their equity tilt:

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%

The headline equity allocation is a rough-and-ready indication of how risky a ride each fund may deliver in the future.

  • An aggressive investor prepared to bear much stock-market-related pain might pick the LifeStrategy 80% Equity Fund in the pursuit of higher expected rewards.
  • A more risk-shy individual would be down in 20% territory. Most of their assets would be in less volatile bonds and they would accept lower expected returns over the long-term as the trade-off.

A six pack of funds

An individual LifeStrategy fund is essentially a bumper pack of Vanguard index funds that break down the total investment market into distinct asset classes.

For example, it works like this for the LifeStrategy 60% Equity fund:

Sub-fund Allocation
UK Government Bond Index 18.6%
UK Investment Grade Bond Index 13.3%
UK Inflation-linked Gilt Index 8.1%
UK Equity Index 21%
FTSE Developed World ex-UK Index 33.6%
MSCI Emerging Markets Stock Index 5.4%

The bond allocation is 40%, a figure that’s assumed almost default status for DIY investors with a 10-year plus time horizon:

  • Almost half that 40% bond allocation is taken by an intermediate UK Gilt fund that blends short-term, medium-term and long-term government bonds for an average duration of 9.3.
  • The 13.3% allocation to corporate bonds is pretty chunky, and can be expected to offer a greater return in exchange for more risk than if you were entirely in gilts.
  • To round off the bond piece, there’s 8.1% in inflation-linked gilts.

The remaining 60% of your assets is split among various equity sub-funds:

  • The UK equity index tracked is the FTSE All-Share. A 21% allocation provides the home bias that many investors instinctively reach for to insulate against currency risk.
  • The FTSE Developed World ex-UK index is dominated by large cap stocks in the US, Europe, Japan and the developed Pacific Rim (mostly Australia). There’s 33.6% in there.

(Semi) technically speaking, to provide a sort of jangling set of master keys Vanguard has blended together the various FTSE and MSCI indices that govern these sub-funds to create its own so-called LifeStrategy indices. The other LifeStrategy funds maintain proportionally similar holdings between the sub-funds that compose the bond and equity asset allocations, but vary the total bond versus equity mix to juggle risk versus reward.

In broad terms, each LifeStrategy fund captures the main benefits of a globally diversified portfolio, although they are entirely missing refinements such as commodities, property, and small-cap and value shares.

Of course, that’s not to say you can’t pick up those asset classes elsewhere for yourself once the LifeStrategy fund has got you off to a good start.

Cost control

Unlike at Tesco, Vanguard charge you more for buying in bulk. The annual management charge (AMC) is an average of the underlying funds plus an administrative top-up.

The quoted AMC of the LifeStrategy 60% fund is 0.31%1. That compares to a weighted average TER of 0.23%, if you held the component funds as separates.

But the difference is not a whole hill of beans in the long run, even though I’m obsessed with cutting costs like an axe-wielding Tory Minister.

You’ll also pay an upfront cost called a dilution levy. For once, this is a good cost as it’s designed to penalise market-timers switching in and out of funds like manic high-frequency traders. The dilution levy is meant to cover the transaction fees incurred by trading, and is paid back into the fund for the benefit of the buy-and-holders.

The biggest hurdle for retail investors using Vanguard funds has always been dealing fees that play havoc with small, drip-fed contributions. But the LifeStrategy route elegantly side-steps the problem by enabling you to invest in an entire Vanguard portfolio for just one dealing fee.

If you buy using Alliance Trust’s regular investing scheme, you’ll only pay a dealing fee of £1.50. That amounts to an acceptable 0.5% off a £300 monthly contribution.

The big win

For my money, the best thing about the Vanguard LifeStrategy funds is that they minimise the input of hot-headed humans.

Whether directing the flow of new monthly contributions or rebalancing the portfolio, there’s always a chance that our febrile brains can muck things up.

How many times have I hankered over gold as it’s frothed and bubbled during the last 12 months? Equally, it’s not easy to make yourself sell down an over-performing asset just to fit in with your pesky asset allocation.

These LifeStrategy funds provide a ready solution for meddlers. Just set up the direct debit and forget about it. The money flows into the predetermined allocations like water into irrigation channels. Rebalancing happens without you needing to lift a finger and so you’ve got built-in risk control that offers some measure of protection against the markets and yourself.

Passive investors often style themselves as lazy investors and you’ll be hard-pressed to find a lower maintenance option than this at the cost.

I personally don’t want to give up that level of control. I’ve enjoyed the process of working out my own asset allocation, researching my fund choices and tending to my investments. The act of rebalancing keeps me in touch with my portfolio and the market mechanisms that affect it. If I was more hands off I fear I’d lose sight of what I was doing it all for.

But for many people investing is about as much fun as slopping out. So if you want to take the pain away, then take a look at the  Vanguard LifeStrategy funds.

Take it steady,

The Accumulator

  1. The fund doesn’t have a TER yet as it’s been operating for less than 12 months. However Vanguard’s TER and AMC are usually one and the same. []

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{ 222 comments… add one }
  • 198 The Accumulator March 15, 2017, 9:28 pm

    Hi Simple_socrates, it’s for the year. Trustnet are offering a similar number. That will be a time weighted return though, not £ weighted. If you invested in it through the course of the year then your returns will look different.

  • 199 Chris October 17, 2017, 8:53 pm

    I seem to be at the “end” stage of accumulation and am now looking to move into de-accumulation. I therefore need to put together a portfolio which I will draw from over the next 20-30 years. I’ve read many many articles on passive investing and putting together a diversified portfolio based on something around a 70/30 equity/bond split whilst keeping a cash pot to cater for an inevitable bear market(s) during this period. To be honest I feel totally exasperated with it all and am wondering if I should just invest the whole pot into one of the Vanguard lifestyle funds but still keep the cash pot. This would give me a fully diversified and managed portfolio from which to draw from without me getting too involved and keeping costs to a minimal. What do you think?

  • 200 The Accumulator October 18, 2017, 5:50 pm

    Hi Chris,
    There isn’t a simple answer to managing your finances in retirement. There are a lot of factors to consider. I’ve just reviewed a fantastic book that could help you with this very problem – there’s a link to a free sample of the book from here: http://monevator.com/review-living-off-your-money-by-michael-mcclung/

    If that looks too complicated then a simpler solution that takes a lot of the challenges off the table is creating a minimum income floor with the remainder of your pot going into a riskier portfolio. These posts explain more:
    http://monevator.com/the-most-important-goal-for-every-retiree/
    http://monevator.com/secure-retirement-income/

  • 201 JamesHannley February 14, 2018, 5:42 pm

    Hi,

    If I have maxed out my ISA. What is the best way to invest more into Vanguard LifeStrategy funds? I assume its just to open an account with them and the total cost should be the 22bps OCF right?

    Thanks!
    James

  • 202 The Accumulator February 18, 2018, 7:07 pm

    Hi James, Vanguard will also charge a 0.15% platform fee. You can find out more on your options here: http://monevator.com/compare-uk-cheapest-online-brokers/

  • 203 David February 24, 2018, 8:21 pm

    Hi all. I am in the process of transferring half of my Isa pot(vgls) to my wife but this still means we will both still be touching the FCSC compensation limits, I’m not so much worried about Vanguard more so the platform Iweb but would like to invest further under the Isa wrapper, if you any thoughts please let me know Thanks.

  • 204 Matt February 28, 2018, 12:46 pm

    Accumulator, I have recently been comparing the Vanguard funds with the Blackrock consensus funds; are you familiar with these and how do you see the comparison between the two?

  • 205 The Accumulator March 1, 2018, 6:45 pm

    Hi Matt,

    I’m not a fan of the Consensus funds because the managers have a wide remit to change the asset allocation. The Consensus 85 fund can change equity exposure from anywhere between 40-85%. That’s a huge range and essentially means I don’t know what I’m buying into. I prefer the Vanguard approach so I can stay in control of my own asset allocation.

  • 206 Jonathan May 2, 2018, 8:40 pm

    Hi,

    This might be quite a simple question, but how would I find a break down of the total investment market into distinct asset classes for LifeStrategy 20-100%?

    Thanks in advance!

  • 207 The Accumulator May 31, 2018, 7:36 am

    Hi Jonathan, it’s simplest to look at an ETF or an index that covers the global market inc emerging markets:

    https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf/portfolio-data

  • 208 Simms November 9, 2018, 5:11 pm

    Hi,
    I’m just starting out and am on the fence regarding opening a Vanguard ISA or Vanguard General Account. I’m still a student and don’t pay tax at the moment. Also, will taking a job overseas make a difference.
    Thank you!

  • 209 The Accumulator November 10, 2018, 5:05 pm

    The Investor has written a great deal about regretting not investing in ISAs in his younger days: http://monevator.com/get-an-isa-life/

    Vanguard don’t charge more for an ISA so there’s no reason not to.

    Re: overseas move: https://www.gov.uk/individual-savings-accounts/if-you-move-abroad-or-die

  • 210 Rhod January 5, 2019, 8:00 pm

    Hi,

    Considering that the VLS100 fund has a bias towards the UK, have you looked at the ‘Fidelity Allocator World Fund Y Acc’ fund? The fund seems to have a similar ongoing charge, invests predominantly in indexes, is less bias towards UK and also invests in property.

    Cheers,
    Rhod

  • 211 MikeW March 13, 2019, 10:50 am

    On the topic of Vanguard: you say
    “An aggressive investor prepared to bear much stock-market-related pain might pick the LifeStrategy 80% Equity Fund in the pursuit of higher expected rewards.”

    If you were young, with the investment expecting to span one or perhaps several decades….is there a reason why you would not pick the 100% equity fund path?
    Over longer periods, I believe equities generally outpace ‘the other things’ (bonds etc) in their portfolios….wondering why the ‘aggressive’ investor would not do that for a period of time, shuffling down perhaps after some years in?

    (apols if already asked, a lot of comments to skim!!)

  • 212 The Investor March 13, 2019, 11:54 am

    @MikeW — If one is very young (under 30) then I believe there’s case for starting with 100% equities, in terms of maximizing your chances of the highest returns. However that doesn’t mean any particular person *should* do it. Firstly because people’s risk tolerance is very different which means both emotional pain and potential financial losses (selling all your shares at the bottom of a bear market and missing a bounceback is a wealth killer). And secondly because just because the chances are high that 100% shares will prove long-term the better bet, that doesn’t mean they *will* prove the better bet, and most of us aren’t in a game to try to squeeze out the very best returns at the chance of doing worse, if we could get good returns with a lower chance of doing badly.

    So yes, I think for some 23-year olds, say, 100% in shares for 10 years then dialing down risk might be fine. But as always, it depends.

    The following article goes into the pros and cons in quite a bit of detail (a few years old so the numbers will have changed but the gist is the same).

    https://monevator.com/shares-deliver-the-best-long-term-returns-so-why-invest-in-bonds/

  • 213 The Accumulator March 14, 2019, 12:46 am
  • 214 Daniel March 20, 2019, 10:52 pm

    Hello,

    Is it possible to get a product like the Vanguard LifeStrategy fund with a pension wrapper or within a personal pension instead of within an ISA?

    Many thanks

  • 215 MikeW March 21, 2019, 7:07 am

    No….Vanguard have been working on that for some time, I believe, but for some reason do not offer the ability to have a pension: https://www.vanguardinvestor.co.uk/need-help/answer/do-you-offer-a-pension-or-a-sipp

  • 216 Daniel March 21, 2019, 9:32 am

    Thanks Mike for your speedy response, will continue to explore the options .

  • 217 Jumble April 6, 2019, 1:52 pm

    Hi,
    I decided to invest in the LS80 fund, however, as I read more about finance (i’m a late starter really), i hadn’t cottoned on that it has such a UK bias. Some people say that suits them and some say not but don’t really explain why.
    What questions should I be asking myself to decide if it suits me or not?

  • 218 The Accumulator April 6, 2019, 8:31 pm

    Hi Jumble, here’s the counter to UK bias:
    https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

    The author of that piece, Lars Kroijer, has written a great book on simple investing and the advantages of a global portfolio. The book is linked from the post.

  • 219 The Accumulator April 28, 2019, 7:04 pm

    @ Daniel – you can get the LifeStrategy funds in a SIPP wrapper through many different platforms (just not Vanguard themselves yet). Most of the vendors here will provide LifeStrategy options: https://monevator.com/compare-uk-cheapest-online-brokers/

  • 220 Daniel Mason April 29, 2019, 8:14 am

    Brilliant thanks

  • 221 Jumble May 9, 2019, 8:57 pm

    Hi,
    Me again. I bought Lars book and he is not keen on home bias for sure but I am unclear which tracker he is suggesting for equities – he mentions VT but i’m not sure that’s really one for the UK (not offered by HL for example)?
    I’d be interested if anyone has followed his strategy and which ETF(s) they chose (and why).
    Thanks.

  • 222 The Investor May 10, 2019, 12:15 pm

    @Jumble — Hi, this article and the comments below will probably help you:

    https://monevator.com/how-to-chooose-total-world-equity-trackers/

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