Vanguard has made its name by offering low-cost index funds that require little to no ongoing management on the part of the investor. This has helped the investing behemoth accumulate over $7.2 billion in assets under management — a number steadily growing by the day.
Some of Vanguard’s LifeStrategy Funds (as well as its target date funds) take investing to an entirely new level of simplicity. As we’ll explore below, these funds offer an incredibly easy way for anyone to invest for retirement — although they do come with a few minor drawbacks. On the whole, however, a single fund strategy appears to be completely acceptable for retirement savings.
When a single fund can work
Vanguard’s LifeStrategy Funds are considered “funds-of-funds,” which means that their underlying portfolios are made up of other Vanguard funds. LifeStrategy funds are tailored to specified levels of risk and reward, which in this case remain static (i.e., they don’t change) as time goes on. This is unlike target date funds, which shift their risk profiles as investors age.
Specifically, Vanguard offers a variety of LifeStrategy Funds: Income, Conservative Growth, Moderate Growth, and Growth. If you were to choose Vanguard’s LifeStrategy Growth Fund (NASDAQMUTFUND: VASGX), you’d get an 80% stock and 20% bond portfolio via Vanguard’s passively managed index funds. You’d have to do nothing more than buy the fund and leave it alone until you’re ready to retire — assuming your risk tolerance remained the same over time.
The real beauty of the single fund strategy lies in its efficiency. Once you’ve made the commitment to one of these funds, there’s no need to follow the market every day, no need to scour analyst reports for the next hot stock, and no need to periodically rebalance your portfolio. There’s literally no time or energy commitment, which is really appealing to many lay investors (and many experts alike!).
Costs to consider
First, you’ll pay an annual management fee of 0.14% to invest in these funds, which amounts to $14 for every $10,000 invested. It’s safe to say that the fee shouldn’t be something preventing you from investing in these funds, but it is an additional cost you’ll need to pay if you go the LifeStrategy route.
You could always go ahead and buy the underlying portfolio funds directly, but that will take extra time and require ongoing rebalancing. Some people are fine with this, and some aren’t — it’s nothing more than a matter of preference.
Next, remember that risk tolerance for most people changes over time. LifeStrategy Funds don’t meaningfully change their underlying holdings as time progresses, so the risk of the fund remains constant over time. In other words, you might buy a fund when you’re 30 and hold it until you retire at 65, but an aggressive asset allocation may not make sense for you throughout the entire time period.
Another somewhat subtle cost is that you’ll lose the opportunity to tax-loss harvest in taxable accounts. Tax-loss harvesting refers to locking in the loss of a losing investment and applying it against a locked-in gain from the sale of another investment. In effect, tax-loss harvesting reduces your tax bill.
When you hold a LifeStrategy Fund, you only hold a single ticker — this means that you won’t have any opportunity to offset losses as markets fluctuate. Still, the effect of tax-loss harvesting can be limited depending on your tax bracket as well as your investment selection. Indexed portfolios won’t have much opportunity for tax-loss harvesting if markets continue to collectively rise over the long term.
A great option with some costs
Only you can determine if a LifeStrategy Fund is right for you, but if you’re willing to commit to a specific asset allocation for a period of many decades, it’s not a bad idea. This type of fund, when held in a retirement account, is a great one-size option for investors without an appetite for investing and managing their own portfolios.
Be aware, however, that you’ll pay a small price for access and you’ll also be limited in your tax strategy, especially if you hold one of these funds in a taxable account. No matter which route you choose, know that the single fund option will ultimately get you where you need to go.
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