The Vanguard LifeStrategy Funds - Automatic Portfolio Rebalancing Between Stocks and Bonds

Index fund investing is a great way for the common investor to save for retirement due to the broad diversification. As individual investors move closer to retirement, they should consider a more conservative balance between stocks and bonds as a way to reduce risk, lower volatility, and prepare to start making withdrawals.

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As equities increase in value, you may find that you need to rebalance your stock-to-bond ratio. This can be a difficult practice for average investors. So, how can you automatically rebalance your portfolio to the intended stock-to-bond ratio that fits your investment risk tolerance?

The Vanguard LifeStrategy Fund are index funds with a set allocation between stocks and bonds and will automatically rebalance to maintain the intended stock-to-bond ratio. These funds are low-fee index funds, broadly diversified, and allow you to choose your level of risk tolerance between stocks and bonds.

Keep reading to learn about each Vanguard LifeStrategy Fund and its specific stock-to-bond ratio.

What are LifeStrategy Funds?

The Vanguard LifeStrategy Funds are a low-cost, automatic, passive way to invest for your retirement goals. Through automatic re-balancing between stocks and bonds, the LifeStrategy Funds are able to stick to their allocations without the investor (you) having to manage it.

They’re essentially investment funds of investment funds. As you’ll see in the breakdowns below, a LifeStrategy portfolio consists of a range of other index funds (stocks and bonds).

The goals are to provide an easy-to-understand, passive investment strategy and to keep people’s sight on the long-term.

How LifeStrategy Funds work

The common wisdom is that the further away you are from retirement, the more risk you can tolerate which means you can be weighted more heavily towards stocks. As you approach retirement age, waking up to a 30% market correction may not be in your best interest. The closer to retirement age, the less risk you can tolerate.

For example, the LifeStrategy Income Fund (VASIX) has a stock-to-bond ratio of 20/80 compared to the LifeStrategy Growth Fund (VASGX) with a stock-to-bond ratio of 80/20.

The difference between growth and income

The word “income” when used to describe an investment vehicle means that the basket of stocks owned in the portfolio provides dividend income. Income-producing stocks are typically well-established, stable, blue-chip companies. The word “growth” when used to describe an investment vehicle means that the companies typically reinvest their earnings rather than paying distributions to shareholders which allows the company to scale or “grow” in value.

Stock to bond ratios

The benefit of the LifeStrategy Funds is they take the guesswork out of balancing a portfolio. It’s long been thought that you need to be diversified between stocks and bonds as you age closer to retirement.

Bonds provide a “smoothing” effect on your portfolio. The more weighted your portfolio is to bonds, the less volatile (smaller peaks and valleys). The trade-off is lower average returns.

When bonds are at all-time lows, it’s difficult for some to envision having a 20% or more allocation to bonds, but when that pendulum swings, it swings fast. Especially if inflation begins to increase. Only you can decide how much risk is right for your investment strategy, long-term goals, and emotional well-being.

Expense Ratio & Minimum Investment

The average expense ratio for the Vanguard LifeStrategy Funds is 0.13% and the minimum initial investment is $3,000. This is comparative to the popular index funds like VTSAX (0.04% expense ratio and $3,000 minimum initial investment). The reason the expense ratio is higher with the LifeStrategy Funds is because of the re-balancing and automation that’s provided.

How To Invest in Vanguard LifeStrategy Funds

To purchase a Vanguard LifeStrategy Fund, you need to open a brokerage account. Typical brokerages include Vanguard, Charles Schwab, Fidelity, etc.

  1. Open an investment account with a brokerage that provides access to Vanguard LifeStrategy Funds

  2. Fund the investment account

  3. Search for the ticker symbol (like VASIX)

  4. Purchase the LifeStrategy Fund of your choice.

4 Vanguard LifeStrategy Funds

  1. LifeStrategy Income Fund (VASIX)

  2. LifeStrategy Conservative Growth Fund (VSCGX)

  3. LifeStrategy Moderate Growth Fund (VSMGX)

  4. LifeStrategy Growth Fund (VASGX)

The Vanguard LifeStrategy Income Fund (VASIX)

An income fund is tailored towards generating income. As an investor in the LifeStrategy Income Fund, you will experience less growth but also be exposed to less stock market risk.

This is achieved with a greater bond to stock ratio. More bonds fewer stocks.

80% Bonds // 20% Stocks

LifeStrategy Income Fund (VASIX)

Source: investor.vanguard.com

LifeStrategy Income Fund (VASIX) Performance

At the time of the last update per Vanguard on 4/30/2021, here are the average annual returns for VASIX:

1-year: 8.34%

3-year: 6.83%

5-year: 5.50%

10-year: 4.78%

Since inception (1994): 6.25%

LifeStrategy Income Fund (VASIX) Holdings

At the time of the last update per Vanguard on 3/31/2021, here are the 5 holdings of VASIX:

  1. Vanguard Total Bond Market II Index Fund Investor Shares

  2. Vanguard Total International Bond Index Fund Investor Shares

  3. Vanguard Total Stock Market Index Fund Investor Shares

  4. Vanguard Total International Stock Index Fund Investor Shares

  5. Vanguard Total International Bond II Index Fund

The Vanguard LifeStrategy Conservative Growth Fund (VSCGX)

The conservative growth fund is tailored towards current income rather than long-term growth. As an investor in the LifeStrategy Conservative Growth Fund, you will experience more growth potential, but less stock market risk.

60% Bonds // 40% Stocks

LifeStrategy Conservative Growth Fund (VSCGX)

Source: investor.vanguard.com

LifeStrategy Conservative Growth Fund (VSCGX) Performance

At the time of the last update per Vanguard on 4/30/2021, here are the average annual returns (before taxes) for VSCGX:

1-year: 21.46%

3-year: 8.09%

5-year: 7.59%

10-year: 6.40%

Since inception (1994): 7.05%

LifeStrategy Conservative Growth Fund (VSCGX) Holdings

At the time of the last update per Vanguard on 3/31/2021, here are the 5 holdings of VSCGX:

  1. Vanguard Total Bond Market II Index Fund Investor Shares

  2. Vanguard Total Stock Market Index Fund Investor Shares

  3. Vanguard Total International Bond Index Fund Investor Shares

  4. Vanguard Total International Stock Index Fund Investor Shares

  5. Vanguard Total International Bond II Index Fund

The Vanguard LifeStrategy Moderate Growth Fund (VSMGX)

The moderate growth fund is tailored towards long-term growth. As an investor in the LifeStrategy Moderate Growth Fund, you will experience more potential growth, but also added exposure to stock market risk.

This is achieved with a greater stock-to-bond ratio. More stocks, fewer bonds.

40% Bonds // 60% Stocks

LifeStrategy Moderate Growth Fund (VSMGX)

Source: investor.vanguard.com

VSMGX holds 20% more stocks than bonds. This provides more long-term growth potential but also increases the market risk.

This is important for those that are a little over halfway to retirement. As you get closer to retirement, investors typically start to transition their portfolio towards the less risky side while sacrificing growth.

LifeStrategy Moderate Growth Fund (VSMGX) Performance

At the time of the last update per Vanguard on 4/30/2021, here are the average annual returns (before taxes) for VSMGX:

1-year: 27.23%

3-year: 10.70%

5-year: 10.15%

10-year: 7.92%

Since inception (1994): 8.0%

LifeStrategy Moderate Growth Fund (VSMGX) Holdings

At the time of the last update per Vanguard on 3/31/2021, here are the 5 holdings of VSMGX:

  1. Vanguard Total Stock Market Index Fund Investor Shares

  2. Vanguard Total Bond Market II Index Fund Investor Shares

  3. Vanguard Total International Stock Index Fund Investor Shares

  4. Vanguard Total International Bond Index Fund Investor Shares

  5. Vanguard Total International Bond II Index Fund

The Vanguard LifeStrategy Growth Fund (VASGX):

The growth fund is tailored toward long-term growth. As an investor in the LifeStrategy Growth Fund, you will experience much more growth potential in exchange for a significantly higher exposure to stock market risk.

This is achieved with a much greater stock-to-bond ratio. More stocks, fewer bonds.

20% Bonds // 80% Stocks

LifeStrategy Growth Fund (VASGX)

Source: investor.vanguard.com

VASGX holds 60% more stocks than bonds. This provides more growth potential, but also significantly increases the market risk.

This is important for investors who are further out from retirement. They want to achieve a higher level of growth and invest in more equities rather than bonds.

LifeStrategy Growth Fund (VASGX) Performance

At the time of the last update per Vanguard on 4/30/2021, here are the average annual returns (before taxes) for VSMGX:

1-year: 37.64%

3-year: 12.49%

5-year: 12.40%

10-year: 9.31%

Since inception (1994): 8.63%

LifeStrategy Growth Fund (VASGX) Holdings

At the time of the last update per Vanguard on 3/31/2021, here are the 5 holdings of VASGX:

  1. Vanguard Total Stock Market Index Fund Investor Shares

  2. Vanguard Total International Stock Index Fund Investor Shares

  3. Vanguard Total Bond Market II Index Fund Investor Shares

  4. Vanguard Total International Bond Index Fund Investor Shares

  5. Vanguard Total International Bond II Index Fund

Summary

There are many options when it comes to investing in low-fee index funds. Vanguard has one of the largest selections available to meet any investing need.

The LifeStrategy Funds are great for those who want a built-in asset allocation and auto-re-balancing. You’ll pay a slightly higher amount in expense ratios compared to index funds like VTSAX, but receive the auto rebalancing between stocks and bonds as a feature.

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