Vanguard LifeStrategy: is a single fund all I need?

The Vanguard LifeStrategy funds are hugely popular. Paul Summers takes a closer look at the advantages and drawbacks of owning them.

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Ten years on, the Vanguard LifeStrategy range continues to be hugely popular with UK retail investors. Today, I’m looking at the arguments for and against having one of these funds as my entire portfolio.

Let’s quickly recap on how they work.

Vanguard LifeStrategy: one-fund investing

Vanguard’s LifeStrategy range is made up of five funds. Each of these differ in the proportion of equities and bonds they hold. So, the LifeStrategy 100% Equity fund invests 100% in stocks. The majority of these are from developed markets, such as the US and UK. 

However, the LifeStrategy 80% Equity fund — which I personally hold — only invests 80% in stocks. The remaining 20% goes into bonds. The LifeStrategy 60% Equity and LifeStrategy 40% Equity therefore offer an increasingly cautious mix. 

If I were very risk-averse, I could opt for the LifeStrategy 20% Equity fund (20/80 equity/bond split). 

Some advantages…

There’s are many reasons why the Vanguard LifeStrategy range has accrued £29bn of investors’ capital over the last 10 years.

#1. Instant diversification. With a few mouse clicks, these passive funds allow me to spread my cash around a massive number of stocks and bonds. Trying to do this any other way would be pretty impractical and expensive.

#2. Low fees. It costs far less to manage a passive fund compared to one run by a human money manager. This allows Vanguard to set its LifeStrategy fees at just 0.22%. Keeping costs low can have a huge impact on returns over time.

#3. Fuss-free. Checking in to my portfolio sporadically is vital if I’m to reach my financial goals. However, the Vanguard LifeStrategy funds require no maintenance. Rebalancing is done automatically. This ensures the equity/bond weighting is maintained. 

#4. Great performance (so far). Since launching in 2011, the funds have beaten a good proportion of their active counterparts. The LifeStrategy 80%, for example, has climbed 150% in value. 

Some drawbacks…

#1. Can’t beat the market. By its very nature, an investment product designed to track market returns will never beat it. As such, a Vanguard LifeStrategy fund will not radically grow my wealth in double-quick time. There’s also no guarantee the performance to date will be repeated.

#2. Too diversified. As Warren Buffett said, diversification “makes little sense if you know what you’re doing.” Those with a tolerance for risk may do better by being more concentrated in only a few (brilliant) stocks. Passive investing means I’m compelled to own market dogs as well as stars.

#3. No small-cap focus. The LifeStrategy funds only hold stocks from the biggest firms in the world. Therefore, I’d need to find another way of getting exposure to smaller, faster-growing companies. Historically, these have delivered greater gains over the very long term.

#4. Inflation. Bonds tend to be negatively correlated with stocks. Holding them is therefore seen as a way of reducing risk. However, inflation is problematic for fixed assets. This could mean those funds with higher bond weightings could struggle going forward.

What I’m doing

I’m happy to keep a Vanguard LifeStrategy fund as a core holding in my portfolio. Even so, I enjoy trying to generate an even better return through my own stock-picking. Whether this actually happens is another thing entirely!

That said, a single fund portfolio like this would probably be ideal if I didn’t have the time, energy, or inclination to follow the stock market’s inevitable twists and turns.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Paul Summers owns shares in Vanguard LifteStrategy 80% Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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