Vanguard LifeStrategy Review: All-in-one financial solution?

What is a Vanguard LifeStrategy fund?

LifeStrategy funds work as a “fund of funds”, which means that unlike “traditional” mutual funds or ETFs that buy individual securities to create a diversified investment, a fund of funds diversifies by owning other funds. In this case, Vanguard only uses its own Index Funds.

Each LifeStrategy fund comprises a combination of exposure to Equity (stocks) and Fixed Income (bonds): from 20% to 100% in Equity, with the remaining being the Fixed Income component. Each fund indicates the percentage of Equity on the names, as shown:

Stocks generally provide higher returns over time but come with increased risk, while bonds tend to be more stable, though they usually offer lower returns. By blending these two asset types, the funds aim to balance potential growth and risk management.

Summary table

The differences between all the LifeStrategy funds come down to the mix of stocks and bonds in each, so the following information is similar to all:

Highlights

• Investments on track: Vanguard ensures that the equity exposure remains stable throughout your investment time horizon. So, if you invest in a 60% equity LifeStrategy fund, you will not see an equity exposure of 40% or 80% in 3, 5 or 10 years down the line;
• Highly diversified: Each LifeStrategy fund holds 6,000 to 20,000 shares and bonds around the world;
• Rebalancing: Automatically done for you. No need to worry about what assets to buy or sell;
• Risk profiles: From more conservative (higher exposure to bonds) to more aggressive (higher exposure to equities) risk profiles;
• Costs: All Vanguard’s LifeStrategy funds have an ongoing charge (OCF) of 0.22%.

Performance comparison

The following graph compares the performance of all the Vanguard LifeStrategy funds. The top green line is the 100% equity exposure LifeStrategy whereas the bottom blue line is the 20% equity exposure LifeStrategy:

As you notice, the more exposure to stocks a fund has, the more likely it is to show higher returns.

However, you must also consider the other side of the same coin: risk. And, with no surprise, the higher equity exposure brings the most risk (higher volatility):

Annual costs

One particular aspect of Vanguard LifeStrategy funds is that the ongoing charge of 0.22% already includes the costs associated with each Index Fund inside each strategy.

According to the latest Vanguard annual report (page 124), this is the breakdown:

The “Total Synthetic OCF” is the sum of the “Fund Direct Charge,” which is the weighted average annual cost of all the Index Funds in each LifeStrategy fund, plus the “Synthetic element,” which is no more than the additional cost of setting up the LifeStrategies investment structure.

Analysis of each LifeStrategy fund

As stated above, the LifeStrategy funds only differ from one another in what concerns the mix of stocks and bonds. As such, we will focus on that.

LifeStrategy 20% equity fund

Let’s start with the most conservative portfolio. As stated on the Vanguard website:

“The Fund seeks to hold investments that will pay out money and increase in value through a portfolio comprising approximately 20% shares and 80% bonds”.

The portfolio composition shows that (orange boxes are the equity exposure):

The performance has been the following:

LifeStrategy 40% equity fund

As stated on the Vanguard website:

“The Fund seeks to hold investments that will pay out money and increase in value through a portfolio comprising approximately 40% shares and 60% bonds and other similar fixed income investments”.

The portfolio composition shows that (orange boxes are the equity exposure):

Compared to the 20% Equity, the 40% Equity adds more exposure to the Pacific region and increases the weight in the other Equity Index Funds.

The performance has been the following:

LifeStrategy 60% equity fund

As stated on the Vanguard website:

“The Fund seeks to hold investments that will pay out money and increase in value through a portfolio comprising approximately 60% shares and 40% bonds and other similar fixed income investments”.

The portfolio composition shows that (orange boxes are the equity exposure):

From the 40% Equity to the 60% Equity, we notice a significant rise in the exposure to the US stock markets through the “Vanguard U.S. Equity Index Fund GBP Acc”.

The performance has been the following:

Out of curiosity, my co-founder at Investing in the Web, Pedro Braz, has exposure to this particular Vanguard LifeStrategy fund.

LifeStrategy 80% equity fund

As stated on the Vanguard website:

“The Fund seeks to hold investments that will pay out money and increase in value through a portfolio comprising approximately 80% shares and 20% bonds and other similar fixed income investments”.

The portfolio composition shows that (orange boxes are the equity exposure):

From the 60% Equity to the 80% Equity, the same pattern remains: higher exposure to global equities.

The performance has been the following:

LifeStrategy 100% equity fund

As stated on the Vanguard website:

“The Fund seeks to hold investments that will pay out money and increase in value through a portfolio comprising approximately 100% shares”.

The portfolio composition shows that (only equities):

The performance has been the following:

Tax efficiency: ISAs, SIPPs, and LifeStrategy funds

When investing in Vanguard LifeStrategy funds, tax considerations play an important role, particularly for UK investors using ISAs (Individual Savings Accounts) or SIPPs (Self-Invested Personal Pensions). Here’s how these tax-efficient vehicles impact LifeStrategy investments:

ISAs

ISAs are one of the most tax-efficient ways to invest in the UK. By investing in Vanguard LifeStrategy funds through an ISA, investors can enjoy several key benefits:

• Tax-free growth: Any gains from investments within an ISA are exempt from capital gains tax (CGT);
• Tax-free income: Dividends and interest received from LifeStrategy funds in an ISA are also completely tax-free;
• Contribution limits: The current annual ISA contribution limit is £20,000 (as of 2024), meaning that investors can shelter a significant amount from taxes every year.

In summary, this makes ISAs an excellent choice for investors looking to build a long-term, tax-efficient portfolio.

SIPPs

SIPPs offer another tax-efficient way to invest in Vanguard LifeStrategy funds, particularly for those focused on retirement planning. Here’s how investing through a SIPP works:

• Tax relief on contributions: Contributions to a SIPP are eligible for tax relief, meaning that the government adds 20% to your contributions (for basic-rate taxpayers) or even more for higher-rate taxpayers;
• Tax-free growth: Like ISAs, investments held in a SIPP grow free of capital gains tax;
• Tax-free withdrawal (to an extent): Upon retirement (currently from age 55), investors can withdraw up to 25% of their pension tax-free. The remaining 75% will be subject to income tax, but this can still be advantageous depending on your tax bracket at the time of withdrawal.
• Lifetime allowance consideration: It’s important to consider the Lifetime Allowance (currently £1,073,100 as of 2024), which caps the amount you can save into a pension before facing additional tax charges. Investors with large portfolios should be aware of this.

SIPPs is an ideal vehicle for long-term retirement investors who want to minimize their tax liabilities.

Who are LifeStrategy funds best suited for?

Vanguard LifeStrategy funds are designed with simplicity and broad diversification in mind, making them appealing to various investor profiles. Here are the key types of investors who may benefit from LifeStrategy funds:

• Beginner investors: Those new to investing often appreciate the simplicity of a “set-it-and-forget-it” approach. LifeStrategy funds offer instant diversification across global equities and bonds, eliminating the need for beginners to research individual stocks or manage complex portfolios. By automatically rebalancing, these funds also reduce the effort needed to maintain a balanced portfolio over time.
• Long-term investors: These funds are particularly suited for individuals with a long-term investment horizon. Because they are built with a passive investment strategy, LifeStrategy funds work well for those who are focused on long-term growth and are comfortable with holding their investments for decades. The bond-equity mix allows investors to adjust the risk based on their timeline.
• Risk-averse investors: For those who prioritize stability, LifeStrategy funds with a higher bond allocation (like LifeStrategy 20% or 40%) provide a safer option compared to more equity-heavy funds. These are ideal for investors nearing retirement, or those looking to preserve wealth rather than chase high returns.
• Investors seeking simplicity: Vanguard LifeStrategy funds are perfect for investors who want diversification without the hassle of managing multiple investments. The funds automatically rebalance to ensure they remain aligned with the chosen risk level.
• Cost-conscious investors: With low fees, Vanguard LifeStrategy funds are also ideal for those who want to keep investment costs down. Investors sensitive to expense ratios and hidden fees may find these funds appealing because they are significantly more affordable than many actively managed funds or other investment products.

However, LifeStrategy funds may not be the best option for more experienced investors who prefer full control over their asset allocation or those looking to fine-tune their investments with specific asset classes (e.g., real estate, commodities, or sector-specific stocks).

Furthermore, there is a high UK bias: One of the main drawbacks of the LifeStrategy 100% Eqity is its heavy allocation to UK stocks (around 25%), which is much higher than the actual weighting in the global market (around 4%). Many investors prefer more globally diversified funds.