Vanguard Life Strategy – Review
The Vanguard Life Strategy range consists of low-cost, one-stop-shop portfolios that provide broad exposure across geographies and asset classes.
The idea behind them is simplicity. Once you’ve picked one, all you need to do then is sit back and enjoy life and let the fund do the heavy lifting for you.
There are five funds in the range.
Which one you choose will depend upon your risk appetite and time horizon.
Risk tolerance and time horizon
Now, risk is a tricky subject, but the simplest way of thinking about it is this. If you are prepared to lose all your money, your risk tolerance is high, but if you aren’t, your risk tolerance is low.
Most of us sit somewhere in between. Ask us what our risk tolerance is and nine times out of ten we’ll claim it’s higher than it actually is. We aren’t fibbing. There’s actually a good reason for it.
You see, the trouble with risk tolerance is that you only really know yours when the stock markets actually crash and the value of your portfolio drops. As a result Vanguard also takes time horizon into consideration and there is logic to this.
In short, the longer the time horizon the more chance there will be for markets to recover and subsequently your investment portfolio to recover and reach new highs.
Using this concept Vanguard generally groups investors in to three:
- Low willingness to take on risk or shorter term time horizon (3-5 years)
- Moderate willingness to take on risk or medium to longer term time horizon (5+ years)
- Higher willingness to take on risk or a longer time horizon (10+ years)
Traditionally, the way you take on more risk is to increase the amount of stocks in your portfolio compared to bonds for any given time period. (Notice I said traditionally. There may be some holes in this method. More on this below).
Bonds don’t tend to give you big returns, but they are deemed safer. Stocks are riskier but they should provide bigger returns. In other words, most people, most of the time could do with both and nearly all the range give you that. (One doesn’t. We’ll come to that shortly).
With that in mind Vanguard provides the following five choices:
- Vanguard Life Strategy 20% equity fund
- Vanguard Life Strategy 40% equity fund
- Vanguard Life Strategy 60% equity fund
- Vanguard Life Strategy 80% equity fund
- Vanguard Life Strategy 100% equity fund
Equity here means stocks or what we like to refer to as shares in Britain. So the 20% equity fund is telling us 20% of your money would be placed in stocks (or shares) leaving the remainder to be invested in bonds.
As those percentages go skywards, so does your risk until you hit the 100% equity option, which is considered to be maximum risk. Because it doesn’t contain bonds.
It used to be the case that whatever your situation Life Strategy funds had you covered. Notice I said ‘used to.’ And remember I touched upon the fact that their might be some holes in this equity bond idea above.
Bonanza
As I write this, everybody who is anybody is pulling their money out of LifeStrategy funds with heavy allocations to bonds and instead sticking them in one of the Vanguard LifeStrategy Equity Funds. I’m talking about the 80% and 100% ones here. The ones with minimal or no bonds.
Bearing in mind our little discussion on risk above, that doesn’t sound good does it?
Now, you don’t have to be Sherlock Homes to come to the conclusion this money shifting might just be related to the super mega bond crash of 2022.
Bond funds crashed hard. Funds that had heavy allocations to bonds crashed hard too and these include the ones we are talking about here.
So all that talk about more equity increasing risk kind of went into reverse in 2022. All those bond heavy Life Strategies Vanguard has been promoting to avoid risk turned out to be very risky indeed.
OK, that’s not strictly fair. It wasn’t just Vanguard. It was the entire finance industry pretty much. They all say roughly the same. More bonds = less risk.
No matter who said what, we are left in the same situation. One where bond heavy funds aren’t quite as safe as we thought they were.
You can read a lot more on this topic here, but the summary version is this. You almost definitely need bonds in your portfolio.
The chances of a big bond crash occurring again anytime soon are pretty small. In fact, small enough that I wouldn’t sweat a day thinking about it, but if you are concerned about it and it’s stopping you investing, then you can mix an equity fund with a short bond fund. Short bonds lower the returns a bit, but lower the risk a lot.
Expat situation
Spoiler alert! The expat Situation isn’t good. In fact, Vanguard don’t let expats invest. You need to be resident in one of the countries Vanguard operates in. Yes, contrary to popular belief, Vanguard does operate outside the US, but their coverage isn’t great. You can read more about this here. The key being you have two options:
- investing with international Vanguard platforms
- investing in Vanguard funds via an expat stockbroker / investment platform
If you have an international Vanguard platform where you live then simply get in touch with Vanguard (you can find their global site here).
Alternatively, you can choose to invest via the second approach and to be perfectly honest, its quite often a cheaper way to go.
How you can invest if you live overseas
You see Vanguard’s funds are available on most (if not all) investment platforms. All you have to do is find one that accepts expats and non residents. If you haven’t already found one, we’ve compared some of the best ones here.
Once you have one, you can simply choose a Vanguard fund.
Now, when it comes to Life Strategies Vanguard has put a spanner in the works for non residents in that a lot of them are index funds, rather than ETFs. The UK versions being prime examples.
Traditional index funds aren’t usually available to non residents unless they come in ETF format.
The good news is the European versions do come as ETFs and so are available to all. These would definitely suit people living in the Eurozone or those who intended to retire there. For others currency becomes an issue, but there are ways around that too. The worst case scenario being you need two funds. Again, if that is of interest you might want to read this.
