Vanguard Target vs LifeStrategy

SoupAnxiety

Hi,

I've been reading up on LifeStrategy funds and want to consolidate my £6k portfolio split between index tracker equities and corporate / government bonds into LS80. The folks on the forum were a big help yesterday and I've got more confidence in the Vanguard approach. I'm in my 20s saving for retirement in an ISA and will continue to top up the ISA monthly, the majority of my spare cash goes into cash savings and my money pit house but as time goes on I'll put more and more into the LifeStrategy funds.

I'm set on moving everything into a single LS80 holding, I'm not aiming to beat the market and will keep this holding for years and years. Although the LS funds take care of rebalancing to keep your chosen equity / bond split they do not automatically take care of lifestyling. The UK offerings of the Vanguard Target Retirement funds seem to do this, they are no more expensive in terms of annual charges (both are 0.24%) and as I'm comfortable with an initial 80% equity exposure the 80% in the TR fund is OK with me.

The big pull for me is that they take care of switching from equities to bonds when I'm in my 40s, my instinct with investments is "it won't happen to me" and I know without automation I'll probably gamble on equities far longer than is sensible and risk being wiped out close to retirement.

Do Vanguard have any magic for switching from accumulation to income? Logically this would compliment lifestyling - increase bond weighting in time for retirement then receive income to supplement income in old age. TR only takes care of the bond weighting element, I understand that when aiming for growth accumulation is generally best. This might be something which I should worry about later (and something with no easy / automated solution).

Is there any catch to the TR funds? From what I can gather they are effectively LS80 for the initial period and as you get into your 40s they step through the different LS grades ending up at roughly 30% equities in your 70s. Looking at sector and country weightings the TR 2055 compares to LS80 but my worry is I'm missing something and the TR funds have hidden costs / less growth opportunity in the shorter term / invest in snake oil.

Thanks in advance!

adam_1979

Hi Sa

I have recently changed from the Vanguard LS funds to the target retirement funds. As you say the investment is pretty much the same until you get older when the life styling kicks in.

I have chosen to invest in two of the target retirement funds so I should have a larger window of when I want to retire (in my mind anyway).

As for income I guess I will look at that nearer the time

EdSwippet

SoupAnxiety wrote: »

Is there any catch to the TR funds? From what I can gather they are effectively LS80 for the initial period and as you get into your 40s they step through the different LS grades ending up at roughly 30% equities in your 70s. Looking at sector and country weightings the TR 2055 compares to LS80 but my worry is I'm missing something and the TR funds have hidden costs / less growth opportunity in the shorter term / invest in snake oil.

There's no 'catch' to these funds. They will do what they claim, and there won't be any hidden charge or tricky behaviour in them.

With that said, while I am a fan of Vanguard, I am not all that enthusiastic about these or anyone else's lifestyling funds. To me, they seem like the ideal product we should have had in the past, when retirement dates were (somewhat) fixed and annuities were how one built retirement income.

But today is not like the past. And the the future probably won't be like today either. How accurately can you actually predict your retirement date when in your 20s? What will market conditions, and the opportunities for generating income, be that far ahead? If (likely?) you don't annuitise, how large a portfolio would you need for the return on a 30% equity and 70% bond allocation to be enough to sustain you through forty or fifty years of pension drawdown?

There is certainly a niche for lifestyling products. Folk who are or want to be entirely disengaged from the whole process. Or a few who can really accurately predict the rest of their working lives and plan to buy an annuity. And while lifestyling probably doesn't produce an optimum outcome, it might produce a sufficient one. It is however to my mind an inherently inflexible and potentially brittle approach to saving for retirement. Personally, I would (and do) stick to controlling my own equity and bond split through 'purer' Vanguard funds.

Other and entirely rational folk may of course disagree :-)

SoupAnxiety

Thanks for the replies. EdSwippet, you've identified an issue I hadn't really thought about. At the moment I have no idea what my plans are, the 2055 date is based on "the way of doing things" and retiring in your mid 60s. I do not want to work for that long (who does!).

I'm stuck between opting for the retirement 2055 fund or buying LS80. For the foreseeable future until I'm in my 40s they are both near identical in terms of holdings and bond / equity splits. One approach might be to move everything to LS80 now, top up monthly and when I am 40+ review my options then. However, there's no real difference reviewing options at 40 with a LS80 or TR holding. You'd expect both to have similar performance and growth at that point.

The crystal ball question is - is holding LS80 and reallocating when I'm 40 (Into a retirement fund, something more adventurous, liquidating and spending money on a stamp collection etc) likely to be better than holding a TR fund and reallocating when I'm 40? TR appeals as a default position, which I can deviate from if things go better than I'm hoping for. LS requires intervention regardless.

EdSwippet

SoupAnxiety wrote: »

The crystal ball question is - is holding LS80 and reallocating when I'm 40 (Into a retirement fund, something more adventurous, liquidating and spending money on a stamp collection etc) likely to be better than holding a TR fund and reallocating when I'm 40? TR appeals as a default position, which I can deviate from if things go better than I'm hoping for. LS requires intervention regardless.

If you hold everything in an ISA or SIPP then it makes no difference which you pick for about the next one or two decades (flip a coin for now, perhaps?!). After that, switching around may cost a bit in trading fees and time out of the market, but no worse than that. If you're working outside the ISA and pension shelters though, it is worth getting the decision right at the very start. Otherwise you can wind up with a large gain on which you may have to pay capital gains tax if you decide to switch horses in mid-stream.

For what it's worth, a relatively easy way to sort-of neuter 'intervention' is to slide into revised allocations using new contributions. For example, suppose you start with two funds, 80% in a stock fund and 20% in a bond fund. Over the years you gradually increase the proportion of new money going into bonds so you end up at 50/50 or wherever, but now dynamically set the end point based on when (and how) you anticipate you will want and use the money. This also works for rebalancing where equities have outgrown (or outshrunk!) bonds. Of course, you can do this by blending assorted percentages of LifeStrategy funds as well, but it is harder and a bit messier.

Admittedly nothing will be as entirely hands-off as target retirement funds, but then only you can know your own evolving plans so only you can truly adjust for them.

webnibbler

While the idea of target-dated funds may seem a bit dated, I think there is value in taking away the manual effort of managing your allocation in the later stages of accumulation. I've just switched from the LS80 to the TDF 2030, with the view I can always shift to the 2035 if I need to work for longer.

Vanguard's literature mentions that they designed the fund with many options for taking income in mind:

Vanguard’s Target Retirement Funds are designed to give you sufficient resources at retirement so that when the time comes, you have the flexibility to choose what you do with your money: take lump sums, draw a regular income or buy an annuity.

SoupAnxiety

Everything will be held in an ISA for the foreseeable future. For the next 15 years I need to build a portfolio and invest money rather than hoarding cash for short / medium term expenses. Looking at real world examples it seems it is tough to beat Vanguard gains and many amateur investors admit to getting similar returns but losing more in their DIY portfolios.

Thanks so much for the detailed and considered responses. I'm overthinking it at the moment and panicking that decisions now will stuff me up in the future. It seems that all things considered it's impossible to go wrong with a Vanguard LS / TR fund. Even if your plans change and you're already on the TR glide path you could offset with new contributions (as you pointed out).

I wish the Vanguard funds offered more exposure to smaller companies and emerging markets but there must be a reason why they do not and they are the grown ups!

I have a tendency to tinker and hope for the best, both of which mean a self managed portfolio will become an obsession and one which bites me on the bum if I get the balancing wrong. On top of that a net weighted charge of around 0.18% for a DIY portfolio with 0.24% for Vanguard means that the 0.06% premium for expert oversight which I'd almost certainly fail to beat makes it a no brainer. TR 2055 it is!

Thanks all :beer:

msallen

I'm in my late forties now and only recently started a SIPP using LS80 (I have some older pension pots from various employers still sitting in their original schemes - all changed in the last year or so from "lifestyle" to "drawdown").

I have little or no hope of retiring much before state pension age (so nigh on 20 years to go) and I'm planning to keep piling everything into LS80 for another 5-8 years before splitting my new contributions between LS80 and a "safer" more bond-centric fund (maybe LS20, or maybe one from a different provider) slowly winding down the LS80 contributions and ramping up the LS20 ones such that all new contributions are going into LS20 for last 3-5 years. This should leave me somewhere in the rough area of 50% equities at retirement.

webnibbler

SoupAnxiety wrote: »

I'm overthinking it at the moment and panicking that decisions now will stuff me up in the future. It seems that all things considered it's impossible to go wrong with a Vanguard LS / TR fund. Even if your plans change and you're already on the TR glide path you could offset with new contributions (as you pointed out).

Unfortunately there are no certainties in investing, so to say it's impossible to go wrong is probably going a bit far. But you will be stacking the odds of a good outcome in your favour with either the LS funds or TDF over the long term.

SoupAnxiety wrote: »

I have a tendency to tinker and hope for the best, both of which mean a self managed portfolio will become an obsession and one which bites me on the bum if I get the balancing wrong.

Research has shown that the best investors are dead! In other words, as investors we are by far the biggest factor in the success or failure of our investments. The more I can keep my "inner chimp" away from the investment process and automate everything the less chance I can negatively impact the outcome.

If you can't resist tinkering, keep 10% of your funds in a separate account and see if you can beat your LS80 over the long term (hint: you won't!) I'm doing this just to keep myself busy and avoid tinkering with the funds that really matter.

green_man

Have you got any other pension savings as well? Why are you not using a SIPP or have you a workplace pension option?

If you are genuinely just using this for retirement I would invest in 100 equities until at least my 40s you will still have at least 15 years then before you start accessing this money, at this point you could start moving into the LS80 then maybe LS60 at 50 etc.

FYI I am retired, 50, but most of my pension cash in still in equities as I intend to drawdown at 55 so there will be no sudden annuity conversion.

dunstonh

webnibbler wrote: »

While the idea of target-dated funds may seem a bit dated, I think there is value in taking away the manual effort of managing your allocation in the later stages of accumulation. I've just switched from the LS80 to the TDF 2030, with the view I can always shift to the 2035 if I need to work for longer.

Vanguard's literature mentions that they designed the fund with many options for taking income in mind:

You are correct that they are largely dated.

Compliance firms have been warning advisers for a while not to use them and many providers have pulled their lifestyling funds. It is somewhat ironic that Vanguard launch theirs as the rest of the market is pulling out.

However, unlike normal lifestyling funds, vanguard stop short of full risk reduction.