Vanguard LifeStrategy available in Europe! A Retriever Portfolio in One ETF

Imagine, that your Dad or cousin didn’t invest in that pharma stock a while ago that initially surged, then stagnated and in the end underperformed the market. 

Because most of them do.

Now, he doesn’t even want to sell it anymore because of the emotional attachment. Imagine he didn’t have to think about when selling or buying. Or even rebalancing.

He/she almost certainly isn’t following Banker on Wheels to realize that, as of December 2020, there is a new kid in town. Vanguard LifeStrategy is now available to European Investors!

Your financial advisor may not like that, given the fees he’s charging, but who cares – the Golden Retriever Portfolio (with a little nuance) is now available in one UCITS ETF!

What is Vanguard LifeStrategy?

It may not necessary be your cup of tea – I get it. Some investors like flexibility. 

But learn more about these funds to make that comment during a (post Covid-19) family reunion when someone asks about the best investment. Whether it’s a bull or a bear market, it could save them lots of money. 

And stress. If they ask about Bonds, tell them the Babushka doll includes that as well. The advantage of this investment is that it’s easy to explain, even a Golden Retriever gets it.

For dog lovers

Until now, it was fairly easy to buy a Equity World ETF. But you would usually want a World Bond ETF that goes with it. 

Vanguard LifeStrategy ETFs are Funds of Funds, that offer a cheap way of getting a global, diversified portfolio that has a fixed level of equities which is determined by the share component of the portfolio. 

Who are Vanguard LifeStrategy Funds for?

Vanguard LifeStrategy funds are the perfect  solution for you if:

  • You are investing for the long term and want an established and reliable ETF provider
  • You are looking for simplicity and a cheap Fund
  • You want to have hands-off portfolio without the need to rebalance ETFs
  • You want to lower transactions costs and taxes (this may depend on jurisdiction)

When would Vanguard LifeStrategy Funds NOT be suitable?

Vanguard LifeStrategy funds may not be a solution for you if:

  • You like to build your own portfolio and adjust to your personal needs, tax situation or want full flexibility (e.g. Banker or Cyclist portfolios).
  • You want to reduce costs to the absolute minimum (LifeStrategy, while cheap at 0.25%, is slightly more expensive than its components – Equity at 0.22% and Bonds at 0.10%) because Vanguard charges for rebalancing the ETFs.
  • You want another asset allocation than the proposed ones (80/20, 60/40, 40/60, 20/80), an allocation that changes over time or don’t want Bonds at all
While the Vanguard LifeStrategy ETFs may not fulfill all your needs they can still serve as the backbone of your portfolio.
 You can then add other investments around this core Fund or even tweak the Equity/Bond allocation by adding a World ETF.

Vanguard LifeStrategy Fund Types

What are the common characteristics of Vanguard LifeStrategy ETFs?

The underlying ETFs are the same for each LifeStrategy Fund:

All LifeStrategy Funds are rebalanced regularly (e.g. monthly basis) so that the asset allocation remains fixed over time – Equity/Bonds are bought as they trade lower (understand how rebalancing works)

There is a little quirk in the way these ETFs are assembled (see technical details section) but essentially that’s all you need to know.

What is the difference between Vanguard LifeStrategy ETFs?

The LifeStrategy Funds differ by the asset allocation or the proportion of Equity and Bond ETFs

Vanguard recommends 60% and 80% Equity ETFs for investors with higher risk profile and 5+ years investment horizon.  

The 100% Equity Fund is not explicitly available in Europe, but it is equivalent to Vanguard FTSE All-World

Are Vanguard LifeStrategy Funds the same as Golden Retriever Portfolio?

The only difference with a Golden Retriever portfolio is that it does not include Inflation Linked Bonds/Gold. This could be helpful in rare scenarios when both Equities and Bonds underperform at the same time (look here for the 1970s). Not that I see this happening anytime soon, but I like being forecast-free.

Do Vanguard LifeStrategy ETFs have a track record?

Vanguard LifeStrategy Funds have traded on the US Stock Exchanges since 1994. Vanguard has also launched LifeStrategy in the UK in 2011 and more recently Canada in 2018. While European Funds are brand new and size is an important criterion in selecting an ETF Vanguard’s experience and Retail demand makes this a likely success.

However, since the EUR funds started trading in December 2020 there is little performance data, yet. 

But I combined the EUR-denominated benchmarks, for which data is available since 1999 and the underlying Funds since their launched, then substracted the 0.25% fee to see how they would have performed.

How to choose a Lifestrategy fund

What losses can you stomach?

The #1 criterion when choosing a LifeStrategy Fund is how much risk you can tolerate. 

You don’t want to end up like this guy.

Data from 1999 includes choppy market conditions. The period starts just before the Dot Com crash and followed by the GFC Crisis in 2008

It’s great decade to stress test the Funds – you can show the animation below to your relatives and ask how much (unrealized) losses they would be able to stomach during a crisis on a 1,000 EUR value as at the last market peak. Agreed, it’s theory. Nothing replaces real life crisis reaction. But it’s a good start.

As you can see a 100% Equity portfolio lost almost 55% of value during both stress periods. A 60% Equity portfolio dropped 25-30%. 

Yes, Covid-19 was just a blip

Animated drawdowns for €1,000 from prior market peak

Why history may be misleading

Returns expectations are where things get more challenging.

While the 1999-2021 period, where EUR benchmark data does exist, is very useful for stress testing, it is tricky from a return perspective due to (i) the first lost decade for Equities but also (ii) higher returns from Bonds than currently available

Below is the performance of a 1,000 EUR portfolio from 1999 until 2021 with 0% (or entirely Bonds) to 100% Equity allocation.

Expected historical performance of Vanguard LifeStrategy Funds
Historical Risk and Return for Vanguard LifeStrategy Benchmarks
  • Over the past two decades:
  • 100% Equity World ETF returned 5% annually
  • Adding bonds was a great idea. If you look at the 100% Bond portfolio the return was 3.9% – not very dissimilar to Equities

Over the last, exceptional decade:

  • 100% Equity World ETF returned 10.4% annually
  • Adding bonds reduced risk but also added a drag with 3% return
 

What can you expect?

Reasonable expectations for next decade(s):
 
  • Equities are unpredictable. But a reasonable long term average (over few decades) is a return of 7% annually – doubling your investment after 10 years. Below is the data for World Equities (in USD) since 1988
  • Given negative Bond yields in Europe, the Bond portion should not be expected to make any meaningful contribution to returns in the next years (which will be different to the 3% experienced over the past decade)
Long term return of World Equities

How to invest in a Lifestrategy fund

I/Vanguard are not exactly selling dreams when you take into account that Bonds won’t contribute much to the returns in a 60/40 portfolio.

What are the options? For your relatives, keep it simple.

For yourself, think about the right mix of assets – holding it longer or treating as the core part of your portfolio.

Holding it for longer

Given  negative Bond yields holding higher proportion of Equities could be a solution (if you can stomach losses). 

Since 1988 (based on USD data), chances of losses were reduced below 5% if holding World Equities above 5 years. 

But if you have a short to medium term investment horizon and need to fund a project, the 20 to 40% Equity portfolios are probably still the most sensible choices.

Holding period needed to avoid losses in 100% Equity Portfolio

Adding satellites

Having a e.g. 90% Vanguard LifeStrategy core and 10% satellite portfolio could work as well. 

Adding other asset classes could be a solution for a slightly more complex portfolio – like the Cyclist or the Banker.

Have a look at risk and return profiles of different asset classes over the past two decades.

But remember, setting the right expectations is probably the most reasonable first step.

What else do i need to know about Vanguard Lifestrategy

There are numerous factors you need consider before buying an ETF. 

Some apply to Vanguard LifeStrategy ETFs – I have listed them below.

Key considerations

What's under the hood?

Note that if you check the underlying ETFs you may be surprised to see more ETFs (German and Italian brochures are available)

 

Don’t worry if some ETFs are added to the two I mentioned above. This is just how Vanguard is implementing it because of UCITS law limiting any single component to maximum of 20%. Vanguard goes around that restriction using other funds but the result is the same as if you had exposure to these two ETFs.

Vanguard states in its factsheet that no active bet is made. 

What are the different Funds

Most brokers would allow you to access Xetra and Borsa Italiana

Finally, you need to know the difference between accumulating and distributing share classes.

Here is the answer.

Good Luck and keep’em* rolling !

(* Wheels & Dividends)

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