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How Good Are Vanguard's Life Strategy Funds? - Much Better Returns From Vanguard Index Funds With Dynamic Asset Allocation

"Studies have shown that your asset allocation has a bigger impact on your long-term returns than any specific fund you pick. So why not pick aVanguard LifeStrategyFund that has asset allocation built in?" This is the opening statement on a Vanguard web-page, which also lists other potential benefits of investing in such a fund. The historic performance of the LifeStrategy Moderate Growth Fund was analyzed from Jan-2000 onward, and it is very clear from the analysis that this was a fairly high risk investment with low returns. An alternative investment model with Vanguard index funds is proposed which would have produced much higher returns with less risk.

Vanguard uses four index funds which can be combined according to a specific asset allocation to form a LifeStrategy fund "that's right for your situation". There is no guidance given as what may be right for one's situation, so the Vanguard LifeStrategy Moderate Growth Fund (MUTF:VSMGX) was chosen for analysis, as its description implied that this would be a moderate risk investment with reasonable returns. It has the industry standard 40% of its assets in bond funds, and 60% in stock funds, and Vanguard maintains the specific static asset allocation by ongoing rebalancing, freeing you from the hassle of doing this yourself. The fund was analyzed to see whether its historic performance did in fact "help manage risk while trying to grow savings", which is supposed to be one of the benefits of investing in a LifeStrategy fund.

Performance of LifeStrategy Fund VSMGX and component funds

Table-1 and Table-2, (1st to 4th line) list the performance and risk measurements of LifeStrategy Moderate Growth Fund VSMGX and three of its component funds from the beginning of 2000 to end of end of July 2014. The fourth component fund, the international bond fund was omitted, because this fund is only about a year old. One can see that the lowest risk fund was the Total Bond Market Index Fund, but it also had the lowest returns over the last 10 years.

Performance and Risk Measures

The 2000-2014 performance of the LifeStrategy Fund VSMGX is disappointing. Risk measurements do not confirm that this fund helped manage risk, and no beneficial impact on long-term returns was observed due to its specific asset allocation and mix. This can be seen from the returns of VSMGX over the last 10 years which were a lot lower than those of the single Total Stock Market Index Fund.

Dynamic investment strategy with iM(MAC-Vang)20/80

Here is a better strategy to increase performance with less risk which anybody can follow. However, it requires some stock-market timing:

  • Investment during up-market periods: 80% stocks and 20% bonds.
  • Investment during down-market periods: 20% stocks and 80% bonds.

For simplicity only two Vanguard funds are used:

  • Total Bond Market Index Fund (MUTF:VBMFX)
  • Total Stock Market Index Fund (MUTF:VTSMX)

It is as simple as that: when switching the asset allocation according to stock-market climate, much higher returns can be achieved with less risk. The up- and down-market periods come from the MAC-US moving average cross- over system which has been backtested over 65 years with good results. From 2000 to 2014 the models signaled only 5 down-market periods and 6 up-market periods, including the current up-market period.

Performance of iM(MAC-Vang)20/80 versus Vanguard LifeStrategy Fund VSMGX

The backtest from the beginning of 2000 to end of end of July 2014 shows that performance and risk measurements for (MAC-Vang)20/80 were significantly better than for the Vanguard LifeStrategy Fund VSMGX. These are shown in the last line of Table-1 and Table-2. Additional performance measurements are listed below:

  • A $100 initial investment invested in LifeStrategy Fund VSMGX would have grown to $201, whereas (MAC-Vang)20/80 would have produced $350 over the same period.
  • 1-year returns of (MAC-Vang)20/80 were compared to those of the LifeStrategy Fund VSMGX. There was only one year (2008) when (MAC-Vang)20/80 showed a significant negative return of -6.3%, but it was only about a quarter of the 27% loss of VSMGX for the same year.
  • Saving can be simulated by calculating terminal values when investing $1.00 each year from 2000 to 2013 in (MAC-Vang)20/80 and VSMGX. One would have invested a total of $14.00 cumulatively by the end. It shows that the terminal values of (MAC-Vang)20/80 were higher for every year than those of the Vanguard Life Strategy Fund. After inflation, the $14.00 invested in the LifeStrategy fund would at the end have only have had a real value of $19.11, whereas the real terminal value from (MAC-Vang)20/80 would have been 36% higher at $25.92.


Investors in Vanguard funds can achieve good returns with less risk by following a simple market timing strategy to decide on the asset allocation for their investment. A dynamic asset allocation strategy dependent on stock-market climate is the key to better returns. There is no need to invest in many funds, only the Total Bond Market Index Fund and the Total Stock Market Index Fund are used.

A more elaborated article with more figures and tables can be viewed here.