Executive Summary: Vanguard’s balanced funds offer low-cost, hands-off diversification—but they’re not all created equal. In this issue, I’ll break down what sets them apart and how to choose the right one for your needs.
Can you hold two opposing views at once? When it comes to balanced mutual funds, I can.
On the one hand, simplicity is often your portfolio’s best friend. You don’t need a dozen funds or fancy strategies to succeed. A classic Vanguard balanced fund can get the job done with minimal fuss and minimal expense.
But here’s the rub: Some of Vanguard’s balanced funds, the set-it-and-forget-it, one-size-fits-all options, simply don’t pass the test. To be clear, my primary concern lies with the Target Retirement funds, which build portfolios based solely on a single variable: your age. That’s too thin a thread to hang a retirement plan on. The LifeStrategy funds are better, and as I said last week, you could do far worse than owning one of Vanguard’s life-cycle portfolios.
But make no mistake, these funds are built for the broadest audience possible, not for engaged investors. Vanguard even says, in summation, that its target funds are for the uninitiated and uneducated. There’s a difference between simple and simplistic—and I aim to steer well clear of the latter.
Here’s why I can appreciate the simplicity of balanced funds, while also believing that some of Vanguard’s options come up short.
Simple and Steady
Over the past two decades, the average U.S. college endowment—portfolios with deep pockets and access to the best institutional investors, not to mention elite venture capital and private equity firms—compounded at a 6.9% annual rate.
Vanguard’s LifeStrategy Moderate Growth (VSMGX)? It wasn’t far behind, earning 6.3% per year with far less complexity.
Alternatively, LifeStrategy fund investors collectively compounded their money at a 6.2% annual rate over the past 20 years. To take it a step further, the average LifeStrategy and Target Retirement shareholder has matched the average endowment's 6.9% annual return.
And my Moderate Portfolio? It compounded at an annual rate of 7.4% over the same period.
All are pretty simple investment options compared to complex endowment portfolios. Simple can be highly effective—but with a little effort, simple can be improved upon!
With my biases on full display, let’s pick up where last week’s Funds Focus left off. We covered Vanguard’s Target Retirement and LifeStrategy funds. Now it’s time to analyze the rest of the balanced lineup.