Hello there. I've been a longtime frugalist (in the main), but relatively new to Mr Money Moustache and his amazing way of managing money and the good life. And dipping into this forum has already been pretty inspiring.
I'm pleased to report that its transformed my life already, although I appreciate its an ongoing project and there's a lot of work still to do. While I need to hit ebay and offload a heap of things, I also need to get my investment strategy in order.
I've been thinking about Vanguard ETFs v Lifestyle Strategy Funds, from an Australian perspective. And I'd love to hear your thoughts. Perhaps this might also be useful for someone else in a similar situation.
ContextBut firstly some context.
My investments are currently 51% Direct Shares (mix of blue chip and a few speccies), 3% Cash, 29% Vanguard Aus ETF (VAS), 6.6% Vanguard All World ETF (hedged), 6.6% Aus Small Cap LIC (6.6%), 3% Vanguard High Growth Lifestyle Strategy Fund (Retail).
Note: I've read what MMM has to say about indexing, and I've also just finished Malkiel's 'Random walk down Wall Street', Bernstein's 'Four Pillars of Investment' and I'm a convert to the passive index approach. I've also previously read Ben Graham's 'Intelligent Investor' and just finished Peter Lynch's 'One Up on Wall Street', the latter was a particularly entertaining read, although i'm convinced by Malkiel, Bernstein, Jack Bogle and MMM to take on an index approach. I'd previously been a fan of value investing ala Graham and Lynch, but I've found beating the market is a lot harder in practice than in theory. Its not too hard to do it for a short period of time, but sustained over a few decades then I think I'd rather trust in the market as a whole. To be honest, I think if I'd had the foresight to index from the beginning I'd be ahead of my position now, which has been the result of buying and holding (but not trading).
Non-Australian readers may not appreciate that Vanguard index funds are not as dirt cheap as they seem to be in the US.Lifestyle Fund v ETF So with that out of the way, I was wondering if anyone had any thoughts on buying into a Vanguard Life Strategy Fund (High Growth - 90% Growth/ 10% Income) or replicating the allocation via purchasing ETFs.
The Wholesale Life Strategy Funds have fees of 0.37% for the High Growth Fund (and 0.36% for the Growth Fund). Note they have a stated minimum investment of $500k, but after calling them turns out they can be a pretty flexible about that. The retail funds have a much higher fee of .90% for the first 50k, but which drops down to a lower percentage as your investment increases.
Here are their wholesale funds:
https://www.vanguardinvestments.com.au/institutional/jsp/investments/managed-funds-wholesale.jsp#fundstabHere are the retail funds:
https://www.vanguardinvestments.com.au/retail/ret/investments/managed-funds-retail.jsp#fundstabThe asset allocation for the High Growth Fund is:
- Income assets 10%
Australian fixed interest 4%
International government bonds (hedged) 4%
International credit securities (hedged) 2%
- Growth assets 90%
Australian property securities 5%
International property securities (hedged) 5%
Australian shares 40%
International shares 31%
International small companies 4.5%
Emerging markets shares 4.5%
This got me thinking. Would it be significantly cheaper to replicate the mix of investments via ETFs, even taking into account the cost of rebalancing (brokerage and time).
Spreadsheet!I prepared a google spreadsheet that analysed the cost of holding the above asset mix via ETFs (or their nearest equivalents). It came to be .2040%, which is lower, but then you have to factor in brokerage fees to allow for buying and selling in rebalancing or buying more, for which I allocated $250 - 10x$25 each. I've attached the spreadsheet to this post.
The difference seems relatively minimal. If you invested $1 milllion, the Lifestyle Fund would be charging you $3.7k p.a, whereas an ETF strategy would cost you $2.04k. This is a difference of $1.4k per annum
more to invest via the Lifestyle Strategy Fund.
At around $150k it would cost the same to do an ETF solution compared to the Lifestyle Strategy, around $557 p.a.
It's not possible to do a completely accurate comparison as the Lifestyle Strategy fund includes certain Vanguard funds that are not covered by ETFs (yet) such as:
International Fixed Interest Index Fund (Hedged)
International Credit Securities Index Fund (Hedged)
International Property Securities Index Fund (Hedged)
International Small Companies Index Fund
So it can only be an approximation.
Any thoughts?
Cost / Benefit Analysis
Here's a bit of more of a qualitative cost benefit analysis I've done as well.
All this spreadsheeting is quite novel for a liberal arts grad to be doing!
ETF portfolioProsLower cost per ETFs
Cons- Requires manual rebalancing
- Only works out if you invest lump sums.
Lifestyle Fund
Pros- Automatic asset allocation and rebalancing. Gets around the inertia and fear that may stop rebalancing.
- Greater diversification (the lifestyle growth fund has allocations in international small cap. There is currently no Australian ETF that covers this category)
- Easier to dollar cost or value average small amounts
ConsHigher fees
Thanks in advance for any comments, feedback etc.