Author Topic: From 3 VG funds to Vanguard Life Strategy (VASGX)  (Read 7836 times)

jzb11

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From 3 VG funds to Vanguard Life Strategy (VASGX)
« on: March 30, 2015, 05:21:47 AM »
Hey Everyone,

I was reading a thread and someone mentioned vanguard life strategy funds. Looking at the following fund, I found it interesting that it was basically a fund composed of my current portfolio of separate funds:

VFIAX    46%
VFWAX  34%
VBTLX   20%

https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT

1   Vanguard Total Stock Market Index Fund Investor Shares           56.1%
2   Vanguard Total International Stock Index Fund Investor Shares   24.1%
3   Vanguard Total Bond Market II Index Fund Investor Shares           15.8%
4   Vanguard Total International Bond Index Fund Investor Shares      4%

Anyway I'm considering moving into this fund exclusively to keep things simple. Also to remove the need to re balance my portfolio manually. This is my IRA (about 50K, 30 years old).I am also considering using this fund for my post tax investing as well.

What are your thoughts/comments?

Revelry

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #1 on: March 30, 2015, 05:45:49 AM »
I have my IRA in a LS fund.  I looked at the expense ratios and it was lower using it than splitting it out in separate funds, but I was comparing Investor shares not Admiral.  I'm lazy and not too knowledgeable so it works for me.

tj

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #2 on: March 30, 2015, 07:50:53 AM »
A fine choice. Nothing wrong with this fund.

Philociraptor

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #3 on: March 30, 2015, 08:52:26 AM »
The weighted average ER of those 4 (admiral) funds comes out to 0.08%. LSG's ER is 0.17%. You pay 0.09% for simplicity. Over a 30-year time period, this will reduce your LSG holdings vs individually holding the constituent funds by 2.66%. Of course, in order to have an admiral fund of the Total Int. Bond, you'd need $200k in your account based on it's 4% weight, so this number is worst-case scenario.

Edited for clarity.
« Last Edit: March 30, 2015, 09:15:17 AM by Philociraptor »

tj

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #4 on: March 30, 2015, 09:01:53 AM »
The weighted average ER of those 4 (admiral) funds comes out to 0.08%. LSG's ER is 0.17%. You pay 0.09% for simplicity. Over a 30-year time period, this will reduce your overall portfolio by 2.7%. Your choice whether it's worth it to you or not.

This is bad math.

Philociraptor

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #5 on: March 30, 2015, 09:02:53 AM »
The weighted average ER of those 4 (admiral) funds comes out to 0.08%. LSG's ER is 0.17%. You pay 0.09% for simplicity. Over a 30-year time period, this will reduce your overall portfolio by 2.7%. Your choice whether it's worth it to you or not.

This is bad math.
Enlighten me please.

tj

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #6 on: March 30, 2015, 09:04:05 AM »
The weighted average ER of those 4 (admiral) funds comes out to 0.08%. LSG's ER is 0.17%. You pay 0.09% for simplicity. Over a 30-year time period, this will reduce your overall portfolio by 2.7%. Your choice whether it's worth it to you or not.

This is bad math.
Enlighten me please.


You simply multiplied 9 basis points by 30 years and assumed that this lowers your entire portfolio value by 270 basis points. That makes no logical sense.

Philociraptor

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #7 on: March 30, 2015, 09:07:40 AM »
Not quite. I supposed I should clarify that when I said "entire portfolio" I meant "LSG holdings". I'll fix that.

To get 2.7%, I did 1-(99.91%)^30. Is that not correct?

tj

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #8 on: March 30, 2015, 09:13:23 AM »
Not quite. I supposed I should clarify that when I said "entire portfolio" I meant "LSG holdings". I'll fix that.

To get 2.7%, I did 1-(99.91%)^30. Is that not correct?

I'm not sure - but even if that is mathematically correct, the LifeStrategy fund still has Vanguard managing it, automatically rebalancing the underlying funds and deciding when to change the allocations or add new funds - there's no way to know if you could do better than they can, and there is of course a time cost to managing it yourself..

dandarc

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #9 on: March 30, 2015, 09:15:44 AM »
Not quite. I supposed I should clarify that when I said "entire portfolio" I meant "LSG holdings". I'll fix that.

To get 2.7%, I did 1-(99.91%)^30. Is that not correct?
It is close, but it depends on the return.  According to FV in excel, and assuming annual compounding, if you had $1K invested and got an 8% return for 30 years, at the .08% ER, you'd have $9,841.43.  At .17%, $9,598.16 - a reduction of $243.26.  243.26/9841.43 = 2.472%.  So not quite as big a difference as your estimate.

skyrefuge

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #10 on: March 30, 2015, 04:10:28 PM »
To get 2.7%, I did 1-(99.91%)^30. Is that not correct?

I'm not sure - but even if that is mathematically correct....

Hot tip: you may want to avoid pompously flying in with a "This is bad math" if you don't actually know that the math is incorrect. Having nothing to offer on what the correct math might be, and then shifting the goalposts to an unrelated point is pretty cheesy too.

There are two slightly different ways to apply an expense ratio to a rate-of-return. dandarc's method applies the ER to the amount at the beginning of the period, while another option as used by this calculator applies the ER to the amount at the end of the period. When your rate-of-return is positive, the second method results in a slightly lower figure than the first, since the expense ratio applies to a larger number.

X=investment, R=rate-of-return, E=expense ratio, Y=years
Method 1: X*(1+R-E)^Y = $1000*(1+0.08-0.0008)^30 = $9841.43
Method 2: X*((1+R)*(1-E))^Y = $1000*((1+0.08)*(1-0.0008))^30 = $9823.93

The "advantage" to Method 2 is that when comparing the effects of two different ERs, the rate-of-return becomes a non-factor. The equation to find "percentage decrease in final value due to a higher expense ratio" simplifies to:

Eh=high expense ratio, El=low expense ratio
1-((1-Eh)/(1-El))^Y = 1-((1-0.0017)/(1-0.0008))^30 = 2.667165%

Philociraptor did 1-(1-Eh-El)^Y = 1-(1-(0.0017-0.0008))^30 = 2.665059184%

I'm not sure what the derivation is for that equation, or why the result is freakishly-close-but-not-the-same, so I'm in no position to declare it either "bad math" or "good math".

Anyway, it would be interesting to see Vanguard research on people who intentionally made the switch from an all-in-one fund to individual funds for the reduced expense ratios, to see whether the cost advantage actually materialized in their returns, or if lack-of-trading/increased-trading eliminated the theoretical advantage.
« Last Edit: March 30, 2015, 07:52:05 PM by skyrefuge »

forummm

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #11 on: March 30, 2015, 06:44:40 PM »
Hey Everyone,

I was reading a thread and someone mentioned vanguard life strategy funds. Looking at the following fund, I found it interesting that it was basically a fund composed of my current portfolio of separate funds:

VFIAX    46%
VFWAX  34%
VBTLX   20%

https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT

1   Vanguard Total Stock Market Index Fund Investor Shares           56.1%
2   Vanguard Total International Stock Index Fund Investor Shares   24.1%
3   Vanguard Total Bond Market II Index Fund Investor Shares           15.8%
4   Vanguard Total International Bond Index Fund Investor Shares      4%

Anyway I'm considering moving into this fund exclusively to keep things simple. Also to remove the need to re balance my portfolio manually. This is my IRA (about 50K, 30 years old).I am also considering using this fund for my post tax investing as well.

What are your thoughts/comments?

What you're doing now is fine. Switching is also a fine thing to do. People have pointed out that the expense ratio will cost you a little bit if you switch. I think either choice is good. I would stick with individual funds myself. But I like being aware of my investments and checking in on them. Your preferences may be different than mine.

johnny847

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #12 on: March 30, 2015, 07:37:41 PM »
To get 2.7%, I did 1-(99.91%)^30. Is that not correct?

I'm not sure - but even if that is mathematically correct....

Hot tip: you may want to avoid pompously flying in with a "This is bad math" if you don't actually know that the math is incorrect. Having nothing to offer on what the correct math might be, and then shifting the goalposts to an unrelated point is pretty cheesy too.

There are two slightly different ways to apply an expense ratio to a rate-of-return. dandarc's method applies the ER to the amount at the beginning of the period, while another option as used by this calculator applies the ER to the amount at the end of the period. When your rate-of-return is positive, the second method results in a slightly lower figure than the first, since the expense ratio applies to a larger number.

X=investment, R=rate-of-return, E=expense ratio, Y=years
Method 1: X*(1+R-E)^Y = $1000*(1+0.08-0.0008)^30 = $9841.43
Method 2: X*(1+R)(1-E)^Y = $1000*(1+0.08)(1-0.0008)^30 = $9823.93

The "advantage" to Method 2 is that when comparing the effects of two different ERs, the rate-of-return becomes a non-factor. The equation to find "percentage decrease in final value due to a higher expense ratio" simplifies to:

Eh=high expense ratio, El=low expense ratio
1-((1-Eh)/(1-El))^Y = 1-((1-0.0017)/(1-0.0008))^30 = 2.667165%

Philociraptor did 1-(1-Eh-El)^Y = 1-(1-(0.0017-0.0008))^30 = 2.665059184%

I'm not sure what the derivation is for that equation, or why the result is freakishly-close-but-not-the-same, so I'm in no position to declare it either "bad math" or "good math".

Anyway, it would be interesting to see Vanguard research on people who intentionally made the switch from an all-in-one fund to individual funds for the reduced expense ratios, to see whether the cost advantage actually materialized in their returns, or if lack-of-trading/increased-trading eliminated the theoretical advantage.

You've got an error in Method 2:
X*(1+R)(1-E)^Y = $1000*(1+0.08)(1-0.0008)^30 = $1054.38

I do believe you meant
X*[(1+R)(1-E)]^Y = $1000*[(1+0.08)(1-0.0008)]^30 = $9823.93

skyrefuge

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #13 on: March 30, 2015, 07:53:45 PM »
You've got an error in Method 2:
X*(1+R)(1-E)^Y = $1000*(1+0.08)(1-0.0008)^30 = $1054.38

I do believe you meant
X*[(1+R)(1-E)]^Y = $1000*[(1+0.08)(1-0.0008)]^30 = $9823.93

Oops, yes, somehow I must have briefly thought exponentiation was associative! Thanks, edited my post.

ikomrad

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #14 on: April 06, 2017, 09:32:56 PM »
What did the you (OP) finally decide to do? And were you happy with your decision?

Mariposa

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #15 on: April 09, 2017, 12:45:02 PM »
^That's some math. Much of it makes intuitive sense, though I'm not sure I'm able to wrap my mind around all of it.

A couple of other considerations:

1. An extra 0.09% of 50k is $45 a year; for a balance of $1mil it's $900. It doesn't become worth it to me with a larger balance, but for a lot of people, it still is.

2. Our investment accounts include 401k / 403b / different employer contribution accounts / IRAs / taxable. Except for the last 2, decent investment options are limited. The allocations in the IRAs and taxable will need to balance things out. For this reason, a balanced fund like Lifestrategy doesn't work in our situation, since we are balancing over all accounts.

3. If you go with a balanced fund for your taxable account as well, you will end up paying more in taxes for the bond portions:

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

Again, this may be a level of optimization that's not worth it to some people.

farfromfire

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #16 on: April 09, 2017, 01:54:54 PM »
To get 2.7%, I did 1-(99.91%)^30. Is that not correct?

I'm not sure - but even if that is mathematically correct....

Hot tip: you may want to avoid pompously flying in with a "This is bad math" if you don't actually know that the math is incorrect. Having nothing to offer on what the correct math might be, and then shifting the goalposts to an unrelated point is pretty cheesy too.

There are two slightly different ways to apply an expense ratio to a rate-of-return. dandarc's method applies the ER to the amount at the beginning of the period, while another option as used by this calculator applies the ER to the amount at the end of the period. When your rate-of-return is positive, the second method results in a slightly lower figure than the first, since the expense ratio applies to a larger number.

X=investment, R=rate-of-return, E=expense ratio, Y=years
Method 1: X*(1+R-E)^Y = $1000*(1+0.08-0.0008)^30 = $9841.43
Method 2: X*((1+R)*(1-E))^Y = $1000*((1+0.08)*(1-0.0008))^30 = $9823.93

The "advantage" to Method 2 is that when comparing the effects of two different ERs, the rate-of-return becomes a non-factor. The equation to find "percentage decrease in final value due to a higher expense ratio" simplifies to:

Eh=high expense ratio, El=low expense ratio
1-((1-Eh)/(1-El))^Y = 1-((1-0.0017)/(1-0.0008))^30 = 2.667165%

Philociraptor did 1-(1-Eh-El)^Y = 1-(1-(0.0017-0.0008))^30 = 2.665059184%

I'm not sure what the derivation is for that equation, or why the result is freakishly-close-but-not-the-same, so I'm in no position to declare it either "bad math" or "good math".

Anyway, it would be interesting to see Vanguard research on people who intentionally made the switch from an all-in-one fund to individual funds for the reduced expense ratios, to see whether the cost advantage actually materialized in their returns, or if lack-of-trading/increased-trading eliminated the theoretical advantage.
This post has been brought back from the dead, I doubt anyone cares anymore, but bolded part is taylor expansion for small El:
1/(1-El) ~ 1 + El + El^2...
and then ignoring elements of order 2 or more, giving the base (1-(Eh-El))
« Last Edit: April 09, 2017, 01:57:50 PM by farfromfire »

Philociraptor

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Re: From 3 VG funds to Vanguard Life Strategy (VASGX)
« Reply #17 on: April 11, 2017, 06:41:47 PM »
To get 2.7%, I did 1-(99.91%)^30. Is that not correct?

I'm not sure - but even if that is mathematically correct....
...

Eh=high expense ratio, El=low expense ratio
1-((1-Eh)/(1-El))^Y = 1-((1-0.0017)/(1-0.0008))^30 = 2.667165%

Philociraptor did 1-(1-Eh-El)^Y = 1-(1-(0.0017-0.0008))^30 = 2.665059184%

...
This post has been brought back from the dead, I doubt anyone cares anymore, but bolded part is taylor expansion for small El:
1/(1-El) ~ 1 + El + El^2...
and then ignoring elements of order 2 or more, giving the base (1-(Eh-El))

Thanks for this. Lazy math is lazy.