Investors often respond to complicated questions about their finances by gravitating to a simple solution, even if it’s the wrong one. Typically, the simple solution is expedient, more than anything else. Vanguard STAR Fund (VGSTX) is one such fund — it’s a life-cycle fund that is, and always has been, geared to small investors who don’t have enough money to diversify on their own. Once the only option for the little guy at Vanguard, Vanguard STAR has since gotten some competition from the Target Retirement funds, which now also have $1,000 minimums. That low minimum remains Vanguard STAR’s biggest appeal, but some investors may be happier with the lower expenses and index-heavy approach at a Target Retirement fund.
Leave the Low Returns of Life-Cycle Funds
Of course, why wouldn’t we go for the promises that have been made about these funds? Funds like Vanguard’s STAR LifeStrategy line and the series of Target Retirement funds sure seem like a simple solution to the complex problem of retirement investing. But, as it turns out, the simple solution on paper is not always the best.
The problem is that investing in one of Vanguard’s many set-it-and-forget-it life-cycle funds is nowhere near the same as investing in a well-tuned portfolio of individual Vanguard funds geared to your objectives and risk tolerance. It may feel like you’re doing your money some good by investing in a life-cycle fund, but with a little extra effort you can do better.
As your assets grow, and with it, presumably, your tax rate, it makes sense to more finely hone your portfolio rather than simply leave it in a fund like STAR. There are better options, particularly for taxable investors who have in the past lost some 25% of their STAR gains to taxes each year.
Life-cycle funds proved to be a bit more complicated and fraught with problems in reality than in theory. Most stark: Huge, unexpected losses suffered during the last bear market, which was the first bear for most life-cycle funds and shareholders. The fast side of investors’ brains got the better of them. And I would blame the fast-thinking sides of the mutual fund industry’s brains as well, who figured out a good marketing pitch before they figured out whether they were pushing a good product, properly. Of course, as we’ve seen all too often over the past several decades, this “market first” mentality is nothing new for the fund industry.
Sun is Setting on Vanguard STAR
Vanguard STAR has had a long, healthy life — but given the turnover and addition of fund managers at every equity fund in the portfolio except Primecap, it’s hard to say this is still the STAR fund of old. And, when it comes to risk, this fund showed it in 2008 and 2009, as its maximum cumulative loss, which previously stood at -16.6%, a loss suffered in the 1987 market drop, was obliterated.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.