Vanguard, with its low-fee structure, qualified fund managers and broad choice of funds, is the single BEST fund family out there. But I also know you can’t just buy any old Vanguard funds and hold them for success in the long haul.

17 years ago, when I first started the Independent Adviser for Vanguard Investors, there were 55 Vanguard funds. Today, there are over 150 funds and ETFs, and Vanguard has over $1 trillion under management.

But all this growth comes at a cost. Vanguard has begun to “outsource” the management of its funds, which means navigating the Vanguard waters is more hazardous than ever before.

Don’t rely on Vanguard for help. Like any company, they accentuate the positive—and bury the negative in a hole so deep, it would take years to discover on your own.

I’m NOT afraid to expose the sub-par funds in Vanguard’s closet—the ones you should avoid at all costs.

Vanguard Fund to Avoid #1: STAR LifeStrategy Income (VASIX)

This fund may be popular in 401(k) plans, and when it’s all you’re offered, it may have to do. Still, when you talk about confusing the investor, Vanguard does it in spades with its rash of “life-cycle” funds, including 11 Target Retirement portfolios.

You’re excused if you can’t figure out which to buy. But I’ll make it easy for you. Don’t bother with any of them.

LifeStrategy Income is the most conservative of Vanguard’s STAR LifeStrategy funds. In years when bonds are strong, its relative returns and low, low risk look terrific. But looks can be deceiving!

This Vanguard fund is not too different—when it comes to performance—from Target Retirement Income. In fact, for the last 5 years, both funds have identical 5.9% annual returns. But for much of that time, the target fund was outperforming by a significant amount.

Vanguard says this fund is best for those in their “late retirement years.” That means 75 and older. Maybe this fund will work for you, but by the time you’re 75, you’ll probably have a mix of investments into which this fund may not fit at all. Even at 75, you could need your money for another two decades.

Be careful before putting money in Life Strategy Income for the long haul.

Vanguard Fund to Avoid #2: Total International Index (VGTSX)

Total International combines Vanguard’s three international sector index funds into one. And as with its domestic index funds, Total International shareholders spent a long time waiting to recover from the 47.3% loss suffered in the 2000-2002 bear market, finally breaking even in August 2005.

Like all Vanguard funds, Total International has bare-bones expenses and tremendous diversification. This one fund offers stakes in over 40 countries by putting almost 60% of assets into European Index, more than 25% into Pacific Index and about 15% in Emerging Markets Index.

But Vanguard’s active foreign funds have outpaced Total International over rolling one-year, three-year and five-year periods. If you want to track overseas stock markets rather than outpace them, then buy this fund. But several actively managed funds have put Total International to shame over the long haul. You can do so much better.

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Vanguard Fund to Avoid #3: Diversified Equity (VDEQX)

This is one of Vanguard’s newer funds. Bowing to those who say active management can beat the indexes, Vanguard chose to prove this theory wrong. The result is Diversified Equity.

The problem with this fund? Instead of investing entirely in index funds, like many of the others, this one invests in a portfolio of eight actively managed Vanguard funds. That adds up to some 20 different management teams. Not only is this fund way overdiversified, it’s also handled by a team of Vanguard’s worst managers!

Based on my back-testing of performance of its underlying funds, Diversified Equity should perform almost like a clone of Total Stock Market. I had hoped that with time and some improvements to the management teams, the fund would begin to show some outperformance. But it’s still trailing Total Stock Market (while taking on more risk), and I don’t see that changing anytime soon.

Whichever way you cut it, my model portfolios have put this fund to shame. Stay away from this one.

The One Vanguard Fund to Buy Now: Strategic Equity (VSEQX)

This is one of my top buys right now for one simple reason: It’s a fund with a history of protecting shareholders. Its approach to selecting both growth and value stocks meant it didn’t dive as deep in the 2002 bear market.

This Vanguard fund uses computer models to select stocks for its portfolio using a special index benchmark to avoid straying too far from the “norm.” As the markets swing from growth to value, or vice versa, this fund goes with the flow. It will continue to outperform most of the small- and mid-cap funds with low expenses and optimized trading strategies.

And here’s one of its biggest secrets (although subscribers to my Independent Adviser service have known this for quite a while.) After a false start, fund performance has skyrocketed. The fund had just over $900 million in assets at the end of 2002. It now has $8 billion!

Despite the rapid increase in size, I’m still convinced it’s going to win the performance derby.

Vanguard closed this fund in the spring of 2006 and then reopened it in November 2006 with a higher minimum investment. However, there are signals that Vanguard may be closing it again in a few months—so get in now, before it’s too late.

For over 17 years, independent Vanguard “watchdog” Dan Wiener has been telling subscribers to his Independent Adviser which underperforming, poorly run, undiversified or tax-inefficient funds to avoid AND giving them the best Vanguard investments for their money. In fact, the recommendations in his Growth Portfolio earn a 144% advantage over the typical Vanguard investor! Don’t miss the chance to gain this competitive advantage for your portfolio. Click here to accept a risk-free trial to The Independent Adviser for Vanguard Investors today.