Are fund of funds worth having? Specifically Vanguard LifeStrategy Conservative Growth, which has 28% Vanguard Total Stock Market Index and 12% Vanguard Total International Stock Market Index and 60%Vanguard Total Bond Market II Index Fund. Or would it be better to go with 40% 500 Vanguard index fund and 60% a total bond fund. I want to allocate 40%-60%. Also, thought about the Vanguard Wellesley Income Fund Admiral as an only fund because it keeps 40-60 allocation. All seem low cost.
Fund of funds
- Thread starter glinka
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Generally, fund of funds add expense, so you are usually better off doing it yourself. If your target is a 40% stock 60% fixed income allocation, you can do that investing 90% of your portfolio in Wellesley and the remaining 10% in another Vanguard equity fund.
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I think fund of funds can be good or bad.
Pros:
Hide volatility from you. You do not see as much evidence of the equities dropping (but they do drop). This is a big deal for many folks.
Automatically keep an asset allocation for you. They buy stocks when stocks are down; they sell stocks when stocks are down.
Cons:
Not tax efficient. This is only a problem in taxable accounts. Not a problem in an IRA, Roth, 401(k) in a tax-advantaged account. You get unqualified dividends from the fixed income portion of the fund of funds. Also I read you do not get to take the foreign tax credit for foreign taxes paid.
Fewer tax-loss harvesting opportunities. If equities are down, you cannot just sell a bit of the equities and buy something similar. This is not a problem in a tax-advantaged account.
When you withdraw to pay expenses, you withdraw from both equities and fixed income even if it would make more sense to withdraw from one or the other.
Pros:
Hide volatility from you. You do not see as much evidence of the equities dropping (but they do drop). This is a big deal for many folks.
Automatically keep an asset allocation for you. They buy stocks when stocks are down; they sell stocks when stocks are down.
Cons:
Not tax efficient. This is only a problem in taxable accounts. Not a problem in an IRA, Roth, 401(k) in a tax-advantaged account. You get unqualified dividends from the fixed income portion of the fund of funds. Also I read you do not get to take the foreign tax credit for foreign taxes paid.
Fewer tax-loss harvesting opportunities. If equities are down, you cannot just sell a bit of the equities and buy something similar. This is not a problem in a tax-advantaged account.
When you withdraw to pay expenses, you withdraw from both equities and fixed income even if it would make more sense to withdraw from one or the other.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
If you really want simple and don't want to bother with thinking about AA, rebalancing, etc then it is convenient, albeit at a higher cost. I think it is better to look to the fund of funds as an asset allocation model and then DIY.
If you are in the withdrawal phase, you can't choose to withdraw only from your bond/cash allocation while letting the equity portion recover if you have just the single fund. It's just a matter of simplicity versus control. I thought Vanguard usually didn't add fees on top of the constituent funds, but you can research that.
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