Fund of funds

[glinka]

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.

[MichaelB]

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.

[LOL!]

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.

[pb4uski]

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.

[Animorph]

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.