Andrew Hallam
11.05.2021

Vanguard’s LifeStrategy Funds Might Be The Best Choice for British Expats
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Andrew Popplewell has lived in the United Arab Emirates since 2005. But when the 47 year-old first left the United Kingdom, he didn’t know how to best invest his money. “We had some UK based unit trust [actively managed fund] investments,” he says, “and also a UAE portfolio bond.”

As an expat in the UAE, adding more money to his UK-based funds made little sense. After all, the investment gains could be taxable. A financial advisor in the UAE convinced him to buy a tax-free portfolio bond. But because of its high internal fees, it didn’t make money.

As an expat in the UAE, Andrew had far better options. He chose to open an account with Swissquote Bank Europe and add money to one of Vanguard’s LifeStrategy Funds. As long as he lives in the UAE, any capital gains he makes won’t be taxable.

I first mentioned Vanguard’s LifeStrategy funds in my book, Millionaire Expat. At the time, investors required at least 100,000 GBP to invest in such funds. But Swissquote Bank Europe lowered the minimum to just 1000 GBP.

Each fund represents a globally diversified portfolio of indexes wrapped up in a single fund. For example, Vanguard’s LifeStrategy 60% Equity fund provides exposure to the UK stock index and global stock indexes. It’s a “60% Equity fund” because 60 percent of the internal holdings are stock market indexes. The remaining 40 percent represent UK and global bond market indexes.

Approximate Fund Allocations*

_{Source: Vanguard UK
To find Vanguard LifeStrategy funds on the Swissquote Bank Europe platform, use the fund purchase codes (ISIN) above.}

_{*I listed four allocations above. But each fund actually comprises more than four index funds. However, based on each fund’s internal holdings, the allocations above are accurate within 1 or 2 percentage points.}

Vanguard rebalances each fund’s internal holdings to maintain a consistent allocation. For example, when stocks fell in March 2020, Vanguard ensured its LifeStrategy 60% Equity fund maintained 60 percent in equities (stock indexes) and 40 percent in bond indexes. To do that, Vanguard sold some of the bond indexes, adding the proceeds to their stock indexes when stocks were low. This practice ensures that the fund maintains a consistent risk level, and in some cases, it can even boost returns. After all, by rebalancing back to a consistent allocation, the fund managers tend to sell a bit of what has risen, while adding the proceeds to something that has fallen (or hasn’t risen as much). Think of the classic, “Buy Low, Sell High.”

Vanguard charges a paltry 0.22 percent per year for its LifeStrategy funds. That means, if Andrew had 100,000 GBP invested, Vanguard would skim off 220 GBP a year. This is called an expense ratio fee. It’s something all funds charge, including ETFs.

All-in-one index fund portfolio solutions, such as these, are ideal for Brits abroad. But they do charge commissions. Each time Andrew adds money to his Vanguard LifeStrategy Fund, he pays Swissquote Bank Europe a fee that amounts to 0.5 percent, or a minimum of 24.95 Euros (approximately 21.68 GBP). For example, if he chose to invest 2000 GBP every month, 0.5 percent of 2000 GBP would be 10 GBP. But because Swissquote Bank Europe’s minimum commission for these products is 24.95 euros (approximately 21.68 GBP) that’s what Andrew would pay in commission for a 2000 GBP purchase.

That’s why some investors prefer to add money to these funds on a quarterly basis, instead of monthly. By doing so, it allows them to deposit larger sums, thereby lowering the commissions they pay.

Other investors prefer to build their own portfolios of ETFs and pay slightly lower commission rates. But Vanguard’s LifeStrategy funds offer hidden benefits. For example, these funds encourage investors to behave much better.

When purchasing individual stocks or ETFs, investors must select what to buy in any given month. When stocks crash, they often fret with the question, “Should I rebalance now, or should I wait?” Research suggests that investors who buy individual index funds or ETFs don’t perform as well as investors who buy all-in-one index fund portfolio products.

Morningstar’s most recent Mind The Gap study measured investors’ performance in seven stock market fund categories over the 10 years ending December 31, 2019. These ten years should have been easy on the nerves. After all, stocks went up almost every year. But if we don’t include investors who bought all-in-one portfolio funds, the typical investor underperformed the funds they owned by 0.93 percent per year. To do that, investors would have bought more on highs and less on lows. In contrast, all-in-one portfolio investors earned better returns than the returns posted by their funds. Such investors, after all, never have to ask themselves, “Which fund should I buy this month?” Nor did they have to ask, “When should I rebalance?” Most of them, instead, just added consistent sums to their all-in-one portfolio funds. This dollar-cost-averaging allowed them to buy a greater number of fund units when prices were low and a lower number of fund units when prices were higher. As a result, over the 10 years ending December 31, 2019, investors in all-in-one funds outperformed the posted returns of their funds by an average of 0.40 percent per year.

So, individual fund investors underperformed their funds by 0.93 percent per year, and all-in-one fund investors outperformed by 0.4 percent per year. That gave the all-in-one fund investors a behavioural advantage of about 1.33 percent per year.

And this 10-year period (ending December 2019) should have been easy on the nerves. After all, global stocks went up almost every year. In contrast, the 15-year period from 2004-2019 gave us a mixed bag of everything.

Stocks soared from 2004-2007. They crashed heavily in 2008/2009. Then they soared from 2010 to 2020, with just one down year (2018). Stocks rise and fall. Fluctuations freak people out. But such volatility doesn’t impact investors in all-in-one portfolio index funds as much as it hurts investors who buy individual index funds (or ETFs).

Below, you can see data from several individual Vanguard index funds in the United States. Vanguard’s S&P 500 Index Fund averaged 8.62 percent from June 30, 2004 to June 30, 2019. If investors could have controlled their inner greed and fears, those who invested in the S&P 500 over this time period should have earned about 8.62 percent per year. But that didn’t happen. Investors speculated, often holding off on purchases until “the right time.” In other cases, they switched index funds or sold at a low. That’s why, according to Morningstar, the typical investor in this fund averaged just 6.34 percent per year. In other words, they gave up an average of 2.28 percent per year over 15 years. Below, you can see the subsequent performance gaps between how Vanguard’s index funds performed compared to how investors performed in those same funds.

How Investors Performed Compared To The Funds They Owned
June 30, 2004 – June 30, 2019

_{Source: Morningstar.com}

In contrast, Vanguard USA’s all-in-one Target Retirement fund investors behaved far better. They didn’t have to worry about which fund to buy in any given month because they owned a diversified portfolio wrapped up in a single fund. Such investors don’t have to worry about when to rebalance, either, because Vanguard does it for them.

Below, you can see how Vanguard USA’s all-in-one fund portfolios performed over the same 15-year period ending June 30, 2019. In most cases, they actually earned better returns than the posted returns of their funds. This is likely a result of investors adding a consistent sum every month, allowing them to buy more fund units when the fund prices were lower and fewer fund units when the fund prices were higher. In other words, most of them just stuck to a plan and they didn’t speculate.

Investors In All-In-One Funds Perform Better Because They Behave Better
June 30, 2004 – June 30, 2019

_{Source: Morningstar.com
*Investors in Vanguard’s Target Retirement 2015 fund were likely withdrawing money after 2015. That might be the reason such investors underperformed their fund. While markets soared from 2015-2019, they were selling to cover retirement costs.}

Now let’s see how commissions for Vanguard UK’s LifeStrategy Funds might alter the equation. Assume Andrew Popplewell’s Life Strategy 80% Equity fund averaged 8 percent per year over the next fifteen years. Assume he invested 2000 GBP per month, thereby paying 24.95 euros (about 21.68 GBP) in monthly commissions.

His friend, Joe, finds a brokerage that pays him to invest. No such brokerage exists. But let’s assume he finds one that pays him 10 GBP every time he invests and it doesn’t charge commission.

If Andrew’s fund averaged 8 percent over the next fifteen years, let’s assume that an equally diversified collection of ETFs earned the same return. But Joe (if he’s normal) will likely underperform his ETFs. He won’t always rebalance when he should. He might switch ETFs if he believes he has found “a better one.” Just being in a position to tinker with his allocation increases the odds that Joe will speculate. Let’s assume Joe’s behaviour hampers his returns by about 1 percent per year. Well done, Joe. Most individual index fund investors hurt themselves more than that between June 2004 and June 2019.

Now let’s pretend Joe’s brokerage paid him 10 GBP to invest each month and it didn’t charge commissions.

In contrast, Andrew adds money every month and outperforms the posted return of Vanguard’s LifeStrategy 80% Equity fund by 0.2 percent per year. That’s a lower behavioural advantage compared to what the average all-in-one portfolio investor had over the ten years ending December 31, 2019 and over the 15 years ending June 30, 2019. And instead of his brokerage paying him (sorry Andrew) Swissquote Bank Europe charges Andrew 24.95 euros (about 21.68 GBP) for each purchase.

^{*Rough equivalent commission of 24.95 euros
**This is just as an example. Nobody knows how the markets will perform in the future
***No brokerage actually pays people to make purchases, but we’re having some fun with this}

If Morningstar’s evidence is any indication, British expats like Andrew Popplewell will likely beat the performance of most investors who choose to build portfolios of individual ETFs…even if such investors weren’t charged commissions and were paid to invest.

Vanguard UK or iShares UK could create all-in-one portfolio ETFs with similar allocations to Vanguard’s LifeStrategy funds. If they did, that would level the playing field for investors who chose ETFs.

Until then, however, Vanguard’s LifeStrategy Funds, offered by Swissquote Bank Europe, might be the world’s best option for British expats.

Historical Fund Returns In GBP

_{Sources: Vanguard UK and Morningstar UK
Investment returns are in GBP
Past fund returns are not an indication of future returns}

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

Swissquote Bank Europe S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Swissquote Bank Europe and Swissquote Bank Europe accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Swissquote Bank Europe.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.