<PAGE> 1
VANGUARD
LIFESTRATEGY(TM)
FUNDS
VANGUARD LIFESTRATEGY
INCOME FUND
VANGUARD LIFESTRATEGY
CONSERVATIVE GROWTH FUND
VANGUARD LIFESTRATEGY
MODERATE GROWTH FUND
VANGUARD LIFESTRATEGY
GROWTH FUND
[PHOTO]
ANNUAL REPORT
DECEMBER 31, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 2
FELLOW SHAREHOLDERS:
Two roads diverged in a wood, and I--I took the one less traveled by, and that
has made all the difference.
[PHOTO]
John C. Bogle
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the past
25 years, the assets we hold in stewardship for investors have grown from $1
billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant nearly
four years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to assure
you that I will remain vigorous and active in a newly created Vanguard unit,
researching the financial markets, writing, and speaking. I'll continue to focus
whatever intellectual power and ethical strength I possess on my mission to
assure that mutual fund investors everywhere receive a fair shake. In the spirit
of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to
go before I sleep.
You have given me your loyalty and friendship over these long years, and I
deeply appreciate your thousands of letters of support. For my part, I will
continue to keep an eagle eye on your interests, for you deserve no less. May
God bless you all, always.
/s/ JOHN C. BOGLE
CONTENTS
REPORT FROM THE CHAIRMAN ................... 1
AFTER-TAX RETURNS REPORT ................... 6
THE MARKETS IN PERSPECTIVE ................. 8
PERFORMANCE SUMMARIES ...................... 10
FUND PROFILES .............................. 14
FINANCIAL STATEMENTS ....................... 19
REPORT OF INDEPENDENT ACCOUNTANTS .......... 31
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REPORT FROM THE CHAIRMAN
[PHOTO]
John J. Brennan
The four Vanguard LifeStrategy Funds provided positive returns during 1999. It
was a banner year for stocks and a baleful one for bonds, so the funds' returns
were directly correlated to the proportion of their assets in equities. The
Growth Fund, which has a target allocation of 80% in stocks and 20% in bonds,
delivered the highest total return of 17.3%. The Income Fund, which invests
about 80% of its assets in bonds, posted a gain of just 2.8%.
<TABLE>
<CAPTION>
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TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1999
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<S> <C>
LIFESTRATEGY INCOME FUND 2.8%
Income Composite Index* 5.0
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LIFESTRATEGY CONSERVATIVE GROWTH FUND 7.9%
Conservative Growth Composite Index* 10.0
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LIFESTRATEGY MODERATE GROWTH FUND 12.0%
Moderate Growth Composite Index* 13.9
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LIFESTRATEGY GROWTH FUND 17.3%
Growth Composite Index* 19.1
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</TABLE>
*Total returns for the composite indexes are derived by applying the fund's
target allocation to the results of the following benchmarks: for U.S. stocks,
the Wilshire 5000 Total Market Index; for international stocks, the Morgan
Stanley Capital International Europe, Australasia, Far East Index; for bonds,
the Lehman Brothers Aggregate Bond Index; and for cash investments, the Salomon
Smith Barney 3-Month U.S. Treasury Bill Index.
The table at right presents each fund's total return for the year. It also
shows the results for the funds' benchmarks--composites made up of unmanaged
indexes that are weighted to reflect the target asset allocation of each fund.
Each of our funds lagged its composite index. Each fund's total return is based
on the change in its net asset value during the 12-month period, adjusted for
income dividends and capital gains distributions. The table on page 5 presents
those per-share figures, along with each fund's yield as of December 31, 1999.
FINANCIAL MARKETS IN REVIEW
The U.S. economy continued its remarkable growth in 1999. As 2000 begins, the
nation is on the verge of the longest-running expansion in U.S. history.
Inflation-adjusted economic output rose 4.0% during the 12-month period, and the
nation's unemployment rate was at a 30-year low of 4.1% of the workforce at
year-end. Overseas economies also picked up steam, and yet inflation on the
homefront did not get out of hand. A significant rise in energy prices did help
push up consumer prices by 2.7% during the year. However, the "core" rate of
inflation, which excludes the volatile food and energy sectors, rose just
1.9%--the smallest annual increase since 1965.
Nonetheless, fears of higher inflation were reflected in a steady rise in
interest rates during the fiscal year. The yield of the 30-year U.S. Treasury
bond ended the year at 6.48%, up 138 basis points (1.38 percentage points) from
its starting point of 5.10% on December 31, 1998. The Federal Reserve Board
encouraged the uptrend, raising its target for short-term interest rates three
times by a total of 75 basis points in an attempt to slow the economy.
Short-term money market rates also rose. The yield of 90-day Treasury bills
ended the period at 5.33%, up 88 basis points from 4.45% one year earlier.
Bond prices are, of course, tightly linked to interest rates, and rising
rates cause prices of existing bonds to fall. Interest rates rose across all
maturities in 1999, and prices dropped accordingly. On balance, the bond market
suffered its worst year since 1994. Long-term bonds were hardest hit by the rise
in rates, as always, and their prices fell
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almost -15% during the year. The total return of the Lehman Aggregate Bond
Index, a broad measure of the U.S. bond market, was -0.8%, as a price decline of
- -7.0% more than offset interest income of 6.2%.
The U.S. stock market rode the white-hot technology sector in 1999 to an
unprecedented fifth consecutive year of returns exceeding 20%. Stocks got off to
a strong start during the first four months of the year but, weighed down by
higher interest rates, struggled through most of the summer and into the fall.
Through September, the Wilshire 5000 Index returned 4.6%. But technology stocks
led the market on an upward tear in the fourth quarter, bringing the Wilshire
5000's full-year return to a remarkable 23.8%. The Standard & Poor's 500 Index,
which is dominated by large-capitalization stocks, returned 21.0%. Small-cap
stocks, as measured by the Russell 2000 Index, returned 21.3%--a fine showing
for a market segment that had badly lagged large-cap stocks in the five previous
years.
The rise of the major indexes in 1999 suggests a broad advance for the
market, but in truth it was a year of "haves" and "have nots"--a huge number of
stocks did not join in the market's ascent. Fully 60% of those listed on the New
York Stock Exchange actually declined in price in 1999, and so did 48% of the
stocks listed on the Nasdaq market. (In fact, 36% of NYSE stocks and 31% of
Nasdaq issues fell by more than 20%.) As mentioned, the technology sector was
the year's leading "have"--the tech stocks in the S&P 500 Index gained 74% and
were largely responsible for growth stocks within the index (up 28.2%) far
outpacing value stocks (12.7%). Among small stocks, the difference between
growth and value was an amazing 44.6 percentage points: the Russell 2000 Index's
growth stocks leapt 43.1%, while its value stocks fell -1.5%.
Stock markets overseas posted terrific gains in 1999. European markets
jumped more than 30% in local-currency terms, though U.S. investors collected
just half of those gains as the euro, in its first year as a common currency,
fell nearly -15% versus the dollar. Japan soared nearly 62% in dollar
terms--thanks in part to a strengthening yen--and the major emerging markets
were just as strong, rebounding from a dismal 1998.
FISCAL 1999 PERFORMANCE OVERVIEW
The year's returns for the LifeStrategy funds ranged from 17.3% for the Growth
Fund to 2.8% for the Income Fund. The latter fund's dividend yield ended the
period at 5.73%, up from 5.01% at the end of 1998.
As you know, the LifeStrategy funds are "funds of funds" that invest in up
to five underlying Vanguard portfolios. Each of the LifeStrategy funds earned a
return of 23.8% from its holding of Vanguard Total Stock Market Index Fund,
which tracks the Wilshire 5000 Index. At year-end, this index fund made up 5%,
21%, 36%, and 50%, respectively,
<TABLE>
<CAPTION>
TARGET AND ACTUAL ASSET ALLOCATIONS (DECEMBER 31, 1999)
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STOCKS* BONDS CASH
------------------ ------------------ -------------------
LIFESTRATEGY FUND TARGET ACTUAL TARGET ACTUAL TARGET ACTUAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income 20% 15% 80% 85% 0% 0%
Conservative Growth 40 36 60 64 0 0
Moderate Growth 60 56 40 44 0 0
Growth 80 75 20 25 0 0
- ------------------------------------------------------------------------------------------
</TABLE>
*International stock positions for the Income, Conservative Growth, Moderate
Growth, and Growth Funds equal, respectively, 0%, 6%, 10%, and 15% of assets.
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of the Income, Conservative Growth, Moderate Growth, and Growth Funds. Each
LifeStrategy fund gains additional exposure to large U.S. stocks by holding
one-quarter of its assets in Vanguard Asset Allocation Fund, which may invest in
any combination of stocks, bonds, and cash reserves. The Asset Allocation Fund
earned only 5.2% in 1999, due to its relatively light weighting in stocks and
heavy weighting in bonds.
The subpar performance of the Asset Allocation Fund played a key role in
the relative weakness of the LifeStrategy funds versus--both the composite
indexes and similar composites of peer mutual funds. Asset Allocation's adviser,
Mellon Capital Management Corporation, seeks to provide equity-like returns
while taking on less risk than an all-stock portfolio. This year, the adviser's
allocation model proved too conservative. The fund's stock exposure was trimmed
in May from 60% of assets, where it stood at year-end 1998, to 50%. In November,
it was sliced again, to 40%. Meanwhile, stock market valuations--particularly in
the fourth quarter--climbed to unprecedented levels. We note that over the long
term, Mellon--which has managed the Asset Allocation Fund since its inception in
1988--has proven quite adept at its mission.
For three LifeStrategy funds--Conservative Growth, Moderate Growth, and
Growth--the stock allocations shown in the adjacent table include international
exposure through investments of 6%, 10%, and 15% of assets, respectively, in
Vanguard Total International Stock Index Fund. This international exposure
proved profitable during the year, as the strength of equity markets around the
globe led Total International to a gain of 29.9%.
The fixed-income components of the LifeStrategy funds struggled in 1999.
Vanguard Short-Term Corporate Fund had a total return of just 3.3%, as declines
in the market value of its bonds offset about half of their interest payments.
Vanguard Total Bond Market Index Fund fared worse, posting a decline of -0.8%.
The latter fund is subject to more interest-rate risk than Short-Term Corporate
because it holds bonds with an intermediate-term average maturity. The bond
market clearly demonstrated in 1999 that its risks can be substantial. We remain
confident, however, that bonds are an important component in a balanced
investment program, offering a valuable combination of income and relative price
stability when compared with stocks.
As the table below illustrates, all four LifeStrategy funds delivered weak
fiscal 1999 results compared with their mutual fund benchmarks. The funds were
hurt, as noted, by the conservative posture of Vanguard Asset Allocation Fund.
Our underperformance is also partly attributable to the fact that the average
stock and bond funds managed, for a change, to beat the broad market indexes for
the year. Because the LifeStrategy funds rely heavily on index funds--which cede
the possibility of "beating the market" in favor of closely tracking it--they
will underperform actively managed peer funds from time to time. That said, we
note that all four funds beat their mutual fund benchmarks each year from
1995--their first full year of operations--through 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
TOTAL RETURNS
YEAR ENDED DECEMBER 31, 1999
--------------------------------------
VANGUARD MUTUAL FUND
LIFESTRATEGY FUND FUND BENCHMARK* IFFERENCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
Income 2.8% 5.7% -2.9%
Conservative Growth 7.9 11.3 -3.4
Moderate Growth 12.0 16.1 -4.1
Growth 17.3 22.1 -4.8
- ---------------------------------------------------------------
</TABLE>
*Each benchmark is a blended composite that weights the returns of the average
comparable mutual fund for each asset class in proportion with the target
weighting of the appropriate LifeStrategy fund. All average fund figures are
derived from data provided by Lipper Inc.
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<PAGE> 6
LONG-TERM PERFORMANCE OVERVIEW
The table below presents the results of each of the LifeStrategy funds since
their inception on September 30, 1994, as well as the returns of each fund's
composite benchmarks. It also shows the value of hypothetical $10,000
investments made in each fund and its benchmarks since the funds' inception. As
you can see, we have earned, on average, 2.4 to 2.9 percentage points more per
year than the averages for peer funds. Through the power of compounding, such
seemingly small differences are magnified over time. For example, assuming the
reinvestment of income and capital gains distributions, a $10,000 investment in
the Growth Fund on September 30, 1994 would have grown to $25,948, or $3,121
more than the $22,827 that would have accumulated in an average peer.
<TABLE>
<CAPTION>
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TOTAL RETURNS
SEP. 30, 1994, TO DEC. 31, 1999
------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- --------------------------------------------------------------------------
<S> <C> <C>
LIFESTRATEGY INCOME FUND 11.4% $17,634
Income Composite Average 9.0 15,717
Income Composite Index 10.6 16,937
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LIFESTRATEGY CONSERVATIVE
GROWTH FUND 14.2% $20,053
Conservative Growth
Composite Average 11.6 17,787
Conservative Growth
Composite Index 13.5 19,464
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LIFESTRATEGY MODERATE GROWTH FUND 17.1% $22,866
Moderate Growth Composite Average 14.5 20,333
Moderate Growth Composite Index 17.0 22,763
- --------------------------------------------------------------------------
LIFESTRATEGY GROWTH FUND 19.9% $25,948
Growth Composite Average 17.0 22,827
Growth Composite Index 19.9 25,949
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</TABLE>
An essential ingredient in our long-term success is our low costs. In
1999, LifeStrategy investors effectively paid 0.29 percentage point (0.28 in the
case of the Income Fund) to cover their share of the operating expenses of the
underlying funds. Our average competitors charged roughly four times as
much--between 1.16 and 1.41 percentage point. In many cases, the expenses of
competing "funds of funds" include not only the indirect costs of the underlying
funds but also an additional layer of expense paid to a management company for
the service of bundling those funds in one convenient package. Vanguard does not
saddle LifeStrategy investors with an additional charge.
It is important to recognize that the past decade's returns for the
LifeStrategy funds and their benchmarks were unusually generous compared with
long-term norms. This is principally due to the fantastic stock market returns
experienced during the period. The U.S. stock market, as measured by the
Wilshire 5000 Index, produced an average annual return of 17.6% during the
1990s, more than 1 1/2 times the average return of about 11% achieved by stocks
since 1925.
In part, the big returns of the past decade reflect the underlying growth
in the economy and in corporate profits. But another part of the gains can be
traced to growing optimism about stocks and less fear of their risks. These
changes in perception are reflected in the extraordinary rise in the average
stock's price/earnings ratio--from about 16 as the decade of the 1990s began to
an unprecedented 33 when it ended. No one knows how or when investor perceptions
may change. But we note that the moods of markets, made up as they are of
self-interested individuals, can shift dramatically.
In constructing long-term plans, it is prudent to recognize that financial
markets will go through bad times as well as good, and to adopt realistic
assumptions about future returns. We don't believe it is realistic to expect the
next decade to be as rewarding as the
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<PAGE> 7
past one. This isn't a forecast of doom. If inflation remains in the
neighborhood of below 3% annually, it would take stock returns of only 8% to 9%
a year to provide decent real, or inflation-adjusted, returns of 5% to 6%. If
long-term bond returns approximate their current yields--and that's the best
guess to make--the current yields of nearly 6.5% on long-term U.S. Treasury
securities translate into a real return of nearly 4 percentage points, assuming
inflation continues to hover around 2.5%.
IN SUMMARY
When one asset class performs so well, as stocks did again in fiscal 1999, and
another performs poorly, as did bonds, it can be easy to conclude that
diversification is not worthwhile. That conclusion would be dead wrong.
At Vanguard, we continue to believe that most investors should hold
balanced portfolios of stocks, bonds, and short-term reserves. The four
LifeStrategy funds offer a range of options for investors who have considered
their investment goals, time horizon, and tolerance for risk and selected an
appropriate asset allocation. With such a plan in place, investors are
well-advised to "stay the course."
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
January 14, 2000
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A Note of Thanks to Our Founder
- --------------------------------------------------------------------------------
As you may have read on the inside cover of our report, our founder, John C.
Bogle, retired on December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982. John J. Brennan
<TABLE>
<CAPTION>
FUND STATISTICS
- -----------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE YEAR ENDED DECEMBER 31, 1999
---------------------------- ------------------------------
DECEMBER 31, DECEMBER 31, INCOME CAPITAL GAINS SEC
LIFESTRATEGY FUND 1998 1999 DIVIDENDS DISTRIBUTIONS YIELD*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income $13.22 $12.82 $0.69 $0.07 5.73%
Conservative Growth 14.71 15.10 0.63 0.11 4.49
Moderate Growth 16.86 18.18 0.55 0.13 3.42
Growth 18.79 21.41 0.45 0.16 2.28
- -----------------------------------------------------------------------------------------------
</TABLE>
*30-day advertised yield net of expenses at month-end.
NOTE: IN MARCH 2000, EACH FUND IS EXPECTED TO MAKE A SUPPLEMENTAL DISTRIBUTION
OF LONG-TERM CAPITAL GAINS REALIZED IN NOVEMBER AND DECEMBER 1999. THE
APPROXIMATE AMOUNTS OF THE DISTRIBUTIONS ARE EXPECTED TO BE: LIFESTRATEGY INCOME
FUND, $0.08; LIFESTRATEGY CONSERVATIVE GROWTH FUND, $0.10; LIFESTRATEGY MODERATE
GROWTH FUND, $0.11; LIFESTRATEGY GROWTH FUND, $0.13.
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<PAGE> 8
A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the LifeStrategy funds' after-tax performance. The figures on this page
demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own a LifeStrategy
fund in a tax-deferred account such as an individual retirement account or a
401(k), this information does not apply to you. Such accounts are not subject to
current taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------- ---------------------- ---------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LifeStrategy Income Fund 2.8% 0.5% 12.0% 9.4% 11.4% 8.9%
LifeStrategy Conservative
Growth Fund 7.9 5.8 14.9 12.6 14.2 11.8
LifeStrategy Moderate
Growth Fund 12.0 10.4 18.2 16.2 17.1 15.1
LifeStrategy Growth Fund 17.3 16.0 21.0 19.4 19.9 18.2
- -------------------------------------------------------------------------------------------------------
Average Domestic
Hybrid Fund** 8.8% 6.5% 15.6% 12.7% N.A. N.A.
- -------------------------------------------------------------------------------------------------------
</TABLE>
*September 30, 1994.
**Based on data from Morningstar, Inc.
- The after-tax return calculations use the top federal income tax rates
in effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
- The peer funds' returns are provided by Morningstar, Inc. (Elsewhere in
this report, returns for comparable mutual funds are derived from data provided
by Lipper Inc., which differ somewhat.)
As you can see, the tax efficiency of the LifeStrategy funds has varied
considerably. For example, the Income Fund's pretax total return of 2.8% for the
12 months ended December 31, 1999, was reduced by taxes to 0.5%. In other words,
for investors in the highest tax bracket, taxes cut the fund's pretax return by
2.3 percentage points. At the other end of the spectrum was the Growth Fund. Its
pretax total return of 17.3% for the 12 months ended December 31 was reduced by
taxes to 16.0%. Over longer time periods, this pattern has persisted--the more
growth-oriented LifeStrategy funds have delivered more of their pretax returns
to investors than the income-oriented funds. Given that income distributions are
taxed at full rates while unrealized capital gains remain tax-deferred,
investors should recognize that a mutual fund's income return is generally less
tax-efficient than its capital return.
We stress that because many interrelated factors affect how tax-friendly a
fund may be, it's very difficult to predict tax efficiency. A fund's tax
efficiency can be influenced by its turnover rate, the types of securities it
holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
6
<PAGE> 9
Finally, it's important to note that our calculation does not reflect the
effect of your own investment activities. Specifically, you may incur additional
capital gains taxes--thereby lowering your after-tax return--if you sell all or
some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
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<PAGE> 10
THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1999
A global expansion in economic activity bolstered stocks at home and
abroad during 1999. The muscular U.S. economy provided a good bit of the oomph,
but it got an assist from solid growth in Asian, European, and Latin American
economies that had slumped in 1997 and 1998.
Interest rates increased significantly--causing bond prices to fall--as
both investors and monetary policymakers grew concerned that economic growth was
so vigorous that it would cause inflation to accelerate.
U.S. STOCK MARKETS
The booming economy and growing corporate profits provided plenty of fuel for
stock prices during 1999. However, higher interest rates restrained the rise,
especially for financial-services and electric utility stocks regarded as
interest rate sensitive.
U.S. economic output increased at an inflation-adjusted rate of about
4%--a very rapid pace for such a large, mature economy. Analysts estimated that
corporate profits would grow by 14% in 1999 and again in 2000. Consumer
spending, which accounts for roughly two-thirds of economic activity, was
strong. People felt prosperous, thanks to the long bull market, plentiful jobs,
and rising incomes. (After-tax personal income grew by more than 5% in 1999, and
unemployment at year-end was at a three-decade low of 4.1% of the workforce.)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
----------------------------------
1 YEAR 3 YEARS 5 YEARS
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 21.0% 27.6% 28.6%
Russell 2000 Index 21.3 13.1 16.7
Wilshire 5000 Index 23.8 26.1 27.1
MSCI EAFE Index 27.3 16.1 13.2
- ---------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -0.8% 5.7% 7.7%
Lehman 10 Year Municipal Bond Index -1.3 4.8 7.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.7 5.0 5.2
- ---------------------------------------------------------------------------
OTHER
Consumer Price Index 2.7% 2.0% 2.4%
- ---------------------------------------------------------------------------
</TABLE>
The stock market, as measured by the Wilshire 5000 Index, gained 23.8%,
with more than three-quarters of the gain coming in the final quarter of 1999.
For the first time in several years, smaller stocks outpaced
large-capitalization issues. The S&P 500 Index, which is dominated by large-cap
stocks and accounts for more than three-quarters of the U.S. stock market's
total value, gained 21.0% during the year; the rest of the market gained 35.4%.
Hidden in the market averages was an amazing divergence in stock
performance. Prices soared for most technology-related stocks, but performance
was pedestrian, at best, for most other issues. Indeed, three-fifths of stocks
on the New York Stock Exchange fell in 1999. The technology sector of the S&P
500 Index gained 74%, and the producer-durables sector, driven by huge gains for
some makers of telecommunications and technology gear, was up 49%. These results
were in stark contrast to the declines suffered by food and beverage companies
in the consumer-staples sector (-16%) and by many companies in the health-care
group (-10%).
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<PAGE> 11
Investors seemed bedazzled by the prospects for growth in revenue and
profits among tech stocks, but less interested in the actual profits for nontech
companies. Remarkably, the average S&P 500 stock without earnings gained 36.5%
in 1999, while the average stock with earnings rose 11.5%. There is general
agreement that growth in Internet commerce, computers, software, wireless
communications, and other key tech sectors will be stupendous. However, there is
much disagreement about whether profits will grow so impressively, given the
intense competition. During 1999, optimists clearly ruled.
U.S. BOND MARKETS
The pickup in worldwide economic activity buoyed stock prices but depressed bond
prices. Interest rates, which move in the opposite direction from bond prices,
rose sharply. The rate increase stemmed from increased borrowing by corporations
and individuals and from investors' fears that a sizzling economy was bound to
send inflation soaring.
The inflation evidence was ambiguous. Price increases were greater in 1999
than in 1998 at both the wholesale and consumer levels. Wholesale prices rose
3.0%, the biggest gain since 1990. And the Consumer Price Index advanced 2.7% in
1999 after a gain of just 1.6% in 1998. However, energy prices, which plunged in
1998 and shot up in 1999, skewed the figures in both periods. At the consumer
level, the "core rate" of inflation, which excludes food and energy prices, was
up just 1.9% in 1999, the smallest increase in 35 years.
At midyear, the Federal Reserve Board, aiming to cool the economy a bit to
head off price pressures, began raising short-term interest rates. In all, the
Fed pushed up rates by 0.75 percentage point in three quarter-point steps. The
bond market anticipated the Fed--interest rates began rising sharply in
February--and at year-end the yield of 30-year U.S. Treasury bonds was up 1.38
percentage points (138 basis points) to 6.48%. The 10-year Treasury note--a
benchmark for mortgage lenders--rose 179 basis points, from 4.65% to 6.44%.
Short-term rates didn't rise as far; 3-month Treasury bill yields were up 88
basis points to 5.33% at year-end.
Price declines, as usual, were greatest for long-term bonds and least for
short-term bonds. The overall market, as measured by the Lehman Aggregate Bond
Index, which has an intermediate-term average maturity, posted a -0.8% total
return in 1999. Short-term bonds generally provided returns of 2% to 3%.
Long-term bonds suffered significant price declines, and the Lehman Long
Government/Corporate Index recorded a -7.7% total return.
INTERNATIONAL STOCK MARKETS
Bullishness among stock investors was an international phenomenon in 1999. The
biggest gains came in Pacific-region and emerging markets that had suffered most
from economic slumps and currency crises during 1997 and 1998.
Overall, the Morgan Stanley Capital International Europe, Australasia, Far
East (EAFE) Index of major developed markets produced a 27.3% return for U.S.
dollar-based investors. The MSCI Pacific Free Index gained an astounding 56.4%
for U.S. investors, as a strong rise in the Japanese yen against the U.S. dollar
tacked on about 12.5 percentage points to a 43.9% return in local currencies. In
Europe, currency fluctuations had the opposite effect: European currencies,
including the new 11-nation common currency, the euro, mostly fell against the
dollar, and the 30.3% return in local currencies was nearly halved to 15.8% in
U.S. dollars.
Emerging markets managed a stunning turnaround, as the Select Emerging
Markets Free Index rose 60.9% in U.S.-dollar terms after having plummeted -18.4%
in 1998 and -16.4% in 1997.
9
<PAGE> 12
PERFORMANCE SUMMARY
LIFESTRATEGY INCOME FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- ---------------------------------------------------------------
LIFESTRATEGY INCOME FUND INCOME
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.2% 1.4% 0.2% 0.3%
1995 17.7 5.3 23.0 19.2
1996 1.9 5.7 7.6 7.4
1997 8.5 5.7 14.2 13.0
1998 7.9 5.3 13.2 11.2
1999 -2.5 5.3 2.8 5.0
- ---------------------------------------------------------------
</TABLE>
*60% Lehman Aggregate Bond Index, 20% Wilshire 5000 Index, and 20% Salomon Smith
Barney 3-Month Treasury Index.
See Financial Highlights table on page 26 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------
LifeStrategy Income Income Lehman Aggregate
Income Fund Composite Average* Composite Index** Bond Index
<S> <C> <C> <C> <C>
10/1/98 10000 10000 10000 10000
1994 12 10020 9984 10034 10038
1995 03 10618 10393 10545 10544
1995 06 11354 10910 11157 11186
1995 09 11780 11249 11522 11405
1995 12 12324 11583 11960 11891
1996 03 12323 11676 11996 11681
1996 06 12476 11857 12174 11747
1996 09 12739 12098 12414 11965
1996 12 13266 12447 12843 12324
1997 03 13276 12412 12851 12255
1997 06 14088 13063 13591 12704
1997 09 14700 13649 14167 13126
1997 12 15153 13814 14506 13512
1998 03 15800 14320 15058 13723
1998 06 16219 14489 15366 14044
1998 09 16356 14235 15437 14638
1998 12 17150 14869 16135 14688
1999 03 17228 14942 16247 14614
1999 06 17350 15217 16444 14485
1999 09 17256 15110 16334 14584
1999 12 17634 15717 16937 14568
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
-------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LifeStrategy Income Fund 2.82% 11.97% 11.41% $17,634
Income Composite Average* 5.70 9.50 8.99 15,717
Income Composite Index** 4.97 11.04 10.55 16,937
Lehman Aggregate Bond Index -0.82 7.73 7.43 14,568
- ---------------------------------------------------------------------------------------------
</TABLE>
*A composite fund average weighted 60% average fixed-income fund, 20% average
general equity fund, and 20% average money market fund. Derived from data
provided by Lipper Inc.
**60% Lehman Aggregate Bond Index, 20% Wilshire 5000 Index, and 20% Salomon
Smith Barney 3-Month Treasury Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LifeStrategy Income Fund 9/30/1994 2.82% 11.97% 5.92% 5.49% 11.41%
- -------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
PERFORMANCE SUMMARY
LIFESTRATEGY CONSERVATIVE GROWTH FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- ---------------------------------------------------------------
LIFESTRATEGY CONSERVATIVE CONSERVATIVE
GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.3% 1.4% 0.1% 0.1%
1995 19.3 5.0 24.3 21.4
1996 5.6 4.8 10.4 10.1
1997 12.0 4.8 16.8 15.8
1998 11.3 4.6 15.9 14.2
1999 3.4 4.5 7.9 10.0
- ---------------------------------------------------------------
</TABLE>
*40% Lehman Aggregate Bond Index, 35% Wilshire 5000 Index, 20% Salomon Smith
Barney 3-Month Treasury Index, and 5% MSCI EAFE Index.
See Financial Highlights table on page 27 for dividend and capital gains
information for the past five years.
[LINE GRAPH]
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------
LifeStrategy Conservative Conservative Growth Conservative Growth Lehman Aggregate Wilshire
Growth Fund Composite Average* Composite Index** Bond Index 5000 Index
<S> <C> <C> <C> <C> <C>
10/1/98 10000 10000 10000 10000 10000
1994 12 10010 9949 10011 10038 9922
1995 03 10618 10374 10566 10544 10816
1995 06 11371 10944 11202 11186 11828
1995 09 11897 11416 11702 11405 12908
1995 12 12447 11738 12158 11891 13536
1996 03 12617 11977 12358 11681 14304
1996 06 12854 12256 12621 11747 14939
1996 09 13137 12504 12878 11965 15355
1996 12 13736 12913 13389 12324 16414
1997 03 13768 12853 13417 12255 16507
1997 06 14942 13805 14513 12704 19296
1997 09 15680 14587 15242 13126 21191
1997 12 16044 14608 15498 13512 21560
1998 03 17098 15458 16459 13723 24427
1998 06 17509 15590 16775 14044 24885
1998 09 17081 14788 16295 14638 21901
1998 12 18592 15980 17698 14688 26602
1999 03 18819 16090 17956 14614 27626
1999 06 19231 16700 18436 14485 29739
1999 09 18948 16487 18147 14584 27818
1999 12 20053 17787 19464 14568 32925
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
-------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LifeStrategy Conservative Growth Fund 7.86% 14.91% 14.17% $20,053
Conservative Growth Composite Average* 11.30 12.32 11.59 17,787
Conservative Growth Composite Index** 9.98 14.22 13.52 19,464
Lehman Aggregate Bond Index -0.82 7.73 7.43 14,568
Wilshire 5000 Index 23.77 27.11 25.47 32,925
- ----------------------------------------------------------------------------------------------
</TABLE>
*A composite fund average weighted 40% average fixed-income fund, 35% average
general equity fund, 20% average money market fund, and 5% average
international fund. Derived from data provided by Lipper Inc.
**40% Lehman Aggregate Bond Index, 35% Wilshire 5000 Index, 20% Salomon Smith
Barney 3-Month Treasury Index, and 5% MSCI EAFE Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LifeStrategy Conservative Growth Fund 9/30/1994 7.86% 14.91% 9.39% 4.78% 14.17%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
PERFORMANCE SUMMARY
LIFESTRATEGY MODERATE GROWTH FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- ---------------------------------------------------------------
LIFESTRATEGY MODERATE MODERATE
GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -2.1% 1.4% -0.7% -0.3%
1995 24.1 3.8 27.9 26.5
1996 9.0 3.7 12.7 12.6
1997 15.9 3.9 19.8 19.5
1998 15.5 3.5 19.0 17.8
1999 8.6 3.4 12.0 13.9
- ---------------------------------------------------------------
</TABLE>
*50% Wilshire 5000 Index, 40% Lehman Aggregate Bond Index, and 10% MSCI EAFE
Index.
See Financial Highlights table on page 27 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------
LifeStrategy Moderate Moderate Growth Moderate Growth Lehman Aggregate Wilshire
Growth Fund Composite Average* Composite Index** Bond Index 5000 Index
<S> <C> <C> <C> <C> <C>
10/1/98 10000 10000 10000 10000 10000
1994 12 9930 9886 9969 10038 9922
1995 03 10605 10378 10640 10544 10816
1995 06 11441 11079 11405 11186 11828
1995 09 12123 11705 12063 11405 12908
1995 12 12705 12070 12614 11891 13536
1996 03 12999 12414 12914 11681 14304
1996 06 13315 12786 13254 11747 14939
1996 09 13612 13061 13544 11965 15355
1996 12 14320 13579 14197 12324 16414
1997 03 14331 13453 14194 12255 16507
1997 06 15942 14802 15772 12704 19296
1997 09 16870 15872 16749 13126 21191
1997 12 17150 15754 16964 13512 21560
1998 03 18679 17032 18436 13723 24427
1998 06 19108 17136 18807 14044 24885
1998 09 18054 15684 17746 14638 21901
1998 12 20414 17511 19988 14688 26602
1999 03 20754 17632 20364 14614 27626
1999 06 21487 18587 21121 14485 29739
1999 09 20947 18209 20580 14584 27818
1999 12 22866 20333 22763 14568 32925
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
--------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LifeStrategy Moderate Growth Fund 12.01% 18.15% 17.05% $22,866
Moderate Growth Composite Average* 16.12 15.51 14.47 20,333
Moderate Growth Composite Index** 13.88 17.96 16.95 22,763
Lehman Aggregate Bond Index -0.82 7.73 7.43 14,568
Wilshire 5000 Index 23.77 27.11 25.47 32,925
- -------------------------------------------------------------------------------------------
</TABLE>
*A composite fund average weighted 50% average general equity fund, 40% average
fixed-income fund, and 10% average international fund. Derived from data
provided by Lipper Inc.
**50% Wilshire 5000 Index, 40% Lehman Aggregate Bond Index, and 10% MSCI EAFE
Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LifeStrategy Moderate Growth Fund 9/30/1994 12.01% 18.15% 13.28% 3.77% 17.05%
- ----------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
PERFORMANCE SUMMARY
LIFESTRATEGY GROWTH FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- --------------------------------------------------------------
LIFESTRATEGY GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -1.5% 1.4% -0.1% -0.6%
1995 26.0 3.2 29.2 28.9
1996 12.5 2.9 15.4 15.4
1997 19.4 2.9 22.3 22.3
1998 18.8 2.6 21.4 20.5
1999 14.8 2.5 17.3 19.1
- --------------------------------------------------------------
</TABLE>
*65% Wilshire 5000 Index, 20% Lehman Aggregate Bond Index, and 15% MSCI EAFE
Index.
See Financial Highlights table on page 28 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 30, 1994-DECEMBER 31, 1999
- --------------------------------------------------------------------------------
LifeStrategy Growth Growth Wilshire
Growth Fund Composite Average* Composite Index** 5000 Index
<S> <C> <C> <C> <C>
10/1/98 10000 10000 10000 10000
1994 12 9990 9850 9944 9922
1995 03 10684 10357 10658 10816
1995 06 11539 11111 11447 11828
1995 09 12311 11874 12245 12908
1995 12 12911 12224 12814 13536
1996 03 13381 12725 13295 14304
1996 06 13789 13205 13729 14939
1996 09 14105 13481 14033 15355
1996 12 14901 14068 14782 16414
1997 03 14922 13911 14798 16507
1997 06 16970 15612 16812 19296
1997 09 18067 16923 17979 21191
1997 12 18218 16618 18077 21560
1998 03 20274 18329 20090 24427
1998 06 20683 18379 20467 24885
1998 09 18854 16199 18627 21901
1998 12 22117 18698 21780 26602
1999 03 22659 18862 22353 27626
1999 06 23818 20254 23510 29739
1999 09 22987 19728 22699 27818
1999 12 25948 22827 25949 32925
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
---------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LifeStrategy Growth Fund 17.32% 21.03% 19.91% $25,948
Growth Composite Average* 22.08 18.30 17.02 22,827
Growth Composite Index** 19.14 21.15 19.91 25,949
Wilshire 5000 Index 23.77 27.11 25.47 32,925
- ---------------------------------------------------------------------------------------------
</TABLE>
*A composite fund average weighted 65% average general equity fund, 20% average
fixed-income fund, and 15% average international fund. Derived from data
provided by Lipper Inc.
**65% Wilshire 5000 Index, 20% Lehman Aggregate Bond Index, and 15% MSCI EAFE
Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LifeStrategy Growth Fund 9/30/1994 17.32% 21.03% 16.93% 2.98% 19.91%
- ------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
FUND PROFILE
LIFESTRATEGY INCOME FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1999, including its allocations to various asset classes and to underlying
Vanguard funds. Key elements of this Profile are defined on page 15.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------------------------
<S> <C>
Yield 5.7%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.28%
</TABLE>
*For underlying funds.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- ----------------------------------------------------
<S> <C>
STOCKS 15%
BONDS 85%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
LIFESTRATEGY LEHMAN
INCOME INDEX*
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.46 1.00
Beta 0.98 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- ------------------------------------------------------------
<S> <C>
Vanguard Total Bond Market Index Fund 50.1%
Vanguard Asset Allocation Fund 24.9
Vanguard Short-Term Corporate Fund 20.0
Vanguard Total Stock Market Index Fund 5.0
- ------------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------------
<S> <C>
STYLE Blend
MARKET CAP Large
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------------------
<S> <C>
AVERAGE MATURITY Medium
CREDIT QUALITY Treasury/Agency
</TABLE>
14
<PAGE> 17
ALLOCATION TO UNDERLYING FUNDS. This table shows the distribution of a fund's
assets in underlying Vanguard funds.
AVERAGE WEIGHTED EXPENSE RATIO. Funds that invest in other Vanguard funds incur
no direct expenses, but do bear proportionate shares of the operating,
administrative, and advisory expenses of the underlying funds. The average
weighted expense ratio is the average of these expense ratios, weighted in
proportion to the amount of the fund invested in each underlying fund.
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a fund's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation (growth, value, or a blend).
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a fund's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (Treasury/agency, investment-grade
corporate, or below investment-grade).
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.
15
<PAGE> 18
FUND PROFILE
LIFESTRATEGY CONSERVATIVE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1999, including its allocations to various asset classes and to underlying
Vanguard funds. Key elements of this Profile are defined on page 15.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------------------
<S> <C>
Yield 4.5%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
</TABLE>
*For underlying funds.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -----------------------------------------------
<S> <C>
STOCKS 36%
BONDS 64%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
LIFESTRATEGY
CONSERVATIVE GROWTH S&P 500
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 0.41 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- ----------------------------------------------------------
<S> <C>
Vanguard Total Bond Market Index Fund 29.2%
Vanguard Asset Allocation Fund 25.0
Vanguard Total Stock Market Index Fund 20.8
Vanguard Short-Term Corporate Fund 19.4
Vanguard Total International
Stock Index Fund 5.6
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------------------
<S> <C>
STYLE BLEND
MARKET CAP LARGE
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------------------
<S> <C>
AVERAGE MATURITY MEDIUM
CREDIT QUALITY TREASURY/AGENCY
</TABLE>
16
<PAGE> 19
FUND PROFILE
LIFESTRATEGY MODERATE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1999, including its allocations to various asset classes and to underlying
Vanguard funds. Key elements of this Profile are defined on page 15.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------------------------
<S> <C>
Yield 3.4%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
</TABLE>
*For underlying funds.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- -----------------------------------------------
<S> <C>
STOCKS 56%
BONDS 44%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
LIFESTRATEGY
MODERATE GROWTH S&P 500
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.97 1.00
Beta 0.60 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- ------------------------------------------------------
<S> <C>
Vanguard Total Stock Market Index Fund 35.6%
Vanguard Total Bond Market Index Fund 29.4
Vanguard Asset Allocation Fund 24.6
Vanguard Total International
Stock Index Fund 10.4
- ------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------------------
<S> <C>
STYLE BLEND
MARKET CAP LARGE
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------------------
<S> <C>
AVERAGE MATURITY MEDIUM
CREDIT QUALITY TREASURY/AGENCY
</TABLE>
17
<PAGE> 20
FUND PROFILE
LIFESTRATEGY GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1999, including its allocations to various asset classes and to underlying
Vanguard funds. Key elements of this Profile are defined on page 15.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------------------------
<S> <C>
Yield 2.3%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
</TABLE>
*For underlying funds.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- ------------------------------------------------------
<S> <C>
STOCKS 75%
BONDS 25%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------
LIFESTRATEGY
GROWTH S&P 500
- ------------------------------------------------------
<S> <C> <C>
R-Squared 0.97 1.00
Beta 0.79 1.00
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION TO UNDERLYING FUNDS
- ----------------------------------------------------------
<S> <C>
Vanguard Total Stock Market Index Fund 50.1%
Vanguard Asset Allocation Fund 24.8
Vanguard Total International
Stock Index Fund 15.3
Vanguard Total Bond Market Index Fund 9.8
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
EQUITY INVESTMENT FOCUS
- ------------------------------------------------------
<S> <C>
STYLE BLEND
MARKET CAP LARGE
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME INVESTMENT FOCUS
- ------------------------------------------------------
<S> <C>
AVERAGE MATURITY MEDIUM
CREDIT QUALITY TREASURY/AGENCY
</TABLE>
18
<PAGE> 21
FINANCIAL STATEMENTS
DECEMBER 31, 1999
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's investments in shares of
each Vanguard fund, along with the value of each investment on the last day of
the reporting period. Other assets are added to, and liabilities are subtracted
from, the value of Total Investments to calculate the fund's Net Assets.
Finally, Net Assets are divided by the outstanding shares of the fund to arrive
at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the fund's investments and their cost,
and reflects the gains (losses) that would be realized if the fund were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES (100.1%)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUND (5.0%)
Vanguard Total Stock Market Index Fund Investor Shares 840,429 $ 27,919
------------
BALANCED FUND (24.9%)
Vanguard Asset Allocation Fund 5,821,112 138,542
------------
BOND FUNDS (70.2%)
Vanguard Total Bond Market Index Fund Investor Shares 29,103,082 278,226
Vanguard Short-Term Corporate Fund Investor Shares 10,577,856 111,385
------------
389,611
------------
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $540,355) 556,072
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- --------------------------------------------------------------------------------------------------------------------
Other Assets 4,539
Liabilities (5,233)
------------
(694)
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------
Applicable to 43,320,848 outstanding $ .001 par value shares of beneficial interest
(unlimited authorization) $555,378
===================================================================================================================
NET ASSET VALUE PER SHARE $ 12.82
===================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $536,412 $12.38
Overdistributed Net Investment Income (48) --
Accumulated Net Realized Gains 3,297 .08
Unrealized Appreciation--Note D 15,717 .36
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS $555,378 $12.82
====================================================================================================================
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY CONSERVATIVE GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.6%)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS (26.3%)
Vanguard Total Stock Market Index Fund Investor Shares 10,903,292 $ 362,208
Vanguard Total International Stock Index Fund 6,780,393 97,027
-----------
459,235
-----------
BALANCED FUND (24.9%)
Vanguard Asset Allocation Fund 18,304,270 435,642
-----------
BOND FUNDS (48.4%)
Vanguard Total Bond Market Index Fund Investor Shares 53,117,810 507,806
Vanguard Short-Term Corporate Fund Investor Shares 32,100,428 338,018
-----------
845,824
-----------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $1,526,361) 1,740,701
- ----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a Pooled Cash Account
3.25%, 1/3/2000
(COST $2,041) $2,041 2,041
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $1,528,402) 1,742,742
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- ----------------------------------------------------------------------------------------------------------------------
Other Assets 13,665
Liabilities (8,660)
-----------
5,005
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------------------
Applicable to 115,757,522 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $1,747,747
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.10
======================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,522,213 $13.15
Overdistributed Net Investment Income (252) --
Accumulated Net Realized Gains 11,446 .10
Unrealized Appreciation--Note D 214,340 1.85
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,747,747 $15.10
=======================================================================================================================
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY MODERATE GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.9%)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS (46.0%)
Vanguard Total Stock Market Index Fund Investor Shares 36,858,152 $1,224,428
Vanguard Total International Stock Index Fund 24,985,537 357,543
----------
1,581,971
----------
BALANCED FUND (24.5%)
Vanguard Asset Allocation Fund 35,471,565 844,223
----------
BOND FUND (29.4%)
Vanguard Total Bond Market Index Fund Investor Shares 105,678,225 1,010,284
----------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $2,835,149) 3,436,478
- ----------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a Pooled Cash Account
3.25%, 1/3/2000
(COST $875) $875 875
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $2,836,024) 3,437,353
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- ----------------------------------------------------------------------------------------------------------------------
Other Assets 13,603
Liabilities (10,239)
----------
3,364
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------------------
Applicable to 189,295,791 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $3,440,717
======================================================================================================================
NET ASSET VALUE PER SHARE $18.18
======================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $2,819,475 $14.89
Overdistributed Net Investment Income (349) --
Accumulated Net Realized Gains 20,262 .11
Unrealized Appreciation--Note D 601,329 3.18
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,440,717 $18.18
======================================================================================================================
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANIES (99.8%)
- ----------------------------------------------------------------------------------------------------------------------
STOCK FUNDS (65.3%)
Vanguard Total Stock Market Index Fund Investor Shares 47,854,624 $1,589,731
Vanguard Total International Stock Index Fund 33,899,643 485,104
----------
2,074,835
----------
BALANCED FUND (24.7%)
Vanguard Asset Allocation Fund 32,967,850 784,635
----------
BOND FUND (9.8%)
Vanguard Total Bond Market Index Fund Investor Shares 32,458,515 310,303
----------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(COST $2,425,405) 3,169,773
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- ----------------------------------------------------------------------------------------------------------------------
Other Assets 19,246
Liabilities (11,988)
----------
7,258
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------------------
Applicable to 148,371,954 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $3,177,031
======================================================================================================================
NET ASSET VALUE PER SHARE $21.41
======================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $2,413,437 $16.26
Overdistributed Net Investment Income (674) --
Accumulated Net Realized Gains 19,900 .13
Unrealized Appreciation--Note D 744,368 5.02
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,177,031 $21.41
======================================================================================================================
</TABLE>
22
<PAGE> 25
STATEMENT OF OPERATIONS
This Statement shows each fund's Income Distributions Received from the other
Vanguard funds in which it invests. This Statement also shows any Capital Gain
Distributions Received from the other funds' realized net gains, Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY
LIFESTRATEGY CONSERVATIVE MODERATE LIFESTRATEGY
INCOME GROWTH GROWTH GROWTH
FUND FUND FUND FUND
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Income Distributions Received $28,790 $ 69,346 $ 95,481 $ 61,317
Interest 20 33 93 119
- --------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 28,810 69,379 95,574 61,436
- --------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain Distributions Received 6,011 20,790 43,933 43,044
Investment Securities Sold 438 3,149 777 142
- --------------------------------------------------------------------------------------------------
REALIZED NET GAIN 6,449 23,939 44,710 43,186
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES (20,810) 30,650 195,611 319,106
- --------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $14,449 $123,968 $335,895 $423,728
==================================================================================================
</TABLE>
23
<PAGE> 26
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY
INCOME FUND CONSERVATIVE GROWTH FUND
-------------------------- -----------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 28,810 $ 18,114 $ 69,379 $ 47,782
Realized Net Gain 6,449 6,230 23,939 18,699
Change in Unrealized Appreciation (Depreciation) (20,810) 19,239 30,650 97,520
Net Increase in Net Assets Resulting
from Operations 14,449 43,583 123,968 164,001
---------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (28,895) (18,129) (69,029) (48,539)
Realized Capital Gain (2,987) (6,279) (12,422) (18,656)
---------------------------------------------------------------
Total Distributions (31,882) (24,408) (81,451) (67,195)
---------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 289,918 273,108 622,417 721,533
Issued in Lieu of Cash Distributions 27,894 21,361 77,054 63,978
Redeemed (193,898) (108,685) (409,950) (269,557)
--------------------------------------------------------------
Net Increase from Capital Share Transactions 123,914 185,784 289,521 515,954
- ------------------------------------------------------------------------------------------------------------------
Total Increase 106,481 204,959 332,038 612,760
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 448,897 243,938 1,415,709 802,949
---------------------------------------------------------------
End of Year $555,378 $448,897 $1,747,747 $1,415,709
==================================================================================================================
(1)Shares Issued (Redeemed)
Issued 22,022 21,063 41,835 50,880
Issued in Lieu of Cash Distributions 2,169 1,632 5,195 4,416
Redeemed (14,818) (8,368) (27,487) (19,020)
---------------------------------------------------------------
Net Increase in Shares Outstanding 9,373 14,327 19,543 36,276
==================================================================================================================
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY
MODERATE GROWTH FUND GROWTH FUND
------------------------- ---------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 95,574 $ 61,334 $ 61,436 $ 39,054
Realized Net Gain 44,710 30,755 43,186 26,190
Change in Unrealized Appreciation (Depreciation) 195,611 220,429 319,106 233,545
--------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 335,895 312,518 423,728 298,789
--------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (95,504) (61,591) (61,628) (39,473)
Realized Capital Gain (24,016) (30,946) (23,053) (26,309)
--------------------------------------------------------
Total Distributions (119,520) (92,537) (84,681) (65,782)
--------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,442,247 874,948 1,224,603 712,132
Issued in Lieu of Cash Distributions 110,050 86,634 82,841 64,618
Redeemed (529,899) (337,628) (393,582) (269,352)
--------------------------------------------------------
Net Increase from Capital Share Transactions 1,022,398 623,954 913,862 507,398
- -----------------------------------------------------------------------------------------------------------
Total Increase 1,238,773 843,935 1,252,909 740,405
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,201,944 1,358,009 1,924,122 1,183,717
--------------------------------------------------------
End of Year $3,440,717 $2,201,944 $3,177,031 $1,924,122
===========================================================================================================
(1)Shares Issued (Redeemed)
Issued 82,824 55,074 61,878 40,609
Issued in Lieu of Cash Distributions 6,202 5,182 3,988 3,460
Redeemed (30,350) (21,344) (19,873) (15,501)
--------------------------------------------------------
Net Increase in Shares Outstanding 58,676 38,912 45,993 28,568
===========================================================================================================
</TABLE>
25
<PAGE> 28
FINANCIAL HIGHLIGHTS
This table summarizes each fund's investment results and distributions to
shareholders on a per-share basis. The table also presents the fund's Total
Return and shows net investment income and expenses as percentages of average
net assets. The expense ratio is zero because the fund pays no direct expenses;
its share of the expenses of the other funds in which it invests reduces the
income received from them. The data in the table will help you assess: the
variability of the fund's net income and total returns from year to year; the
relative contributions of net income and capital gains to the fund's total
return; the extent to which the fund tends to distribute capital gains; and the
portion of capital gains distributions representing the "pass-through" of
capital gains distributions received from other Vanguard funds. The table also
shows the Portfolio Turnover Rate, a measure of trading activity. A turnover
rate of 100% means that the average security is held in the fund for one year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY INCOME FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.22 $12.43 $11.55 $11.54 $ 9.88
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .69 .63 .63 .64 .49
Capital Gain Distributions Received .14 .20 .15 .19 .09
Net Realized and Unrealized Gain (Loss) on Investments (.47) .78 .83 .03 1.66
-------------------------------------------------------
Total from Investment Operations .36 1.61 1.61 .86 2.24
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.69) (.63) (.63) (.64) (.49)
Distributions from Realized Capital Gains (.07) (.19) (.10) (.21) (.09)
-------------------------------------------------------
Total Distributions (.76) (.82) (.73) (.85) (.58)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.82 $13.22 $12.43 $11.55 $11.54
========================================================================================================================
TOTAL RETURN 2.82% 13.17% 14.23% 7.65% 22.99%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $555 $449 $244 $151 $121
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 5.37% 5.24% 5.54% 5.66% 5.76%
Portfolio Turnover Rate 11% 3% 6% 22% 4%
========================================================================================================================
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
LIFESTRATEGY CONSERVATIVE GROWTH FUND
YEAR ENDED DECEMBER 31,
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $14.71 $13.40 $12.14 $11.68 $ 9.89
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .58 .56 .53 .47
Capital Gain Distributions Received .18 .20 .18 .20 .11
Net Realized and Unrealized Gain (Loss) on Investments .31 1.32 1.27 .46 1.80
----------------------------------------------------
Total from Investment Operations 1.13 2.10 2.01 1.19 2.38
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.63) (.59) (.56) (.53) (.47)
Distributions from Realized Capital Gains (.11) (.20) (.19) (.20) (.12)
----------------------------------------------------
Total Distributions (.74) (.79) (.75) (.73) (.59)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $15.10 $14.71 $13.40 $12.14 $11.68
====================================================================================================================
TOTAL RETURN 7.86% 15.88% 16.81% 10.36% 24.35%
====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,748 $1,416 $803 $462 $219
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 4.34% 4.32% 4.61% 4.86% 5.14%
Portfolio Turnover Rate 5% 3% 1% 2% 1%
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
LIFESTRATEGY MODERATE GROWTH FUND
YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $16.86 $14.81 $12.97 $12.11 $ 9.86
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .55 .510 .490 .44 .36
Capital Gain Distributions Received .24 .241 .236 .22 .13
Net Realized and Unrealized Gain (Loss) on Investments 1.21 2.054 1.819 .87 2.25
--------------------------------------------
Total from Investment Operations 2.00 2.805 2.545 1.53 2.74
--------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.55) (.510) (.490) (.44) (.36)
Distributions from Realized Capital Gains (.13) (.245) (.215) (.23) (.13)
--------------------------------------------
Total Distributions (.68) (.755) (.705) (.67) (.49)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $18.18 $16.86 $14.81 $12.97 $12.11
==============================================================================================================
TOTAL RETURN 12.01% 19.03% 19.77% 12.71% 27.94%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,441 $2,202 $1,358 $826 $235
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 3.47% 3.43% 3.72% 3.98% 4.42%
Portfolio Turnover Rate 3% 5% 2% 3% 1%
==============================================================================================================
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------------------------------------------
LIFESTRATEGY GROWTH FUND
YEAR ENDED DECEMBER 31,
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $18.79 $16.04 $13.68 $12.36 $ 9.93
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .45 .410 .39 .34 .32
Capital Gain Distributions Received .29 .264 .28 .24 .14
Net Realized and Unrealized Gain (Loss) on Investments 2.49 2.751 2.36 1.32 2.43
---------------------------------------------------
Total from Investment Operations 3.23 3.425 3.03 1.90 2.89
---------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.45) (.410) (.38) (.35) (.31)
Distributions from Realized Capital Gains (.16) (.265) (.29) (.23) (.15)
---------------------------------------------------
Total Distributions (.61) (.675) (.67) (.58) (.46)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $21.41 $18.79 $16.04 $13.68 $12.36
===============================================================================================================
TOTAL RETURN 17.32% 21.40% 22.26% 15.41% 29.24%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,177 $1,924 $1,184 $629 $217
Ratio of Expenses to Average Net Assets--Note B 0% 0% 0% 0% 0%
Ratio of Net Investment Income to Average Net Assets 2.50% 2.53% 2.84% 3.18% 3.67%
Portfolio Turnover Rate 1% 2% 1% 0% 1%
===============================================================================================================
</TABLE>
28
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
Vanguard LifeStrategy Funds comprise the LifeStrategy Income Fund, LifeStrategy
Conservative Growth Fund, LifeStrategy Moderate Growth Fund, and LifeStrategy
Growth Fund, each of which is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund. Each fund follows a
balanced investment strategy by investing in selected Vanguard funds to achieve
its targeted allocation of assets to U.S. stocks, international stocks, bonds,
and short-term reserves.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The funds consistently follow such
policies in preparing their financial statements.
1. VALUATION: Investments are valued at the net asset value of each
Vanguard fund determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date. Temporary cash
investments are valued at cost, which approximates market value.
2. FEDERAL INCOME TAXES: Each fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distri-butions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
4. REPURCHASE AGREEMENTS: Each fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
5. OTHER: Income and capital gain distributions received are recorded on
the ex-dividend date. Security transactions are accounted for on the date
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
B. Under a special service agreement, The Vanguard Group furnishes corporate
management, administrative, marketing, and distribution services to the funds.
The special service agreement provides that Vanguard will reimburse the funds'
expenses to the extent of savings in administrative and marketing costs realized
by Vanguard in the operation of the funds. Accordingly, all expenses incurred by
the funds during the year ended December 31, 1999, were reimbursed by Vanguard.
The funds' Trustees and officers are also Directors and officers of Vanguard and
the funds in which the funds invest.
C. During the year ended December 31, 1999, purchases and sales of investment
securities were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
(000)
--------------------------------
LIFESTRATEGY FUND PURCHASES SALES
----------------------------------------------------------------------
<S> <C> <C>
Income $ 187,199 $61,645
Conservative Growth 366,697 73,039
Moderate Growth 1,118,237 76,904
Growth 938,373 12,348
----------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (continued)
D. At December 31, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
(000)
-----------------------------------------------
NET
APPRECIATED DEPRECIATED UNREALIZED
LIFESTRATEGY FUND SECURITIES SECURITIES APPRECIATION
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income $ 31,368 $(15,651) $ 15,717
Conservative Growth 243,620 (29,280) 214,340
Moderate Growth 640,278 (38,949) 601,329
Growth 756,216 (11,848) 744,368
--------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders And Trustees Of
Vanguard LifeStrategy Funds
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard LifeStrategy Income Fund, Vanguard LifeStrategy Conservative Growth
Fund, Vanguard LifeStrategy Moderate Growth Fund and Vanguard LifeStrategy
Growth Fund (the "Funds") at December 31, 1999, the results of each of their
operations for the year then ended, the changes in each of their net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 2, 2000
31
<PAGE> 34
- --------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD LIFESTRATEGY FUNDS
This information for the fiscal year ended December 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The Conservative Growth, Moderate Growth, and Growth Funds distributed
$2,260,000, $3,646,000, and $4,324,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended
December 1999, all of which is designated as a 20% rate gain distribution.
For corporate shareholders, the percentage of investment income (dividend
income plus short-term gains, if any) that qualifies for the
dividends-received deduction is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------
<S> <C>
LifeStrategy Income Fund 3.0%
LifeStrategy Conservative Growth Fund 6.7
LifeStrategy Moderate Growth Fund 12.4
LifeStrategy Growth Fund 21.3
-----------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
32
<PAGE> 35
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN C. BOGLE - (1967) Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN - (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JoANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson-Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MacLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. - (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON - (1985) Retired Chairman of Rohm & Haas Co.; Director of
Cummins Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY - Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS - Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DiSTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MacKINNON - Fixed Income Group.
F. WILLIAM McNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Core Management Group.
<PAGE> 36
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
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Post Office Box 2600
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
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"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire
Associates.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the funds' shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q880-02/17/2000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
