3 Fund Portfolio vs. VWINX

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shilla
Posts: 13
Joined: Sat Oct 11, 2014 11:13 pm

3 Fund Portfolio vs. VWINX

Post by shilla »

Folks,

I was running some backtesting on a 3 fund portfolio (40% stocks, 60% bonds) and then did a comparison to
Vanguard Wellesley VWINX (40% stocks, 60% bonds).
http://www.portfoliovisualizer.com/backtest-portfolio
I included annual rebalancing in the 3 fund returns.

Here is the make up of the 3 fund portfolio:
60% - Total Bond Market Index (VBMFX)
30% - Total Stock Market Index (VTSMX)
10% - Total Intl Stock Market Index (VGTSX)

The testing ran from 1997 - 2013. Below are the results. I have to ask the following
questions to fully understand the difference between the two options.
- Why wouldn't someone go with VWINX? Better returns, lower standard device, lower draw down.
- Is there mgmt change or strategy change risk with the Wellesley fund?
- What would be the major tax differences to consider between the two options in a taxable account? Yield? Capital gains?
- VWINX has a higher fee but the returns below would be net of fees and still has a 1.16% advantage


Portfolio Components
Ticker Name CAGR StdDev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
VWINX Vanguard Wellesley 7.97% 7.16% 20.15% -9.81% -18.85% 0.80 0.76
VGTSX Vanguard Total International Stock Index 5.43% 23.00% 42.03% -44.06% -58.49% 0.24 0.19
VTSMX Vanguard Index Trust Total Stock Market Index 7.76% 20.06% 33.34% -37.04% -50.90% 0.36 0.36
VBMFX Vanguard Bond Index Fund Total Bond Fd 5.49% 3.57% 11.59% -2.27% -4.04% 0.86 0.23

Portfolio Return (Portfolio 1 is VWINX, Portfolio 2 is the 3 fund combination)
# Initial Balance Final Balance CAGR StdDev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
1 $10,000 $36,803 7.97% 7.16% 20.15% -9.81% -18.85% 0.80 0.76
2 $10,000 $30,629 6.81% 7.38% 15.93% -12.43% -20.54% 0.62 0.42

My biggest concern with just buying the Wellesley fund would be the risk of change in how the fund is run such that it no longer performs like it did
in the past. However, its track record is impressive and keeping with the boglehead approach, less is sometimes better.

Thoughts?

I suspect the formatting of the table data above will get shifted when I post this topic so I apologize in advance.
anil686
Posts: 1316
Joined: Thu May 08, 2014 12:33 pm

Re: 3 Fund Portfolio vs. VWINX

Post by anil686 »

Not an expert on this but...

The bonds are not the same in both. You are comparing 60% Treasury/Agency grade bonds and a shorter duration with TBM to Wellesley - longer duration and more credit risk. with both of those caveats - you are taking on more bond risk. Your equity risk is muted to some extent with lower standard deviation than TSM with large value holdings only (60 stocks). This helps mute some of the volatility of the equities. TSM contains mid/small cap stocks with more volatility (25% of TSM are these) and there is very little international in Wellesley. So, IMHO, you may be better off looking at int term inv grade bond fund 60% and large value index 40% and comparing them if you want to look at comparable index options - JMO though...
Grt2bOutdoors
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Location: New York

Re: 3 Fund Portfolio vs. VWINX

Post by Grt2bOutdoors »

You are not making an apples to apples comparison with your index vs. active portfolio. Here are some of the key differences:
Total Stock Market index is a blend of value and growth equities, large, small and midcap. Wellesley is 100 of the largest value stocks in the S&P 500. It holds no small cap and may be on the fringes of holding 1 or 2 midcaps. There are 400 midcap companies in the MDY. There are thousands in the small cap universe.

Fixed income - Total Bond Market is approximately 70% US Treasury. Wellesley holds intermediate duration investment grade corporates mainly. International equities? Wellesley is mainly multinational domestic.

My question to you is what do you feel more comfortable owning? I wouldn't worry too much about the charter changing, though active managers come and go simply because no one lives forever, at least not yet!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
asif408
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Joined: Sun Mar 02, 2014 7:34 am
Location: Florida

Re: 3 Fund Portfolio vs. VWINX

Post by asif408 »

shilla wrote:- Why wouldn't someone go with VWINX? Better returns, lower standard device, lower draw down.
- Is there mgmt change or strategy change risk with the Wellesley fund?
The old adage "Past performance does not forecast future performance" comes to mind (Taylor Larimore is known to include that line in his posts).

I think the biggest knock against active funds is that they are subject to manager risk. Who currently runs the fund? How much experience do they have? How long have they run it? Will they still be running it in 20-30 years? With an index fund, the main question is: how well does the fund track the index it follows? Fewer concerns with an index fund, IMO.
shilla wrote:My biggest concern with just buying the Wellesley fund would be the risk of change in how the fund is run such that it no longer performs like it did
in the past. However, its track record is impressive and keeping with the boglehead approach, less is sometimes better.

Thoughts?

I suspect the formatting of the table data above will get shifted when I post this topic so I apologize in advance.
Vanguard's actively managed funds have done pretty well over the years and at pretty low cost. You could surely do a lot worse than VWINX. If you're concered you could go 50/50 with Wellesley and Lifestrategy Conservative Growth. That way 50% of your investment is active and 50% is passive (or some other amount you choose that you are comfortable with).
livesoft
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Re: 3 Fund Portfolio vs. VWINX

Post by livesoft »

I think VWINX is a great example of a self-fulfilling prophecy. Because of its past performance folks really love it. That keeps attracting new assets and new buyers which helps support the prices of the things the managers buy which keeps the cycle going. I suppose there is nothing wrong with that since there are worse bubbles that one can be involved with.
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anil686
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Re: 3 Fund Portfolio vs. VWINX

Post by anil686 »

Forgot to answer the question of a taxable account. Depends on your bracket - higher tax brackets - would not be tax efficient compared to TSM/TISM and muni bond fund due to the
a) cap gains from the balanced fund
b) bond interest (taxable)
Grt2bOutdoors
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Location: New York

Re: 3 Fund Portfolio vs. VWINX

Post by Grt2bOutdoors »

livesoft wrote:I think VWINX is a great example of a self-fulfilling prophecy. Because of its past performance folks really love it. That keeps attracting new assets and new buyers which helps support the prices of the things the managers buy which keeps the cycle going. I suppose there is nothing wrong with that since there are worse bubbles that one can be involved with.
That's quite a stretch you're making "new buyers which helps support the prices of the things the managers buy which keeps the cycle going".
How much is the value of the S&P 500? If 68% of the S&P 500 is the playground they operate in, are you telling us that those new assets are the reason why the S&P 500 is up 13.5% this year? because Wellesley's stock purchases are propping up the prices and perpetuating the cycle? :oops: I guess the market's been in a bubble since 1929 then? :twisted:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Levett
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Location: upper Midwest

Re: 3 Fund Portfolio vs. VWINX

Post by Levett »

VWINX as a "bubble" fund is hilarious!

That's like likening a slug to Seabiscuit. :D

Love it.

Levett
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: 3 Fund Portfolio vs. VWINX

Post by livesoft »

It's quite a stretch to suggest that I wrote that VWINX was in a bubble. I did no such thing, so it is hilarious.

But then again maybe you didn't write that I wrote that VWINX was in a bubble and you wrote something else.
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placeholder
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Re: 3 Fund Portfolio vs. VWINX

Post by placeholder »

shilla wrote:Why wouldn't someone go with VWINX?
1. It's not available in my 401k (44% of portfolio)
2. It's not efficient in my taxable accounts (38% of portfolio)
3. I don't use a three fund portfolio so a comparison to that isn't of concern to me
Invest4Life2882
Posts: 56
Joined: Sun Dec 15, 2013 4:49 pm

Re: 3 Fund Portfolio vs. VWINX

Post by Invest4Life2882 »

Why couldn't VWINX be used to compliment and tilt (if one wanted to) their three fund portfolio. Wellesley with it being so heavy in bonds and large cap stocks has reduced volatility. If an investor wanted to tilt to corporate bonds and dividend paying stocks I think it could make an excellent compliment.
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