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Bogleheads
Investing Advice Inspired by Jack Bogle
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gcode
Joined: 30 Oct 2009
Posts: 1
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 Posted: Fri Oct 30, 2009 10:24 am Post subject: Vanguard Managed Payout Fund-Your thoughts? |
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Hi: I've been a Vanguard Fund investor for many years, I have read through this forum often as a guest. I'm asking this question with an elder family member in mind.
I'm curious what your thoughts are on a Vanguard Managed Payout Fund for someone who is mid-60s, zero debt, and is not interested in managing their own money. Their needs are a monthly payout with modest growth.
Thank you!
Thanks for the information, I appreciate all of your input!
Ken
Last edited by gcode on Fri Oct 30, 2009 12:59 pm; edited 1 time in total |
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mpt follower
Joined: 27 Apr 2007
Posts: 304
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| Posted: Fri Oct 30, 2009 10:37 am Post subject: |
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My view is that there is nothing there that you cannot do by yourself and save the fee. However, it could be very useful for someone that is absolutely ignorant on basic investments or has decided that do not want to mess with it and rather let someone else do it. I say this because if you give the money to a financial adviser, you will most likely pay more and get lower performance. Vanguard is honest, they are discipline, and use index funds, which are proven to be superior.
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Fri Oct 30, 2009 10:47 am Post subject: |
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I agree. To be honest, I really don't see what the portfolio management has to do with some kind of payout anyway. Sustainability should be determined by the total return pattern and withdrawal rate.
One thing that is a bit unusual about these is that they include somewhat exotic components like Vanguard Market Neutral Fund, which I in fact own. Terrible returns, has dropped like a stone during both bull and bear stock markets. So far under its T-Bill benchmark I don't see how it can ever get back. It's probably already doomed to be dissolved. Did I mention I own it? |
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dbr
Joined: 04 Mar 2007
Posts: 3457
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| Posted: Fri Oct 30, 2009 11:23 am Post subject: |
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I believe there is a serious danger the uninformed investor will not understand what is in these funds and how they behave. It will be all too easy to wrongly believe the payout rates function as a guaranteed annuity rather than an excessive and risky rate of unsustainable withdrawal.
Note that Vanguard is at some pains to explain these factors, but the whole point about being uninformed and naive is the inability to understand the explanation. |
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Sheepdog
Joined: 27 Feb 2007
Posts: 1277
Location: Indiana, retired 1998 age 65
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| Posted: Fri Oct 30, 2009 11:33 am Post subject: |
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I agree with all of the above. I looked carefully at the Distribution Focus fund when it was introduced and found it misleading at the best because many uninformed investors would not understand it. I did understand it and declined. It would be very dangerous to my in-retirement financial health. I have been very disappointed in our company to have introduced it.
Most of the payout is return of capital, not earnings. In other words, an investor is spending their investment and not growing. Look at Vanguards information of payouts to date. https://personal.vanguard.com/....st=tab%3A4
100% of 2008's payout was return of capital. The person may has well put all of his/her money in a box and take out some every month. It could not have been worse. The payout this year contains 62% return of capital. Taking out return of capital means less from which to earn in the future. Dangerous.
Jim
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YDNAL
Joined: 10 Apr 2007
Posts: 3824
Location: Biscayne Bay
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| Posted: Fri Oct 30, 2009 12:03 pm Post subject: Vanguard Managed Payout Fund-Your thoughts? |
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| Vanguard wrote: | Vanguard Managed Payout Growth Focus Fund Investor Shares (VPGFX)
1 Vanguard Total Stock Market Index Fund Investor Shares 48.9%
2 Vanguard European Stock Index Fund Investor Shares 14.2%
3 Vanguard Intermediate-Term Investment-Grade Fund Investor Shares 10.1%
4 Vanguard Pacific Stock Index Fund Investor Shares 7.5%
5 Vanguard Emerging Markets Stock Index Fund Investor Shares 6.2%
6 Vanguard Market Neutral Fund Investor Shares 5.0%
7 Vanguard REIT Index Fund 4.9%
8 Other 3.2%
Total — 100.0% |
| Vanguard wrote: | Vanguard Target Retirement 2045 Fund (VTIVX)
1 Vanguard Total Stock Market Index Fund Investor Shares 71.9%
2 Vanguard Total Bond Market II Index Fund Investor Shares* 10.1%
3 Vanguard European Stock Index Fund Investor Shares 8.9%
4 Vanguard Pacific Stock Index Fund Investor Shares 4.7%
5 Vanguard Emerging Markets Stock Index Fund Investor Shares 4.4%
Total — 100.0% |
| gcode wrote: | | I'm curious what your thoughts are on a Vanguard Managed Payout Fund for someone who is mid-60s, zero debt, and is not interested in managing their own money. Their needs are a monthly payout with modest growth. |
gcode,
Do you see a huge difference between funds? Take out holdings 6-8 (put to Total Stk Mkt) and any difference begins to disappear.
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Landy
“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” - Warren Buffett |
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bob u.
Joined: 23 Feb 2007
Posts: 1899
Location: east lansing, mi
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| Posted: Fri Oct 30, 2009 12:11 pm Post subject: |
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Here's the bottom line: Vanguard investors have voted with their feet. Total assets in the three funds amount to $360.3 million.
Clearly, other alternatives have been chosen.
End of conversation for me.  Bob U.
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dbr
Joined: 04 Mar 2007
Posts: 3457
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| Posted: Fri Oct 30, 2009 12:17 pm Post subject: |
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In earlier discussions on this forum people didn't disagree that an investor wanting to hold the type of AA in these funds might well use them in a tax advantaged account with distributions reinvested. What advantage would be gained doing that was never clear.
I noticed the Vanguard website is back to putting forward target retirement funds rather than managed payout funds for retirement investing.
Agreed the lack of investment in these funds tells the tale. |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Fri Oct 30, 2009 12:32 pm Post subject: |
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We know they didn't do all that well in 2008.
Other than that they are too new, but recent history shows their equity might be high. Vanguard obvviously designed them with a higher amount of equity to last longer doing payouts, but 2008 really beat them up.
The "other" was determined to be commodities last time we looked.
Paul |
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expat
Joined: 10 Mar 2008
Posts: 147
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| Posted: Fri Oct 30, 2009 12:52 pm Post subject: |
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What about the Vanguard Target Retirement Income (VTINX) instead?
Vanguard Total Bond Market II Idx Inv 44.97%
Vanguard Total Stock Mkt Idx 24.02%
Vanguard Inflation-Protected Secs 20.06%
Vanguard Prime Money Market 4.96%
Vanguard European Stock Index 3.03%
Vanguard Pacific Stock Index 1.61%
Vanguard Emerging Mkts Stock Idx 1.30%
CMT Market Liquidity Rate 0.05%
Then set Vanguard to withdraw a 1 percent (or less) per quarter to your bank account. Done! |
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RustyShackleford
Joined: 13 Sep 2007
Posts: 376
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| Posted: Fri Oct 30, 2009 1:45 pm Post subject: |
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Although I'm not here to defend the Managed Payout Funds, and
probably wouldn't get into them (VPGDX) again, and may bail soon ...
I think a couple of the criticisms above may be red herrings.
The "fee" is mentioned, but I believe there are no fees other than
the fees on the funds held. Last I checked, the 4% OER on Market
Neutral was what was responsible for the overall OER being so high.
So you aren't really paying higher OER on everything else, you just
have one investment (Market Neutral) with a very high OER.
The issue of distributions being "return of capital" is true. BUT, we
ARE in the midst (well, hopefully near the end) of the worst economic
downturn since the Great Depression. And these funds DID promise
"payout". So where was it supposed to come from ? |
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MossySF
Joined: 19 Apr 2007
Posts: 908
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| Posted: Fri Oct 30, 2009 1:56 pm Post subject: |
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| Sheepdog wrote: |
Most of the payout is return of capital, not earnings. In other words, an investor is spending their investment and not growing. |
It's hard to imagine any portfolio where a 7% annual distribution would not include return of capital unless we were in a high inflation period. I personally wouldn't draw too many conclusions on the asset dollars in the funds. After all, not many equity-heavy funds that started late 2007/early 2008 has much assets in them. Plus the much higher minimums ($25K versus $3K) means Vanguard has restricted the investor pool.
I do agree about the questions of the floating allocations. If they had a published asset allocation each fund would strictly follow, I'd be far more tempted to use them in a tax-deferred account to simplify life. (E.g. hold one Managed Payout Fund and then a 2nd fund to tilt the portfolio versus currently holding say 10+ different funds.)
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nisiprius
Joined: 26 Jul 2007
Posts: 6999
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Fri Oct 30, 2009 2:09 pm Post subject: Re: Vanguard Managed Payout Fund-Your thoughts? |
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| gcode wrote: | | I'm curious what your thoughts are on a Vanguard Managed Payout Fund for someone who is mid-60s, zero debt, and is not interested in managing their own money. Their needs are a monthly payout with modest growth. |
gcode, I am skeptical about the Managed Payout funds but so much depends on personal investing philosophy. What bothers me about them is that I think they could be very misleading to someone who doesn't want to understand about investing, and who wants a safe, stable monthly payout.
Now, there is a body of thought that says that a good way to manage a retirement portfolio is to have a rather high stock allocation, meaning that the value of the portfolio will fluctuate a lot and would be consider "risky" by most people and certainly by me (I'm a fraidy-cat). But that if you just grit your teeth and withdraw a steady amount anyway, overspending and depleting the portfolio during the bad times, over the long run stocks ought to do so much better than bonds that they will rescue you from your overspending and build the portfolio back up, so that overall you'll do better in the long run than with a more conservative portfolio. And you can make it safer by cutting back a bit in the bad times and allowing yourself to spend a little more during the good times.
I don't believe this myself. The idea that you can safely overspend when stocks are doing poorly because eventually they'll bounce back and make it back up makes me want to say, like Dana Carvey's sarcastic Church Lady, "very convenient."
But someone really subscribes to that philosophy, and was going to do something like that anyway, then a Managed Payout fund is a way to automate the process. No calculations to do, and someone else has taken the responsibility for guessing how big a withdrawal the fund can withstand.
The thing is that you really have to have looked into the high-stock-allocation philosophy for yourself and have made your own decision. It's not the sort of thing you should blindly trust someone else to do for you. Vanguard's system for calculating the payouts might work fine, and then again it might not. If it doesn't work, you're the one that's in trouble, not Vanguard, because if you read the not-so-fine print Vanguard doesn't promise a darn thing.
In short, the Managed Payout funds are a perfectly good way of implementing an retirement strategy, that I personally think is hooey, but that many people would say is perfectly sound.
Incidentally, if that little blip we went through back in March is really over and done with, then five years from now people may look back at the Managed Payout funds and say "see? They rode right through it and did just fine."
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Last edited by nisiprius on Fri Oct 30, 2009 2:21 pm; edited 1 time in total |
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bob u.
Joined: 23 Feb 2007
Posts: 1899
Location: east lansing, mi
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| Posted: Fri Oct 30, 2009 2:20 pm Post subject: |
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John Ameriks, of Vanguard, is one of the people most closely associated with the creation of Managed Payout Funds.
He has a recent piece put out by the Pension Research Council in which he compares managed payout funds with other ways of taking retirement income.
Here's a link. http://www.pensionresearchcoun....p?file=815
Bob U.
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"There's no hurry anymore when all is said and done." |
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dumbmoney
Joined: 16 Mar 2008
Posts: 1312
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| Posted: Fri Oct 30, 2009 5:12 pm Post subject: |
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I found it a little disturbing that there were posts on the forum (not many, but some) to the effect of, "I trust Vanguard to achieve the stated objective", as if the fact that Vanguard is a trustworthy firm meant they were stocked with Buffetts and Soroses who can walk on water.
Vanguard's claim to fame, and the reason why they are justly praised, is their low cost, consumer friendly philosophy, not their investment acumen.
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nisiprius
Joined: 26 Jul 2007
Posts: 6999
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Fri Oct 30, 2009 5:52 pm Post subject: |
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| dumbmoney wrote: | | I found it a little disturbing that there were posts on the forum (not many, but some) to the effect of, "I trust Vanguard to achieve the stated objective..." |
I found it a little disturbing that Vanguard didn't volunteer any white papers or research or Monte Carlo simulations or anything to suggest why they thought they could achieve the stated objective.
The almost proverbial "4% rule" assumes the portfolio will quite possibly get drawn down and just hopes it won't run out within thirty years. If Vanguard is going to set an expectation that they can deliver 5% (in the Growth and Distribution Focus fund) without drawing down the portfolio--actually they seem to be suggesting$100,000 sustains a payout of $460/month = 5.5%--it's really incumbent on them to explain why they think they can do it.
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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grabiner
Joined: 20 Feb 2007
Posts: 2799
Location: Columbia, MD
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| Posted: Fri Oct 30, 2009 8:47 pm Post subject: Re: Vanguard Managed Payout Fund-Your thoughts? |
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| YDNAL wrote: | | Vanguard wrote: | Vanguard Managed Payout Growth Focus Fund Investor Shares (VPGFX)
1 Vanguard Total Stock Market Index Fund Investor Shares 48.9%
2 Vanguard European Stock Index Fund Investor Shares 14.2%
3 Vanguard Intermediate-Term Investment-Grade Fund Investor Shares 10.1%
4 Vanguard Pacific Stock Index Fund Investor Shares 7.5%
5 Vanguard Emerging Markets Stock Index Fund Investor Shares 6.2%
6 Vanguard Market Neutral Fund Investor Shares 5.0%
7 Vanguard REIT Index Fund 4.9%
8 Other 3.2%
Total — 100.0% |
| Vanguard wrote: | Vanguard Target Retirement 2045 Fund (VTIVX)
1 Vanguard Total Stock Market Index Fund Investor Shares 71.9%
2 Vanguard Total Bond Market II Index Fund Investor Shares* 10.1%
3 Vanguard European Stock Index Fund Investor Shares 8.9%
4 Vanguard Pacific Stock Index Fund Investor Shares 4.7%
5 Vanguard Emerging Markets Stock Index Fund Investor Shares 4.4%
Total — 100.0% |
| gcode wrote: | | I'm curious what your thoughts are on a Vanguard Managed Payout Fund for someone who is mid-60s, zero debt, and is not interested in managing their own money. Their needs are a monthly payout with modest growth. |
gcode,
Do you see a huge difference between funds? Take out holdings 6-8 (put to Total Stk Mkt) and any difference begins to disappear. |
And that is a serious red flag. If the managed payout fund is similar to the Target Retirement 2045 fund, then it doesn't look like a good fund for a retiree living off the distributions. I believe a retiree would be better off in Target Retirement 2005 or Target Retirement Income.
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David Grabiner |
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brick-house
Joined: 07 May 2009
Posts: 49
Location: Philadelphia, PA
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| Posted: Fri Oct 30, 2009 8:51 pm Post subject: |
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John Ameriks reminds me of the actor portraying the PC in the Mac commercials. A little awkward because he knows that he is selling an inferior product.
Let me get this straight. On 5.02.2008, when the S&P 500 was at 1413, Vanguard launched mutual funds with an equity allocation range of 70% - 80% that are designed to provide inflation adjusted income without reducing principal, yet have no insurance rider. The investor takes full capital risk while Vanguard collects an expense ratio on a product that ignores the impact of large magnitude stock market losses on a withdrawal strategy and the fact that stocks are riskier over time.
My humble opinion is that these funds are Vanguard’s Pinto. They should admit the design flaw and recall the product before they blow up.
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gte834s
Joined: 15 Jul 2007
Posts: 246
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| Posted: Sat Oct 31, 2009 1:12 am Post subject: |
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| expat wrote: | What about the Vanguard Target Retirement Income (VTINX) instead?
Vanguard Total Bond Market II Idx Inv 44.97%
Vanguard Total Stock Mkt Idx 24.02%
Vanguard Inflation-Protected Secs 20.06%
Vanguard Prime Money Market 4.96%
Vanguard European Stock Index 3.03%
Vanguard Pacific Stock Index 1.61%
Vanguard Emerging Mkts Stock Idx 1.30%
CMT Market Liquidity Rate 0.05%
Then set Vanguard to withdraw a 1 percent (or less) per quarter to your bank account. Done! |
+1
Regards, |
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bob u.
Joined: 23 Feb 2007
Posts: 1899
Location: east lansing, mi
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| Posted: Sat Oct 31, 2009 6:22 am Post subject: |
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brick-house,
You may be interested in how Vanguard (and Ameriks, in particular) attempted to piggyback the managed payout funds (an unknown product) onto a well-known product, about which Ameriks had done some significant publication and research when he was at TIAA-CREF--e.g., a fixed immediate income annuity.
The strategy appeared to be that one could "enhance" a fixed immediate income annuity with a managed payout fund. So far, not so good, not only in terms of performance but because of lack of interest as measured by assets under management, as I noted in an earlier post.
Here's the pitch (yes, Vanguard does like to sell products  ).
https://personal.vanguard.com/....y_ALL.html
Bob U.
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"There's no hurry anymore when all is said and done." |
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Taylor Larimore
Moderator
Joined: 27 Feb 2007
Posts: 7149
Location: Miami Florida
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| Posted: Sat Oct 31, 2009 6:48 am Post subject: Risks in Managed Payout Funds |
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Hi Ken:
Welcome to the Bogleheads Forum!
I went to Vanguard's Managed Payout Funds Prospectus to learn more about the risk in these funds. Guess what I found? Eight pages of risk plus a link to more risks. 
I've copied the eight pages below:
| Quote: | Primary Risks
The Fund’s investment strategies are intended to create a moderate level of risk for
the Fund. An investment in the Fund, however, could lose money over short,
intermediate, or even long periods of time because the Fund allocates its assets
worldwide across different asset classes and investments with specific risk and return
characteristics. Results may vary substantially over time, and there is no guarantee
that the Fund will achieve its investment objective or that any of its investment
strategies will succeed.
The Fund is subject to one or more of the risks described in this section. Each of these
risks, alone or in combination with other risks, has the potential to hurt, sometimes
significantly, Fund performance and reduce Fund distributions.
Managed Distribution Risk
The Fund is expected to continue to make monthly cash distributions under its
managed distribution policy regardless of the Fund’s investment performance.
Because these distributions will be made from Fund assets and shareholders are
generally not expected to reinvest such distributions in additional Fund shares, the
Fund’s monthly cash distributions will reduce the amount of assets available for
investment by the Fund. It is possible for the Fund to suffer substantial investment
losses and simultaneously experience additional asset reductions as a result of its
distributions to shareholders under the managed distribution policy. Moreover, even if
the Fund’s capital grows over short, intermediate, or long periods of time, it is
possible that such growth will be insufficient to enable the Fund to maintain the
amount of its scheduled cash distributions without returning capital to shareholders.
The Fund’s managed distribution policy is designed to distribute a consistent amount
of cash once per month throughout each calendar year, excluding any additional
distributions required to comply with applicable law. Under the managed distribution
policy, the dollar amount of the Fund’s scheduled monthly distributions for a particular
calendar year generally will increase or decrease each January based on the Fund’s
performance over the previous three years. Accordingly, the dollar amount of the
Fund’s monthly cash distributions could increase or decrease substantially from one
year to the next and over time depending on, among other things, the performance of
the financial markets in which the Fund invests, the allocation of Fund assets across
different asset classes and investments, the performance of the Fund’s investment
strategies, and the amount and timing of prior distributions by the Fund. It is also
possible for your distributions from the Fund to decrease substantially from one year
to the next and over time, depending on the timing of your investments in the Fund.
Any redemptions you make from your Fund account also may proportionately reduce
the amount of future cash distributions you will receive from the Fund.
Manager Risk and Asset Allocation Risk
The Fund is subject to manager risk and asset allocation risk, which are the risks that
poor investment selections and/or poor asset allocation decisions by the advisor, and
the asset allocation targets set by the investment committee (described on page 49),
will cause the Fund either to fail to achieve its objective or to generate lower returns
than were possible from different investment selections and/or asset allocation
decisions. The Fund’s advisor uses quantitative analysis and professional judgment to
select the asset classes and investments that make up the Fund’s investment
portfolio. In making such decisions, the advisor must, among other things, monitor
and evaluate the expected risks, returns, and correlations of eligible assets classes
and investments, as well as the likelihood that the selected combination will achieve
the Fund’s investment objective. These decisions are based, in part, upon the
advisor’s forecasts, estimates, analysis of historical events, and other aspects of
quantitative analysis and professional judgment. The advisor’s decisions may, for a
variety of reasons, fail to accurately predict the actual risk, returns, and correlations of
the asset classes and investments held by the Fund. Among the reasons predictions
could be inaccurate are scarcity of historical data about certain asset classes or
investments, the fact that future events may not follow historical norms, and the
potential for human error. It is possible that the advisor’s allocation of Fund assets
across specific asset classes and investments will cause the Fund to incur losses or
underperform other funds with a similar investment objective. The underlying
Vanguard funds in which the Fund invests also may be subject to manager risk to the
extent that an underlying fund advisors’ poor security selection will cause that
underlying fund to underperform relevant benchmarks or other funds with similar
investment objectives.
There is no guarantee that the advisor will succeed in combining multiple asset classes
and investments in a manner that either achieves the Fund’s investment objective or
maintains a moderate level of risk. There can be no assurance that any asset classes or
investments with relatively low historical correlations to the U.S. stock market will
exhibit low correlations in the future. It is possible that the returns and direction of the
Fund’s asset classes and investments may suddenly converge with the investment
returns of the U.S. stock market, thereby magnifying the risks of the Fund’s portfolio as
a whole. This could potentially result in significant losses and significant reductions in
the dollar amount of monthly distributions by the Fund. Diversification does not
necessarily ensure a profit or protect against a loss in a declining market. The Fund
could lose money at any time and may underperform the markets, asset classes, and
investments in which it invests during any given period that such markets, asset
classes, or investments rise or fall. The Fund’s asset allocation strategy is complex and
may involve more risk than other funds that invest only in stocks, bonds, cash, or a
combination thereof.
Stock Risks
The Fund’s investments in underlying funds that invest in stocks subject it to stock
risks, such as stock market risk and REIT stock risk.
• Stock market risk is the chance that stock prices overall will decline. Stock markets
tend to move in cycles, with periods of rising prices and periods of falling prices. In
addition, investments in foreign stock markets can be riskier than U.S. stock
investments. The prices of foreign stocks and the prices of U.S. stocks have, at times,
moved in opposite directions.
• REIT stock risk includes risks associated with investments in an underlying fund
that invests primarily in REITs, and includes real estate industry risk and investment
style risk, as well as stock market risk (previously described) and interest rate risk
(described under “Bond Risks”). Real estate industry risk is the chance that the
stocks of REITs will decline because of adverse developments affecting the real
estate industry and real property values. Investment style risk is the chance that the
returns from REIT stocks—which typically are small- or mid-capitalization stocks—will
trail returns from the overall stock market. Historically, these stocks have performed
quite differently from the overall market.
Foreign Stock Risks
The Fund’s investments in underlying funds that invest in foreign stocks subject
it to foreign stock risks, such as currency risk, country/regional risk, and emerging
markets risk.
• Currency risk is the chance that the value of a foreign investment, measured in U.S.
dollars, will decrease because of unfavorable changes in currency exchange rates.
• Country/regional risk is the chance that world events—such as political upheaval,
financial troubles, or natural disasters—will adversely affect the value of securities
issued by companies in foreign countries or regions.
• Emerging markets risk is the chance that the emerging markets will be substantially
more volatile, and substantially less liquid, than the more developed foreign markets.
Bond Risks
The Fund’s investments in underlying funds that invest in bonds or money market
instruments subject it to bond risks, such as interest rate risk, income risk, credit risk,
call risk, and, to a limited extent, event risk.
• Interest rate risk is the chance that bond prices overall will decline because of rising
interest rates.
• Income risk is the chance that an underlying fund’s income will decline because of
falling interest rates.
• Credit risk is the chance that the issuer of a security will fail to pay interest and
principal in a timely manner, or that negative perceptions of the issuer’s ability tomake such payments will cause the price of that security to decline, thus reducing an
underlying fund’s return.
• Call risk is the chance that during periods of falling interest rates, issuers of callable
bonds may call (repay) securities with higher coupons or interest rates before their
maturity dates. If an underlying fund holds a bond that is called, the underlying fund
would then lose potential price appreciation and would be forced to reinvest the
unanticipated proceeds at lower interest rates, resulting in a decline in the underlying
fund’s income. For mortgage-backed securities, this risk is known as prepayment risk.
• Event risk is the chance that corporate fixed income securities will suffer a substantial
decline in credit quality and market value because of a corporate restructuring.
Inflation-Linked Investment Risk
The Fund’s investment in Vanguard Inflation-Protected Securities Fund subjects it to
risks associated with investing in inflation-indexed securities. These risks include the
chance of considerable income fluctuations associated with changes in inflation, as
well as bond risks (previously described).
Commodity-Linked Investment Risk
The Fund’s investments in commodity-linked investments subject it to risks
associated with investments that create exposure to the total return of exchangetraded
futures contracts on physical commodities. These risks include commodity
futures trading risk, structured note risk, and derivatives risk.
• Commodity futures trading risk is the chance that the Fund could lose all or
substantially all of its investments in instruments linked to the returns of commodity
futures. Commodity futures trading is volatile, and even a small movement in market
prices could cause large losses. The prices of commodity futures are subject to change
based on various factors, including, but not limited to, the following: lack of liquidity;
global supply and demand for commodities; disorderly markets; limitations on
deliverable supplies; the participation of hedgers and speculators; domestic and foreign
interest rates and investors’ expectations concerning interest rates; domestic and
foreign inflation rates and investors’ expectations concerning inflation rates; investment
and trading activities of institutional investors; global or regional political, economic, or
financial events and situations; government regulation and intervention; technical and
operational or system failures; nuclear accident; terrorism; and natural disasters.
• Structured note risk is the risk associated with investments in commodity-linked
structured notes, which includes commodity futures trading risk and bond risks (each
previously described).
• Derivatives risk is the risk associated with the use of futures contracts, options on
futures contracts, options on securities, swap agreements, warrants, forward
contracts, and other derivatives. Derivatives may involve risks different from, and
possibly greater than, investments in the underlying securities, assets, reference rates,or indexes. Losses involving certain derivatives can sometimes be substantial or even
greater than the principal amount invested—in part because a relatively small price
movement in such derivatives may result in an immediate and substantial loss to the
investor. Derivatives also involve the risk of mispricing or improper valuation and the
risk that changes in the value of the derivative may not correlate perfectly with the
underlying securities, assets, reference rates, or indexes. The market for many
derivatives is, or can suddenly become, illiquid, which may result in significant, rapid,
and unpredictable changes in the prices for derivatives. The use of a derivative subjects
the investor to the risk of non-performance by the counterparty, potentially resulting in
delayed, partial, or even non-payment of amounts due under the derivative contract.
Market Neutral Investment Risk
The Fund’s investment in Vanguard Market Neutral Fund subjects it to risks associated
with market neutral investing, such as strategy risk, short-selling risk, manager risk,
investment risk, and country risk and currency risk (previously described).
• Strategy risk is the chance that the long/short market neutral investment strategy
used by the Market Neutral Fund will not succeed. There is no guarantee that the fund
will be able to limit exposure to general stock market risk or produce returns that
exceed the returns of 3-month Treasury bills. The fund’s use of short sales in
combination with its long positions in an attempt to improve performance or to reduce
overall portfolio risk may not be successful and may result in greater losses or lower
positive returns than if the fund held only long positions.
• Short-selling risk is the chance that the fund will lose money in connection with its
short sales of securities. Short selling allows an investor to profit from declines in the
prices of securities. To engage in a short sale, the fund must “borrow” securities for a
fee. There is no guarantee that the price of the borrowed securities will decline; in
fact, it may rise. Short selling involves higher transaction costs than long-only
investing. To close out short positions, the fund may have to sell related long positions
at disadvantageous times to produce cash to unwind a short position. The fund’s loss
on a short sale is potentially unlimited, because there is no upward limit on the price a
borrowed security could attain.
• Manager risk is the chance that poor security selection or strategy execution will
cause the Market Neutral Fund to fail to achieve its investment objective or to
underperform other funds with a similar investment strategy. An advisor’s security
selection process may not eliminate all stock market risk factors associated with the
long and short positions it establishes for the fund. It is possible that the stocks the
fund holds long will decline in value at the same time that the stocks it holds short
increase in value, thereby increasing potential losses to the fund. The fund’s advisors
could have different opinions on the valuation of a particular security, which could
affect their investment decisions. For example, one advisor could take a short position
in a security at the same time that the other advisor has taken a long position in the same security. In that event, any gain from the short position may be partially or totally
offset by a decline in the long position, or vice versa.
• Investment risk is the chance that the Market Neutral Fund’s advisors take positions
in securities, intentionally or unintentionally, that increase the fund’s sensitivity to
certain investment factors. These factors may include market capitalization of
underlying securities, growth and/or value spread, and other factors. These factors
may cause the fund to fail to achieve its investment objective of limiting exposure to
general stock market risk, or cause it to underperform other funds with a similar
investment strategy.
Absolute Return Strategy Risks
If Vanguard invests in a fund that employs an absolute return strategy, the risks
associated with investment in an absolute return fund are expected to include
leverage risk, swap agreement risk, manager risk, currency trading risk, liquidity risk,
and leverage financing risk. The other risks would include stock risks, bond risks, short
selling risk, and derivatives risk (each previously described). It is possible for the Fund
to experience a total loss of the entire amount it may in the future invest in the
absolute return fund.
• Leverage risk is the chance that any leveraged losses will exceed the principal
amount invested by the Fund. Returns from a leveraged investment can be more
volatile than returns from the underlying investment. Leverage exists when an
investor achieves the right to a return on a total investment amount that exceeds the
cash amount the investor contributed to the entity or instrument achieving the return.
Leverage magnifies the effect of gains and losses. Vanguard expects that an absolute
return fund may employ substantial leverage in connection with its investments. The
absolute return fund’s losses from its leveraged investments could result in a total
loss of all amounts the Fund invests in the absolute return fund. Vanguard expects
that an absolute return fund would limit the personal liability of its shareholders to the
amount invested in the absolute return fund. In that case, the Fund, as a shareholder
of the absolute return fund, would be legally protected from losing more than the cash
amount the Fund invested in the absolute return fund.
• Swap agreement risk is the chance that the counterparty to a swap agreement
entered into by the absolute return fund will default. However, there are typically
contractual remedies that may be pursued under a swap agreement in the event of a
default by a swap counterparty. In the case of currency swaps, the absolute return
fund may exchange with another party respective commitments to pay or receive
currency, and therefore would be subject to currency trading risk (described in a
following paragraph).
• Manager risk is the chance that poor investment selections will cause the absolute
return fund either to fail to achieve its investment objective or to generate lower
returns than were possible from different investment selections. The absolute return fund’s future success depends upon the expertise of Vanguard, which has limited
experience in managing absolute return investment strategies. The absolute return
fund is subject to the risk that Vanguard will not be successful in executing one or
more absolute return strategies. The absolute return fund’s investment program may
be considered speculative and is expected to involve substantial risks. There is no
guarantee that the absolute return fund will achieve its investment objective or that its
strategies will succeed. The absolute return fund could lose money at any time and
may underperform the markets in which it invests during any given period, regardless
of whether such markets rise or fall. Absolute return investing is complex and may
involve greater risk than investing in a balanced portfolio of stocks, bonds, and cash.
There is no guarantee that the performance of the absolute return fund will have low
correlation with the returns of the U.S. stock market. It is possible that the investment
returns of the absolute return fund may suddenly converge with the investment
returns of the U.S. stock market during a period of declining stock prices, thereby
eliminating the diversification benefit the advisor would expect from including the
absolute return fund within the Fund’s investment portfolio. Although the advisor
believes an appropriate level of investment in the absolute return fund could have the
potential to reduce the volatility of the Fund’s investment portfolio as a whole, an
investment in the absolute return fund could experience high volatility and increase
the Fund’s overall volatility.
• Currency trading risk is the chance that the absolute return fund could suffer losses
from currency-related investments. Currency prices can be highly volatile and trading
currencies for non-hedging purposes is generally considered speculative and involves
a high risk of a substantial or total loss of invested capital. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of
reasons, including, but not limited to, changes in interest rates, the imposition of
currency controls, the devaluation of a currency by a country’s government or banking
authority, or political developments in the United States or abroad.
• Liquidity risk is the chance that the markets, assets, and instruments in which the
absolute return fund invests are, or may become, illiquid. Vanguard expects that the
absolute return fund generally will seek to invest in liquid markets, assets, and
instruments, although the absolute return fund may have the ability to invest a portion
of its assets in markets, assets, or instruments that are or may become illiquid. In
addition, Vanguard expects to treat its investment in the absolute return fund as liquid.
There is no assurance, however, that the absolute return fund’s investments will not
suddenly become illiquid for an indefinite period of time. Illiquidity could cause the
absolute return fund to experience difficulties in valuing its portfolio holdings and may
cause that fund to delay redemptions and/or honor redemption requests by the Fund
with distributions of illiquid underlying portfolio holdings on an in-kind basis.
• Leverage financing risk is the chance that the absolute return fund will be unable to
access and maintain financing sufficient to leverage its investments to targeted levels. Vanguard expects that the absolute return fund will require the use of substantial
leverage in order for its absolute return strategies to exhibit volatility and generate
expected returns similar to the historic volatility and returns of the U.S. stock market.
It is possible that the derivative or other counterparties that finance the leverage
employed by the absolute return fund may not be able or willing to provide the level of
financing that Vanguard believes is required to achieve its volatility and return targets.
For additional information on investment risks, please see More on the Funds. |
No doubt about it. Stick with Vanguard's Target Retirement Funds.
_________________
Best wishes
Taylor
The Majesty of Simplicity |
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brick-house
Joined: 07 May 2009
Posts: 49
Location: Philadelphia, PA
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| Posted: Sat Oct 31, 2009 8:03 am Post subject: |
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Bob,
Good morning. Thanks for the link.
Coffee is for closers. Luckily, the managed payout folks are going to WaWa for their java. As you mentioned, the investing public is rejecting these. I mean eight pages of risks! .58% expense ratio. 70 -80 % equity allocation. Come on Vanguard, admit the mistake!
As a TIAA CREF and Vanguard investor for my variable portfolio holdings, I have been disappointed in both companies over the past few years. The trend at both institutions is towards more products and convoluted solutions to the problem of retirement income. IMHO, these solutions are sales oriented, not solution oriented.
TIAA-CREF punted their investment leadership to Roger Ibottson. The Ibottson models are overcomplicated and confuse investors while rejecting/contradicting TIAA-CREF’s straight forward advice of the past. I mean if you have been providing guaranteed income since 1918 and pioneered the variable annuity, why defer to an unproven stock centric model. TIAA’s old advice was four model portfolios and well written guidance on the amount, type (fixed, variable), and importance of an annuity as longevity insurance. Don’t even get me started on the “wealth management” salesman, computer system problems, and the long term care insurance debacle.
Vanguard also appears to be moving toward complicated strategies. In the past few years, it has offered new products such as the Managed Payout Funds while the Target Retirement funds were already serving the purpose and a smashing sales success. In addition, Vanguard raised the equity allocations of the Target Retirement funds a few years ago at the top of the market. It makes me wonder if Vanguard understands the impact of large magnitude stock market losses on a retiree’s withdrawal strategy.
I guess it boils down to buyer beware even with TIAA-CREF and The Vanguard Group.
_________________
Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac? George Carlin |
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YDNAL
Joined: 10 Apr 2007
Posts: 3824
Location: Biscayne Bay
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| Posted: Sat Oct 31, 2009 8:59 am Post subject: Re: Vanguard Managed Payout Fund-Your thoughts? |
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| brick-house wrote: | | I guess it boils down to buyer beware even with TIAA-CREF and The Vanguard Group. |
brick,
With all due respect, that is always the case.
| gcode wrote: | Hi: I've been a Vanguard Fund investor for many years, I have read through this forum often as a guest. I'm asking this question with an elder family member in mind.
I'm curious what your thoughts are on a Vanguard Managed Payout Fund for someone who is mid-60s, zero debt, and is not interested in managing their own money. Their needs are a monthly payout with modest growth. |
Why would gcode (OP) look at the 3 M.P. funds for an "elder family member" after going through VG's product description? | Vanguard wrote: | Vanguard Managed Payout Growth Focus Fund Investor Shares (VPGFX)
- Designed to generate regular monthly retirement income without exhausting capital.
- Uses a managed distribution policy that seeks to distribute a targeted amount of cash to shareholders each month.
- Seeks to provide steady payout amounts that are reset annually.
- Broadly diversified fund of funds structure that encompasses a variety of investment strategies and asset classes. |
These funds are nothing but hybrid Target Date fund with "managed payout" in the name and significant Equity risk.
_________________
Landy
“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” - Warren Buffett
Last edited by YDNAL on Sat Oct 31, 2009 9:18 am; edited 1 time in total |
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bob u.
Joined: 23 Feb 2007
Posts: 1899
Location: east lansing, mi
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| Posted: Sat Oct 31, 2009 9:18 am Post subject: |
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Hi Taylor,
I guess 8 pages of risk really means risk, huh? 
You say "the majesty of simplicity," and I think another way of putting that is to say "complication ain't no solution!" 
Brick-house: when I visit my in-laws in Philly, I confess I'm the first one up and take a walk to Wawas for some java. Nice people at the local Wawas. Bob U.
_________________
"There's no hurry anymore when all is said and done." |
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nisiprius
Joined: 26 Jul 2007
Posts: 6999
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Sat Oct 31, 2009 3:07 pm Post subject: Re: Risks in Managed Payout Funds |
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| Taylor Larimore wrote: | | Eight pages of risk plus a link to more risks. |
Oh, Taylor, Taylor, Taylor, shame on you for exaggerating so. | Quote: | Commodity-Linked Investment Risk
The Fund’s investments in commodity-linked investments subject it to ...commodity futures trading risk, structured note risk, and derivatives risk, blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah ... |
But in point of fact the Managed Payout funds don't hold any commodities currently. So you should really only count it as seven pages of risks.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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Taylor Larimore
Moderator
Joined: 27 Feb 2007
Posts: 7149
Location: Miami Florida
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| Posted: Sat Oct 31, 2009 3:35 pm Post subject: Carried away |
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Hi Nisiprius:
| Quote: | | Oh, Taylor, Taylor, Taylor, shame on you for exaggerating so. |
I got carried away.
_________________
Best wishes
Taylor
The Majesty of Simplicity |
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Fbone
Joined: 20 Jun 2009
Posts: 241
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| Posted: Sat Oct 31, 2009 6:12 pm Post subject: |
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"The absolute return fund’s future success depends upon the expertise of Vanguard, which has limited experience in managing absolute return investment strategies."
This was my favorite statement among the 8 pages. Or what I read of the 8 pages. My vision blurred before I finished. |
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chuck-lyn
Joined: 15 Apr 2009
Posts: 26
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| Posted: Sat Oct 31, 2009 7:49 pm Post subject: |
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I don't have any creds on this forum and have only posed a couple
of times. My friends on the Early Retirement Forum
where I have posted over 1000 times know me as "charlie".
I am 75, retired since '89, and have been a semi-serious investor
for 30 years.
With all due respect, I think most of you guys are exposing a case
of group-think on the subject of Vanguard's Managed Payout Funds.
If you like diversification, these funds are more diversified than any
other balanced funds VG offers.
They are index funds, for the most part.
They hold a higher percent foreign (30% equity) than most other
VG balanced funds (20% at most).
The high equity allocation makes them "OK" for a taxable accout, IMHO.
I hold the 5% payout fund in my taxable, currently reinvesting
dividends. At some point, when the return of capital component
settles, I might start The payout (If I need to).
These funds were launched at the worst economic time since the Great
Depression and suffered as a consequence. However, the 5%
fund is slightlly ahead of Wellington, YTD, last time I looked.
Yes, I don't like the Market Neutral part either, but they reduced
exposure from 10% to 5% and I can live with that.
Seriously, guys, don't be too eager to throw out the baby with the wash.
Cheers,
charlie |
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bob u.
Joined: 23 Feb 2007
Posts: 1899
Location: east lansing, mi
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| Posted: Sun Nov 01, 2009 6:12 am Post subject: |
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Hi Charlie,
If you go back to when the Managed Payout funds were first proposed and then eventually began, you will see that any number of us independently expressed our reservations about the funds.
I well remember being lectured by a poster when I expressed my reservations not only about the funds in general, but about the Market Neutral fund in particular.
I'd suggest you differentiate between group-think and what emerged, perhaps, as a consensus. There's a difference.
In the meantime, there's no denying--based on AUM--that investors have chosen other Vanguard investment vehicles for their retirement income stream.
Continued good fortune with your investments. Bob U.
_________________
"There's no hurry anymore when all is said and done." |
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Sheepdog
Joined: 27 Feb 2007
Posts: 1277
Location: Indiana, retired 1998 age 65
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| Posted: Sun Nov 01, 2009 9:20 am Post subject: |
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Charlie,
As I wrote earlier, I researched the Distribution Focus fund before it was funded. I read the prospectus thoroughly, even the fine print which Taylor copied. It was not for me. I felt that this particular one was wrong for anyone. I don't believe this is "group think". This particular fund of the Managed Payout group touted over 7% to be taken out each year. This fund was not founded as an allocation model to rollover earnings, but as a fund to supplement retirement income by distributing 7%+ to the investor even if there is not any earnings. Let's say a retiree with limited income read that, and I bet some did, and put nearly all they had into it to gain more income than they could in CDs for example, their future finances could be in jeapordy. 7+ percent distribution will cause their small nestegg to disappear quickly. That is why I said it was wrong. It was wrong how they advertised it. When giving retirement income models they started with the Target Retirement funds and when it got down to the year of retirement they recommended the retirement funds go to the Distribution Focus fund. That was wrong. If you notice now, Vanguard now shows Retirement Income as the fund to graduate to.
Jim
Jim
_________________
Happiness is not having what you want.
It's wanting what you have.
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Look to the future because that is where you will spend the rest of your life. |
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nisiprius
Joined: 26 Jul 2007
Posts: 6999
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Sun Nov 01, 2009 10:00 am Post subject: |
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You make good points, and please please please feel welcome to chime in. I certainly am negative but ambivalent about the funds themselves. But my hostility, which dates from before the fund opened--people in this forum were discussing them when Vanguard filed its application with the SEC--stems more from how Vanguard presents these funds than about the funds themselves. They are perfectly reasonable funds for anyone who is fairly risk-tolerant and would be investing that way anyway, actually has read and absorbed and believes the eight pages of risk and the disclaimers, and is not counting on them to achieve the hoped-for goals. When people ask about safe withdrawals from high-stock-allocation portfolios, I point out--grudgingly!--that Vanguard has a product intended to do that very thing.
I'd be a heck of a lot happier if Vanguard had just used a conventional, conservative allocation--like their Target Retirement Income fund--and instead of that amazing 5% had set the payout at the classic 4%, with the weighted-average-payout mechanism helping to make that 4% safer.
I'm sure they are a reasonable choice for you. But I'm sure you're thking of this fund as a risky stock investment, not as a sort of fixed annuity!
Of course Vanguard like all financial companies is a master of the fingers-crossed-behind-back disclaimer, but every press account of these funds has described them as an "alternative to [fixed] annuities." People are going to think the choice is between 5% COLAed per life and no access to principal and nothing to leave the kids, versus these magic funds that are going to pay 5% COLAed per life and full access to principal and full preservation of principal for the kids.
Vanguard soft-pedals the risk of these funds in every way imaginable, starting with a web page calculator that tells you to the penny how big your monthly payment will be. Mr. Ameriks should be ashamed of himself for his presentation of how diversification reduces risk in these funds. Everybody's tired of my screenshot, below, but I'm going to keep posting it over and over again. It's a perfect example of why people end up thinking that risky investments are safe. | Quote: | | If you like diversification, these funds are more diversified than any other balanced funds VG offers. |
I sort of object. Whenever someone is advocating any exotic investment they always say "don't you like diversification?" I like diversification, but that doesn't mean I'm automatically prepared to put 5% into gold or Thomas Kinkade Painter Of Light collectibles or commodities. | Quote: | | They are index funds, for the most part. |
I like indexing, not index funds per se. The Managed Payout funds are emphatically not index funds, because the managers make no secret of the fact that they are going to actively manage the allocations within the funds.
For example... there aren't any commodities at all in the funds right now. Presumably it is contemplated that there will be someday, when these market-timing experts judge the time is right. This is the antithesis of the lazy, boring, satisficing way I invest. I don't have anything allocated to commodities, but if I did, I'd pick a percentage and stick with it.
And just because something is an index fund does not automatically make it suitable or attractive to me. I am not interested in investing in the MSCI All Peru Index or the S&P Long-Only Merger Arbitrage Index or the XKCD Upper-Lower-Midcap Collectible Comics Index (OK, I made that last one up).
OK, here's Ameriks explaining why these funds aren't so risky. Shame on him. What he's actually saying is OK. Unfortunately a picture is worth a thousand words:
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. |
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bob u.
Joined: 23 Feb 2007
Posts: 1899
Location: east lansing, mi
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| Posted: Sun Nov 01, 2009 11:20 am Post subject: |
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Nisiprius mentioned "active management" in the payout funds.
I should say so!
I'm using Morningstar info, which may not be the most up to date, but here are the portfolio turnover numbers for the three managed payout funds:
VPDFX 82%
VPGDX 73%
VPFFX 68%
Just for comparative purposes, here are the numbers for two "income" funds that some of us use:
VG Target Retirement Income: 14%
Vanguard Wellesley Income (either version): 27%
You pays your money and you takes your choice. Bob U.
_________________
"There's no hurry anymore when all is said and done." |
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maj
Joined: 25 Jun 2008
Posts: 112
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| Posted: Sun Nov 01, 2009 11:50 am Post subject: Does Vanguard listen? |
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I realize that we Vanguard owners are not the board nor the executive staff; however, the corporate structure of Vanguard implies effective owner participation.
The Managed Payout Funds have not been well-received--only +300 million in assets--as the average investor's Harvard, Yale Endowment equivalents.
MP were launched by Vg management which refuses to launch an Indexed Series of funds which have been requested by countless Vg owners, namely:
Balanced Index 80% stock (with 20% international) - 20% bonds;
Balanced Index 60% stock (with 15% international - 40% bonds;
Balanced Index 40% stock (with 10% international) - 60% bonds;
Balanced Index 20% stock (with 5% international) - 80% bonds.
Vg management (correctly, I believe) consistently urges indexing, balanced portfolio, minimum turnover, low cost. Yet, management refuses to offer a series which can be used by Joe Six Pack, who will never stick to an annual or semi-annual rebalancing of separate funds, who does not want the hassle of permanent record keeping for small transactions, who does not want to create capital gains/losses that involve the I.R.S., and who is looking for a Money Manager who can be trusted, trusted, trusted.
Vg certainly offers the reason to trust re fiduciary responsibility but does not provide Joe Six Pack with a series of balanced index funds which he can purchase with absolutely clear understanding of the fixed asset allocations and with peace of mind.
The absurd performance of the LifeStrategy Funds 25% allocation to the Asset Allocation Fund during the recent panic is evidence freely available to management.
Meanwhile, back on the ranch, Vg initiates Managed Payout Funds, Diversified Equity Fund, Strategic Small Cap Equity--Gimme a Break!
I hope that the new Vg CEO will be more flexible in his attentiveness to Vg investors needs. For some of us 'owners' it has been a dry run since John Bogle.
peace
maj
PS In the past I promised not to bring up this issue again. I won't make that promise again. |
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JMacDonald
Joined: 19 Feb 2007
Posts: 577
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| Posted: Sun Nov 01, 2009 11:50 am Post subject: |
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| bob u. wrote: | Nisiprius mentioned "active management" in the payout funds.
I should say so!
I'm using Morningstar info, which may not be the most up to date, but here are the portfolio turnover numbers for the three managed payout funds:
VPDFX 82%
VPGDX 73%
VPFFX 68%
Just for comparative purposes, here are the numbers for two "income" funds that some of us use:
VG Target Retirement Income: 14%
Vanguard Wellesley Income (either version): 27%
You pays your money and you takes your choice. Bob U. |
Hi,
Those numbers seem a bit odd to me considering that most of the payout funds are comprised of index funds. Where is all of that turnover coming from?
_________________
Best Wishes,
Joe |
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chuck-lyn
Joined: 15 Apr 2009
Posts: 26
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| Posted: Sun Nov 01, 2009 11:51 am Post subject: |
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I agree that these funds could be misleading to the great unwashed.
But, this is no reason to throw them out if you know what you are
doing and they fit your needs.
As for paying out capital, some need that to maintain their living sandards.
There is nothing wrong with that if carefully managed.
Five percent of the last 3 years average NAV seems to be a prudent
way to calculate the distribution to me.
The balanced aspect appeals to me because as an elderly investor
I don't have much new money coming in to do the balancing. I would
have to sell winners and buy losers in my taxable account, thus
creating taxable events. I bet there are a lot of us old f###s in the
same boat. This fund is for my kids if I don't need to touch it.
Finallly, these funds represent a sophisticated investment tool wrapped
in a simple package. At this point I have neither the desire nor courage
to replicate something similar in my taxable account. Further, my
wife's eyes glaze over on this subject and who knows when I may
need to use a drool cup.
Cheers,
charlie |
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Oicuryy
Joined: 22 Feb 2007
Posts: 236
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| Posted: Sun Nov 01, 2009 12:23 pm Post subject: |
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Is this allocation all that different from one a Boglehead might hold?
50% U.S. stocks
25% International stocks
5% REIT stocks
15% nominal bonds
5% TIPS
Do you really think that a retiree would go broke withdrawing 5% of the then-current value of that allocation every year?
Ron
_________________
Money is fungible |
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brick-house
Joined: 07 May 2009
Posts: 49
Location: Philadelphia, PA
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| Posted: Sun Nov 01, 2009 1:01 pm Post subject: |
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Oicurry wrote
| Quote: | | Do you really think that a retiree would go broke withdrawing 5% of the then-current value of that allocation every year? |
It depends on the sequence of returns after the withdrawals start. Reverse dollar cost averaging can destroy a retirement strategy built on a stock heavy portfolio.
Thorough examples of the dangers of reverse dollar cost averaging can be found at www.analyzenow.com, under helpful articles, post retirement planning.
This fund is marketed as a personal endowment strategy. I think that is a misleading example. An endowment has new funds coming into the portfolio every year, plus they can hire fund managers such as David Swenson that utilize unconventional asset classes.
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Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac? George Carlin |
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dbr
Joined: 04 Mar 2007
Posts: 3457
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| Posted: Sun Nov 01, 2009 2:46 pm Post subject: |
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| Oicuryy wrote: | Is this allocation all that different from one a Boglehead might hold?
50% U.S. stocks
25% International stocks
5% REIT stocks
15% nominal bonds
5% TIPS
Do you really think that a retiree would go broke withdrawing 5% of the then-current value of that allocation every year?
Ron |
Very possibly this model would be quite feasible for any retiree. However, the outcome is strongly dependent on withdrawal rate, so there is a world of difference between the 3%, 5%, and 7% funds. The 7% one is the dangerous one.
A different problem is that the withdrawal should not have the same volatility as the fund. It doesn't seem like a very good model for cash flow purposes for a retiree. |
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nisiprius
Joined: 26 Jul 2007
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| Posted: Sun Nov 01, 2009 2:50 pm Post subject: |
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(Correction, the actual failure rate in the Trinity study was 17%, not 13% as I'd stated earlier).
| Oicuryy wrote: | Is this allocation all that different from one a Boglehead might hold?
50% U.S. stocks
25% International stocks
5% REIT stocks
15% nominal bonds
5% TIPS
Do you really think that a retiree would go broke withdrawing 5% of the then-current value of that allocation every year?
Ron |
Well, the old 1998 Trinity study suggests a 17% chance of going broke within 30 years drawing 5%-initial-than-COLAed from a 75%-stock portfolio. Tweak the figures to taste--TIPS and REITS and international will probably improve the results--but on the other hand the Trinity study doesn't have the "benefit" of including data from the Lost Decade.
I say the evidence is that there's a non-negligible chance of a retiree going broke withdrawing 5%-than-COLAed from a Managed Payout-like portfolio.
Taking your statement literally, of course one will never go broke drawing 5% of the then-current-value every year--nor 10% nor 50% nor 90%. You just, ahem, experience a gradual downward adjustment of the payout.
The Managed Payout funds obviously reduce the chances of portfolio exhaustion--probably virtually eliminating it--by adjusting the payouts, but of course at the cost of not meeting their stated goals.
There's no way to come to any absolute agreement on any of this, but, honestly, don't you feel that 5% is, at the very least, promising quite a lot? Doesn't possibility of actually meeting the stated goals (5% average payout per year with no loss of real value in capital) depend on the managers' really being add quite a bit of value through aggressive management of a portfolio? And isn't that portfolio significantly riskier than the usual "retirement income" portfolio?
The Managed Payout funds combine two elements: an adjusted-payout systematic-withdrawal plan, and a portfolio that is not insanely risky, but definitely hotter-spiced than the usual "retirement income" mix. Obviously this fund is perfectly appropriate for someone who really understands this, and who really has given informed consent to Taylor's "eight pages of risks."
The questions about these funds are: a) Has Vanguard minimized the risks--to a degree verging on misrepresentation--in their presentation of them to the public? b) Do Vanguard's stated goals, which of course they disclaim responsibility for meeting, set responsible and conservative expectations, or are they too optimistic?
When my wife got an email about these funds from Vanguard, she said to me "So, do you know about these Managed Payout funds? I'm not too sure what they are, but from the email, aren't they kinda like these fixed annuities you were thinking of getting?"
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MossySF
Joined: 19 Apr 2007
Posts: 908
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| Posted: Sun Nov 01, 2009 2:59 pm Post subject: |
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| Quote: |
MP were launched by Vg management which refuses to launch an Indexed Series of funds which have been requested by countless Vg owners, namely:
Balanced Index 80% stock (with 20% international) - 20% bonds;
Balanced Index 60% stock (with 15% international - 40% bonds;
Balanced Index 40% stock (with 10% international) - 60% bonds;
Balanced Index 20% stock (with 5% international) - 80% bonds.
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Except I want one that is instead:
60% stock with 15% eafe 10% em, 5% reit, 15% small cap value
40% bonds with 15% tips, 5% international
Well .. maybe I don't want this fund. I just made up the numbers on the fly to illustrate what you want might not be what others want. And I don't know about requested by countless VG investors either. The past few years I've been here, the top requests have been International Bonds, International Small Cap, International Small Cap Value -- not many mentions of combo index fund variations.
What might satisfy both our requirements instead is not a slew of index funds to cover all the variations but more tools to implement a portfolio AA that does all the things we currently do manually. (Rebalancing with distributions, rebalancing with purchases, band rebalancing triggers, etc.) Hence, instead of having the 4 fund variations you've listed, you simply enter in "60% total stock market, 20% total intl stock market, 20% total bond market" and every dollar invested, every dollar of distribution, every sell order -- interfaces your global AA first and buys/reinvests/sells from the correct sequence of funds to stick with your AA.
An even wilder idea is then to put everybody under a collective trust and a super duper computer matches everybody's AA up. If someone has a 40/60 AA and is sell stock/buying bonds, he's matched up with the guy with a 60/40 AA performing the reverse transaction so no taxable events happen. This would mean though every investor has their own NAV price for this "custom AA" fund.
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nisiprius
Joined: 26 Jul 2007
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| Posted: Sun Nov 01, 2009 3:04 pm Post subject: |
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| MossySF wrote: | | What might satisfy both our requirements instead is not a slew of index funds to cover all the variations but more tools to implement a portfolio AA that does all the things we currently do manually. |
Precisely. If I can tell Vanguard to do a systematic exchange or withdrawal, every week or every month or every quarter, by dollar amount or percentage or "sinking balance," why can't I set up an automatic rebalance to a specific allocation?
Instead of just having four choices--reinvest all, pay out all, reinvest dividends but not interest, reinvest interest but not dividends--why can't I have "pay out according to the moving average of the last three years' NAV?"
Why do I have to buy the Managed Payout portfolio management strategy if all I want is the Managed Payout payout management strategy?
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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MossySF
Joined: 19 Apr 2007
Posts: 908
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| Posted: Sun Nov 01, 2009 3:07 pm Post subject: |
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| nisiprius wrote: |
I say the evidence is that there's a non-negligible chance of a retiree going broke withdrawing 5%-than-COLAed from a Managed Payout-like portfolio. |
Hmm ... I'm pretty sure the payouts for Managed Payout Funds has to be 5% of current value. Thinking through how the COLA thing would work -- somebody who invested in 2008 would start at 5% and then be 5%+COLA in 2009. Another person who starts in 2009 would then start at the 5%+COLA mark? Then 10 years from now, it's 5%+10 years of COLA? That would make for pretty far ranging numbers for every investor.
How the SWR numbers would compare for 4%+COLA versus 5% of portfolio value, I dunno. And what's the chance of going broke for a traditional 4%+COLA SWR portfolio?
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nisiprius
Joined: 26 Jul 2007
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| Posted: Sun Nov 01, 2009 3:15 pm Post subject: |
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| MossySF wrote: | | nisiprius wrote: |
I say the evidence is that there's a non-negligible chance of a retiree going broke withdrawing 5%-than-COLAed from a Managed Payout-like portfolio. |
Hmm ... I'm pretty sure the payouts for Managed Payout Funds has to be 5% of current value. |
They use a clever and reasonable-sounding compromise, based on a three-year moving average. It may be that university endowments use a similar three-year moving average and that's where the idea came from. So, when the portfolio drops, the payouts don't get hit with the full drop immediately, they get adjusted downward slowly gradually, and the hope is that the portfolio might recover before the payouts fall too far--which may be exactly what happened this year, i.e. the payout system may have worked well. | Quote: | | Thinking through how the COLA thing would work -- somebody who invested in 2008 would start at 5% and then be 5%+COLA in 2009. Another person who starts in 2009 would then start at the 5%+COLA mark? Then 10 years from now, it's 5%+10 years of COLA? That would make for pretty far ranging numbers for every investor. |
Indeed, and this is a frequent criticism of the assumptions underlying the classic "SWR" studies. | Quote: | | How the SWR numbers would compare for 4%+COLA versus 5% of portfolio value, I dunno. And what's the chance of going broke for a traditional 4%+COLA SWR portfolio? |
For what it's worth, the Trinity study showed a 2% failure rate for 4%-then-COLAed withdrawals from a 75%-stocks portfolio, and a 17% failure rate for 5%-then-COLAed from that portfolio.
Trinity study at bob90245's website, here.
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dbr
Joined: 04 Mar 2007
Posts: 3457
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| Posted: Sun Nov 01, 2009 3:20 pm Post subject: |
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| MossySF wrote: | | nisiprius wrote: |
I say the evidence is that there's a non-negligible chance of a retiree going broke withdrawing 5%-than-COLAed from a Managed Payout-like portfolio. |
Hmm ... I'm pretty sure the payouts for Managed Payout Funds has to be 5% of current value. Thinking through how the COLA thing would work -- somebody who invested in 2008 would start at 5% and then be 5%+COLA in 2009. Another person who starts in 2009 would then start at the 5%+COLA mark? Then 10 years from now, it's 5%+10 years of COLA? That would make for pretty far ranging numbers for every investor.
How the SWR numbers would compare for 4%+COLA versus 5% of portfolio value, I dunno. And what's the chance of going broke for a traditional 4%+COLA SWR portfolio? |
If one goes through all the literature and models on this one would find that 4% + COLA or 5% portfolio value, either way, has an excellent chance of surviving just fine, for the sorts of investments in these funds. That is what all that literature is all about and why SWR is called SWR. It is entirely reasonable to provide cushions by underwithdrawing, oversaving, compensating for the impact of severe market declines just at retirement etc. It is also entirely reasonable to recognize a larger world of strategies which include annuitization, TIPS, or whatever.
There is a major problem in anyone purchasing a managed payout fund under the perception that such a fund is a buy and forget secure solution to retirement cash flow funding. |
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Oicuryy
Joined: 22 Feb 2007
Posts: 236
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| Posted: Sun Nov 01, 2009 4:48 pm Post subject: |
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| brick-house wrote: | | Thorough examples of the dangers of reverse dollar cost averaging can be found at www.analyzenow.com, under helpful articles, post retirement planning. |
| nisiprius wrote: | | Well, the old 1998 Trinity study suggests a 17% chance of going broke within 30 years drawing 5%-initial-than-COLAed from a 75%-stock portfolio. |
Hebeler's study of reverse dollar cost averaging and the Trinity study both used constant real withdrawals. The payouts from the managed payout funds are not constant.
| nisiprius wrote: | The Managed Payout funds obviously reduce the chances of portfolio exhaustion--probably virtually eliminating it--by adjusting the payouts, but of course at the cost of not meeting their stated goals.
There's no way to come to any absolute agreement on any of this, but, honestly, don't you feel that 5% is, at the very least, promising quite a lot? Doesn't possibility of actually meeting the stated goals (5% average payout per year with no loss of real value in capital) depend on the managers' really being add quite a bit of value through aggressive management of a portfolio? |
Because the payouts vary with the returns, the MP funds will meet their payout goals if they meet their return goals. 5% real, 7% nominal, long-term annualized return seems to me to be a very reasonable expectation for that asset allocation. Vanguard reports that the historical nominal return of an 80/20 stock/bond mix was 9.2%. I don't expect the active manager's tweaking to have much effect on returns one way or the other.
The expected returns and the volatility of payouts are relevant issues. IMO, the distorted expense ratio, the number of pages of risk disclosures, the lack of popularity and Vanguard's marketing approach are all irrelevant issues.
Ron
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nisiprius
Joined: 26 Jul 2007
Posts: 6999
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| Posted: Sun Nov 01, 2009 5:05 pm Post subject: |
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| Oicuryy wrote: | | Because the payouts vary with the returns, the MP funds will meet their payout goals if they meet their return goals. 5% real, 7% nominal, long-term annualized return seems to me to be a very reasonable expectation for that asset allocation. |
Please state a rough ballpark number of years, that you think constitutes "the long term" for purposes of this discussion--that is, what number of years do you think is long enough for you to feel reasonably sure that a holder of the fund will feel satisfied that it has essentially met its goals.
Ambiguity over the phrase "the long term" is the rock on which understanding often founders.
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Oicuryy
Joined: 22 Feb 2007
Posts: 236
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| Posted: Sun Nov 01, 2009 6:44 pm Post subject: |
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| nisiprius wrote: | | Please state a rough ballpark number of years, that you think constitutes "the long term" for purposes of this discussion--that is, what number of years do you think is long enough for you to feel reasonably sure that a holder of the fund will feel satisfied that it has essentially met its goals. |
I think people should give these funds at least fifteen years. But I suspect few people will wait that long. Some posters in this thread made up their mind before the funds even launched.
Ron
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nisiprius
Joined: 26 Jul 2007
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| Posted: Sun Nov 01, 2009 7:10 pm Post subject: |
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| Oicuryy wrote: | | Some posters in this thread made up their mind before the funds even launched. |
"Hey, I resemble that remark!"
When we're discussing this in 2024, one thing's for sure: I won't say "but they're yet to be tested in a down market."
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brick-house
Joined: 07 May 2009
Posts: 49
Location: Philadelphia, PA
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| Posted: Sun Nov 01, 2009 7:59 pm Post subject: |
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oicurry wrote:
| Quote: | | Hebeler's study of reverse dollar cost averaging and the Trinity study both used constant real withdrawals. The payouts from the managed payout funds are not constant. |
Good point. Even though Hebeler uses constant withdrawals in his research, his work on order of return risk (reverse dollar cost averaging) is important to consider. The average historic return of 9.2% that Vanguard reports includes the last ten years when an 80/20 portfolio would have returned a nominal return of about 1.41% a year. What if the next ten years are a repeat of the last ten years? What if the next ten years are like the 1970s? How would a Japanese Managed Payout Fund have fared the last twenty years? Since the sequence or order of returns has a huge impact on this fund’s income payments and principal value, then I need to be concerned with the immediate short run after my purchase. A 7% nominal return and 5% real return (2% inflation rate?) may occur over the “long run”, but if my immediate short run includes a large stock market loss; then I may be waiting a long time to get my 5% real return (1966 – 1982). If the fund is depleting capital to make those payments, then I will be waiting even longer to achieve those “long term” returns. There appears to be a big difference between purchasing this fund on May 2, 2008 (S&P 500 at 1413) and March 9, 2009 (S&P 500 at 666).
To combat order of return risk, the Managed Payout Funds use a withdrawal formula that reduces income payments in down markets. This indeed provides protection against total capital depletion. However, it sets someone up for declining income payments and declining principal at a time when their human capital (ability to earn income) is declining and their medical costs are rising.
If I was explaining this product to a family member, then I would state there is a strong possibility that you could have declining capital and declining income. Not a fine print risk, but a strong possibility. If you have an emergency and need access to the principal, then depending on the whims of the stock market you may be selling at a big loss to take care of that emergency. I would urge them to read Vanguard's Managing Your Retirement Brochure which spends a few pages clearly spelling out order of return risk and lists some proactive steps to combat this risk:
To help address the order-of-returns risk,
be flexible.
• Reduce your spending during periods
of market decline.
• Seek part-time work to generate
income.
• Purchase an income annuity with part
of your assets.
• Use the percentage withdrawal
method on page 9.
Sorry for the Tolstoy response. To summarize, I think that Vanguard does not adequately communicate the risks of this product. The product is dangerous if the user does not use this product in combination with other stable sources of income, possess the ability to stay calm in a market downturn, and have the discipline/ability to reduce spending and/or get part time work in a market downturn.
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Oicuryy
Joined: 22 Feb 2007
Posts: 236
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| Posted: Sun Nov 01, 2009 9:07 pm Post subject: |
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| brick-house wrote: | I would urge them to read Vanguard's Managing Your Retirement Brochure which spends a few pages clearly spelling out order of return risk and lists some proactive steps to combat this risk:
To help address the order-of-returns risk,
be flexible.
• Reduce your spending during periods
of market decline.
• Seek part-time work to generate
income.
• Purchase an income annuity with part
of your assets.
• Use the percentage withdrawal
method on page 9. |
Here is a link to the brochure.
http://www.vanguard.com/pdf/ptmyr.pdf
As you read page 9, keep in mind that the managed payout funds use the "percentage-withdrawal method" not the "dollar-adjusted withdrawal method".
Ron
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