Vanguard Wellington instead of total bond market?

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heythere
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Vanguard Wellington instead of total bond market?

Post by heythere »

Hi folks, longtime reader but first-time poster. Here's my info to start off:

Emergency funds: Three months
Debt: Lots of student loan debt (law degree) and car loan currently at $9k (3.1% interest); no credit card, etc.; no mortgage but will be buying a home within a year
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 0% State
State of Residence: WA
Age: 32
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30-40% of stocks

A little extra info: right now I only have a Vanguard IRA savings account with about $25,000. I currently have it invested in the total US stock market fund; total international fund; and Wellington fund. My overall asset allocation is about 91% stocks and 9% bonds with 70/30 domestic to international stocks.

I am contributing the max to my IRA and will continue to do that. I have no employer retirement plan at the moment but I will be changing jobs in less than a year and will almost certainly add an employer-retirement plan at that time.

My wife has federal retirement and TSP. We max out her contributions to the extent that the feds will match.

Anyway, I generally set up my IRA according to the three-fund philosophy that I got mainly from reading Bogle and Bernstein. My personal twist on it was to not get a bond index and instead go with the Vanguard Wellington fund for my "safer" investment.

I did this because I want to have a pretty aggressive investment strategy, figuring (1) I am going to add an employer-retirement plan at some point and (2) my wife has the primary retirement investments right now in a bit more-conservative asset allocation. To me a bond index just didn't really fit that goal and I'm hoping to get higher returns from the Wellington fund.

Is this a dumb idea?

Potential problems I can see:
- Wellington appears to invest primarily in large cap value stocks, so I am tilting my portfolio a bit toward large-cap for my domestic stock market investments. I do like having some value stocks in there though.
- As for bonds, Wellington appears to invest primarily in medium-term investment-grade corporate bonds. This is my primary concern, that my bonds might be too concentrated and thus harming the diversification of the portfolio.
- Wellington fund is a tad more expensive than total bond market index fund although quite inexpensive for an actively managed fund

Can I stick with this idea of pursuing slightly higher returns through the Wellington fund or am I better off just scrapping that and going with the typical three-fund approach including a total bond index? (I want to add a REIT eventually but need to grow the assets first.)
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bertilak
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Re: Vanguard Wellington instead of total bond market?

Post by bertilak »

I have all my investments in two funds, Wellington and Wellesley, so am a fan, but Wellington doesn't seem to match what you are trying to do. Wellington is about 65/35 stocks/bonds so this doesn't match your desired AA. Wellington is somewhat conservative but mostly because of the 35% bonds.

In my case I use those funds so I can put my whole portfolio on autopilot. I wanted something very easy to explain to anyone who might need to take over managing the portfolio -- no slice-n-dice, no re-balancing, no complicated decisions. I don't think that is what you want so I recommend you stick with TSM, TBM and perhaps some international stock. I see no need to get fancy nor to go international with bonds. Bonds are there to moderate the volatility and only secondarily to generate returns. I did have REITs until I decided simplicity was more important.
Last edited by bertilak on Mon Nov 25, 2013 6:38 am, edited 1 time in total.
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Re: Vanguard Wellington instead of total bond market?

Post by gwrvmd »

What you are doing is fine. Wellington is a excellent investment, just remember it is only 35% bonds. An asset allocation of 91% stocks and 9% bonds is aggressive but at your age that is fine. At your age it is more important to save and use all the tax deferred space you have available than to worry that your stock/bond ratio is a little different than some others might consider "optimal". Good Start!..Gordon
Last edited by gwrvmd on Sat Nov 16, 2013 6:55 pm, edited 1 time in total.
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Padlin
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Re: Vanguard Wellington instead of total bond market?

Post by Padlin »

I don't see a benefit to having the Wellington as opposed to using the appropriate amount of Total US Stock or VIVAX (large Value) and the Total US Bond funds. Wellington is up 17.6% for the year, VTSMX is up 29.25% and VBMFX is down just under 2%. Maybe someone else can do the math and work out the 65/35 split but it sure looks about the same as Wellingtons 17.6% to me. VBMSX is of course more diversified then the bond portion of Wellington and you save a bit on the fees. I don't see where it makes much of a difference one way or the other so if you feel better with Wellington, go for it.
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heythere
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Re: Vanguard Wellington instead of total bond market?

Post by heythere »

bertilak wrote:I have all my investments in two funds, Wellington and Wellesely, so am a fan, but Wellington doesn't seem to match what you are trying to do. Wellington is about 65/35 stocks/bonds so this doesn't match your desired AA. Wellington is somewhat conservative but mostly because of the 35% bonds.

In my case I use those funds so I can put my whole portfolio on autopilot. I wanted something very easy to explain to anyone who might need to take over managing the portfolio -- no slice-n-dice, no re-balancing, no complicated decisions. I don't think that is what you want so I recommend you stick with TSM, TBM and perhaps some international stock. I see no need to get fancy nor to go international with bonds. Bonds are there to moderate the volatility and only secondarily to generate returns. I did have REITs until I decided simplicity was more important.
Ahh yes, sorry, I should've explained this better. I set up the proportion of investments such that I end up with about 10% bonds overall. So while Wellington is 35-40% bonds that is counteracted by having more funds in the total stock market and total international funds.

It would make rebalancing a bit of a chore and lessen any benefit I'd get from that exercise. But my understanding is that there isn't really much of a benefit to rebalancing anyway?
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bertilak
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Re: Vanguard Wellington instead of total bond market?

Post by bertilak »

heythere wrote:
bertilak wrote:I have all my investments in two funds, Wellington and Wellesely, so am a fan, but Wellington doesn't seem to match what you are trying to do. Wellington is about 65/35 stocks/bonds so this doesn't match your desired AA. Wellington is somewhat conservative but mostly because of the 35% bonds.

In my case I use those funds so I can put my whole portfolio on autopilot. I wanted something very easy to explain to anyone who might need to take over managing the portfolio -- no slice-n-dice, no re-balancing, no complicated decisions. I don't think that is what you want so I recommend you stick with TSM, TBM and perhaps some international stock. I see no need to get fancy nor to go international with bonds. Bonds are there to moderate the volatility and only secondarily to generate returns. I did have REITs until I decided simplicity was more important.
Ahh yes, sorry, I should've explained this better. I set up the proportion of investments such that I end up with about 10% bonds overall. So while Wellington is 35-40% bonds that is counteracted by having more funds in the total stock market and total international funds.

It would make rebalancing a bit of a chore and lessen any benefit I'd get from that exercise. But my understanding is that there isn't really much of a benefit to rebalancing anyway?
Right. I actually understood that in the beginning but I guess I was myself a bit unclear. I was just trying to say that the use of Wellington doesn't seem to help you achieve your goal any better than a mix of TSM, TBM, etc.. It's just an added complexity.

To me the idea of a balanced fund (as is Wellington) is that you leave the managing of that balance to the fund manager. You pay a bit extra ER to get that help. If you are not taking advantage of it then why pay for it?
Last edited by bertilak on Sun Nov 17, 2013 10:44 am, edited 1 time in total.
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Phineas J. Whoopee
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Re: Vanguard Wellington instead of total bond market?

Post by Phineas J. Whoopee »

heythere wrote:...
It would make rebalancing a bit of a chore and lessen any benefit I'd get from that exercise. But my understanding is that there isn't really much of a benefit to rebalancing anyway?
Hey there, heythere, and welcome to the forum.

I think it depends on what you mean by "benefit." Expectantly, rebalancing into bonds should lower the long-term return of a equity and fixed income portfolio. Now, of course, there are behavioral errors, and the feeling of suffocating in panic, to contend with, but if everybody was always all stocks society would be better off, right?

Of course rebalancing lowers expected return, because it carries lower risk than a portfolio that is never rebalanced. Of course each of us is investing for ourselves as individuals, or at most as families, with our own timelines and exposures to sequence-of-returns risk, so the greatest good for the greatest number doesn't necessarily line up with our own needs very well.

If by "benefit" you mean keeping the risk of your portfolio at approximately the level you chose, then yes, there is great benefit.

PJW
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heythere
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Re: Vanguard Wellington instead of total bond market?

Post by heythere »

Phineas J. Whoopee wrote:
heythere wrote:...
It would make rebalancing a bit of a chore and lessen any benefit I'd get from that exercise. But my understanding is that there isn't really much of a benefit to rebalancing anyway?
Hey there, heythere, and welcome to the forum.

I think it depends on what you mean by "benefit." Expectantly, rebalancing into bonds should lower the long-term return of a equity and fixed income portfolio. Now, of course, there are behavioral errors, and the feeling of suffocating in panic, to contend with, but if everybody was always all stocks society would be better off, right?

Of course rebalancing lowers expected return, because it carries lower risk than a portfolio that is never rebalanced. Of course each of us is investing for ourselves as individuals, or at most as families, with our own timelines and exposures to sequence-of-returns risk, so the greatest good for the greatest number doesn't necessarily line up with our own needs very well.

If by "benefit" you mean keeping the risk of your portfolio at approximately the level you chose, then yes, there is great benefit.

PJW
Thanks for the response. When I said "benefit" I guess I really meant expected rate of return over the long-term. Since I am still relatively young my plan is basically to sock money away in a fairly aggressive IRA account and just not touch it for quite some time, ideally not for at least ten years. Then when I'm getting older and want a little less risk I could see moving a bit more towards bonds and rebalancing on a regular basis so I don't get too tilted towards equities.

I suppose the true test would be a 2008-like event though. I have yet to go through something like that as an investor so while I would like to believe that I could hold course, I suppose everyone needs that experience before they can truly know their risk tolerance.

Interesting thoughts here. Perhaps I will go away from Wellington and do the total bond market index instead. The cost difference is minimal but it does seem that I am perhaps making things a little tougher than they need to be.
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Re: Vanguard Wellington instead of total bond market?

Post by nisiprius »

Looking at 2008-2009, would you say that there is any similarity at all between Vanguard Total Bond Market Index and Vanguard Wellington? I'm not asking which earned more or which is better, I'm asking whether they are similar.

Image

If we look at the two, over the entire history of Total Bond, again, I would ask: is there any similarity between the two?

Image
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Re: Vanguard Wellington instead of total bond market?

Post by dbr »

I think the OP plans to use the bond component of Wellington as his bond allocation, not the fund as a whole as his bond allocation.

To me this seems probably not to be a serious mistake but also seems to be a pointless complication, at least if the inspiration is the three fund portfolio.

In any case at 90/10 the bonds could be about anything remotely reasonable and it would be all the same. One could even argue that at 90/10 there could just as well be no bonds at all, but that is a different discussion.
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Re: Vanguard Wellington instead of total bond market?

Post by TwoCybers »

Heythere I think what you are doing is just fine - But I have a slightly different reason for favoring Wellington. Wellington is an actively managed fund, where as the All Bond option is not. We face, in my view, some changes in the the fixed income world as the Fed slows its control of interest rates. While not manager is perfect, I think clearly some bonds will be more/less desirable compared to the market in total. I am willing to bet on the Wellington managers.

A large number of people point out that Growth is different from Value. Small cap from Large. -- And the list goes on. Over a long period, I cannot see any great advantage in having a dozen diversifications. Rather I do a very simple test - I fire up Morningstar and compare the option over the last 10 years to Wellington. Very few things beat it and then only by a small amount. Wellington itself does significantly beat 65% S&P500 plus 35% All Bond Index. I may be naive , but I choose to believe Wellington Management at least can reduce holdings in some dogs, which accounts for their beating a mix of indexes.
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Re: Vanguard Wellington instead of total bond market?

Post by investor »

TwoCybers wrote:Heythere I think what you are doing is just fine - But I have a slightly different reason for favoring Wellington. Wellington is an actively managed fund, where as the All Bond option is not. We face, in my view, some changes in the the fixed income world as the Fed slows its control of interest rates. While not manager is perfect, I think clearly some bonds will be more/less desirable compared to the market in total. I am willing to bet on the Wellington managers.

A large number of people point out that Growth is different from Value. Small cap from Large. -- And the list goes on. Over a long period, I cannot see any great advantage in having a dozen diversifications. Rather I do a very simple test - I fire up Morningstar and compare the option over the last 10 years to Wellington. Very few things beat it and then only by a small amount. Wellington itself does significantly beat 65% S&P500 plus 35% All Bond Index. I may be naive , but I choose to believe Wellington Management at least can reduce holdings in some dogs, which accounts for their beating a mix of indexes.

+1

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heythere
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Re: Vanguard Wellington instead of total bond market?

Post by heythere »

dbr wrote:I think the OP plans to use the bond component of Wellington as his bond allocation, not the fund as a whole as his bond allocation.

To me this seems probably not to be a serious mistake but also seems to be a pointless complication, at least if the inspiration is the three fund portfolio.

In any case at 90/10 the bonds could be about anything remotely reasonable and it would be all the same. One could even argue that at 90/10 there could just as well be no bonds at all, but that is a different discussion.
Yes that is correct.

I don't know if it's a great idea but as long as it isn't a stupid one I am probably going to stick with it. I do like the idea of having some component of the portfolio that is actively managed at a very low fee. I realize it cuts against the index fund theory and the three-fund portfolio in particular but it doesn't seem to be too radical of a departure.
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Re: Vanguard Wellington instead of total bond market?

Post by bUU »

Until recently, I was using Wellesley and Wellington as the exclusive containers for our bonds allocation. I still hold Wellington, but the portion of my bonds allocation previously contained in Wellesley is now in THOPX (short-term bond fund) and EAFAX (floating rate fund).
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Re: Vanguard Wellington instead of total bond market?

Post by SkierMom »

For clarification, I think the OP is asking about the appropriateness of utilizing the bond component of the Wellington fund; not the fund itself as a replacement for Vanguard Total Bond Market.

Personally, I do the same thing since I favor Wellington's bond slant of mid-term corporate Vs. getting the kitchen sink, TPs, Munis and negative interest on the short-term bonds, and the like in Total Bond Market.

He could also use just a specific mid-term or long-term corporate bond fund, or similar index.
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