VWINX a 1-Stop Shop? [Vanguard Wellesley]

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Ripple202
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VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Ripple202 » Sun Feb 08, 2015 7:56 am

I've been investing for a long time and have lately been studying different types of lazy portfolios. From all I see, it seems that VWINX steadily beats out all performance for the long term (even when interest rates were high). I'm looking for your take on why this is or isn't the safest, all-in investment. I've read a lot about its heavy allocation to bonds and that it won't do well when rates rise (it did well in the 80s). I've also read about the need to diversify with index funds. Knowing I know that, the question is coming because of the fund's performance, which looks to be amazing. Looking forward to thoughts to see if I'm missing something. VWINX seems like the best investment out there.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by synergy » Sun Feb 08, 2015 3:04 pm

Welcome to the forum, Ripple. I don't know if Wellesley is the "best" investment but it is compatible with my risk tolerance. I am nearly retired and the 60/40 bond/equity allocation seems proper for me. I have used Wellesley for several of my accounts for several years. As you point out,it has done well historically in different markets. My thinking is that the equity allocation is enough to provide the gains related to a bull market and the bond allocation is sufficient to moderate a bear market. This allocation limits a high upside but provides the protection from those big dips. There are several other forum members who have a substantial percentage of their portfolio in Wellesley and they seem satisfied with the results. Good luck.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by ogd » Sun Feb 08, 2015 3:50 pm

Ripple202 wrote:I've been investing for a long time and have lately been studying different types of lazy portfolios. From all I see, it seems that VWINX steadily beats out all performance for the long term (even when interest rates were high). I'm looking for your take on why this is or isn't the safest, all-in investment. I've read a lot about its heavy allocation to bonds and that it won't do well when rates rise (it did well in the 80s). I've also read about the need to diversify with index funds. Knowing I know that, the question is coming because of the fund's performance, which looks to be amazing. Looking forward to thoughts to see if I'm missing something. VWINX seems like the best investment out there.

Two reasons:

1) The big one: you've selected a fund that's perfomed well in the past. Therefore, it's trivially guaranteed that the fund's past performance looks good, so much so that I'm struggling to say it with words different from the first sentence. It should be no surprise. Rather, the question is whether such a fund is more likely to do better in the future, and from all we know about the markets and managers and funds the answer is "NO". This runs counter to the human experience from any other field, e.g. hiring anyone from basketball players to plumbers, but it's nevertheless true. Furthermore, investing based on past performance actively hurts investors, who end up underperforming the very funds they invest in by a big margin, as they consistently sell underperforming funds cheap and buy outperformers expensive, often right before the relative performance reverses.

2) The structural one: this conservative fund did well in a period when bond interest rates were high. Not dropping (it would have done even better if they stayed there), but merely high. The thing with high is that it's measurable and you don't have to guess what the future trajectory will be: it should be clear to anyone that interest rates are much lower now than in the past 30 years. I would say this fund is too conservative for most investors except those close or in retirement and going forward the factors that made it look like a good all-weather investment despite that conservative bent are simply not there anymore.

Welcome to the forum and I hope the above message is a good introduction to the kind of (sound and proven) ideas you'll find here.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by chaz » Sun Feb 08, 2015 4:08 pm

I like Balanced Index fund. :D
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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Toons » Sun Feb 08, 2015 4:32 pm

synergy wrote:Welcome to the forum, Ripple. I don't know if Wellesley is the "best" investment but it is compatible with my risk tolerance. I am nearly retired and the 60/40 bond/equity allocation seems proper for me. I have used Wellesley for several of my accounts for several years. As you point out,it has done well historically in different markets. My thinking is that the equity allocation is enough to provide the gains related to a bull market and the bond allocation is sufficient to moderate a bear market. This allocation limits a high upside but provides the protection from those big dips. There are several other forum members who have a substantial percentage of their portfolio in Wellesley and they seem satisfied with the results. Good luck.



+1 :thumbsup
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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Texas Radio » Sun Feb 08, 2015 4:44 pm

Some on this board believe that Total Bond Market Index fund is a flawed option to handle all of one's bond needs. I submit that Total Bond Market Index combined with the actively managed bond portion of Wellesley can satisfy the bond portion of a portfolio.
A portfolio is like a bar of soap. The more you handle it the smaller it gets.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by lack_ey » Sun Feb 08, 2015 4:50 pm

Ripple202 wrote:[...] From all I see, it seems that VWINX steadily beats out all performance for the long term (even when interest rates were high). [...]

Just to make sure we're all on the same page, high interest rates mean high bond yields, which is good for the performance of a fund like this that's so heavily in bonds. But really, you should look at inflation-adjusted performance and real (inflation-adjusted) yields. Real yields were generally also higher in the modern era than they are now, though. Right now, with interest rates like they are, we know that performance will very likely not be anything like it was.

As for what you're asking, "best" is a loaded word. Even if we could figure out optimum portfolios, it would look different for everybody because timelines, needs, desires, income, savings rates, etc. are all different.

To me, these are the main issues to consider:
  • Is the stock/bond ratio Wellesley income uses the best (or let's just say "sensible") for you?
  • If so, is Wellesley income the best way to implement such an allocation?
Based on traditional analysis of so-called risk-adjusted return from the standpoint of some kind of average gains divided by some kind of numerical representation of risk (like standard deviation), historically bond-heavy balanced portfolios such as Wellesley income by itself are superior to equity-heavy portfolios. They achieved lower returns but with significantly less volatility. However, this may not be the best way to think about risk for any given person. For someone with a long horizon, year-by-year gyrations may be less important than the possibility of a significant shortfall when money is needed, for example.

This is not to say that bonds are bad now—it could be and many expect that equity returns could be correspondingly lower as well, so principals and observations about historical portfolio risk-return may be very relevant in the future, just with diminished expectations of returns everywhere.

As pointed out earlier, do note that it is easy for everybody to determine which funds have done well in the past. Which of those will continue to do well in the future is anyone's guess, and most people's guesses are wrong when it comes to fund performance. In other words, do you expect Wellesley's stock and bond selections to continue beating the market? If so, why? Also, consider the heavy dominance of US stocks in Wellesley's stock allocation and the relative performance of US vs. international equities and what you might expect from both in the future. The preference of Wellesley fund managers to pick large value-tilted stocks is also something else to think about. There are other characteristics of the stock and bond selections to be aware of.

Finally, is the expense ratio worth paying for? (though it's very low for any kind of actively managed fund, that's for sure) If you plan on holding this in a taxable account, do note the relatively heavy tax burden incurred by such a fund because of the nature of the bonds, stocks, and turnover. I think it's relatively safe to say it isn't worth holding in a taxable account, especially in higher tax brackets.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Lafder » Sun Feb 08, 2015 8:01 pm

My parents have just Wellesley and are happy with it. My grandma did too and I think they just copied her.
lafder

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Jerry55 » Sun Feb 08, 2015 11:58 pm

I have Wellesley Admiral Funds in a ROTH IRA, and am happy geting 7-9% per year. Not trying to swing for the fences.
I also have the Wellington Admiral, which is 2/3 as much as Wellesley, and it's done a little bit better.
I'm 59, have been retired 2 years and have a pension which more than supports me. It depends on what you're looking for.
Some folks are looking for High gains, others like me, are looking for safer gains, and 7-8% is just as good as 11-14% gains.

Find your comfort zone....good luck.
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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by VPP » Mon Feb 09, 2015 6:51 am

Ripple202, Wellesley would be an excellent choice for anyone. If you compare it to a classic boglehead portfolio with 40 total stock, 10 small value, 20 international and 30 total bond, that's 70% stocks to Wellesley's 38 and Wellesley outperformed in 30yrs, 20yrs, 10yrs and even from 08 until now. It has performed in rising and falling rates, a wonderful fund.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Dandy » Mon Feb 09, 2015 8:56 am

Can't argue with the very good track record. Not sure I would make it my only investment:

1. Not much international - not critical
2. No? small cap - not critical
3. Holds 60 stocks - a bit concentrated especially for a very large fund
4. Hold 800+ bonds - a bit concentrated especially for a very large fund
5. Bond Duration 6.5 years - not critical
6. Turnover - 100+% - a bit high but Admiral Shares 18 bp expense ratio - quite good

With 40+ Billion in assets it is extremely hard for an "active" fund to keep great performance. It either has to take big bets or become a closet index fund. Seems as if Wellesley has gone the concentrated route -- albeit with remarkable results.

So what you own is a very concentrated balanced fund. 60 (mostly giant) US companies that pay high divs and a diversified but concentrated US intermediate bonds. I own some Wellesley and considered expanding it to cover a substantial part of my IRA. While it's long track record is tempting - I feel it is a bit too concentrated to be a substantial part of my retirement portfolio.
I don't think there is a great all in one fund. They all seem to have a concern or two e.g. holding too much international bonds.

I would feel a better one fund choice would be Balanced Index, Target Date or LIfe Strategy Funds, or even Tax Managed Balanced in taxable accounts. Basic Boglehead philosophy is to favor broad based, passive, low cost index type investments and not to focus so much on prior performance. That belief seems to be too easily trumped by the long track record of Wellesley and Wellington. I think they deserve a place but not the core or more of your portfolio.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Ripple202 » Mon Feb 09, 2015 10:04 am

Thank you all for the quick remarks, very helpful. Has anyone thought about going all in on Vanguard Balanced index (I like that is regularly balances and has low cost) ? I'm generally conservative so would look for a recommendation that accommodates that.

Essentially, I'm looking for a very simple portfolio structure and haven't seen one that performed well over time.

Appreciate the guidance.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Toons » Mon Feb 09, 2015 10:09 am

Ripple202 wrote:Thank you all for the quick remarks, very helpful. Has anyone thought about going all in on Vanguard Balanced index (I like that is regularly balances and has low cost) ? I'm generally conservative so would look for a recommendation that accommodates that.

Essentially, I'm looking for a very simple portfolio structure and haven't seen one that performed well over time.

Appreciate the guidance.


Good Prior Thread on Balanced Index Fund :happy

viewtopic.php?f=1&t=139126
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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Ripple202 » Mon Feb 09, 2015 10:23 am

Perfect, thank you. I'll read today.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by VPP » Mon Feb 09, 2015 10:41 am

Ripple202 wrote:Thank you all for the quick remarks, very helpful. Has anyone thought about going all in on Vanguard Balanced index (I like that is regularly balances and has low cost) ? I'm generally conservative so would look for a recommendation that accommodates that.

Essentially, I'm looking for a very simple portfolio structure and haven't seen one that performed well over time.

Appreciate the guidance.


It will come down to establishing what you want your asset allocation to be and your comfort zone. Wellesley and the balanced index are both simple and low cost, just different asset allocations and the balanced index holds a higher quantity of stocks and bonds and will out perform in go-go stock times and wellesley in the rest. For 30, 20 & 10, it's wellesley, for the last 5 it's balanced. The balanced index will endure larger declines in bad years. In 08, balanced declined 22%, wellesly 9.84. If you are leaning more to a little agressive and can endure the larger decline, the balanced index in a simple, low cost choice.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by nisiprius » Mon Feb 09, 2015 10:43 am

This is more in the nature of a question than an observation.

Something I haven't quite figured out--it's hard to find the right data to download, and Vanguard doesn't really spell this out anywhere--but I have the impression that, in addition to its other merits, Wellesley has a relatively stable quarterly distribution. If I've got this right, Wellesley's distributions might be more equal and more stable than Vanguard's other "retirement income" funds.

Vanguard's website "product summary" description says among other things that Wellesley might be suitable for "Investors with a medium- or long-term time horizon who have a goal of steady income..."

Vanguard does not use the phrase "steady income" in their descriptions of Target Retirement income or LifeStrategy Retirement Income; the language used in both cases is "current income and some capital appreciation."

For Managed Payout, the language they use is "regular monthly payouts."

I would be curious to know the experience of people who are actually using Wellesley. Among all of the various withdrawal strategies, one fairly reasonable one is "spend the income, hope that's a reasonable withdrawal rate that allows the capital to grow enough to hold real value, and hope the variations in income are tolerable." I have the impression that with Wellesley you could do that on a quarterly basis--it pays in $X at the start of the quarter and you allow yourself to spend 1/3 of this in each of the next three months. With the others it seems to me you'd need to save up a full year, because the distributions fluctuate, and then budget 1/12 of the last year's savings for each of the next twelve months. In the days when the money market settlement account earned a "reasonable" interest rate that might not have been difficult, but these days it seems as if it would be a pain...

In short--this is more like a question than a statement--is "steadiness of distributions" valuable, and, if so, does Wellesley provide steadier distributions than the others?
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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by VPP » Mon Feb 09, 2015 11:35 am

nisiprius wrote:This is more in the nature of a question than an observation.

Something I haven't quite figured out--it's hard to find the right data to download, and Vanguard doesn't really spell this out anywhere--but I have the impression that, in addition to its other merits, Wellesley has a relatively stable quarterly distribution. If I've got this right, Wellesley's distributions might be more equal and more stable than Vanguard's other "retirement income" funds.

Vanguard's website "product summary" description says among other things that Wellesley might be suitable for "Investors with a medium- or long-term time horizon who have a goal of steady income..."

Vanguard does not use the phrase "steady income" in their descriptions of Target Retirement income or LifeStrategy Retirement Income; the language used in both cases is "current income and some capital appreciation."

For Managed Payout, the language they use is "regular monthly payouts."

I would be curious to know the experience of people who are actually using Wellesley. Among all of the various withdrawal strategies, one fairly reasonable one is "spend the income, hope that's a reasonable withdrawal rate that allows the capital to grow enough to hold real value, and hope the variations in income are tolerable." I have the impression that with Wellesley you could do that on a quarterly basis--it pays in $X at the start of the quarter and you allow yourself to spend 1/3 of this in each of the next three months. With the others it seems to me you'd need to save up a full year, because the distributions fluctuate, and then budget 1/12 of the last year's savings for each of the next twelve months. In the days when the money market settlement account earned a "reasonable" interest rate that might not have been difficult, but these days it seems as if it would be a pain...

In short--this is more like a question than a statement--is "steadiness of distributions" valuable, and, if so, does Wellesley provide steadier distributions than the others?



Good point, Wellesley is like a clock on dividend distributions and then in December, dividend and capital gains. In 2014 they distributed close to 5% of the share price in dividends and capital gains and this comes like a clock. That is why income oriented people like it so much. No rebalancing or selling shares for your income, regular and steady. I too, would like to hear from some long time shareholders about that. As I recall from my research, I looked back and saw how steady this was.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by VPP » Mon Feb 09, 2015 11:50 am

nisiprius,

Vanguard has the information, when you are at the Vanguard site in the particular fund, click on "price and performance" then click "see cumulative yearly & quarterly historical returns". It gives a nice break down year by year of the capital gains and dividend ditribution percentages.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by synergy » Mon Feb 09, 2015 4:18 pm

nisiprius,

You got me wondering so I looked back for the last 3 years and the quarterly dividends are remarkably consistent ( a few hundred dollar deviation each quarter). The end of year long term capital gain is then a multiple between 1.75 and 3 of the quarterly dividend. I knew I liked this fund a lot.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by Tamales » Mon Feb 09, 2015 5:01 pm

Here's the quarterly dividend history back to 2000:
Image

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by convert949 » Tue Apr 12, 2016 3:07 am

Some time ago, I helped my mother-in-law consolidate her accounts after the death of her husband. As a long time Vanguard client I suggested that at ~ 80, she choose something conservative but with some chance of growth. We decided to split her holdings 50% to Wellesley and 50% to Total Bond Market. Brother-in-law suggested preferred stocks, commodities and MLP's. He later admitted that she had made the right choice.

I am currently considering Wellesley for our portfolio for some moneys coming in from the recent sale of an asset.

As others have said, stable distributions matter...

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by tbradnc » Tue Apr 12, 2016 8:42 am

A few years ago I helped my mom move from a Waddell & Reed 17 fund kitchen sink portfolio to Vanguard.

We opted for 50% Wellesley and 50% Target Retirement Income. Hands off and she's happy with it.

Edited to add: This is in an IRA.
Last edited by tbradnc on Tue Apr 12, 2016 10:00 am, edited 1 time in total.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by dbr » Tue Apr 12, 2016 8:54 am

It would be good to know if you are investing in a taxable account, a tax deferred account, or have assets in both kinds of accounts. VWINX may not be as tax friendly as other approaches depending on where it is held. 100% turnover is not good in a taxable account. One could check the tax cost of dividends and capital gains distributions.

Also, there is no such thing as one "best" fund. It is not even a good fund unless the asset allocation is consistent with one's objectives. It may not be a good idea to be as concentrated as that fund is and it does have manager risk that at some points they will make missteps.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by BHUser27 » Tue Apr 12, 2016 9:05 am

I love my Wellesley. But I am invested in it for a fairly short time (<10yrs).
Be sure to compare tax implications of owning Wellesley versus other options over your particular time-horizon.
I like to use the tax analysis tool on Morningstar (click the "Tax" tab on any fund's quote page, scroll down to the Tax Analysis view and add other tickers for comparison).
Here is an example:
Image

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by convert949 » Tue Apr 12, 2016 9:07 am

dbr wrote:It would be good to know if you are investing in a taxable account, a tax deferred account, or have assets in both kinds of accounts. VWINX may not be as tax friendly as other approaches depending on where it is held. 100% turnover is not good in a taxable account. One could check the tax cost of dividends and capital gains distributions.

Also, there is no such thing as one "best" fund. It is not even a good fund unless the asset allocation is consistent with one's objectives. It may not be a good idea to be as concentrated as that fund is and it does have manager risk that at some points they will make missteps.

I don't think anyone would accuse Wellesley of being tax friendly. Having said that, as an "income" fund, taking all taxable distributions for living expenses, may make sense for individuals who are relying on that income first, prior to touching principle as was my mother-in-law.

Now, I find myself in the same boat so to speak...

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by listedguru » Tue Apr 12, 2016 6:41 pm

I just took a look at the YTD performance for Wellesley and it's up 4% (nice). Wellington (around 60% stocks) is up just under 2% YTD. I really like Wellesley but I keep reading things about how the bonds in it are going to hurt it (maybe badly) when (if) interest rates start to go up. I'm still sitting on a big (for me) inheritance and I keep coming back to Wellesley but the future is scary (to me).

-Guru

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After-tax return is what counts

Post by Taylor Larimore » Tue Apr 12, 2016 7:02 pm

Looking forward to thoughts to see if I'm missing something.

Ripple202:

All of us seem to have missed the fact that Wellesley is very tax-inefficient and seldom belongs in a taxable account.

During the last 12 months VWINX returned 3.78% before tax and 1.96% after tax--almost half its return lost to taxes.

It is after-tax return that counts.

One more thing to consider: Past performance does not forecast future performance.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: After-tax return is what counts

Post by BHUser27 » Tue Apr 12, 2016 7:21 pm

Taylor Larimore wrote:All of us seem to have missed the fact that Wellesley is very tax-inefficient and seldom belongs in a taxable account.


With due respect, I wouldn't say "all of us". Wasn't this the point of my post? After-tax returns are important - that is why I posted the plots and info about how to make comparisons on M*. That said, I do love Wellesley in our Roth IRAs.

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Re: After-tax return is what counts

Post by listedguru » Tue Apr 12, 2016 7:34 pm

Taylor Larimore wrote:
Looking forward to thoughts to see if I'm missing something.

Ripple202:

All of us seem to have missed the fact that Wellesley is very tax-inefficient and seldom belongs in a taxable account.

During the last 12 months VWINX returned 3.78% before tax and 1.96% after tax--almost half its return lost to taxes.

It is after-tax return that counts.

One more thing to consider: Past performance does not forecast future performance.

Best wishes.
Taylor


So this fund would be okay in an IRA correct? Tax efficiency isn't all that important in tax deferred correct?

Thanks,

-Guru

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Re: After-tax return is what counts

Post by triceratop » Tue Apr 12, 2016 7:35 pm

Taylor Larimore wrote:
Looking forward to thoughts to see if I'm missing something.

Ripple202:

All of us seem to have missed the fact that Wellesley is very tax-inefficient and seldom belongs in a taxable account.

During the last 12 months VWINX returned 3.78% before tax and 1.96% after tax--almost half its return lost to taxes.

It is after-tax return that counts.

One more thing to consider: Past performance does not forecast future performance.

Best wishes.
Taylor


Taylor,
I really must vigorously disagree here. Morningstar simply cannot factor in all investors' tax situations here. Consider a retired investor in a 15% federal marginal bracket and a 6% state bracket (these happen to be my own numbers). Then qualified dividends and long-term capital gains are taxed at 0%, and Morningstar doesn't account for that. They also don't list what tax rate they assume for their typical investor. So I crunched my own numbers for VWIAX, the admiral shares mutual fund of the Wellesley fund. See the results here for 2015:

Image

Conclusion: For such an investor, the tax cost (including state taxes which is a lot of the tax you end up owing -- no qualified treatment in CA) is 0.62%, meaning the investor has lost 16.4% of total return to tax. Also, while it is tax inefficient as compared to many funds, if you are stuck using taxable accounts for bonds you either have to pay the tax on the dividends or accept the lower yield on tax-exempt bonds (See the tax efficiency on the table listed for BND, Vanguard's total bond market ETF). There is no free lunch, but you have to compare apples to apples.
Last edited by triceratop on Tue Apr 12, 2016 7:44 pm, edited 1 time in total.
Reason: clarity, typos
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Re: After-tax return is what counts

Post by triceratop » Tue Apr 12, 2016 7:36 pm

listedguru wrote:
Taylor Larimore wrote:
Looking forward to thoughts to see if I'm missing something.

Ripple202:

All of us seem to have missed the fact that Wellesley is very tax-inefficient and seldom belongs in a taxable account.

During the last 12 months VWINX returned 3.78% before tax and 1.96% after tax--almost half its return lost to taxes.

It is after-tax return that counts.

One more thing to consider: Past performance does not forecast future performance.

Best wishes.
Taylor


So this fund would be okay in an IRA correct? Tax efficiency isn't all that important in tax deferred correct?

Thanks,

-Guru


100% correct.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: After-tax return is what counts

Post by Taylor Larimore » Tue Apr 12, 2016 7:42 pm

BHUser27 wrote:
Taylor Larimore wrote:All of us seem to have missed the fact that Wellesley is very tax-inefficient and seldom belongs in a taxable account.


With due respect, I wouldn't say "all of us". Wasn't this the point of my post? After-tax returns are important - that is why I posted the plots and info about how to make comparisons on M*. That said, I do love Wellesley in our Roth IRAs.

BHUser27:

You are absolutely right. Somehow I overlooked your post which has a much better tax-analysis than my own. I apologize.

Best wishes.
Taylor
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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by looking » Tue Apr 12, 2016 7:57 pm

Ripple202

just wondering to see if just splits 50% wellesley and 50% balanced index fund ?????

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by friar1610 » Tue Apr 12, 2016 8:49 pm

Interesting thread. I've mentioned in a couple of recent posts that I'm considering giving a small jolt to our 100% Total Bond Market Index IRAs which represent most of the bonds in a 56% bond/40% equity/4% cash portfolio. 71 & 69 with one of taking unneeded RMDs and the other soon to. When I look at ways to do this, mixing a chunk of Wellesley with Total Bond is an option that is tempting as it would add some quality corporate bonds to the mix as well as the dividend paying equities. It's one of the very few managed funds this indexer has seriously considered since getting religion in the Church of Indexing.

But, I've yet to pull the trigger.
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Re: After-tax return is what counts

Post by dodecahedron » Tue Apr 12, 2016 9:19 pm

Taylor Larimore wrote:
Looking forward to thoughts to see if I'm missing something.

Ripple202:

All of us seem to have missed the fact that Wellesley is very tax-inefficient and seldom belongs in a taxable account.

During the last 12 months VWINX returned 3.78% before tax and 1.96% after tax--almost half its return lost to taxes.



Vanguard's current figures for VWINX are not quite that bad! According to this page, VXINX returned 3.78% in the 12 months ending March 31, but that page also states that return after tax on distributions was 2.08% and return after tax on distribution AND sale of fund shares was 2.78%.

Now, that still sounds pretty bad BUT Vanguard's calculations really assume worst case scenarios (i.e., taxpayers in the highest possible tax bracket). Many retired taxpayers have modest incomes and/or high tax deductions for medical expenses, charitable giving, etc. and so may not face those worst-case extreme high tax rates assumed by Vanguard's calculations. Vanguard's calculations also don't take into account possibilities for strategic tax loss harvesting or donations of appreciated shares (though admittedly these are easier to optimize in a nonbalanced fund.)

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Computing after-tax returns

Post by Taylor Larimore » Tue Apr 12, 2016 9:40 pm

dodecahedron:

It is interesting that the Morningstar and Vanguard figures differ. In my opinion, both figures are vague estimates because each taxpayer's situation is different.

Best wishes.
Taylor
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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by rgs92 » Wed Apr 13, 2016 1:42 am

I have to note that the equity portion of Wellesley is a managed portfolio, and isn't that at odds with the Bogle core guideline?
Another deviation is that the equity portfolio is in the Large Value area, and isn't that concentration an issue for purists?
(Large value does not necessarily track the S&P I think.)
Also, isn't 23 basis points of expenses significant compared to the 10 or less that you can get elsewhere, and isn't that also a small difference from Bogle tenets?

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Re: Computing after-tax returns

Post by triceratop » Wed Apr 13, 2016 1:47 am

Taylor Larimore wrote:dodecahedron:

It is interesting that the Morningstar and Vanguard figures differ. In my opinion, both figures are vague estimates because each taxpayer's situation is different.

Best wishes.
Taylor


Taylor,

It has been shown earlier in this very thread that both figures are not just vague, but entirely inaccurate. They should not be relied on, not even for purposes of comparison as the expected sources of return varies from fund to fund and thus so do the tax costs.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by dbr » Wed Apr 13, 2016 8:32 am

rgs92 wrote:I have to note that the equity portion of Wellesley is a managed portfolio, and isn't that at odds with the Bogle core guideline?
Another deviation is that the equity portfolio is in the Large Value area, and isn't that concentration an issue for purists?
(Large value does not necessarily track the S&P I think.)
Also, isn't 23 basis points of expenses significant compared to the 10 or less that you can get elsewhere, and isn't that also a small difference from Bogle tenets?


It is more difficult to criticize active management when the cost of management is low. 23 basis points probably meets the measure of significant compared to 10, but I doubt most on this board would consider that difference to be a matter of great concern. Real concern happens when costs all-in rise to the 1%-2%-3% level. Active management of VWINX possibly is a greater issue due to the trading and tax consequences of turnover rather than to the ER. I do not have numbers on the internal trading costs in VWINX compared to an index fund, and someone could track the capital gains distributions that would be the tax issue (aside from dividends). I do think that an actively managed fund carries manager risk. I would not invest in that extra risk.

I don't think the issue of tilt vs total market is a purist issue but rather a matter how one wants to manage risk and return according to one's personal judgement and preference. Mr. Bogle does not credit any advantage to value tilts, but that does not mean this board does not have a measured enthusiasm for such things. I think a more difficult issue is that both the stock and bond portfolios are more concentrated than most people here tend to advocate. It would not be my choice.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by rgs92 » Wed Apr 13, 2016 9:22 am

dbr - thanks for the comprehensive response to my comments. Just one thing -- you mentioned "internal trading costs."
On a general note, I thought all of the costs of a fund could be summed up by its expense ratio. Are these internal trading costs also a factor and are they hidden, so we have no idea what a funds true expenses are? (Is this separate from simple trading losses, which of course is inherent to managed funds?) Thank you again.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by BHUser27 » Wed Apr 13, 2016 9:30 am

rgs92 wrote:<snip> -- you mentioned "internal trading costs."
<snip> Are these internal trading costs also a factor and are they hidden, so we have no idea what a funds true expenses are? (Is this separate from simple trading losses, which of course is inherent to managed funds?)


This paragraph from a typical Vanguard prospectus might help (emphasis mine):

Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells
securities
(or “turns over” its portfolio). A higher portfolio turnover rate may indicate
higher transaction costs and may result in more taxes when Fund shares are held in a
taxable account. These costs, which are not reflected in annual fund operating
expenses
or in the previous expense examples, reduce the Fund’s performance...


Source: https://personal.vanguard.com/pub/Pdf/p085.pdf?2210077569

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by dbr » Wed Apr 13, 2016 9:32 am

rgs92 wrote:dbr - thanks for the comprehensive response to my comments. Just one thing -- you mentioned "internal trading costs."
On a general note, I thought all of the costs of a fund could be summed up by its expense ratio. Are these internal trading costs also a factor and are they hidden, so we have no idea what a funds true expenses are? (Is this separate from simple trading losses, which of course is inherent to managed funds?) Thank you again.


(Typing while above reply posted) Yes, those costs are not reported in the expense ratio. To find them you need to burrow through annual reports and look for brokerage costs. There are various estimates of what those might be on average, but often a number given is 1% expense for every 100% in turnover for stocks. I have the understanding the expense is much less for bonds. That is one reason the real cost of active funds with 1% ER may be more like the far side of 2%. Since VWINX is the topic of conversation, one should find out the actual numbers for that fund, and I don't personally have it at hand. On the other hand, an investor in Vanguard total stock fund will be paying an absolutely negligible amount in this cost. There are other hidden costs as well. One instance, securities lending, is actually income to the fund and benefits the fund holders. I don't have numbers on that either. Another benefit to fund holders not in the ER would be frequent trading or early selling fees, which are deposited in the fund and benefit those who have not paid those fees.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by rgs92 » Wed Apr 13, 2016 9:43 am

Wow, so maybe there is yet another hurdle that active funds need to overcome with these mysterious internal trading costs. Maybe that is the secret sauce to the Bogle finding that just about all managed funds lag the index over the long term and even shorter terms.
Always something new to learn around here...
A virtually secret significant extra expense that's hard to quantify exactly? Amazing.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by dbr » Wed Apr 13, 2016 12:03 pm

rgs92 wrote:Wow, so maybe there is yet another hurdle that active funds need to overcome with these mysterious internal trading costs. Maybe that is the secret sauce to the Bogle finding that just about all managed funds lag the index over the long term and even shorter terms.
Always something new to learn around here...
A virtually secret significant extra expense that's hard to quantify exactly? Amazing.


There is probably nothing good about allowing one's assets to pass through the hands of others. From time immemorial that has been the most effective way around to transfer someone else's money into one's own pockets. There are no good mutual funds, only funds that are not actually evil.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by CRTR » Tue Jun 27, 2017 10:42 am

Wellesley is an EXCELLENT choice for the 1-stop shopper retiree and here is why . . . .

1. Per Morningstar data, the fund has had a negative return in only 6 calendar years since 1971. ('73, -3.3%; '74, -6.4; '87, -2; '94, -4.5; '08, -9.8). This type of performance mitigates -- in fact, eliminates -- sequence of returns risk.

2. As has been illustrated above, it is not necessarily a tax-inefficient investment. For retirees in the lower tax brackets and those living in low/no income tax states, the tax losses are quite low. The majority of the "turnover" in the fund is due to bond maturation and, therefore, does not generate a taxable event. The great majority of the equity dividends are "qualified" and receive favorable tax treatment.

3. What about rising interest rates?!?!? How will rising rates affect bond fund returns? There seems to be a general consensus that rising rates will kill bond funds . . . . personally, I'm not so sure. What's interesting to me is that there seems to be little debate about this and there should be! There are many factors aside from interest rates that affect bond and bond fund prices/returns . . . .but that's another topic, for another day . . . .

4. How has Wellesley performed in a rising rate environment? Not too bad, actually and here's the data. Since 1980, there have been 7 periods with rising interest rates (10 year treasury). Below are the dates, 10 year treasury rise, Wellesley performance.
Dates Treasury Wellesley
05/31/80 - 05/31/82 4.5% 16.0%
04/30/83 - 05/31/84 3.2 1.4
07/31/86 - 07/31/88 2.1 12.6
09/30/93 - 10/31/94 2.6 -5.2
11/30/98 - 12/31/99 2.0 -3.9
11/30/03 - 07/31/06 0.6 2.0
01/31/16 - 06/30/16 0.9 1.2

Well, given that I don't have a crystal ball and am not sure what the future holds, I can't say, for certain, that Wellesley will continue it's steady rise, relatively immune to various market conditions. Just because the management team did well in the past doesn't mean they're gonna do well, going forward. Economic conditions change, management personnel change. I am NOT a proponent of active management and believe that a matched index will always win in the end. On the other hand, for the past 46 years, Wellesley has been making a liar out of me.

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by KyleAAA » Tue Jun 27, 2017 10:52 am

That it only holds 61 sticks and is almost entirely invested in the US would give me pause.

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"Past Performance"

Post by Taylor Larimore » Tue Jun 27, 2017 11:56 am

Ripple202 wrote:I've been investing for a long time and have lately been studying different types of lazy portfolios. From all I see, it seems that VWINX steadily beats out all performance for the long term (even when interest rates were high). I'm looking for your take on why this is or isn't the safest, all-in investment. I've read a lot about its heavy allocation to bonds and that it won't do well when rates rise (it did well in the 80s). I've also read about the need to diversify with index funds. Knowing I know that, the question is coming because of the fund's performance, which looks to be amazing. Looking forward to thoughts to see if I'm missing something. VWINX seems like the best investment out there.
Ripple202:

Welcome to the Bogleheads Forum!

Selecting funds on the basis of past performance can be a serious mistake. This is what experts say:
American Association of Individual Investors: "Top Performance lists are dangerous."

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Arnott and Bernstein (2002, p. 64): “The investment management industry thrives on the expedient of forecasting the future by extrapolating the past."

Barra Research: "There is no persistence of equity fund performance."

Christine Benz, Morningstars Director of Personal Finance: "When we look at our data, at the factors that are most predictive of good performance going forward, low costs are a much better predictor than is great past performance."

Bruce Berkewitz, manager of the Fairholme Fund (FAIRX), was Morningstar's Manager of the Decade in 2009. In March, 2016 the Fairholme Fund was in the bottom 1% of all funds in its category for 1-year; 3-years; and 5-years.

Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Bogleheads' Guide to Investing: "Using past performance to pick tomorrow's winning mutual funds is such a bad idea that the government requires a statement similar to this: "Past performance is no guarantee of future performance." Believe it!"

Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Ben Carlson, author of A Wealth of Common Sense : "Dow Jones looked at nearly 2,900 active mutual funds. Only 2 funds in the top quartile stayed in the top quartile of performance over the next four 1-year periods."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Jonathan Clements, author & former Wall Street Journal columnist: "Suppose you picked stock funds that ranked in their category's top 25% over the past five years. A regular updated study suggests that less than a quarter of these funds will remain in the top 25% over the next five years--even worse than the result you would expect based purely on chance."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Dow Jones Indices Report, June 2015: "The data shows a stronger likelihood for the best-performing funds to become the worst performing funds than vice versa." -- June 2016: "Only 3.7% of large-cap funds maintained top-half performance over five-consecutive 12-month periods. For midcap funds, the comparable figure was 5.79%, and for small-cap funds, it was 7.82%."

Charles D. Ellis, author 16 financial books: "Sadly, investors who rely on performance records are relying on useless data."

Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Forbes (2/2/04 issue): "Over the past decade, Morningstar's five-star equity funds have earned an average 5.7% against a 10.3% return for the Wilshire 5000 (Total Stock Market)."

Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Hebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Mark Hulbert (12-31-2014): "Consider a hypothetical portfolio that each year followed the investment newsletter portfolio that, among the more than 500 tracked by The Hulbert Financial Digest, had the best record during the previous calendar year. Over the past 20 years, that portfolio would have been a disaster, producing an annualized loss of more than -17%."

Mark Hebner, President, Index Fund Advisors: "From 1998 through 2013 only about 8 funds remained in the top 100 the following year."

JPMorgan Chase claimed that 97% of their alternate-asset mutual funds beat their benchmark during the 10-year period ending December, 2013. Morningstar reported that only 33% beat their benchmark during the same period (past-performance calculations differ).

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Peter Lynch's Fidelity Magellan Fund (FMAGX), once the worlds largest and most successful mutual fund, is now in the bottom 10% of its category (Sept 7-2016) for 10-year return

Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."

Bill Miller, former manager of Legg Mason Value Trust (LMVTX), was the only manager to outperform The S&P 500 Index for 15 consecutive years. On 9/7/2016 Miller’s fund is in the bottom 1% for 15 year returns.

Mark Miller, financial author and journalist: "Only 7.33% of domestic equity funds that were in the top quartile of performance in March 2014 were still there two years later."

Morningstar: "The star rating was not designed to have predictive ability about future performance."

Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistence in mutual fund performance. -- Wall Street’s favorite scam is pretending that luck is skill.”

Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Sequoia Fund was the top performing large-cap growth fund at the end of 2015 according to Morningstar. On 4/21/2017 it ranked in the bottom 1% for five year returns.

Standard & Poor's Persistence Scorecard (Dec-2014): "The data show a stronger likelihood for the best-performing funds to become the worst-performing funds than vice versa. Of 421 funds that were in the bottom quartile, 14.45% moved to the top quartile over the five year horizon, while 27.08% of the 421 funds that were in the top quartile moved into the bottom quartile during the same period."

Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard Study: "Persistence of performance among past winners is no more predictable than a flip of a coin."

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by willthrill81 » Sun Jul 16, 2017 10:50 pm

CRTR wrote:Wellesley is an EXCELLENT choice for the 1-stop shopper retiree and here is why . . . .

1. Per Morningstar data, the fund has had a negative return in only 6 calendar years since 1971. ('73, -3.3%; '74, -6.4; '87, -2; '94, -4.5; '08, -9.8). This type of performance mitigates -- in fact, eliminates -- sequence of returns risk.

2. As has been illustrated above, it is not necessarily a tax-inefficient investment. For retirees in the lower tax brackets and those living in low/no income tax states, the tax losses are quite low. The majority of the "turnover" in the fund is due to bond maturation and, therefore, does not generate a taxable event. The great majority of the equity dividends are "qualified" and receive favorable tax treatment.

3. What about rising interest rates?!?!? How will rising rates affect bond fund returns? There seems to be a general consensus that rising rates will kill bond funds . . . . personally, I'm not so sure. What's interesting to me is that there seems to be little debate about this and there should be! There are many factors aside from interest rates that affect bond and bond fund prices/returns . . . .but that's another topic, for another day . . . .

4. How has Wellesley performed in a rising rate environment? Not too bad, actually and here's the data. Since 1980, there have been 7 periods with rising interest rates (10 year treasury). Below are the dates, 10 year treasury rise, Wellesley performance.
Dates Treasury Wellesley
05/31/80 - 05/31/82 4.5% 16.0%
04/30/83 - 05/31/84 3.2 1.4
07/31/86 - 07/31/88 2.1 12.6
09/30/93 - 10/31/94 2.6 -5.2
11/30/98 - 12/31/99 2.0 -3.9
11/30/03 - 07/31/06 0.6 2.0
01/31/16 - 06/30/16 0.9 1.2

Well, given that I don't have a crystal ball and am not sure what the future holds, I can't say, for certain, that Wellesley will continue it's steady rise, relatively immune to various market conditions. Just because the management team did well in the past doesn't mean they're gonna do well, going forward. Economic conditions change, management personnel change. I am NOT a proponent of active management and believe that a matched index will always win in the end. On the other hand, for the past 46 years, Wellesley has been making a liar out of me.
After examining Wellesley from several different angles, it seems to me that there may be a little 'secret sauce' with it. Over the last 30 years, a portfolio comprised of 40% large cap value and 60% intermediate term Treasuries, both of which are the predominant holdings of the fund, would have had similar performance to Wellesley, but Wellesley still would have outperformed by an impressive .65% annually. The std. dev. is virtually identical with both, and the indexed portfolio would have had a somewhat better 'worst year' (-6.39% vs. -9.84%).

The only two factors I can come up with for Wellesley's consistently above average returns (remember that it's only trailed the S&P 500 over the last 47 years by less than half a percent annually) given its composition are that (1) fund managers have been consistently able to pick superior stocks and/or (2) active management on the bond side has been more successful than indexing. I think that Bogleheads would lean toward the second explanation, but if so, then perhaps we should look for actively managed bond funds instead of indexed bond funds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by TBillT » Mon Jul 17, 2017 8:09 am

We have VWINX happy with it.

A more "Boglesque" similar fund (or "Sharpesque") might be Life Strategy Moderate Growth VSMGX, which is total market index. Believe performance is a notch above VWINX.

In Fidelity I use PONDX as a surrogate which seems to match VWINX

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Re: VWINX a 1-Stop Shop? [Vanguard Wellesley]

Post by AllieTB1323 » Mon Jul 17, 2017 9:46 am

TBillT wrote:We have VWINX happy with it.

A more "Boglesque" similar fund (or "Sharpesque") might be Life Strategy Moderate Growth VSMGX, which is total market index. Believe performance is a notch above VWINX.

In Fidelity I use PONDX as a surrogate which seems to match VWINX
Given VWINX is basically 40 : 60 wouldn't a better comparison be VSCGX Life StrategyConservative Growth at the same approximate 40 :60?

If this is the case, according to Morningstar, then Wellesley seems to show superior returns.

BTW, we too own VWINX and are more than happy!

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