30% Wellesley combined with 3 Fund Portfolio advice

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Kevin K
Posts: 119
Joined: Sun Aug 26, 2007 7:47 pm

30% Wellesley combined with 3 Fund Portfolio advice

Post by Kevin K » Wed Jul 20, 2016 10:16 pm

As risk-averse early retirees we have ~30% of our next egg in Wellesley and the rest in a slightly modified version of the 3 Fund portfolio. Our desired overall allocation across all accounts is 40:60 stocks:bonds.

The equity part is pretty easy: 30% Total International and 70% Total U.S. Stock gets us some diversity to offset Wellesley's concentrated equity portfolio and a bit of international to offset its essentially 100% U.S. approach. I have no interest in getting into a more-moving-parts approach with small/value/EM tilts.

My question is on the bond side. I'm tempted to just put almost everything in Vanguard's IT Treasury Fund, thereby offsetting both the lower quality and longer duration of Wellesley's handpicked corporates. I have a year's worth of expenses in Vanguard's short-term bond ETF as well.

Any thoughts appreciated.

User avatar
Posts: 2711
Joined: Tue Feb 20, 2007 1:13 am
Location: New Mexico

Re: 30% Wellesley combined with 3 Fund Portfolio advice

Post by Christine_NM » Thu Jul 21, 2016 12:40 am

I have a similar portfolio with 38% Wellesley for similar reasons. I have considered a Treasury fund several times but so far resisted. It's important to know that Wellesley bond holdings are already nearly 20% Treasury (18 point something).

Like you I have used short term bond funds for short term goals but not as permanent holdings to reduce risk.

With a healthy slug of cash between me and my investment portfolio, I can let the Wellesley managers decide what to hold. I suppose the cash serves the same purpose for me as the IT Treasury fund would for you. Have you considered more cash and more Wellesley and skip the Treasury fund?
16% cash 48% stock 36% bond. Retired, w/d rate 2.85%

Posts: 6695
Joined: Thu Mar 15, 2012 5:24 pm

Re: 30% Wellesley combined with 3 Fund Portfolio advice

Post by inbox788 » Thu Jul 21, 2016 6:45 am

Not sure why you're bothering with Wellesley at all if you're not satisfied with their US centric investments and you're bothered by the fixed income side. You're having to tweak a lot and that's unnecessarily complicated IMO. If it were only one component, you could max Wellesley on others and just add Total International and use BND to round out your AA. Or add a balanced fund and tweak the fixed income. Doing so would still be 3 funds including Wellesley. Or you could just do the straight forward thing and use the 3 typical funds and achieve your desired position without Wellesley. Are there taxes or other complications driving this decision?

Posts: 650
Joined: Mon Jan 18, 2016 3:07 pm
Location: A Midwestern Town

Re: 30% Wellesley combined with 3 Fund Portfolio advice

Post by BHUser27 » Thu Jul 21, 2016 7:02 am

Answer depends on which funds are in tax-advantaged accounts and which are not. How is the portfolio split between taxable and tax advantaged accounts?

Also, what is your income tax bracket?

Posts: 147
Joined: Mon Jun 27, 2016 11:24 am

Re: 30% Wellesley combined with 3 Fund Portfolio advice

Post by nura » Thu Jul 21, 2016 8:14 am

You could pair Wellesley with Balanced Index (vbiax) and VTINX to achieve desired AA, and reduce management risk and ER.

Posts: 31194
Joined: Sun Mar 04, 2007 9:50 am

Re: 30% Wellesley combined with 3 Fund Portfolio advice

Post by dbr » Thu Jul 21, 2016 8:59 am

Without a convincing quantitative model for why you would do these manipulations, I think you should avoid the game. It is possible that a TSM investment significantly tilted to small cap value can be quantitatively justified but even that is not clear taking both risk and return into account.

I also don't think people need to do a lot of figuring regarding bonds. I'll grant you a case for CDs right now, as you are certainly aware, but it would seem intermediate Treasuries with portfolio risk and return adjusted by selecting stock/bond asset allocation is a perfectly good enough plan.

I obviously have a strong bias that there is not a lot to be gained by asset allocation engineering, but others differ.

Topic Author
Kevin K
Posts: 119
Joined: Sun Aug 26, 2007 7:47 pm

Re: 30% Wellesley combined with 3 Fund Portfolio advice

Post by Kevin K » Thu Jul 21, 2016 10:00 am

Thanks everyone for your thoughtful responses.

My available assets are about 40% in an IRA and the rest in a taxable account, and the Wellesley is all within the IRA. My tax bracket is generally 10%, spiking to 15% some years due to capital gains from sale of funds or occasional consulting work income.

I certainly accept that having a large slug of an actively-managed fund and offsetting it with broad index funds could be characterized as contradictory and/or unnecessarily complicated. It is essentially a hedged bet that Wellesley's decades of outperformance of total market funds (including those with 50:50 or higher equity:bond allocations) is likely to continue. Obviously many retirees and conservative income investors hold Wellesley as their sole or largest holding, and one of them who's been looking for W's "secret sauce" had this comment:

"I'm suspect I've said this before, but I think Wellesley's consistent risk adjusted outperformance (Alpha) has as much to do with their bond picks as stock picking.

The bond market is bigger than the stock market, it trades less frequently, and bid ask is wider on the corporate bonds than stocks or government bonds. I think this makes it the perfect market for active management.

Looking at the big pictures, if I have a portfolio and I'm looking to generate income, I can loan money to a government or corporation and collect interest, or I can take an equity position and generally collect dividends.

Most people decide on AA between stocks and bonds and stick it in index funds. A fair number cheat a bit and decide to allocate more to international, or small caps, or value. I think it's not unusual for bond traders who are able to beat the average (It's how Michael Lewis made his early money).

In contrast, Wellesley is constantly looking at both stocks and bonds and deciding what is the best way to get income from a corporation, buy bonds or buy stocks. I'm a pretty sophisticated investor, but I'm pretty clueless on how to determine I'm a better of buying Wells Fargo stock with 3.1% yield or Wells Fargo 2025 bond with the same yield. I suspect that most firms and fund managers that only buy bonds or only buy stocks aren't be that much smarter.

So moving forward, I think Wellesley will continue to provide Alpha because their balanced approached to stocks and bonds is pretty unique and not easily replicated."

Anyway, I feel comfortable with having enough in Wellesley to benefit from the income but see lots of good reasons to have the majority of the portfolio invested in broader index funds and to include a modicum of international exposure. Based on your wise reminders about simplicity I suppose I ought to look at simply putting the non-Wellesley allocation in something like Vanguard Lifestrategy Conservative Growth and calling it a day. Too many capital gains in my TSM Index fund to do that right now, but I could certainly replicate its holdings and still have relatively few moving parts.

Thanks again for the wise perspectives.

Post Reply