Vanguard High-Yield Corporate Fund Investor Shares VWEHX

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Hef Saf
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Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Hef Saf » Thu Jun 08, 2017 9:13 am

Hi All

My mother is interested in Vanguard High-Yield Corporate Fund Investor Shares VWEHX. She wanted
me to ask the forum members for their thoughts regarding the viability of this fund.

Best Wishes, Hef Saf

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Thu Jun 08, 2017 9:21 am

If a person wants to invest in high yield corporate bonds, then this fund is a good choice.

Why one would want to invest in that asset class is a different issue. I would recommend learning more about assets such as here: https://www.bogleheads.org/wiki/High_yield_bonds and about asset allocation altogether https://www.bogleheads.org/wiki/Asset_allocation There are excellent books on asset allocation by Swedroe and Ferri and by Swedroe on bonds. I strongly recommend reading them.

A person who just picks a fund and does not really know why is certainly making a big mistake.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby DaftInvestor » Thu Jun 08, 2017 9:23 am

I believe it is one of the best High-Yield (junk) bonds on the market so if she is looking to allocate a small amount of her portfolio to junk-bonds this is a good choice. That said, most bogleheads don't believe in high-yield bonds - many will respond I'm sure and tell you why.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby carofe » Thu Jun 08, 2017 9:31 am

The Lipper card can tell you some good information comparing with other funds in the category:

http://quotes.wsj.com/mutualfund/VWEHX

It looks to me that she is looking for good yield. I think there is nothing wrong with titling your bond portfolio a little bit to high yields when you are retired. Some people here may argue to death that dividend or high yield bonds tilting is dumb and so on, but oh well.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Thu Jun 08, 2017 9:41 am

carofe wrote:The Lipper card can tell you some good information comparing with other funds in the category:

http://quotes.wsj.com/mutualfund/VWEHX

It looks to me that she is looking for good yield. I think there is nothing wrong with titling your bond portfolio a little bit to high yields when you are retired. Some people here may argue to death that dividend or high yield bonds tilting is dumb and so on, but oh well.


There is noting wrong with choosing high yield bonds in order to set a higher rate of payout from your investment as long as you understand what you are doing. As far as adding high yield as a portfolio component, I don't think this article by Larry Swedroe is arguing "to the death" against high yield bonds, but a person might attend to the reasoning involved. http://www.etf.com/sections/index-inves ... nopaging=1 One can find articles by Rick Ferri that have been on the other side. There is a valid discussion regarding whether or not high yield bonds are a helpful component of an overall portfolio construction, but there is no suggestion whatsoever in the OP that this is what the OP is trying to do.

All too often what the investor thinks they are getting is not what they are getting, but to determine that you have to ask the investor what their understanding is of what they are doing. The problem that does deserve discussion, if it applies here, is that it is not usually a good idea to confuse investment management and cash management.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Valuethinker » Thu Jun 08, 2017 9:52 am

Hef Saf wrote:Hi All

My mother is interested in Vanguard High-Yield Corporate Fund Investor Shares VWEHX. She wanted
me to ask the forum members for their thoughts regarding the viability of this fund.

Best Wishes, Hef Saf


The downward move say starting beginning of 2008 to April 2009 was massive.

She really needs to be comfortable with that. You could print out a graph of it from Morningstar and show her, how bad the bottom was.

Of High Yield bond funds (we used to call them "junk" bonds) it is on the lower credit risk end, so it's better choice than just about any HY fund (in fact it was closed to new investors at one point?).

I really would not advise anyone to have more than 10%, or at max 15%, of their portfolio in this fund (whole portfolio, i.e. including equity funds).

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Thu Jun 08, 2017 9:56 am

Maybe back to first things first is to ask what is the reason for considering that particular fund over other choices. Also, what is this person invested in altogether?

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby VaR » Thu Jun 08, 2017 10:14 am

Also, now is not the best time to get into High Yield bonds. Spreads are very low - meaning that the yield premium you get for taking the extra credit risk is small relative to the yield spreads we've seen historically.

Note that I don't recommend market timing as a strategy, so I just mention the above to add to the recommendations against getting into junk bonds.

Disclosure: I hold a small position in the Vanguard High Yield fund as part of my asset allocation. It's around 2%, I think.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby mptfan » Thu Jun 08, 2017 10:20 am

DaftInvestor wrote:That said, most bogleheads don't believe in high-yield bonds -

Why do you say that? Have you done a survey? I'm not sure that is true, Bogleheads hold a variety of views on high yield bonds.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby DaftInvestor » Thu Jun 08, 2017 11:57 am

mptfan wrote:
DaftInvestor wrote:That said, most bogleheads don't believe in high-yield bonds -

Why do you say that? Have you done a survey? I'm not sure that is true, Bogleheads hold a variety of views on high yield bonds.


So I haven't done a survey (this forum no longer allows polls) so perhaps my comment was more anecdotal than scientific but if you search "hi-yield" and read all the threads from the last few years its certainly the impression I'm left with. Also - the wiki itself seems to make many more negative comments about them - and very few position - such as:
Due to the high risk of this asset class, investors could very easily choose not to include it at all in their portfolios. Certain commentators even argue that the risks are unlikely to be rewarded in the future, and that past success was more due to statutory changes limiting the market for junk bonds or due to different kinds of bonds ("fallen angels") that no longer dominate the market (since the rise of bonds used for mezzanine financing) than due to inherent long-term superiority of the asset class. The same commentators generally argue that risk should be taken in equity rather than in fixed income, since the former offers unlimited potential gains, whereas the latter only offers a limited upside due to the coupon being fixed and call options.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Theoretical » Thu Jun 08, 2017 1:06 pm

If you're going to do it, the fund to pick is either this one or Van Eck's Fallen Angels fund ANGL, because it's an arbitrage play and the bonds are higher quality on the whole.

Credit spreads are painfully tight though.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Thu Jun 08, 2017 1:08 pm

I think the most important outcome of this thread would be for the OP to identify what is leading to asking about investing in this fund.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby mptfan » Thu Jun 08, 2017 1:15 pm

DaftInvestor wrote:Also - the wiki itself seems to make many more negative comments about them - and very few position - such as:
Due to the high risk of this asset class, investors could very easily choose not to include it at all in their portfolios. Certain commentators even argue that the risks are unlikely to be rewarded in the future, and that past success was more due to statutory changes limiting the market for junk bonds or due to different kinds of bonds ("fallen angels") that no longer dominate the market (since the rise of bonds used for mezzanine financing) than due to inherent long-term superiority of the asset class. The same commentators generally argue that risk should be taken in equity rather than in fixed income, since the former offers unlimited potential gains, whereas the latter only offers a limited upside due to the coupon being fixed and call options.

I agree that the wiki makes more negative than positive comments about them, but if you read it carefully, it says "investors could very easily choose not to include it at all in their portfolios." The converse of that is also true, that investors could very easily choose to include it. Also, while it is true that "certain commentators argue that the risks are unlikely to be rewarded in the future..." again, the converse is also true...that certain commentators argue that the risks are likely to be rewarded.

So a critical reading of the wiki reveals that it is biased in the way it is worded and fails to give a balanced view. Generic statements about what investors "could easily do" is not a very convincing critique.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby nisiprius » Thu Jun 08, 2017 4:26 pm

Hef Saf wrote:Hi All

My mother is interested in Vanguard High-Yield Corporate Fund Investor Shares VWEHX. She wanted
me to ask the forum members for their thoughts regarding the viability of this fund.

Best Wishes, Hef Saf
It's a good fund of its kind. It is somewhere in between bond funds and stock funds in terms of safety. With regard to "viability," it's not the sort of investment in which she's likely to lose all, or even most, of her money.

But she needs to be very clear on her understanding of what so-called "high-yield" bonds are. They are not just extra-good bonds selected for their high yield. They are not like "high yield savings accounts." "High yield" is a euphemism for "junk bonds." They are relatively shaky companies that might be unable to pay their bills, including their bond interest payments. The "high yield" reflects the fact that they need to promise and make high interest payments as compensation for the risk that they might not be able to make those payments at all.

It's just like subprime mortgages: shaky borrowers have to pay higher interest to make up for the likelihood that many of them will not be able to keep up their payments.

if there is another stock market crash like 2008-2009 there is every reason to believe that we will see something like we actually saw at the time.

If you had bought $10,000 in each of three mutual funds at year-end 2007, and watched your account values, assuming reinvested dividends,

...in Vanguard High-Yield Corporate Fund Investor Shares VWEHX, you'd have seen only $7,160 on 12/5/2009;

...in an investment-grade bond fund like Vanguard Total Bond Market Index Fund, VBMFX, the very lowest point ever was $9,843, a $160 loss, and by year-end 2008 you'd have seen over $10,500--it was making money.

...in stocks, as in Vanguard Total Stock Market Index Fund, VTSMX, on 3/6/2009 you'd have seen only $4,764, a loss of more than half and much worse than the loss in junk bonds.

As we know now, the recovery was fortunately fairly quick, much quicker than many feared at the time.

--The investment-grade bond fund had almost negligible loss, and was back to $10,000 for good before the end of the year.

--The "high-yield" bond fund took 1-3/4 years to get back to $10,000 for good.

--The stock fund dipped below $10,000 for the last time on 6/1/2012, so it took 4-1/2 years for recovery.

--And today, the stock fund has the most money, the high-yield fund less, and the investment-grade bond fund the least.

Source
Image

All predictions are unreliable, but I think it is very likely that any future stock market crashes would follow the same general pattern: stocks worst, high-yield bonds bad but nowhere near as bad as stocks, investment-grade bonds not as bad as high-yield. And recovery fastest in bonds, next-fastest in high-yield bonds, and slowest in stocks. And, finally, in the long run, highest returns in stocks, much lower in high-yield bonds, lowest in investment-grade bonds.

The reason is that high-yield bonds are issued by shaky companies that might be able to hang on and keep paying in a good economy. But during the economic conditions surrounding a stock market crash, the issuers of high-yield bonds are likely to go under and default on their bonds.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Thu Jun 08, 2017 4:28 pm

A point of view and not intended to be snarky is that if you have to ask you should probably not be buying this asset.

By the way, as usual nisi has presented an excellent write-up.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby oldcomputerguy » Thu Jun 08, 2017 5:08 pm

A large part of this question concerns why your mom wants to invest in bonds in the first place.

Typically one invests in bonds for two reasons: income, or safety (or perhaps a little of both). If her primary concern is income, then yes, high-yield corporate bonds will provide more income than, say, intermediate-term Treasury bonds. But chasing yield on the bond side is not really a good idea. With that higher return comes more risk. HY bonds are more likely to go into default than higher-quality bonds. Also, HY bonds show a higher correlation with equities than high-quality bonds, so they tend to go south right when you may need them the most for safety. If she's looking for a safety net for her portfolio, these bonds won't provide it. (There's a reason high-yield bonds are also known as "junk" bonds.)

Without knowing her reasons for wanting bonds, I would suggest a better choice for her would be an aggregate fund that invests not only in corporate bonds but in government and agency bonds.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby VaR » Thu Jun 08, 2017 5:54 pm

OTOH, I'd like to hear about OP mom's portfolio constraints. For instance, if the portfolio is constrained to contain no equities, then our answer may be different.

OTOOH, the board will probably recommend some equity allocation, in that case - despite the constraint.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Valuethinker » Fri Jun 09, 2017 4:26 am

nisiprius wrote:
The reason is that high-yield bonds are issued by shaky companies that might be able to hang on and keep paying in a good economy. But during the economic conditions surrounding a stock market crash, the issuers of high-yield bonds are likely to go under and default on their bonds.


Another issue is that as we get closer to the next recession, the quality of the borrowers in High Yield usually declines-- same companies with more debt and/or lower quality companies.

i.e. the risk of the HY bonds is growing just as the yield premium ("spread") over an investment grade bond fund is shrinking.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Sammy_M » Fri Jun 09, 2017 5:51 am

VaR wrote:Also, now is not the best time to get into High Yield bonds. Spreads are very low - meaning that the yield premium you get for taking the extra credit risk is small relative to the yield spreads we've seen historically.

Note that I don't recommend market timing as a strategy, so I just mention the above to add to the recommendations against getting into junk bonds.

Disclosure: I hold a small position in the Vanguard High Yield fund as part of my asset allocation. It's around 2%, I think.


Indeed. It appears current SEC yield for Vanguard high yield is 4.6% vs. 1.8% for intermediate treasury and 2.4% for total bond.

Bill Bernstein offers comment on historical spreads here: http://www.efficientfrontier.com/ef/401/junk.htm

We now have the tools to rationally investigate high-yield investing. The risk premium of junk is simply the JTS (Junk-Treasury Spread) minus the loss rate. To begin, take a look at the graph depicting the cumulative default rate of B-rated bonds. Is it rational to invest in a portfolio of B-rated high-yield securities that offers a 3% yield premium over treasuries? (Northeast Investors Trust and Fidelity High Income, for example, are overwhelmingly composed of B-rated bonds.) Only the dullest of blades would do so. With an annual default rate of roughly 7% and a recovery rate of 40%, we’re losing about 4.2% of return (3% minus [.6 x 7%] ) per year. So we’re doomed here to a return lower than Treasuries, at much higher risk. Historically, the JTS is about 4.5%, and even this does not provide an adequate return premium (4.5% minus [7% x .6] is 0.3%). This is the reason why most pundits recommend that long-term investors stay away from junk.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby mptfan » Fri Jun 09, 2017 10:01 am

VaR wrote:... the yield premium you get for taking the extra credit risk is small relative to the yield spreads we've seen historically.

Stated differently... the market pays a risk premium for investing in high yield bonds, but the risk premium is lower now than it has been historically.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby aristotelian » Fri Jun 09, 2017 10:28 am

I would recommend that she consider the Wellesley Income Fund. Although it is a managed fund, it has low expenses. Wellesley includes a mix of stocks and bonds, including but not limited to "junk" bonds. Similar return profile to VWEHX (both about 7% since 2002) but with lower volatility (5.8% vs 8% standard deviation, -9.79% vs -21.29% worst year).

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EeRe: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Iris reticulata » Fri Jun 09, 2017 4:22 pm

Thanks for all the input, everyone. My vanguard account is about the same size as my son,s is, and the same person helped me put it all together, his dad. I have been trying to buy more bonds but I can only do so much in one year because of taxes. I read the independent advisor by Weiner and really don't pay too much attention to my accounts until now. My son tells me I am retirement age and need to be in bonds. So I just put 120,000 inVFIDX. I was going to put 50,000 in high yield corporate but I am now rethinking it. Appreciate the help.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby hoops777 » Fri Jun 09, 2017 5:33 pm

If one is retired and is looking for a little income,you can do much worse than this fund.Put it into a Roth and the income is tax free.If one has no intention of ever selling it and uses it for tax free income throughout retirement it seems reasonable enough.Please correct me if I am wrong.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Hogan773 » Thu Jun 15, 2017 12:18 pm

nisiprius wrote:
Hef Saf wrote:Hi All

My mother is interested in Vanguard High-Yield Corporate Fund Investor Shares VWEHX. She wanted
me to ask the forum members for their thoughts regarding the viability of this fund.

Best Wishes, Hef Saf
It's a good fund of its kind. It is somewhere in between bond funds and stock funds in terms of safety. With regard to "viability," it's not the sort of investment in which she's likely to lose all, or even most, of her money.

But she needs to be very clear on her understanding of what so-called "high-yield" bonds are. They are not just extra-good bonds selected for their high yield. They are not like "high yield savings accounts." "High yield" is a euphemism for "junk bonds." They are relatively shaky companies that might be unable to pay their bills, including their bond interest payments. The "high yield" reflects the fact that they need to promise and make high interest payments as compensation for the risk that they might not be able to make those payments at all.

It's just like subprime mortgages: shaky borrowers have to pay higher interest to make up for the likelihood that many of them will not be able to keep up their payments.

if there is another stock market crash like 2008-2009 there is every reason to believe that we will see something like we actually saw at the time.

If you had bought $10,000 in each of three mutual funds at year-end 2007, and watched your account values, assuming reinvested dividends,

...in Vanguard High-Yield Corporate Fund Investor Shares VWEHX, you'd have seen only $7,160 on 12/5/2009;

...in an investment-grade bond fund like Vanguard Total Bond Market Index Fund, VBMFX, the very lowest point ever was $9,843, a $160 loss, and by year-end 2008 you'd have seen over $10,500--it was making money.

...in stocks, as in Vanguard Total Stock Market Index Fund, VTSMX, on 3/6/2009 you'd have seen only $4,764, a loss of more than half and much worse than the loss in junk bonds.

As we know now, the recovery was fortunately fairly quick, much quicker than many feared at the time.

--The investment-grade bond fund had almost negligible loss, and was back to $10,000 for good before the end of the year.

--The "high-yield" bond fund took 1-3/4 years to get back to $10,000 for good.

--The stock fund dipped below $10,000 for the last time on 6/1/2012, so it took 4-1/2 years for recovery.

--And today, the stock fund has the most money, the high-yield fund less, and the investment-grade bond fund the least.

Source
Image

All predictions are unreliable, but I think it is very likely that any future stock market crashes would follow the same general pattern: stocks worst, high-yield bonds bad but nowhere near as bad as stocks, investment-grade bonds not as bad as high-yield. And recovery fastest in bonds, next-fastest in high-yield bonds, and slowest in stocks. And, finally, in the long run, highest returns in stocks, much lower in high-yield bonds, lowest in investment-grade bonds.

The reason is that high-yield bonds are issued by shaky companies that might be able to hang on and keep paying in a good economy. But during the economic conditions surrounding a stock market crash, the issuers of high-yield bonds are likely to go under and default on their bonds.



Nisi - does your graph include dividends as well? Or is it just graphing the stated NAVs of each fund?

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Valuethinker » Sat Jun 17, 2017 10:38 am

hoops777 wrote:If one is retired and is looking for a little income,you can do much worse than this fund.Put it into a Roth and the income is tax free.If one has no intention of ever selling it and uses it for tax free income throughout retirement it seems reasonable enough.Please correct me if I am wrong.


That's a common conceptual mistake. Confusing income and capital (they are only distinct for tax reasons).

The nav of the HY fund has been falling for years. You get a higher yield but bond defaults eat into your capital.

It's a general bonehead principle to draw down capital and income in retirement and focus on total return.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby hoops777 » Sat Jun 17, 2017 11:19 am

It may or may not be a conceptual mistake but it has worked for some very smart investment professionals who recommend it and use it for their own families.
If I wanted about 400 dollars tax free income a month I would rather put it in this fund,in a Roth,then to buy an annuity,which is taxable,or to have sell stocks.Besides....why would I want to follow a "bonehead" principle :happy
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Sat Jun 17, 2017 11:42 am

hoops777 wrote:It may or may not be a conceptual mistake but it has worked for some very smart investment professionals who recommend it and use it for their own families.
If I wanted about 400 dollars tax free income a month I would rather put it in this fund,in a Roth,then to buy an annuity,which is taxable,or to have sell stocks.Besides....why would I want to follow a "bonehead" principle :happy


How much money would you have to put in VWEHX to supply $400/month, indexed to inflation, for an indefinite period? Would this be uniquely less than the investment required using any variety of other investments? How many investments might be suggested that most likely could produce that result with less initial investment. The point about the Roth may or may not be valid depending on the individual tax situation. A taxable or a qualified annuity may or may not be more suitable. How does "having to sell stocks" help decide the issue one way or the other?

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby hoops777 » Sat Jun 17, 2017 1:18 pm

Dbr there are more ways to invest than simply following the total return mantra 100 pct.
As an example,if someone at age 70 had 100,000 in the SP500 and needed $400 a month from it and had retired in the year 2000,how much would they have left in 2010?Bad luck with sequence of returns risk but I am certain that it happened to a lot of people.The market has recovered wonderfully to this point,but it was very close to being much worse for a much longer time.
There seems to be a lot of people drunk with stock market euphoria and regardless of what anyone here says,having to sell stocks for living expenses can turn out very badly if one has bad luck with the timing of their retirement.
I realize VWEHX took a good hit as well,but it did recover quicker.My point was for the right situation having a small pct of your money in this fund inside a Roth can be a good option.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Sat Jun 17, 2017 1:34 pm

hoops777 wrote:Dbr there are more ways to invest than simply following the total return mantra 100 pct.
As an example,if someone at age 70 had 100,000 in the SP500 and needed $400 a month from it and had retired in the year 2000,how much would they have left in 2010?Bad luck with sequence of returns risk but I am certain that it happened to a lot of people.The market has recovered wonderfully to this point,but it was very close to being much worse for a much longer time.
There seems to be a lot of people drunk with stock market euphoria and regardless of what anyone here says,having to sell stocks for living expenses can turn out very badly if one has bad luck with the timing of their retirement.
I realize VWEHX took a good hit as well,but it did recover quicker.My point was for the right situation having a small pct of your money in this fund inside a Roth can be a good option.


You are right that the risk and return of VWEHX might be just right for someone, if it is. It has to be shown that it is. The alternative is not 100% stocks but some mixture of stocks and bonds. The question is how VWEHX is know to be a better answer than lots of alternatives that are just as good. The question is also how it is known that VWEHX is a good answer at all for this particular investor. People having to sell VWEHX for income can also have a very bad experience. VWEHX is probably returning more now than it is yielding, but that fund has a long history over the last few decades of yielding more than it returned resulting in an investor spending the yield taking too large a withdrawal and running out of money faster then he might have assumed. Of course, there is no objection to anything if the investor is clear on what he is doing. High yield bonds do not have a unique property that somehow end-runs the laws of arithmetic or the facts of risk and return.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Valuethinker » Sat Jun 17, 2017 4:47 pm

hoops777 wrote:It may or may not be a conceptual mistake but it has worked for some very smart investment professionals who recommend it and use it for their own families.
If I wanted about 400 dollars tax free income a month I would rather put it in this fund,in a Roth,then to buy an annuity,which is taxable,or to have sell stocks.


AFAIK the likes of Larry Swedroe don't recommend it-- in fact, I am sure he does not. Ditto William Bernstein. So I will raise your "very smart investment professionsals" with mine ;-).

But it's also conceptually wrong (except for taxes). The reason people use it is a psychological one-- it's easier to control spending of a given pool of capital if you only draw down the income BUT:

- that may mean you can't meet your retirement needs
- what happens if inflation erodes your capital?
- what happens if your capital is eroded?

Look at it this way: if you invested in an MLP that paid out capital and income in its distributions, would you view those equivalently? I.e. this is a good investment? How about if you invested in a portfolio of high yielding stocks, that were also highly leveraged? (because that is, in effect, what a HY bond is)-- ie with a much higher than average possibility of going bust?

What you would be getting for your $400 pcm is a mixture of income and capital. Look at the long term NAV of this fund.

The point about annuities is US specific *but* is it not the case that with an IRA you eventually have to pull the money out and pay tax on it?


Besides....why would I want to follow a "bonehead" principle :happy


Autocorrect has never heard of boggleheads ;-). Seriously. It's an axiom of investing, here, and "here" is about making the bridge between what academics know about investing and practice.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby nedsaid » Sat Jun 17, 2017 5:07 pm

Hef Saf wrote:Hi All

My mother is interested in Vanguard High-Yield Corporate Fund Investor Shares VWEHX. She wanted
me to ask the forum members for their thoughts regarding the viability of this fund.

Best Wishes, Hef Saf


My take is that High-Yield Bonds as an asset class is a take it or leave it proposition. Some experts think these are worthwhile to invest in and other experts say not. As for myself, my only investment in high yield is in a quirky balanced fund that I own that invests in both High-Yield Bonds and High-Yield Stocks; but this is a smaller holding. The vast bulk of your bond holdings should be in Investment Grade Intermediate Term Bonds. In small doses, High Yield Bonds probably won't hurt your mom. I just think that yield chasing, particularly after eight years of it, is a really bad idea. Everyone knows that interest rates are relatively low.

I have a family member who is a pretty good investor but has made mistakes chasing yields. Certain High Yield investments like High Yield Bonds, Preferred Stocks, and certain High Yield stocks can act, in effect, as self liquidating investments. The yield is great but the principal often drops and keeps dropping. In other words, part of that juicy yield is actually carefully disguised principal. There have been High Yield investments that actually just blow up like certain Energy Master Limited Partnerships. Eight percent yield on zero is still zero. There are High Yielding Bonds that default.

So my answer is that in small doses, the Vanguard High Yield Fund would be okay. It actually is conservatively run for a High Yield Bond Fund. But for heaven's sake, don't yield chase, particularly now.
A fool and his money are good for business.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Dale_G » Sat Jun 17, 2017 5:17 pm

dbr wrote:How much money would you have to put in VWEHX to supply $400/month, indexed to inflation, for an indefinite period? Would this be uniquely less than the investment required using any variety of other investments? How many investments might be suggested that most likely could produce that result with less initial investment. The point about the Roth may or may not be valid depending on the individual tax situation. A taxable or a qualified annuity may or may not be more suitable. How does "having to sell stocks" help decide the issue one way or the other?


As a long term holder of Vanguard Junk (mostly for 35 years), Total Bond Market and Total Stock Market, dbr aroused my curiosity.

So I went to MORNINGSTAR to get the year end total return data as reflected in the well used Nisiprius chart. I did make some simplifying assumptions in order to reduce computations. I eventually settled on an initial investment of $109,100 in each VWEHX, Barclay's AGG and VTSAX (TSM Admiral) on 06/22/2007 and withdrew $4,800 at the end of each calendar year (rather than monthly and did not adjust the withdrawal for inflation. I doubt these simplifying assumptions significantly skew the results.

Inflation 2006 - 2016 was 22%.

The result: On 06/09/17 the fund ending values were:

VWEHX = $133,259 = the buying power of the original $109,100 initial investment after inflation
Barclay's AGG (without expenses) = $113,160 for a loss of 15% to inflation
VTSAX = $128,609 for a loss of 3.5% to inflation

Note, the VWEHX results account for any erosion of NAV/capital

The next 10 years are likely to be much different - and everyone has to pick their poison, but over the past 10 years, VWEHX was not a bad choice in a diversified portfolio. The reason VWEHX outperformed VTSAX was due to the sequence of returns early in the game.

Dale
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby hoops777 » Sat Jun 17, 2017 5:20 pm

You are of course correct dbr.I do believe however that this fund has quite a good history and is at the top of the chart if someone is considering this type of fund.It pays more for a reason,so choose your risk.
The advisor I was referring to writes a column every Sunday in my Bay Area newspaper.He heads a company that operates pension plans.His 90 something year old father has had this fund for years.I would say 95 pct of the stuff he writes could come directly from the bogleheads forum.He loves this fund so to each their own :D
I believe Rick Ferri also likes corp bonds.Nobody is god when it comes to investing advice.Vanguard certainly likes corp bonds because they certainly offer a lot of them.
Valuethinker you make good points but you can lose an awful lot of money buying stocks that can devastate your retirement.A lot of people own this fund,it was even closed for some time,so maybe they are all just lemmings being led to the slaughter :D
If Swedroe and Bernstein were omnipotent than Vanguard is what?How much money does Vanguard have invested in corporate bonds?So I guess the point is that Vanguard must be an unscrupulous organization for having hundreds of billions of dollars invested in their corp bond funds.A good
corp bond fund is more risky than treasuries and less risky than stocks,that is what the academics know.End of story so make a choice.
Just to be clear,nobody is saying to put a large pct of their money in VWEHX.
Thank you Dale G for your excellent analysis and thoughts on this horrible investment :D :) :)
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby surfer1 » Sat Jun 17, 2017 5:38 pm

Junk bonds should be thought of as equities - not bonds. If you consider them in this manner, they are less volatile than stocks, but more volatile than bonds.

You'll get the taxable income from the monthly dividend, and you won't see as much gain or loss as you would from stocks.

I use junk bonds as a conservative play, in the same basket as stocks.

Nispirius' post earlier in this thread was a good write up, showing how junk sits right between stocks and bonds with regard to volatility.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby TD2626 » Sat Jun 17, 2017 7:39 pm

One is discussing whether something that is labeled "below investment grade" is a good investment. The "below investment grade" part should be a tip-off - plus the fact that it's also often referred to as "junk".

For the typical bond investor, such as a retired person seeking income and stability of principal, the high-yield fund is generally too risky. This fund doesn't remotely have stability of principal (and long-term investment grade bonds are already risky).

For a younger investors with stock-heavy portfolios, risks should be put into perspective. Nisiprius's post in this thread is very informative. Junk bonds are thought to be safer than stocks. For example, consider which is riskier - stock in a company that's issuing junk bonds - or junk bonds from that company. Compared to things like treasuries, though, the junk bonds are vastly riskier.

One can find support from people like Rick Ferri for a small allocation to this area. Investors who have a long time horizon, who are not simply yield-chasing, and who very truly and deeply understand the risks may consider allocations of, say, 5-10% of bonds to a high-yield fund.

People on this forum often say that Vanguard's junk fund buys the "less junky" junk and that's why it's a good junk fund for those investors who want a small allocation. However, remember that it's called junk for a reason - and ask whether the added complexity of a 5% position is worth whatever benefits you believe will come.

Recall the benefits that can come are not better risk-adjusted total returns. The efficient market hypothesis says that it is not possible to find an investment with better risk-adjusted returns. People who support junk-bond investments claim that bond credit/default risks (the main risks of junk bonds) do not have a 1.00 correlation with equity risk. Finding two risky assets with non-unity correlations and investing in both to decrease portfolio risk is supported by modern portfolio theory.

High-yield bonds involve interest rate risk and credit/default risks. Interest rate risk can be gotten from regular bonds. If credit/default risks are the same as equity risks, then an allocation of stocks and bonds that has the same risk as a junk bond allocation should have the same return (in theory). However, if junk bonds are their own asset class entirely (if credit/default risks do not have a correlation of 1 with equity market risks), then modern portfolio theory suggests a small allocation may be beneficial in theory. Correlation is very high, maybe 1, but probably somewhat lower. So there may be a tiny theoretical benefit as Rick Ferri suggests.

These tiny theoretical benefits could possibly justify at most a 5-10% allocation in a long-term portfolio. Again, is the stress and hassle of, say, a 5% allocation worth it for such a small allocation?

Also, investors shouldn't invest in things they don't understand. Do you fully understand the subtleties of the arguments for and against high-yield bonds that I made above? Do you understand the subtleties of the arguments made by Ferri and Swedroe? If not, one should really stick with investment-grade only in my opinion.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Vanguard Fan 1367 » Sun Jun 18, 2017 3:23 am

I have about 12 percent of my assets involved with Vanguard's Long Term Corporate Bond ETF. Just like the joke about the guy who jumped off the Empire State Building and lived to tell about it (he told about it to the people on the 80th floor, on the 50th floor, etc.) I have been doing well with my investment. But it certainly is a risk. I like that risk better than the VWEHX risk myself in my search for yields.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Valuethinker » Sun Jun 18, 2017 7:42 am

hoops777 wrote:You are of course correct dbr.I do believe however that this fund has quite a good history and is at the top of the chart if someone is considering this type of fund.It pays more for a reason,so choose your risk.
The advisor I was referring to writes a column every Sunday in my Bay Area newspaper.He heads a company that operates pension plans.His 90 something year old father has had this fund for years.I would say 95 pct of the stuff he writes could come directly from the bogleheads forum.He loves this fund so to each their own :D
I believe Rick Ferri also likes corp bonds.Nobody is god when it comes to investing advice.Vanguard certainly likes corp bonds because they certainly offer a lot of them.


Good. Then don't cite same as gods.

This is about not making Capital Gains and Income as separate components of investment return. What matters is Total Return. You can't make an argument for HY Bonds that says "they pay out a high income" and ignore the reduction in capital that is taking place.

Valuethinker you make good points but you can lose an awful lot of money buying stocks that can devastate your retirement.A lot of people own this fund,it was even closed for some time,so maybe they are all just lemmings being led to the slaughter :D


If you want safe money you hold government bonds. If you want risky money you hold stocks. If you hold instruments which are fixed income but also carry equity risk, then you have higher volatility. Empirically, you have not been rewarded for that. Anti Ilmanen's book will take you through the return to credit risk, which is what HY bonds capture, it's certainly not huge, and it's hard to separate it out from equity risk.

Holding a self liquidating portfolio of HY bonds, where they pay a higher yield but deplete your capital, is not a good investment strategy.

Similarly, in the crash, the HY bond fund plunged, and its income was cut. So a strategy of living off the income from that fund wasn't a good one.

What one should not do is advise others to treat capital and income separately in thinking about returns (except for tax reasons). It's fine if you like it, because it helps you regulate your spending -- HY bonds are unlikely to drop to zero in your lifetime, although of course the income from the fund *does* drop (risky right?)-- it's not a stable income that one can rely upon.

If Swedroe and Bernstein were omnipotent than Vanguard is what?


You are making an irrelevant comparison.

What we can do is check back why Swedroe and Bernstein believe this (Bernstein btw has a paper on when HY bonds are cheap, worth a read-- it's on Efficient Frontier). And the answer is because it is academically sound.

How much money does Vanguard have invested in corporate bonds?So I guess the point is that Vanguard must be an unscrupulous organization for having hundreds of billions of dollars invested in their corp bond funds.


1. you are creating a Straw Man
2. everything VG does is in the hundreds of billions so, again, irrelevant
3. I haven't said anything about Investment Grade Corporate Bonds. The same objections to HY in fact occur here (the risk-return, empirically, doesn't do better than US government bonds, but has higher volatility) but it's much less of an issue. You are not (to any significant extent) getting "paid back your capital" in IG corporate bonds.

A good
corp bond fund is more risky than treasuries and less risky than stocks,that is what the academics know.End of story so make a choice.
Just to be clear,nobody is saying to put a large pct of their money in VWEHX.
Thank you Dale G for your excellent analysis and thoughts on this horrible investment :D :) :)


The point is your "strategy" makes a serious conceptual mistake-- separating out capital and income as different things (other than for tax purposes). Other than a psychological point from behavioural investing (about "rationing" how much you spend-- but remember, the payout from the VG has dropped in the past, it's not a constant income).

From the point of view of investing, one should not make that conceptual mistake, nor advise others based on it.

Focus on total return.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby TD2626 » Sun Jun 18, 2017 8:44 am

I think it may be OK for an investor to have a small-ish tilt toward securities that produce more income (or a larger portion of their total return in income) in some circumstances. Total return is of primary importance, but due to the Efficient Market Hypothesis total return should be the same for the same level of risk regardless of what portion of it comes in the form of a regular check. Getting a regular check is easy and convenient, and may help limit spending to more sustainable levels for some. Taking return in the form of capital gains involves routine sales - each of which could require tracking down old cost basis records for capital gain reporting... a major hassle. Thus it is possible to justify a 10% or so allocation to dividend stocks and a 10-20% allocation to higher yeilding bonds (mostly long duration but possibly a little in "junk" like VWEHX) for the convenience of the regular income check without having to make sales as often. An investor who does this small tilt toward income should keep the total risk constant in their portfolio by simultaneously increasing cash reserves or short term bond holdings.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby hoops777 » Sun Jun 18, 2017 12:24 pm

Valuethinker I understand your points and you are obviously a smart person with excellent knowledge about investing.
I never presented anyone as a god but was simply making a point that very smart people have different opinions.My point about Vanguard was relevant.Just because they sell billions of dollars of all types of investments does not change my point about Swedroe who is 100 pct against corp bonds, investment or junk,yet Vanguard obviously disagrees with his analysis,or they do not have our best interest at heart.You cannot have it both ways.Swedroe and Vanguard disagree.
I honestly think the purest bogleheads get a bit dogmatic at times and have no tolerance for a different approach along the lines of what TD2626 just posted,which is exactly how I feel.It is not the end of the world because someone for whatever reason wants to invest a small portion into this fund.Nisprius had a nice chart that pretty much summed it up.
A different note....
Swedroe does not like Wellesley either.A fund that is based on corp bonds and dividend paying stocks!!!

Oh,and I believe Larry Swedroe is brilliant and someone I would gladly hand over every penny I have if he would manage it for me,but there are many roads to Dublin,or however that saying goes.A small detour like putting a small pct of your portfolio into VWEHX will not stop you from getting there.
K.I.S.S........so easy to say so difficult to do.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby dbr » Sun Jun 18, 2017 12:50 pm

There is a big difference between saying that any particular selection of investments is a bad idea and saying that there is no reason that selection of investments is an especially good idea. There are lots of investment proposals that have no particular advantage and should not be represented as such though there is also nothing particularly wrong with them. People are always looking for something "special" that somehow in the end amounts to looking for a free lunch that doesn't exist or some special discovery that somehow no one else sees, and so on. I guess there is nothing wrong with letting someone think they have outsmarted the system when no actual harm is done. Of course, when actual harm is done . . .

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby abuss368 » Sun Jun 18, 2017 3:00 pm

We invested in this fund many years ago and eventually sold. The word "bond" in the fund title should have an asterisk next to it as the fund behaves like a combination of stocks and bonds.
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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Doug E. Dee » Sun Jun 18, 2017 3:25 pm

I can remember buy a junk bond fund 30 years ago because of the very high yield.

Dumped it when I saw my principal eroding at an alarming rate.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Valuethinker » Sun Jun 18, 2017 4:04 pm

hoops777 wrote:Valuethinker I understand your points and you are obviously a smart person with excellent knowledge about investing.
I never presented anyone as a god but was simply making a point that very smart people have different opinions.My point about Vanguard was relevant.Just because they sell billions of dollars of all types of investments does not change my point about Swedroe who is 100 pct against corp bonds, investment or junk,yet Vanguard obviously disagrees with his analysis,or they do not have our best interest at heart.You cannot have it both ways.Swedroe and Vanguard disagree.
I honestly think the purest bogleheads get a bit dogmatic at times and have no tolerance for a different approach along the lines of what TD2626 just posted,which is exactly how I feel.It is not the end of the world because someone for whatever reason wants to invest a small portion into this fund.Nisprius had a nice chart that pretty much summed it up.
A different note....
Swedroe does not like Wellesley either.A fund that is based on corp bonds and dividend paying stocks!!!

Oh,and I believe Larry Swedroe is brilliant and someone I would gladly hand over every penny I have if he would manage it for me,but there are many roads to Dublin,or however that saying goes.A small detour like putting a small pct of your portfolio into VWEHX will not stop you from getting there.


I think that I have made the point, and explained the cognitive flaw with your line of argument.

Hopefully others reading our interchange will be motivated to dig deeper and to understand my point which is one which is made time and again on this Forum by many posters.

The exchange between us is no longer profitable. Thank you for taking the time to reply.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Valuethinker » Sun Jun 18, 2017 4:16 pm

Doug E. Dee wrote:I can remember buy a junk bond fund 30 years ago because of the very high yield.

Dumped it when I saw my principal eroding at an alarming rate.


Probably you managed to catch the 1990 junk bond bust.

The point about NAV loss is one we keep trying to bang away at here.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby Doug E. Dee » Sun Jun 18, 2017 4:31 pm

Valuethinker, I think it was sometime around the '87 downdraft in stocks. I remember I lost money so I thought I should just stick with something more stable like bonds. And why not go for the highest yield?

I just didn't understand what I was getting into, it's that simple. A low grade bond fund probably is fine for a small portion of your AA but the mistake I made was thinking that I was going to get a 10% return on my money, and the principal would not vary much.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby hoops777 » Sun Jun 18, 2017 7:27 pm

Valuethinker and dbr I really do understand your points and thank you for making them.However I will make one last point about just seeing things one way.
I give you WELLESLEY.
1-a managed fund
2-bonds mostly corporate with a longer than avg duration
3-only about 60 stocks that are INCOME oriented per Vanguard and no small cap.
4-very little international in a balanced fund


I would say that this fund violates quite a few beliefs constantly expressed here yet somehow it has been one of the greatest funds in the history of investing.

So maybe nobody has all the answers and putting about 5 pct of your portfolio into VWEHX inside a Roth for some monthly income is not a capital offense. :D
K.I.S.S........so easy to say so difficult to do.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby michaelsieg » Sun Jun 18, 2017 10:26 pm

This fund seems to always cause a lot of emotional reactions - for or against it. If this funds is suitable for the mother of the poster depends on many other things that we don't know - I know of many elderly retirees who completely shy away from equity risk and as this fund clearly has equity risk built in it, it could be a good fit for some retirees, who have little exposure to equity markets and are focused on income.

Last year I looked in more detail into this fund, posted in this thread last year (Cost of $1000 per Month Inflation-Adjusted Income?):
viewtopic.php?f=10&t=186782

This fund has a 35 year history since 1980, I took the daily closing prices and calculated a yearly average price and divided it by the sum of the 12 monthly dividends for that year to get the yearly dividend yield. Then I subtracted inflation for each specific year. The average annual inflation adjusted dividend yield was 6.22%, for the last 15 years the average yield was 4.95%. The yields vary widely, but the only year where there was a negative inflation adjusted yield was in 1980 (-0.23%). There were only 3 years where the inflation adjusted yield was less than 4% (1980:-0.23%, 2005:3.61% and 2006: 3.93% ).
So if we take the annual yield and assume no planned use of principal, the sum required to have 1000/month inflation adjusted is 193000 for the entire life of the fund (which included periods of high inflation in the early 1980s) and using a more conservative assumption with the yield of the past 15 years, you would need about 243000 to have an inflation adjusted income of 1000/month.
This plan would also allow you to use some principal for the years where the yield is below the historic averages. I think of all the proposed ways this fund would be the least expensive way, which surprised me.


Obviously nobody would recommend to use this fund alone for safe retirement income, but I tried to test the hypothesis that this might be a solution. If one is reluctant to put all the eggs in one basket (like using one single annuity from one insurance provider), I could imagine that this fund could be part of the solution for the retirement income problem, if one wants to use several diversified income instruments. Disclaimer, I don’t own this fund, but looking at it made me more interested in it.

The inflation data I took from http://www.usinflationcalculator.com/in ... tion-rates, the daily prices and the monthly dividends of VWEHX from yahoo finance.

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Re: Vanguard High-Yield Corporate Fund Investor Shares VWEHX

Postby hoops777 » Mon Jun 19, 2017 10:46 am

michaelsieg thank you for making a reasonable point and for making it much better than I did.
K.I.S.S........so easy to say so difficult to do.


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