Using Wellesley Fund as a bond alternative

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corey407woc
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Using Wellesley Fund as a bond alternative

Post by corey407woc » Fri Jun 15, 2018 7:57 pm

Hey guys was getting your input on using the Wellesley fund 35:65 stock/bonds as my bond fund. Currently contribute $2500 a month to VTSAX ($30k yearly) and $250 a month to Wellesley which also houses my emergency fund of $30k so around 3k a year to that. I would be able to take the risk of a 10 percent drop of the Wellesley. 28 male and this is in a taxable account. 140k annual salary thanks

Grt2bOutdoors
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Re: Using Wellesley Fund as a bond alternative

Post by Grt2bOutdoors » Fri Jun 15, 2018 8:02 pm

corey407woc wrote:
Fri Jun 15, 2018 7:57 pm
Hey guys was getting your input on using the Wellesley fund 35:65 stock/bonds as my bond fund. Currently contribute $2500 a month to VTSAX ($30k yearly) and $250 a month to Wellesley which also houses my emergency fund of $30k so around 3k a year to that. I would be able to take the risk of a 10 percent drop of the Wellesley. 28 male and this is in a taxable account. 140k annual salary thanks
No. It can go down more than 10%.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

corey407woc
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Re: Using Wellesley Fund as a bond alternative

Post by corey407woc » Fri Jun 15, 2018 8:05 pm

In 2008 it went down 9 percent

Mtn Hiker
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Re: Using Wellesley Fund as a bond alternative

Post by Mtn Hiker » Fri Jun 15, 2018 8:09 pm

from oct 2007 to march 2009 it went down 19%. No, this is not an alternative to a bond fund.

Nate79
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Re: Using Wellesley Fund as a bond alternative

Post by Nate79 » Fri Jun 15, 2018 8:13 pm

Mtn Hiker wrote:
Fri Jun 15, 2018 8:09 pm
from oct 2007 to march 2009 it went down 19%. No, this is not an alternative to a bond fund.
+1

Grt2bOutdoors
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Re: Using Wellesley Fund as a bond alternative

Post by Grt2bOutdoors » Fri Jun 15, 2018 8:13 pm

corey407woc wrote:
Fri Jun 15, 2018 8:05 pm
In 2008 it went down 9 percent
Okay, do you think the maximum the market can go down is 10,20,30,40,50,60,70,80,90 or 100%?
In 2008, markets dropped about 50%. Are you saying the max decline is 50%? Markets can go down and stay down for longer than one can stay solvent. You take risk with equities, safe money belongs in cash, cds, bonds.

If push came to shove you could think of your entire portfolio- stock and bond investments as your emergency fund. So, sure you could Wellesley as part of your safety fund. Personally I would not use that fund, what is your tax bracket?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Wabbit
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Re: Using Wellesley Fund as a bond alternative

Post by Wabbit » Fri Jun 15, 2018 8:15 pm

What is your overall desired asset allocation? If you want Wellesley to be part of that, sure, but I'd suggest to first decide your asset allocation and then do the math to find the balance between Wellesley and VTSAX to get you there.

wassabi
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Re: Using Wellesley Fund as a bond alternative

Post by wassabi » Fri Jun 15, 2018 8:18 pm

corey407woc wrote:
Fri Jun 15, 2018 7:57 pm
Hey guys was getting your input on using the Wellesley fund 35:65 stock/bonds as my bond fund. Currently contribute $2500 a month to VTSAX ($30k yearly) and $250 a month to Wellesley which also houses my emergency fund of $30k so around 3k a year to that. I would be able to take the risk of a 10 percent drop of the Wellesley. 28 male and this is in a taxable account. 140k annual salary thanks
It's just fine for an emergency fund if you have enough disposable savings to serve as a backup to your emergency fund.

Alternatively, you can just save 130% of your emergency fund (e.g., 13k instead of 10k) to make up for a potential drawdown. That way, you're at least getting a good return on your money.

If you are strapped for cash then I wouldn't put it at risk. However, at 28 with a high income and so much disposable cash you're better off going with option 2 above (130% of your emergency) to get a good return on your emergency.

fsh71
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Re: Using Wellesley Fund as a bond alternative

Post by fsh71 » Fri Jun 15, 2018 9:14 pm

I hold Wellesley in taxable -- was my first taxable investment. I had too much cash in savings, so I parked the money there due to the conservative allocation. Now I just balance around it and it's part of my portfolio.

Honestly, if you've got 150%+ of your emergency fund needs in taxable, I wouldn't continue putting more into it, you can do better just putting it into low cost passive funds at your desired allocation.

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grabiner
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Re: Using Wellesley Fund as a bond alternative

Post by grabiner » Fri Jun 15, 2018 9:26 pm

The Wellesley fund is 65% bonds. Therefore, you can use it for your bond holdings, as long as the amount you want to hold in bonds is 65% of the fund balance.

However, I don't like the fund in a taxable account. The stock turnover is fairly high, leading to large capital gains. And both the stocks and bonds tend to be higher-yielding. In addition, the fund has the same problem as all balanced funds: if you want to sell bonds, you have to sell stocks at the same time, paying capital-gains tax on the stocks. If you want an allocation like Wellesley in a taxable account, hold 35% in a value index, and 65% in Total Bond Market index (in a low tax bracket) or a muni fund (in a high tax bracket)
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Nate79
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Re: Using Wellesley Fund as a bond alternative

Post by Nate79 » Fri Jun 15, 2018 11:35 pm

The question is do the bonds this fund holds match the risk profile you are trying to have in the fixed income portion of your portfolio? Do you actually know anything about what bonds this fund holds?

dbr
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Re: Using Wellesley Fund as a bond alternative

Post by dbr » Sat Jun 16, 2018 10:27 am

grabiner wrote:
Fri Jun 15, 2018 9:26 pm
The Wellesley fund is 65% bonds. Therefore, you can use it for your bond holdings, as long as the amount you want to hold in bonds is 65% of the fund balance.

However, I don't like the fund in a taxable account. The stock turnover is fairly high, leading to large capital gains. And both the stocks and bonds tend to be higher-yielding. In addition, the fund has the same problem as all balanced funds: if you want to sell bonds, you have to sell stocks at the same time, paying capital-gains tax on the stocks. If you want an allocation like Wellesley in a taxable account, hold 35% in a value index, and 65% in Total Bond Market index (in a low tax bracket) or a muni fund (in a high tax bracket)
Good analysis. Yes, of course you could use the bond allocation in Wellesley as your bond fund with the obvious limitations. Can you use Wellesley as a whole as a bond fund? Of course not. The fund is 35% stocks.

aristotelian
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Re: Using Wellesley Fund as a bond alternative

Post by aristotelian » Sat Jun 16, 2018 6:34 pm

I hold it in my employer plan because it is one of the better options. For the purposes of determining my asset allocation, I count 35% toward my stock allocation and 65% to my bond allocation.

It would not be a good choice for an emergency fund, both because it is not tax efficient, and because it is made up of stocks and bonds, and neither are are safe as cash.

tibbitts
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Re: Using Wellesley Fund as a bond alternative

Post by tibbitts » Sat Jun 16, 2018 8:26 pm

corey407woc wrote:
Fri Jun 15, 2018 7:57 pm
Hey guys was getting your input on using the Wellesley fund 35:65 stock/bonds as my bond fund. Currently contribute $2500 a month to VTSAX ($30k yearly) and $250 a month to Wellesley which also houses my emergency fund of $30k so around 3k a year to that. I would be able to take the risk of a 10 percent drop of the Wellesley. 28 male and this is in a taxable account. 140k annual salary thanks
There is nothing magic about Wellesley but you don't need anyone's permission to do this. It probably won't matter much, but don't do it because you somehow think the world has changed and this makes sense now but didn't at some other time. My guess is that with inflation at 3% and cash at 6% you'd be all over a money market fund and not even give Wellesley a second thought.

jalbert
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Re: Using Wellesley Fund as a bond alternative

Post by jalbert » Sat Jun 16, 2018 8:42 pm

You likely can establish your preferred asset allocation with a mix of vtsax and Wellesley income, but it would create unnecessary complexity with no benefit.

If you want some of your equity holdings to be an actively managed large cap value portfolio just combine vtsax with some of the Windsor or Windsor II fund or the value index fund and hold a bond fund.
Index fund investor since 1987.

MotoTrojan
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Re: Using Wellesley Fund as a bond alternative

Post by MotoTrojan » Sat Jun 16, 2018 8:44 pm

Also keep in mind it’s awfully tax-inefficient. For a riskier EF it isn’t awful but I wouldn’t use it as a major taxable holding.

rj49
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Re: Using Wellesley Fund as a bond alternative

Post by rj49 » Sat Jun 16, 2018 11:48 pm

Wellesley also throws off some high st capital gains from buying and selling. It’s also not a diversified bond fund, since it’s mostly longer-duration corporate bonds, without the government bond percentage and diversified duration of TBM.

People find all sorts of rationalizations for investing in Wellesley, based on past performance, perceived safety, and yield lust. The risk after 30+ years of a bond market and 10 years of a rising stock market is not a Wellesley crash, but more a period of mediocre returns, with greater losses during a recession or other flight-to-quality, during which TBM would do much better probably, with its Treasuries.

If you want fixed income with a bit more oomph and growth potential, the TR and Lifestrategy income funds have 20-30% in stocks, with much much higher diversification in both bonds and stocks. I do the same in my TSP fund, with an income fund with 20% or so stocks.

InvMoney
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Re: Using Wellesley Fund as a bond alternative

Post by InvMoney » Sun Jun 17, 2018 12:12 pm

Vanguard Wellesley Income is an excellent conservative balanced fund that invests 35% to 40% in large cap, blue chip, dividend paying stocks and 65% to 60% in intermediate term investment grade bonds.

Since inception on 7/1/1970, Wellesley Income Investor Shares (VWINX) have had an average annual return of 9.71%.

During the 47 year period of 1971 thru 2017, Wellesley had only 6 years of negative returns (-3.49% in 1973, -6.43% in 1974, -1.92% in 1987, -4.44% in 1994, -4.14% in 1999 and -9.84% in 2008).

For the 5 year period of 2013 thru 2017, Wellesley had an average annual return of 7.36%, compared to 6.55% for Vanguard Life Style Conservative Growth Fund (VSCGX - 40% invested in US and International stock indexes / 60% invested in US and International bond indexes).

For the 10 year period of 2008 thru 2017, Wellesley had an average annual return of 7.33%, compared to 5.25% for Vanguard Life Style Conservative Growth. (For the year 2008, while Wellesley lost -9.84%, Vanguard Life Style Conservative Growth lost -19.52%.)

For the 15 year period of 2003 thru 2017, Wellesley had an average annual return of 7.39%, compared to 6.61% for Vanguard Life Style Conservative Growth.

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nedsaid
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Re: Using Wellesley Fund as a bond alternative

Post by nedsaid » Sun Jun 17, 2018 12:47 pm

corey407woc wrote:
Fri Jun 15, 2018 7:57 pm
Hey guys was getting your input on using the Wellesley fund 35:65 stock/bonds as my bond fund. Currently contribute $2500 a month to VTSAX ($30k yearly) and $250 a month to Wellesley which also houses my emergency fund of $30k so around 3k a year to that. I would be able to take the risk of a 10 percent drop of the Wellesley. 28 male and this is in a taxable account. 140k annual salary thanks
Well, this would certainly be among the best bond substitutes out there as it is already 60% in bonds. Those bonds are high quality. The stocks in Wellesley are probably blue chips and the so-called low volatility stocks. So Wellesley's stocks are probably more stable than the stock market as a whole. But still, stocks are still stocks, they can go up a lot and they can go down a lot. Certainly, this fund would have more growth potential than a 100% bond fund but it will still be more volatile.

Your idea isn't a bad one but keep in mind that it still has 40% stocks.
A fool and his money are good for business.

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