Another Target Retirement Income vs Wellesley question.

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Bustoff
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Another Target Retirement Income vs Wellesley question.

Post by Bustoff »

I hate to resurrect topics that have been beaten to death...and I swear I have checked the threads for an explanation. So at the risk of being humiliated I will ask anyway.
Can someone please explain why Target Retirement Income is supposed to be less risky than Wellesley, but doesn't actually perform that way?
I get it that Target Retirement Income, due to its various index holdings and diversification should be less risky compared to Wellesley. Vanguard even shows Target Retirement Income having the lower the risk factor of 2 and Wellesley at a higher risk factor of 3.
But this is what perplexes me - if there was ever an acid test for measuring risk, it seems that the financial crises would have met that test and that Wellesley should have experienced much more volatility than the lower risk TRI fund. So why did Wellesley perform slightly better than Target Retirement Income during 2008?
TRI clearly had more Treasuries (which had positive returns) and less corporate bonds (which had negative returns) yet Vanguard Target Retirement Income Inv lost 10.93% while Vanguard Wellesley Income Inv only lost 9.84%.

If one is interested in reducing their risk profile, why sacrifice the returns of Wellesley in favor of Target Retirement Income if that sacrifice doesn't result in less pain?
Thanks

01/03/2008 - 12/31/2008 Vanguard Target Retirement Income Inv :8,891.33 Vanguard Wellesley Income:9,012.09
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Christine_NM
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Re: Another Target Retirement Income vs Wellesley question.

Post by Christine_NM »

Significantly reducing your risk profile also means sacrificing expected return. Wellesley stays in the corporate bond world, is a managed fund with very selective stock holdings, so has a bit more risk. It is specifically searching for income in the form of interest and dividends. This is very different from Target Retirement Income, which relies on a total return approach.

You can't look at just 2008 to compare. Everything, regardless of objective, fell off a cliff then. Maybe you could continue the chart to see how long each fund took to recover. Not sure what that would tell you.

Personally I think Vanguard has it right. Wellesley is a little riskier (because of its narrower approach) but not much. For the extra bit of risk, you get an extra bit of expected return.
18% cash 44% stock 38% bond. Retired, w/d rate 2.5%
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Munir
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Re: Another Target Retirement Income vs Wellesley question.

Post by Munir »

In case of a rise in interest rates, Wellesley has a duration of 6.2 while Target Retiremnt Income's duration is 4.5 (per M*). How these two funds will react to a rise in rates was not tested in 2008. It would be interesting to see how their performance compares in the period May-July of this year.

PS: Wellesley has 5% more equities which may partially explain a higher return but slightly more risk.
Last edited by Munir on Tue Oct 22, 2013 1:31 pm, edited 1 time in total.
YDNAL
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Re: Another Target Retirement Income vs Wellesley question.

Post by YDNAL »

Bustoff wrote:I hate to resurrect topics that have been beaten to death...and I swear I have checked the threads for an explanation. So at the risk of being humiliated I will ask anyway.
Can someone please explain why Target Retirement Income is supposed to be less risky than Wellesley, but doesn't actually perform that way?
To discuss *risk* you must define it.
  1. TR Income offers Market(s) return... you get what the Market(s) give.
  2. Wellesley owns 710 corporate Bonds and 62 Large Cap stocks.
So, can you rely on Wellington Management - over the remainder of your investing life - to give you what you need ?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: Another Target Retirement Income vs Wellesley question.

Post by countdown »

Christine, I always appreciate your informative, objective replies.
They are always educational and on point responsive. Thank you.
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Christine_NM
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Re: Another Target Retirement Income vs Wellesley question.

Post by Christine_NM »

Aw shucks, countdown. Thx.

I try to just answer the questions I've already considered at length.
18% cash 44% stock 38% bond. Retired, w/d rate 2.5%
Levett
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Re: Another Target Retirement Income vs Wellesley question.

Post by Levett »

It would be deceitful for me to pretend I'm agnostic on this matter, but I would note that Vanguard has seen fit to list what it calls "select funds" at the homepage, with a link to the criteria used on the left if you wish to open the link.

This is a link to the "select funds," which might please some, might displease some, and might even surprise a few. ;-)

https://investor.vanguard.com/mutual-funds/select-funds

Happy investing!

Lev
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Bustoff
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Re: Another Target Retirement Income vs Wellesley question.

Post by Bustoff »

YDNAL wrote:
Bustoff wrote:I hate to resurrect topics that have been beaten to death...and I swear I have checked the threads for an explanation. So at the risk of being humiliated I will ask anyway.
Can someone please explain why Target Retirement Income is supposed to be less risky than Wellesley, but doesn't actually perform that way?
To discuss *risk* you must define it.
  1. TR Income offers Market(s) return... you get what the Market(s) give.
  2. Wellesley owns 710 corporate Bonds and 62 Large Cap stocks.
So, can you rely on Wellington Management - over the remainder of your investing life - to give you what you need ?
Interesting question. That same question that could be applied to an SPIA as well. Can one rely on the management of an insurance company to ensure the safety of an annuity over the remainder of their investing life?
I'm simply looking for someone to show some real evidence or any evidence that the Target Retirement Income Fund is safer than Wellesley.
Levett
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Re: Another Target Retirement Income vs Wellesley question.

Post by Levett »

Bustoff,

You have reframed your original question from the general proposition about "risk,"" however defined, to one of "safety"--a different matter in my view.

A mutual fund of any kind is an investment product; an SPIA is an insurance product, which presumably has the implicit backing of the state life insurance guaranty association.

http://www.nolhga.com/

In terms of safety of principal, the SPIA is "safer." But the SPIA does not offer you the opportunity of greater return (in exchange for taking on greater risk) that a mutual fund does.

Lev
AlohaBill
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Re: Another Target Retirement Income vs Wellesley question.

Post by AlohaBill »

Wellesley has 40% stock while Vtinx has 30%. As of yesterday according to Yahoo, it has 39.79% stock. It seems the managers are actively managing.
Last edited by AlohaBill on Tue Oct 22, 2013 5:57 pm, edited 1 time in total.
Levett
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Re: Another Target Retirement Income vs Wellesley question.

Post by Levett »

As of 9/30, Wellesley is 35.33% equity with a fairly sizable short-term reserve position.

As a managed fund, its AA is a moving target.

Lev
dbr
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Re: Another Target Retirement Income vs Wellesley question.

Post by dbr »

To the extent one fund has less equity and lower duration and lower credit risk bonds it will be a less risky fund. One can argue whether or not the stock portfolio in Wellesley is a lower risk portfolio than that in TR. I don't know, and one would need a long history of the volatility of those stocks to know or a theory of stock risk that could distinguish total market and the Wellesley portfolio. I think the theory should be that Wellesley stocks have additional value and less size risk than TSM.

The proposition that Wellesley management can hold more equity and riskier bonds and "manage" risk by tactical means would be a very tough proposition to accept.

Actually observing a difference in risk behavior between two funds is very difficult, certainly any single ten year history would prove nothing.

The answer is that TR is less risky than Wellesley because all we know how to do is estimate risk and our estimate is just what we are saying. Actual outcome is not the same thing as estimating risk because actual outcome is just a single realization of all the possibilities we estimated before. That will also be true of future outcomes as well as past ones.
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Bustoff
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Re: Another Target Retirement Income vs Wellesley question.

Post by Bustoff »

Thanks for the replies everyone.
Levett wrote:Bustoff,

You have reframed your original question from the general proposition about "risk,"" however defined, to one of "safety"--a different matter in my view.

A mutual fund of any kind is an investment product; an SPIA is an insurance product, which presumably has the implicit backing of the state life insurance guaranty association.

http://www.nolhga.com/

In terms of safety of principal, the SPIA is "safer." But the SPIA does not offer you the opportunity of greater return (in exchange for taking on greater risk) that a mutual fund does.

Lev
Thanks Lev- I was afraid of that. Landy's comment got me thinking about another way to examine the issue. I thought Landy was trying to point out the importance of safety and my reference to the annuity was simply to stress there is no absolute safety.
As I mentioned in my OP I can see the Vanguard risk ratings understand the theory but I guess it would be nice to see the difference in the ratings show up in the historical performance. I'm not advocating one fund or another, just trying to understand.
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Bustoff
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Re: Another Target Retirement Income vs Wellesley question.

Post by Bustoff »

dbr wrote:To the extent one fund has less equity and lower duration and lower credit risk bonds it will be a less risky fund. One can argue whether or not the stock portfolio in Wellesley is a lower risk portfolio than that in TR. I don't know, and one would need a long history of the volatility of those stocks to know or a theory of stock risk that could distinguish total market and the Wellesley portfolio. I think the theory should be that Wellesley stocks have additional value and less size risk than TSM.

The proposition that Wellesley management can hold more equity and riskier bonds and "manage" risk by tactical means would be a very tough proposition to accept.

Actually observing a difference in risk behavior between two funds is very difficult, certainly any single ten year history would prove nothing.

The answer is that TR is less risky than Wellesley because all we know how to do is estimate risk and our estimate is just what we are saying. Actual outcome is not the same thing as estimating risk because actual outcome is just a single realization of all the possibilities we estimated before. That will also be true of future outcomes as well as past ones.
Hi dbr -thank you for taking the time to help me understand that. The notion that risk doesn't necessarily reveal itself in historical performance is something I will try to remember.
YDNAL
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Re: Another Target Retirement Income vs Wellesley question.

Post by YDNAL »

Bustoff wrote:
Levett wrote:Bustoff,

You have reframed your original question from the general proposition about "risk,"" however defined, to one of "safety"--a different matter in my view....
Thanks Lev- I was afraid of that. Landy's comment got me thinking about another way to examine the issue. I thought Landy was trying to point out the importance of safety and my reference to the annuity was simply to stress there is no absolute safety.
Sorry for the delayed response... busy!

No, I wasn't pointing to *safety* and rather pointing (and linked) to Wellesley's holdings and management:
  • 1. There is risk in lacking diversification. Owning 62 Large Stocks is not representative of the US Stock Market. The median market cap is $83 billion compared, for instance, to $65 million for S&P 500 VFINX. The 6.4% non-US allocation is most certainly non representative of the non-US Stock Markets. This last point, regardless of what Bogle has said re: S&P 500 company sales - a dead horse (you can search the Forum).

    2. There is 13% Treasury an another 8% in MBS, everything else is corporate bonds = credit risk. Whether we agree with total Bond Market, or not, the Barclays aggregate is over 40% Treasury and 20% MBS.

    3. There is active management risk in Wellesley.
Based on the above, my question was: is Wellington Management - over your investing life - going to provide what you need with Wellesley. Only you can answer this question, and only you should have conviction in the way you allocate your savings.

Now, with regards to *safety*, Equities are risky and non-Equity are less risky. In 1999, for instance, Wellesley lost -6.77% in Capital return, then -0.67%, -0.19%, -2.03% and -0.70% from 2003-2006. The only form of safety for me is to put your savings in a vault and hope/pray for NO inflation.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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