Wellesley or Target Retirement? Similar AA; Different Styles

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
BHChinook
Posts: 200
Joined: Mon Nov 26, 2007 12:44 pm
Location: East Texas

Wellesley or Target Retirement? Similar AA; Different Styles

Post by BHChinook » Fri Feb 17, 2012 1:09 pm

I have most of my IRAs in Vanguards Target Retirement Fund (VTINX). I chose VTINX for simplicity; has nearly the exact asset allocation I seek; it's a fund of index funds; and the cost is only .17%.

Recently, I was looking at Wellesley (VWINX).

Here are roughly the differences I see:

% Equity: VTINX 30 VWINX 36
% TIPS: VTINX 20 VWINX ?
Expense Ratio: VTINX .17 VWINX .25
Management Style: VTINX Index VWINX Active Management

Somehow, and for at least 8 years, Wellesley has managed to outperform VTINX. Using Morningstar's charts for growth of 10,000 (very roughly; I'm only looking for guidance):

Last 8 years: Wellesley higher 20%
Last 5 years: Wellesley higher 5%
Last 3 years: Wellesley higher 10%
Last 1 year: Wellesley higher 3%

Wellesley seems to be a managed fund that has outperformed a similar index fund over a reasonable period of time. Note that Wellesley goes back much farther than 8 years but VTINX does not. Also, with the slightly higher equity allocation, Wellesley should be a little riskier and therefore should return a little more.

Question: Given their similarities and the slightly better performance of Wellesley, would it be reasonable to switch from VTINX to VWINX for IRAs; from an index style to a managed style? Is there any reason to have both these very similar funds in one's IRAs?

Thanks
It's always easier to do nothing than to do something.

KyleAAA
Posts: 6731
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by KyleAAA » Fri Feb 17, 2012 1:19 pm

Those two funds are actually very, very different. The Target Retirement fund invests only in total market index funds (plus TIPS). Wellesley Income actually invests heavily in VALUE stocks and over-weights corporate bonds. Their asset allocations aren't really comparable. The Target Retirement fund is much more diversified. Wellesley Income takes on more risk above and beyond the fact that it owns more stocks. It also tends to own RISKIER stocks and RISKIER bonds, all things considered, because it greatly over-weights value stocks and corporate bonds relative to the market.

BHChinook
Posts: 200
Joined: Mon Nov 26, 2007 12:44 pm
Location: East Texas

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by BHChinook » Fri Feb 17, 2012 1:44 pm

Thanks Kyle,

You are quite right. It's a mistake to simply equate a percentage of equities and not consider what the equities are; but it's easily done. It's comforting to see that greater risk is producing greater gain. But we all have to decide what level of risk we can "sleep with"...
It's always easier to do nothing than to do something.

DSInvestor
Posts: 10884
Joined: Sat Oct 04, 2008 11:42 am

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by DSInvestor » Fri Feb 17, 2012 2:14 pm

You should take a look at Vanguard LifeStrategy Conservative Growth VSCGX er=0.15% which will maintain 40/60 stock bond AA using index funds (TSM, TISM, TBMII).
https://personal.vanguard.com/us/funds/ ... st=tab%3A2

Lifestrategy Income VASIX er=0.13% maintains 20/80 stock/bond AA using index funds (TSM, TISM, TBMII)
https://personal.vanguard.com/us/funds/ ... st=tab%3A2
Wiki

User avatar
nisiprius
Advisory Board
Posts: 36682
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by nisiprius » Fri Feb 17, 2012 2:46 pm

There's another difference, and one that I only cottoned onto recently. Wellesley is managed so as to produce a steady stream of roughly equal quarterly dividends. That is, with Wellesley, if you check the "reinvest capital gains" checkbox but not the "reinvest dividends" checkbox, the quarterly payouts are roughly equal.
Image
For Target Retirement, they are not.
Image

Precisely how this factors into a retirement strategy is unclear. From an investing point of view, you have to withdraw from the portfolio at a roughly steady rate somehow, whether from dividends or fund sales, and how sustainable that rate is, is of course a puzzle. For any portfolio, the time-honored "dividends only" strategy is sustainable, but how much it fluctuates and how well it keeps up with inflation over the long term is the question.

Rather than a "growth of $10,000" chart, I wish Vanguard had a "stream of dividend income from $10,000" chart--one that showed the inflation-adjusted income from a $10,000 investment in Wellesley, with dividends paid out and capital gains reinvested.

It appears to me that Wellesley and Managed Payout are the only Vanguard funds for which the funds themselves can be used directly to generate a fairly even stream of retirement income.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

beardsworth
Posts: 2135
Joined: Fri Jun 15, 2007 4:02 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by beardsworth » Fri Feb 17, 2012 4:46 pm

Wellesley's stock sleeve, in addition to being value/dividend tilted, contains a negligible amount of foreign stock. Target Retirement Income's stock allocation is about 30% foreign (i.e., the 30% allocation to stocks is composed of approximately 21% total domestic index and 9% total foreign index)––and being index funds, both are not only more "blend-y" but also reach down further into mid–caps and a dash of small-cap, as compared to Wellesley's focus on very large U.S. value companies.

Wellesley's bond portfolio concentrates on corporates of fairly long maturity. Target Retirement Income uses Total Bond Market for its main bond component, so will tend more toward an intermediate overall maturity, with a mixture of corporates, Treasury, and mortgage pass-throughs. As noted above, Target Retirement Income also holds--unlike Wellesley--an ongoing 20% allocation to TIPS (Wellesley typically has almost none) and a constant 5% allocation to a money market fund.

Target Retirement Income's future performance relative to Wellesley is, of course, unknown, but I would agree with those who consider the Target the more diversified of these two funds.

BHChinook
Posts: 200
Joined: Mon Nov 26, 2007 12:44 pm
Location: East Texas

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by BHChinook » Fri Feb 17, 2012 5:14 pm

More diversified and simpler... what could be better.
It's always easier to do nothing than to do something.

User avatar
Toons
Posts: 12970
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Toons » Fri Feb 17, 2012 5:31 pm

Buy some of both ,add a little flavor to the mix :D :D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

User avatar
Matigas
Posts: 75
Joined: Sun Dec 26, 2010 3:34 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Matigas » Fri Feb 17, 2012 5:35 pm

BHChinook wrote:More diversified and simpler... what could be better.
Higher returns.

BHChinook
Posts: 200
Joined: Mon Nov 26, 2007 12:44 pm
Location: East Texas

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by BHChinook » Fri Feb 17, 2012 7:19 pm

Higher returns = Higher risks

Lots of funds have higher returns than VTINX but few can match the nice, consistent positive slope of it's curves...
It's always easier to do nothing than to do something.

supersharpie
Posts: 652
Joined: Wed Dec 22, 2010 1:28 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by supersharpie » Fri Feb 17, 2012 7:25 pm

BHChinook wrote:Higher returns = Higher risks

Lots of funds have higher returns than VTINX but few can match the nice, consistent positive slope of it's curves...
Eh, this one isn't too shabby:

http://quote.morningstar.com/fund/f.aspx?t=VWINX

Wellesley has lost, at most, 9% in a given year and has gained an average of over 10% for close to half a century.

User avatar
tipswatcher
Posts: 289
Joined: Tue Jun 21, 2011 5:17 pm
Contact:

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by tipswatcher » Fri Feb 17, 2012 10:27 pm

Buy some of both ,add a little flavor to the mix
Yup, I own them both. Wellesley in an IRA and some Target Retirement in a 401k. I don't focus much on either.

By the way ... I am not retired.

I just want to be.
TIPS: Perfect investment for imperfect times?

User avatar
BigD53
Posts: 1042
Joined: Sat Jul 21, 2007 7:47 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by BigD53 » Fri Feb 17, 2012 10:40 pm

I like both funds, I own both funds, and I don't try to compare them. In fact, it's their differences that appeal to me.

I'm a conservative investor, I like extra income, and I don't need to take a lot of risk. Target Income and Wellesley Income fill that role very nicely. Wellesley has a great record, dating back 40 years. Target Income is much newer, and is much more diversified. It was exactly what I was looking for to pair up with Wellesley. A great, low-cost, Vanguard managed fund, and a great diversified Vanguard index fund. It's the best of both world's for me. :beer

From the Vanguard website:
Vanguard Wellesley® Income Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation. The fund’s stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income focused balanced funds. Investors with a medium- or long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund as a core holding in their portfolio.

(FYI: the bond duration for Wellesley is 6.3 years. Total bond market is 5.0 years)

huntertheory
Posts: 289
Joined: Sat Mar 27, 2010 8:05 am

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by huntertheory » Sat Feb 18, 2012 10:17 am

Target Retirement is a great fund and probably the purer "Bogleheadish" fund as it is indexed and very diversified. If you go with Wellesley I think you need some more international diversification, but it is a great fund. I look at Wellesley as the best of the active investment world, reflecting a sort of Ben Graham-ish image of what used to be called "conservative investment," where the idea was to create a balanced portfolio of high quality common equities by established companies that paid regular dividends and bought at attractive prices, and supplemented with high quality corporate bonds, all bought with sufficient diversification to avoid unnecessary risks. In other words, if there was Bogleheads before Bogle and index funds, I think the forum would be called the Wellesley (or Wellington) heads. No one should ever be negative to Wellesley or Wellington because the funds have done exactly what they profess to do, at very low cost compared to their competitors, and have an incredible track record.

But index funds exist now, and they provide additional diversification, reduce human error (someone still has to trade the things, even with the help of computers, but there is less human risk than active management) and they have extremely low cost. I don't index because I believe in efficient markets in and of themselves, but I do believe in Bogle's "cost matters" hypothesis along with its corollary, that while beating the market is not impossible it's also really hard, and the additional costs typically tip the scales.

Yet I still find Wellington and Wellesley attractive because, as I said, they seem to offer the "best" of the received wisdom of hundreds of years of practice in "conservative investment", while index funds are relative newcomers and rely on both academic theory as well as actual practice to convince us. So I personally index almost everything, but do have a bit of Wellington (and would have Wellesley if I was a bit older). If I like the practices of Wellesley and Wellington so much why don't I put everything there? Diversification, costs, and, yes, I can't help but wonder if those active managers will fail to live up to the standards of the past. Viva la Bogle.

trico
Posts: 684
Joined: Wed Nov 12, 2008 7:04 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by trico » Sat Feb 18, 2012 10:32 am

I just retired last year and went into the Wellesley Income fund for my retirement. I added a touch of Total International Index for some International. I did this to get a lower standard deviation, another words lower volitility. This is so that when the market is volitile like in 2011, you can stay the coarse. also it has a long track record of doing very well over the very long term.

Trev H
Posts: 1874
Joined: Fri Mar 02, 2007 10:47 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Trev H » Sat Feb 18, 2012 10:47 am

You said..

Expense Ratio: VTINX .17 VWINX .25

With a 50K investment in Wellesley Income you can get admiral shares which decreases the ER to .18

Trev H

grizzoola
Posts: 33
Joined: Mon Oct 10, 2011 5:48 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by grizzoola » Sat Feb 18, 2012 11:22 am

huntertheory wrote:If I like the practices of Wellesley and Wellington so much why don't I put everything there? Diversification, costs, and, yes, I can't help but wonder if those active managers will fail to live up to the standards of the past. Viva la Bogle.
I prefer Wellington to Wellesley because its returns are equal to or better than Wellesley. The thing that swayed me most is the incredible track record of Wellington: Over 6% since inception. Inception date? 1929! Wellington has been very good for me. I'm 75, yet Wellington has a 65/35 equity to bond ratio. I do not buy the theory that as you get closer to retirement, you switch from stocks to bonds.

Mtn Hiker
Posts: 30
Joined: Thu Aug 19, 2010 7:50 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Mtn Hiker » Mon Feb 20, 2012 12:51 pm

trico wrote:I just retired last year and went into the Wellesley Income fund for my retirement. I added a touch of Total International Index for some International. I did this to get a lower standard deviation, another words lower volatility. This is so that when the market is volatile like in 2011, you can stay the coarse. also it has a long track record of doing very well over the very long term.
If you look back historically and run the numbers you will find that adding an International index to VWINX would serve to increase volatility not reduce it.
I've tried all kinds of permutations of adding other Vanguard funds to VWINX, plus mixes of just index funds, or mixes of Vanguard managed stock and bond funds, and found nothing that can beat Wellesley for the combination of low volatility and return. In fact there is not much that can beat its return over the very long haul. It's the performance in bear markets that makes all the difference.

BHChinook
Posts: 200
Joined: Mon Nov 26, 2007 12:44 pm
Location: East Texas

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by BHChinook » Mon Feb 20, 2012 1:16 pm

I propose a new strategy for "age in bonds". Although not accepted by many Bogleheaders, I now believe that equities get more risky with longer time horizons. If so, then the "average" investor should follow the new ebchinook rule:

Follow the standard rule until about age 65 and then freeze the bond/equity ratio for about 20 years. If you live that long, your time horizon will surely be getting shorter and you can start to increase your equity positions. The ultimate objective would be for: 1) if equities excel, your heirs will make out like bandits or, 2) if equities tank, the check for your coffin will bounce.

I say the "average" investor because there will always be some with assets so large that all future comfort can be guaranteed with as little or as many equities as they like.

Personally, I am leaning toward Wellesley over Wellington (as a compliment to Target Retirement) as I am more comfortable with the lower equity ratio.
It's always easier to do nothing than to do something.

ryank
Posts: 1
Joined: Sat May 19, 2012 8:24 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by ryank » Sat May 19, 2012 9:01 pm

I work for an employer who provides a Target Retirement account; there's also the opportunity to add active options and specialty options.

Right now, my asset allocation is 100% to the Target Retirement account as I'm beginning investor. The only other things in my portfolio are the STAR fund in a Roth IRA and company stock.

Two of the speciality options I like and am interested in potentially adding to the mix are:
- Wellesley Income Fund Admiral Shares
- Vanguard REIT Index Fund Institutional Shares

I probably wouldn't go higher than 10% on the REIT index for asset allocation, but what thoughts do you have on bringing in Wellesley and how it should be allocated with the Target Retirement account?

newlyretired
Posts: 88
Joined: Sun Jul 31, 2011 8:52 am

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by newlyretired » Sat May 19, 2012 10:30 pm

Mtn Hiker wrote:
If you look back historically and run the numbers you will find that adding an International index to VWINX would serve to increase volatility not reduce it.
I've tried all kinds of permutations of adding other Vanguard funds to VWINX, plus mixes of just index funds, or mixes of Vanguard managed stock and bond funds, and found nothing that can beat Wellesley for the combination of low volatility and return. In fact there is not much that can beat its return over the very long haul. It's the performance in bear markets that makes all the difference.
I agree that Wellesley is a fine fund, and it forms the basis of my AA. But if you look back historically, complementing it with treasuries and more volatile stock does increase the yield and reduce the volatility (as measured by standard deviation). Specifically, consider a portfoilo of 50% Wellesley, 30% VFITX (Intermediate Treasuries), 10% VEIEX (Emerging Market) and 10% NAESX (Small Cap). Backtesting from 1972 to 2011 with the Backtest-Portfolio-returns-rev11a.xls spreadsheet compares this way with straight Wellesley:

Average return: 10.36% (Wellesley) vs. 11.10% (alternative)
Standard deviation: 9.28% (Wellesley) vs 8.88% (alternative)

investor
Posts: 1010
Joined: Mon Feb 19, 2007 10:50 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by investor » Sat May 19, 2012 11:41 pm

in the above example: what does a 50/50 mix of Wellesley and Wellington do over the same time period ??

investor

newlyretired
Posts: 88
Joined: Sun Jul 31, 2011 8:52 am

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by newlyretired » Sun May 20, 2012 12:30 am

investor wrote:in the above example: what does a 50/50 mix of Wellesley and Wellington do over the same time period ??

investor
Here are a few other mixes, including the first two that I posted. The period is 1972 to 2011 with the Backtest-Portfolio-returns-rev11a.xls spreadsheet:

P1: All Wellesley: 10.35% return with 9.28% sd
P2: 50/50 Wellesley/Wellington: 10.56% return with 10.58% sd
P3: 50 Wellesley/30 5-yr tbill/10 sc/10 em: 11.10% return with 8.88% sd
P4: 40 lcv/60 tbm: 9.83% return with 8.85% sd
P5: Another favorite of mine (details below): 11.63% return with 8.99% sd

Here's the same information in a chart, although here the returns are annualized rather than averaged:

Image

Perhaps this indicates the moderating effect on volatility from treasuries (in P3, P4 and P5). The last one has 30% Wellesley, 30% VFITX (intermediate treasuries), and 8% each in scv, reit, emerging market, tips (synthetic for most of the time period), and international sc.

Johm221122
Posts: 5072
Joined: Fri May 13, 2011 6:27 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Johm221122 » Sun May 20, 2012 7:54 am

Wellesley has had a great history,but it is history and past performance does not guarantee future returns.Why add manager risk if you don't have too?For the record I hold managed funds,but not more than 10% in anyone fund

User avatar
Taylor Larimore
Advisory Board
Posts: 27446
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Number one rule for retirees.

Post by Taylor Larimore » Sun May 20, 2012 10:08 am

Grizzoola:
I do not buy the theory that as you get closer to retirement, you switch from stocks to bonds.
Perhaps you should "buy the theory" recommended by Mr. Bogle and most other experts. At age 75, unless you can afford to lose -22% as Wellington did in 2008, it is a good idea to increase your bond allocation as you age (Total Bond Market gained +5% in 2008).

The number one rule in retirement is to not lose what you will need and therefore not take unnecessary risk trying to get more.

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

User avatar
SpringMan
Posts: 5361
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: Number one rule for retirees.

Post by SpringMan » Sun May 20, 2012 11:05 am

Taylor Larimore wrote:Grizzoola:
I do not buy the theory that as you get closer to retirement, you switch from stocks to bonds.
Perhaps you should "buy the theory" recommended by Mr. Bogle and most other experts. At age 75, unless you can afford to lose -22% as Wellington did in 2008, it is a good idea to increase your bond allocation as you age (Total Bond Market gained +5% in 2008).

The number one rule in retirement is to not lose what you will need and therefore not take unnecessary risk trying to get more.

Best wishes.
Taylor
I agree with you and Mr. Bogle about getting more conservative with advancing age. However, pointing out the fact that Wellington fund lost 22% in 2008 is irrelevant because the OP and others were discussing Wellesley Income fund not Wellington.
Best Wishes, SpringMan

investor
Posts: 1010
Joined: Mon Feb 19, 2007 10:50 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by investor » Sun May 20, 2012 12:22 pm

newlyretired:

Thanks for the plots and adding Wellington. Nice results.

investor

newlyretired
Posts: 88
Joined: Sun Jul 31, 2011 8:52 am

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by newlyretired » Sun May 20, 2012 1:14 pm

Johm221122 wrote:Wellesley has had a great history,but it is history and past performance does not guarantee future returns. Why add manager risk if you don't have too?For the record I hold managed funds,but not more than 10% in anyone fund
Ignoring the extra costs of managed funds, the manager risk on its own does not make expected returns better or worse for a given class; I do accept potentially more volatility from owning fewer stocks in fund such as Wellesley (although Wellesley has had higher returns with lower volatility than the unmanaged P4 over these 40 years). Even if there were extra volatility, combining Wellington with other volatile asset classes without overlap and with low correlation can give an overall lower volatility (see Portfolios P3 and P5). You could argue that the 30% in managed funds of P5 could better be spread among two or three low-cost managed funds, and I would see your point there.

As a new retiree, I do worry about maximum drawdown years (a common worry, as pointed out by Taylor Larimore a few posts earlier). For all five of displayed portfolios, the maximum drawdown full year for the period 1972-2011 was 2008 with these values:

P1: -9.84%
P2: -16.07%
P3: -9.81%
P4: -11.36%
P5: -12.67%

I agree with John221122's well-worn maxim that history and past performance do not guarantee future returns, but the exact same statement applies to an unmanaged portfolio such as P3. You could say that it's more likely that a less diversified portfolio will not match past history, and that is again the question of volatility which I talked about above.

That does leave the question of costs, but the cost of Wellesley Income Admiral exceeds the similar unmanaged P4 by less than 0.02%, and the investor shares add only another 0.1%.

Johm221122
Posts: 5072
Joined: Fri May 13, 2011 6:27 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Johm221122 » Sun May 20, 2012 2:01 pm

How many managers beat there benchmark over the long term?how many funds don't even make it 40 years?I don't get it,putting most of portfolio in one managed fund as OP wants to do(unless index fund)but to each his own.If OP has 30 year retirement horizon will the same manager even be there

User avatar
Munir
Posts: 2463
Joined: Mon Feb 26, 2007 4:39 pm
Location: Oregon

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Munir » Mon May 21, 2012 10:16 am

I wish Target Retirement Income used Intermediate Bond Index instead of Total Bond Market for the bond portion of its portfolio- or have a clone to VTINX with that allocation. It would avoid the mbs holdings in TBM and have a better corporate to treasury ratio since 20% of its portfolio is already in TIPS.
Last edited by Munir on Mon May 21, 2012 2:27 pm, edited 1 time in total.

User avatar
FlyHi
Posts: 169
Joined: Thu Mar 24, 2011 11:32 am

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by FlyHi » Mon May 21, 2012 11:35 am

I have set my retired partner's AA to be:

29% CDs
27@ VTINX
44% VWIAX

As the CDs mature I put the money into the two funds with an ultimate plan of 38% VTINX 62% VWIAX
“If you want to feel rich, just count the things you have that money can't buy”

User avatar
Taylor Larimore
Advisory Board
Posts: 27446
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Mortgage Backed Securities ?

Post by Taylor Larimore » Mon May 21, 2012 12:13 pm

Munir wrote:I wish Target Retirement Income used Intermediate Bond Index instead of Total Bond Market for the bond portion of its portfolio- or haver a clone to VTINX with that allocation. It would avoid the mbs holdings in TBM and have a better corporate to treasury ratio since 20% of its portfolio is already in TIPS.
Munir:

During the past 15 years Vanguard's GNMA fund had an annualized return of 6.22% compared with Total Bond Market's 6.14% return. In other words, the GNMA fund improved the return of TBM--and this occurred during the worst mortgage crisis in our history.

What evidence do you have that the seven TRILLION dollars in government guaranteed mortgage-backed securities (mbs) should not be included in a diversified bond fund?

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Beagler
Posts: 3442
Joined: Sun Dec 21, 2008 7:39 pm

Re: Mortgage Backed Securities ?

Post by Beagler » Mon May 21, 2012 12:41 pm

Taylor Larimore wrote: What evidence do you have that the seven TRILLION dollars in government guaranteed mortgage-backed securities (mbs) should not be included in a diversified bond fund?
IIRC Mr. Bogle stated, at a BH Reunion, re: MBS (paraphrasing) "Well, first of all they're not bonds."
Last edited by Beagler on Mon May 21, 2012 1:17 pm, edited 1 time in total.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

User avatar
Munir
Posts: 2463
Joined: Mon Feb 26, 2007 4:39 pm
Location: Oregon

Re: Mortgage Backed Securities ?

Post by Munir » Mon May 21, 2012 1:01 pm

Taylor Larimore wrote:
Munir wrote:I wish Target Retirement Income used Intermediate Bond Index instead of Total Bond Market for the bond portion of its portfolio- or haver a clone to VTINX with that allocation. It would avoid the mbs holdings in TBM and have a better corporate to treasury ratio since 20% of its portfolio is already in TIPS.
Munir:

During the past 15 years Vanguard's GNMA fund had an annualized return of 6.22% compared with Total Bond Market's 6.14% return. In other words, the GNMA fund improved the return of TBM--and this occurred during the worst mortgage crisis in our history.

What evidence do you have that the seven TRILLION dollars in government guaranteed mortgage-backed securities (mbs) should not be included in a diversified bond fund?

Thank you and best wishes.
Taylor
Hi Taylor,

I'm a novice and have no evidence except to rely on the statements of other experts.

1. See comment from Beagler quoting Jack Bogle.
2. Larry Swedroe has been repeatedly quoted as saying he does not like mbs.
3. TBM's performance record has consistently been below the other two Intermediate Bond funds (Intermediate Bond Index and Intermediate Investment Grade).
4. Total Retirement Income already has 20% in TIPS, and then TBM has 70% US government obligations on top of that. The Intermediate Bond Index has a superior allocation and better balance (in my opinion) between corporates and Treasuries.

User avatar
Taylor Larimore
Advisory Board
Posts: 27446
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Taylor Larimore » Mon May 21, 2012 3:24 pm

Munir:

Thank you for your reply.

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

YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by YDNAL » Mon May 21, 2012 3:58 pm

BHChinook wrote:I have most of my IRAs in Vanguards Target Retirement Fund (VTINX). I chose VTINX for simplicity; has nearly the exact asset allocation I seek; it's a fund of index funds; and the cost is only .17%.

Recently, I was looking at Wellesley (VWINX).
Well, perhaps you noticed currently 9,649 MORE Stocks in VTINX than VWINX. You noticed 4,578 MORE Nominal Bonds that go beyond mostly Corporate (Inv Grade) Bonds. You noticed Inflation Protected Bonds. You noticed its holdings closely-track their benchmark Indices.
Question: Given their similarities and the slightly better performance of Wellesley, would it be reasonable to switch from VTINX to VWINX for IRAs; from an index style to a managed style? Is there any reason to have both these very similar funds in one's IRAs?
If you did notice everything above, then it comes down to making an informed decision to switch the IRA, have both, or keep VTINX. :)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

User avatar
Munir
Posts: 2463
Joined: Mon Feb 26, 2007 4:39 pm
Location: Oregon

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by Munir » Mon May 21, 2012 4:36 pm

Taylor Larimore wrote:Munir:

Thank you for your reply.

Best wishes.
Taylor
Taylor,

I have great respect for you, and you are far more knowledgeable than I am. Did the points I listed make any sense to you?

Munir

User avatar
Taylor Larimore
Advisory Board
Posts: 27446
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Bonds are complicated.

Post by Taylor Larimore » Mon May 21, 2012 10:02 pm

Munir wrote:
Taylor Larimore wrote:Munir:

Thank you for your reply.

Best wishes.
Taylor
Taylor,

I have great respect for you, and you are far more knowledgeable than I am. Did the points I listed make any sense to you?

Munir
Munir:

Yes. The points you listed make sense and are about what I expected.

I do not want to get into an argument about which bond funds are best. A good rule is that the higher the bond's yield the higher the risk. There is no "free lunch" in bonds except diversification (and sometimes tax-exempt bonds).

Bonds and bond funds are extremely complicated. I know because I was a director of the Dade County Housing Authority which issues bonds. Bond Indentures which describe the terms and conditions of a bond can easily exceed 50 pages.

Fortunately, it is easy to select bond funds. Any Vanguard, good-quality, diversified, low-cost, short- or intermediate-term bond fund should do the job of providing safety and income in our portfolios.

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

fidelio
Posts: 217
Joined: Sun May 04, 2008 5:28 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by fidelio » Tue May 22, 2012 3:08 am

i've always liked wellesley.

given the anticipated "bond market holocaust" (about which i'm unconvinced -- ok, we've had a 30-yr. bull in bonds, but its demise has been predicted for years .... and the fed says not yet), i'm curious what exactly would happen to wellesley's nav under specific circumstances (obviously there's a bit of fortunetelling here, but what the heck). given today's semi-panic in bogle world about FI, perhaps a discussion of this fund will provide some insight into joe's fate.

say retiree joe plops down $100,000 into wellesley and interest rates go up (although the fed says not until end of 2013, right? if that's true, isn't that another 18 mos. of cap gains on top of div's and interest??). joe is a buy-and-hold guy. i believe the fund holds mostly intermediate high yield corporate bonds in its FI side. i'm not really sure how that would work, but aren't dollars already chasing yields? isn't the reality that, unless there is drastic inflation, the nav will "catch up" with itself in a few years (how many, is there any sort of formula tied to the average maturity of the bonds held?)? also, isn't one of the attractions of wellesley that it also produces income via its equity side in the form of dividends, which would protect its nav?

i think these questions merit discussion by the experts. what happens to joe's 100k in 5 yrs. of inflation, or 5 yrs. of modest interest rate hikes? what about the income produced by the fund? the interest and dividends will continue, correct, even though the nav has dropped, and joe can live on that w/o invading principal, correct (wellesley can be rigged up to pay quarterly div's into a sweep account, which i believe it has done consistently)? and if the fund's nav does catch up as its bonds mature and are purchased at the new higher rates, joes has his 100 thou back, right? on the down side, presumably it would continue to sink in value if there were years of raging inflation, or there is a panic and a run on redemptions, but in those events we're all toast.

thanks.

YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by YDNAL » Tue May 22, 2012 8:52 am

fidelio wrote:... perhaps a discussion of this fund will provide some insight into joe's fate.
Joe should learn about Duration, and read all he can re: uncertainties and the Bond investor.
http://www.bogleheads.org/wiki/Bonds:_Advanced_Topics
https://institutional.vanguard.com/iam/ ... omain=true
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

fidelio
Posts: 217
Joined: Sun May 04, 2008 5:28 pm

Re: Wellesley or Target Retirement? Similar AA; Different St

Post by fidelio » Tue May 22, 2012 1:37 pm

ah ... joe looked at the negative convexity calculator, and thinks he may buy cd's.

Post Reply