Index fund portfolio to "bookend" Wellesley

[Kevin K]

I know that Wellesley is used by many as an all-in-one complete conservative portfolio but I'm interested in "bookending" a ~50% allocation to it with a simple (either fund-of-funds or 3-6 individual fund) portfolio that offsets Wellesley's concentrated all-U.S., value (equities) and intermediate-duration and credit quality (bonds) approach.

I'm thinking that something like a modified Three Fund approach that overweights Total International Stock (VXUS) to compensate for W's all-U.S. equities and substitutes short-to-intermediate Treasuries for Total Bond to offset W's longer-duration and lower quality bonds might make sense.

Would appreciate any thoughts.

[Sandtrap]

I know that Wellesley is used by many as an all-in-one complete conservative portfolio but I'm interested in "bookending" a ~50% allocation to it with a simple (either fund-of-funds or 3-6 individual fund) portfolio that offsets Wellesley's concentrated all-U.S., value (equities) and intermediate-duration and credit quality (bonds) approach.

I'm thinking that something like a modified Three Fund approach that overweights Total International Stock (VXUS) to compensate for W's all-U.S. equities and substitutes short-to-intermediate Treasuries for Total Bond to offset W's longer-duration and lower quality bonds might make sense.

Would appreciate any thoughts.

Wellesley is 40/60 and can "bookended" with either the Vanguard Balanced Index fund at 60/40 for a 50/50 allocation.
or
Wellesley and Wellington can be "bookended" for a 50/50 allocation.

j

[sycamore]

One thought is: what do you actually want to accomplish by bookending?

It's not unreasonable, but my guess is a 50% Wellesley + 50% modified-3-fund-to-compensate-for-Wellesley-tilts would likely deliver returns and volatility very much like a plain 3 fund portfolio without Wellesley. So why bother?

I guess such a portfolio would retain Wellesley's tilt to certain US stocks (value-ish?).

Also, consider it would mean to compensate... how often would you look at Wellesley's portfolio to see what they're up to, how often would you change your compensation factors, would that involve any taxable transactions, etc.

My hunch is you'd get also similar returns if you do 50% Wellesley + 50% plain-jane-3-fund-portfolio where you don't have to do any compensating.

[Bacardi]

Lets get the "Back testing is not a reliable predictor of future results" argument out of the way, but if one were to backtest a 50/50 combo of Wellesley and Wellington against other 50 /50 splits of most other Stock /Bonds combo's, the results are remarkable. Works best in tax advantaged accounts naturally.

[Kevin K]

I guess I wasn't clear that part of what I meant by "bookending" was to diversify across asset classes and strategies. Wellesley is actively-managed, concentrated in its holdings and 100% U.S. So what I'm looking at is including a contrasting but complimentary portfolio that's much more diversified in its equity holdings (total market index funds with a substantial international component) and with higher-quality (i.e. all or mostly Treasury) and shorter-duration bonds to diversify W's IT corporate holdings.

Wellington just inverts Wellesley's bond:equity ratio and so doesn't offer any help, while Balanced Index is 100% U.S. Maybe LifeStrategy Moderate Growth is the best I can do staying within the Vanguard universe.

Thanks for the thoughtful responses in any case

[Barkingsparrow]

I"m transitioning to a similar plan - i.e. - Wellesley supplemented by other funds to approximate 40/60 or 50/50.

Maybe the following link will provide some ideas: https://www.caniretireyet.com/my-invest ... olio-2021/

[Admiral]

Seems you're overly complicating this.

I own Wellesley, Total Stock, Total International, and Total Bond, for an AA of 70/30, with Intl representing about 20% of the 70%.

Why does that not work for you? Total bond is mostly high quality US paper anyway.

[retiredjg]

According to both Vanguard and Morningstar, Wellesley does contain an allocation to foreign stock. Not large, but it is not 100% US stock.

[Admiral]

Forgot to add that if you are a Vg client you can use their portfolio analyzer tool to study potential changes to your holdings and see the resultant asset allocation.

[Miriam2]

Look at this from the other perspective.

If you already owed a Three Fund Portfolio, would you consider adding Wellesley - and why? For what purpose?

[Kevin K]

Thanks everyone for your comments.

I agree Admiral that just using a version of the Three Fund portfolio probably makes the most sense, though I'd substitute Vanguard Intermediate Term Treasury for Total Bond. Slightly better (especially after-tax) risk-adjusted return and better protection during market panics due to not containing any lower-rated bonds. Minor tweak though.

Thanks Barkingsparrow for the link to the "Can I Retire Yet?" blog post. I've followed Darrow for years and his portfolio certainly does have the kind of diversification across asset classes and strategies I'm looking for, albeit with some added complexity from asset classes I'm not interested in (e.g. Bitcoin, SRI funds).

Thanks retiredjg for correcting my erroneous belief that Wellesley had no foreign holdings!

My answer to your excellent question Miriam2 is that Wellesley has had significantly better risk-adjusted returns than any common iteration of the Three Fund portfolio I know of for decades. There's a good article on "Seeking Alpha" about its performance during the 2020 market volatility:

https://seekingalpha.com/article/435205 ... -wellesley

But as I mentioned at the outset, it's a choice to diversify across strategies (actively-managed vs. passive index) not just asset classes. Wellesley's managers have generated "alpha" for 50 years now but admittedly that's been with a huge tailwind, especially in the bond market in recent decades. I'm happy to have half of our nest egg in Wellington Group's hands and the rest in broad-market index funds.

Thanks to all for helping me clarify my thinking and correcting my errors.

[Admiral]

As noted I own Wellesley as an addition to the three fund portfolio. It's held in a tax sheltered account. The reason is I like the income (which granted is reinvested) but it is a steady dividend payer.

That said:

Make sure you go in with eyes wide open. In 2020, Wellesley lost about 25% of its value. It has recovered of course--and 25% is less than the 35% of the broader market--but all those stocks which are responsible for the steady income do come with some added risk. Wellesley's share price fell well below where it was in 2016... before recovering nicely.

[Scott S]

Sounds like the "problem" is that Wellesley is too simple and doesn't give you anything to fiddle with. Am I wrong?

[S_Track]

I know that Wellesley is used by many as an all-in-one complete conservative portfolio but I'm interested in "bookending" a ~50% allocation to it with a simple (either fund-of-funds or 3-6 individual fund) portfolio that offsets Wellesley's concentrated all-U.S., value (equities) and intermediate-duration and credit quality (bonds) approach.

I'm thinking that something like a modified Three Fund approach that overweights Total International Stock (VXUS) to compensate for W's all-U.S. equities and substitutes short-to-intermediate Treasuries for Total Bond to offset W's longer-duration and lower quality bonds might make sense.

Would appreciate any thoughts.

I do this but with Wellesley at 25% and 75% to the passive index side. What I do is mix VG LS Conservative growth with 25% Wellesley. Then I add in VG Total Stock (subtracting from the LS fund) until I get to my desired AA. I like this since I use mostly balanced funds which keeps me from tinkering, reduces my international exposure and gives me a small tilt to large value.

[Kevin K]

I know that Wellesley is used by many as an all-in-one complete conservative portfolio but I'm interested in "bookending" a ~50% allocation to it with a simple (either fund-of-funds or 3-6 individual fund) portfolio that offsets Wellesley's concentrated all-U.S., value (equities) and intermediate-duration and credit quality (bonds) approach.

I'm thinking that something like a modified Three Fund approach that overweights Total International Stock (VXUS) to compensate for W's all-U.S. equities and substitutes short-to-intermediate Treasuries for Total Bond to offset W's longer-duration and lower quality bonds might make sense.

Would appreciate any thoughts.

I do this but with Wellesley at 25% and 75% to the passive index side. What I do is mix VG LS Conservative growth with 25% Wellesley. Then I add in VG Total Stock (subtracting from the LS fund) until I get to my desired AA. I like this since I use mostly balanced funds which keeps me from tinkering, reduces my international exposure and gives me a small tilt to large value.

Thanks for sharing this. It's an elegant and admirably simple solution that addresses my goals (diversification across strategies and asset classes, offsetting Wellesley's concentrated holdings) with the added bonus, as you wisely point out, of reducing if not eliminating tendencies to tinker with things. Really appreciate this.

[Barkingsparrow]

I know that Wellesley is used by many as an all-in-one complete conservative portfolio but I'm interested in "bookending" a ~50% allocation to it with a simple (either fund-of-funds or 3-6 individual fund) portfolio that offsets Wellesley's concentrated all-U.S., value (equities) and intermediate-duration and credit quality (bonds) approach.

I'm thinking that something like a modified Three Fund approach that overweights Total International Stock (VXUS) to compensate for W's all-U.S. equities and substitutes short-to-intermediate Treasuries for Total Bond to offset W's longer-duration and lower quality bonds might make sense.

Would appreciate any thoughts.

I do this but with Wellesley at 25% and 75% to the passive index side. What I do is mix VG LS Conservative growth with 25% Wellesley. Then I add in VG Total Stock (subtracting from the LS fund) until I get to my desired AA. I like this since I use mostly balanced funds which keeps me from tinkering, reduces my international exposure and gives me a small tilt to large value.

Thanks for sharing this. It's an elegant and admirably simple solution that addresses my goals (diversification across strategies and asset classes, offsetting Wellesley's concentrated holdings) with the added bonus, as you wisely point out, of reducing if not eliminating tendencies to tinker with things. Really appreciate this.

A dumb question perhaps - but once you are in retirement, what is the mechanics of withdrawals from an asset allocation constructed like this?

[Wiggums]

Wellesley is 40/60 and can "bookended" with either the Vanguard Balanced Index fund at 60/40 for a 50/50 allocation.
or
Wellesley and Wellington can be "bookended" for a 50/50 allocation.

j
[/quote]
+1

[Kevin K]

I know that Wellesley is used by many as an all-in-one complete conservative portfolio but I'm interested in "bookending" a ~50% allocation to it with a simple (either fund-of-funds or 3-6 individual fund) portfolio that offsets Wellesley's concentrated all-U.S., value (equities) and intermediate-duration and credit quality (bonds) approach.

I'm thinking that something like a modified Three Fund approach that overweights Total International Stock (VXUS) to compensate for W's all-U.S. equities and substitutes short-to-intermediate Treasuries for Total Bond to offset W's longer-duration and lower quality bonds might make sense.

Would appreciate any thoughts.

I do this but with Wellesley at 25% and 75% to the passive index side. What I do is mix VG LS Conservative growth with 25% Wellesley. Then I add in VG Total Stock (subtracting from the LS fund) until I get to my desired AA. I like this since I use mostly balanced funds which keeps me from tinkering, reduces my international exposure and gives me a small tilt to large value.

Thanks for sharing this. It's an elegant and admirably simple solution that addresses my goals (diversification across strategies and asset classes, offsetting Wellesley's concentrated holdings) with the added bonus, as you wisely point out, of reducing if not eliminating tendencies to tinker with things. Really appreciate this.

A dumb question perhaps - but once you are in retirement, what is the mechanics of withdrawals from an asset allocation constructed like this?

Not a dumb question at all. Depends on the size of the portfolio and the percentage you need to withdraw annually. If the interest and dividends Wellesley throws off are enough to meet your needs you could just have those go into a MM account and withdraw them. Otherwise a total portfolio approach: look at your target percentages and stated rebalancing bands in your personal IPS and take your annual "draw" from assets as needed at the beginning of each year to fund your needs while rebalancing in the process of doing so. As an early retiree myself that's about the only "rebalancing" I typically do.

This post from fellow early retiree and retirement calculator expert Darrow Kirkpatrick not only has some great insights on the mechanics of living off of this kind of portfolio but also shows how one savvy investor incorporates a big chunk of Wellesley into a much more diversified and robust allocation:

https://www.caniretireyet.com/investmen ... olio-2019/

[S_Track]

I know that Wellesley is used by many as an all-in-one complete conservative portfolio but I'm interested in "bookending" a ~50% allocation to it with a simple (either fund-of-funds or 3-6 individual fund) portfolio that offsets Wellesley's concentrated all-U.S., value (equities) and intermediate-duration and credit quality (bonds) approach.

I'm thinking that something like a modified Three Fund approach that overweights Total International Stock (VXUS) to compensate for W's all-U.S. equities and substitutes short-to-intermediate Treasuries for Total Bond to offset W's longer-duration and lower quality bonds might make sense.

Would appreciate any thoughts.

I do this but with Wellesley at 25% and 75% to the passive index side. What I do is mix VG LS Conservative growth with 25% Wellesley. Then I add in VG Total Stock (subtracting from the LS fund) until I get to my desired AA. I like this since I use mostly balanced funds which keeps me from tinkering, reduces my international exposure and gives me a small tilt to large value.

Thanks for sharing this. It's an elegant and admirably simple solution that addresses my goals (diversification across strategies and asset classes, offsetting Wellesley's concentrated holdings) with the added bonus, as you wisely point out, of reducing if not eliminating tendencies to tinker with things. Really appreciate this.

YW, and in case you did not hear this Pod Cast on Wellesley:

Morningstar's The Long View Podcast talked with Two of Wellesley's fund managers in their recent episode.

https://www.morningstar.com/podcasts/the-long-view/75