Originally Posted by ksr
Bond fund - I saw recently a lot of talk about VBMFX (Total Bond Market Index). Is this what a lot of people like for a diversified bond allocation and, if so, what is it you like about it? I happened to select VBIIX (Intermediate-Term Bond Index). In comparing the two, I see that VBMFX has shorter average maturity and average duration - maybe that will help keep prices from falling as much if/when interest rates eventually rise? Also VBMFX has 3000+ bonds whereas VBIIX has 1000+ bonds so VBMFX is better diversified. Are there other considerations here?
The extreme "pure index" approach would simply try to invest in every bond and equity in the world in proportion to its market cap. The US centric version of that would invest in Vanguard Total Bond and Vanguard Total Stock indexes. A cost conscious pragmatist would add a Vanguard international equity fund and say close enough.
Less extreme passive investors still generally believe that all else being equal broad diversification is a good idea. Which pushes those passive investors who do not want to make interest rate bets towards a very broad index fund like Total Bond Market Index.
On the other hand, some of the modern portfolio theory research suggests you can have a higher expected return with lower expected volatility by increasing your equity percentage, and the small/value tilt of those equities, while holding the total portfolio's expected volatility constant by shifting your bond allocation to shorter maturities.
In my personal case, in my 401k Vanguard Total Bond Market is the only cheap bond index fund available, so I hold some of it. Outside of my 401k I prefer Vanguard's TIP fund, Vanguard's Short-Term bond funds, and a 5 year ladder of individual TIPs purchased at auction.
Originally Posted by ksr
Wellesley (VWINX) - Is this some sort of holy grail of mutual funds?
Seriously, I see a lot of talk about this one and am just wondering why. I found that it is a balanced fund of about 60% bonds/40% stocks.
If you can not bring yourself to index everything, Wellesley, based on its historical record [Disclaimer: Past performance...] and its very low expense ratio for an actively managed fund, appears to be a very attractive fund choice for an investor with a low tolerance for volatility. Volatility is a much larger problem while drawing down a portfolio than while building up a portfolio.
I do not personally hold any Wellesley shares. Partially because I am still in the build portfolio stage with a relatively high tolerance for volatility, and partly because I feel much more comfortable with passively managed funds. I like to eliminate as much manager risk as possible.
However, if someone is certain they want to invest in actively managed funds, the best advice I've read on this board is "Psst: Wellesley
". [Disclaimer: That advice may by now have been copyrighted and/or patented.