DIY Slice&Dice AA vs Balanced Funds

[Midpack]

I had not done this in a while, but I plotted my actual AA performance (50/40/10) vs Vanguard's Wellesley (40/60) and Wellington (60/40). I knew they'd appear highly correlated, but even more than I imagined. I own 12 funds, mostly indexes, 9 equity funds, 2 bond funds and a MM. I do so mostly to add a small tilt, a value tilt, a few sector funds (low correlation) and control bond duration - yet almost identical to Wellington. Wellesley is lower return, but it's clearly a smoother ride, both as expected.

I got very slightly higher returns than Wellington, but almost neglible. My AA isn't at all high maintenance, but this kinda makes it hard to argue the merits of slice & dice vs balanced funds...just thought it was interesting. Simple is good...

 

[chemist]

Agreed, simple is good. IMHO the ideal portfolio is 3 funds: fill the tax deferred / Roth space with Vanguard Total Bond, fill your taxable space with Vgd Total International, and then put Vgd Total Stock Market wherever there is space left over.

Wellesley / Wellington / Target Retirement is even simpler, but leaves a lot on the table tax wise. Makes it impossible to have your bonds in tax deferred and stocks in taxable as those all in one funds are a hodge podge of stocks and bonds.

Slice n dice? Too complex for me and not convinced it adds anything except complexity. I might add some equity REIT index at some point.

 

[Midpack]

Wellesley / Wellington / Target Retirement is even simpler, but leaves a lot on the table tax wise. Makes it impossible to have your bonds in tax deferred and stocks in taxable as those all in one funds are a hodge podge of stocks and bonds.

Good point on placement. And Wellesley and Wellington have slightly higher expense ratios compared to my AA overall, about 0.1% different.

But I was surprised at how closely correlated the we're to my results.

 

[Chuckanut]

Thank you for your analysis. I have been wondering the same thing. Will there be a significant difference between my desired AA (using index funds) and an income oriented fund such as Wellesly or Wellington?

Your work suggests I can simplify things by buying one of the stock and bond income funds. No yearly rebalancing. No temptation to play with the mix, etc. It could be worse!

 

[Chuckanut]

Ok, now I will play the devil's advocate.

First, as mentioned above by Chemist, one cannot take advantage of tax efficiency by moving highly taxable income to tax- advantaged accounts and less taxed income to personal money.

Second, and I admit this is subject to debate, the income funds have done well in a climate of low interest rates where we have seen some very nice capital gains in the prices of various bonds, and where dividend stocks have done well as investors fled low yield bank accounts for the higher yield of dividend stocks. When this reverses (say 1 year treasuries start yielding 3% and 10 years are 6%), the bonds in the income funds wil plummet causing some nice capital losses for a year or two.

By slicing and dicing, one can keep on eye on things like average bond maturities and minimize the risk of losing much capital.

 

[l2ridehd]

I have 9 funds that kind of map to the OP's. And my plan, just a plan now, is over the next 10 years as I move to lower tax brackets is to move 10% per year to Wellington and Wellesley. All of Wellesley in IRA's and all of Wellington in taxable as long as possible. That will move me to a more conservative AA each year, move me to a simple 2 fund portfolio, and a 50/50 AA. Then move from Wellington to Wellesley to continue that trend as I get older. Trying to maintain an AA of age -15 for other reasons and drop it to 50/50 over the next 10 years. Hard to beat those two funds except the slightly higher ER.

 

[REWahoo]

Then move from Wellington to Wellesley to continue that trend as I get older.

AT age 65 and retired for 6 years, I'm doing something very similar. I currently have 67% of my IRA portfolio in those two funds and I've been gradually increasing it over time.

 

[Bluemoon]

I am 73, a retired widower with no debt. I don't draw down from my funds and I have 3 years expenses in CDs and savings. Owning Wellesley alone pretty much fits my AA but I would be very reluctant to put all of my eggs in one basket. Also Wellesley's bonds are all long term and it has no small caps. To add those missing components would only mean owning more funds and I would be back to where I am now.

 

[REWahoo]

Also Wellesley's bonds are all long term...

Average maturity - 9.8 years
Average duration - 6.3 years

 

[Alan]

Thanks for doing the research Midpack.

My VG IRA has always been simple (Wellesley) but with both my and DW's 401(k)s, (plus DW's Fido IRA and old SEP-IRA) I have kept a mix of funds and balanced them myself each year to meet my desired AA.

When we ER'ed I decided I just wanted simple, initially just so it will be easy for DW should I pass before her. I rolled them over to target funds, Fido for DW and VG for me. However, I find that I like simple for myself as well, but was wondering how much money it might be costing in lost opportunity. Good to know that there is probably not much difference between the two methods.

I will now ignore this thread before others come along to share alternative views that I may not like to see

 

[Bikerdude]

One advantage of the balanced funds is that they re-balance for you at times when you may not want to. I know I was hesitant to buy equities during the 2008 meltdown but Wellington was not. Takes the emotion out of it.

 

[clifp]

One advantage of the balanced funds is that they re-balance for you at times when you may not want to. I know I was hesitant to buy equities during the 2008 meltdown but Wellington was not. Takes the emotion out of it.

I think that is probably the key element and for most people well worth modest additional expense. I'd be more inclined to trust the market timing instincts of the folks at Wellesley/Wellington than the vast vast majority of people or managers to navigate the tricky timing between stocks and bonds.

A couple of things are worth noting though, Wellesley has only 57 stocks in its portfolio and Wellington only 100. They are pretty much all large cap companies, that pay average or above average dividends. There are no Apples nor Google in the mix of stocks with W and W, much less Groupons or the Russell 2000 stocks that none of us have heard of. On the other hand there are not Netflixs, or Pets.com or any of the other silly stocks that you get when you own VFINX, or Total stock Market. If we have another internet bubble W&W will almost certainly be left behind, or course if we have another internet bubble crash W&W also won't be hurt!

 

[Ed_The_Gypsy]

I have a mix of funds (mostly indexes) and stocks with a bias towards dividends--somewhat slice-and-dice. I rebalance every couple of years. I will continue to do this for a while as it seems to be working OK, but I am looking for a single fund to dump everything into at some future time for simplicity for me and my spouse.
A) At some point we will be too old to fuss with it.
B) We will want steady returns as we will not have the years left to recover from a big downdraft.
C) She will probably survive me and I will leave instructions to dump it all into something like Wellesley.

One day I will compare my performance against the standards as Midpack did. I may throw it all into Wellesley sooner than I originally planned.

 

[want2er]

Midpack - Thanks for sharing. This sounds like a good option for my friend. She's retiring in a few months & was wondering where to put her life savings...about $350,000 scattered in various 403b, IRAs with high expense ratios. She has lots of health issues & low risk tolerance. Will need to have some income/withdrawals to supplement $1600 per month in SS. Maybe I'll suggest that she check out W & W for a portion.

 

[audreyh1]

Agreed, simple is good. Simple as an investment strategy is often undervalued and too easily dismissed IMO.

If you are running your own AA portfolio, I think it is a good idea to have a benchmark or two from balanced funds. I have done this since the beginning. I actually keep 10% of my portfolio in the balanced funds as a real concurrent measure. This year we are neck and neck - the benchmark just barely pulling ahead.

During most of 2000s my balanced fund benchmarks were close or sometimes beat my AA soundly. Then I had a string of years where my own AA portfolio severely trounced the balanced funds (2007 - 2010). These were years where the broader diversification of my own AA really paid off - years where less large value stocks helped, or international exposure helped, or REIT exposure helped, or even having a more diversified bond exposure helped. I even "upgraded" my benchmarks during those years to better performing balanced funds, but this is the first year in a while the benchmarks are (just slightly) ahead.

Currently my benchmark is 1/2 DODBX and 1/2 OAKBX. But my AA actually has an increasingly higher bond allocation, so I'm going to have to tweak for that at some point.

I am sticking with my AA for now primarily due to the tax hit I would take if I switched to all balanced funds. But over the long run, it's a wash IMO, and simpler is better. But you've got to figure out to go simpler at the beginning! Unless you hold most investments in an IRA where switching funds has no tax consequences.

Audrey

 

[fritz]

Use Wellesley and Wellington in retirement at a 45/55 (stock/bond) mix. Did use index funds in our accumulation phase, but always had Wellington in the mix. Using only Wellesley and Wellington in retirement gives us a pretty much hands-off balanced approach that long term will be there when I might no longer be capable (and because my wife has no serious interest in investing).

A Wellesley/Wellington 45/55 (stock/bond) mix allows us to pull pretty good dividends to live on (aro. 3%). In the near future when we start Social Security, we'll be able to adjust total dividend withdrawals to partial reinvest, and the combined income sources should last us our lifetime.

 

[okapi]

I invest in Wellesley and Lifestrategy Income funds.Small amount in a short-term bond fund.Because I can mess up a free lunch.

 

[friar1610]

I just moved all of the money in my VG Variable Annuity (about 15% of total portfolio) into the Life Strategy Conservative portfolio (40-60 with the 40% equity divided between S&P 500, Extended Market and International indexes). I had been using the VA, along with my Rollover IRAs as a place to park mostly bond funds and also do some equity rebalancing. Decided that if the VA will eventually go to my wife, it's best to follow the KISS principle. I'll continue to slice and dice (with only the "big 3" VG funds) to achieve the rest of my desired AA (45-50-5) with equities in the taxable and bonds in the Rollover IRAs. It's tempting to go all to one fund but I'd pay too much in CG taxes to convert my taxable equity funds to a single balanced fund.