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Lower Risk Alternative to VBIAX (Vanguard Balanced Index Fund)?
Old 11-17-2019, 09:55 AM   #1
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Lower Risk Alternative to VBIAX (Vanguard Balanced Index Fund)?

About four years ago I moved my retirement savings from my local bank to Vanguard. At that time I put everything in VBIAX (Vanguards balanced index fund) and have been happy with the performance. It's about 60% stocks, 40% bonds, and a low .07% expense ratio. Other than a small blip at the end of 2018 it has been a steady uphill climb since I chose it.

Of course, all good things come to an end, and I see historically VBIAX has lost up to 30% of it's value (around 2008/2009). Now that we're only 3-4 years from retiring, I'm getting a little nervous about a drop that large. My simulations in Flexible Retirement Planner shows we would still do OK (using 7.5% return, 7.5% deviation), but there are still a few random failures about ten years in before we start social security. I guess I'm overly cautious and would prefer 100% probability of success with zero failures.

At this point I'm willing to give up some gains in exchange for a little less volatility.

Anyway, I've been looking at a few other funds, most notably the VWINX Wellesley fund, and the VSCGX life strategy fund. VSCGX has a low .12 expense ratio, but doesn't seem to perform as well.

VWINX seems to perform well (roughly 6% return, 5% deviation), with the biggest drop in 2008/2009 being less than 10%. The .23% expense ratio seems high to me after having .07 in VBIAX, but I don't know if that's something to be worried about.

I really prefer the simplicity of a single "Set and Forget" fund, but I did test some 30/70 and 40/60 runs of VBTLX (Vanguard Total Bond Fund) and VTSAX (Vanguard Total Stock Fund) in the Backtest Portfolio Visualizer and was surprised that VWINX still seemed to perform better.

I'm kind of leaning towards switching to VWINX, but am curious if there are any downsides to that fund, or if there are other alternative funds that might be a better choice. Or just stay with the VBIAX balanced index fund?
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Old 11-17-2019, 11:06 AM   #2
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I compared VBIAX to VWINX in Portfolio Visualizer, using 100% as each portfolio percentage and a starting base of only $10K (feel free to adjust to your real numbers as needed). Link:

VBIAX vs. VWINX

What stands out is that VBIAX had a drawdown of over 32.45% vs. 18.82% for VWINX. Recovery was in 2010 for VBIAX and 2009 for VWINX. Portfolio value was higher for VWINX. In "up" years, VBIAX was up more than VWINX, but those "down" years were really in the basement for VBIAX, which appears to make all the difference. VWINX throws off considerably more annual cash flow than VBIAX, which is something I'd find appealing, though others may not for tax purposes.

If you click on the Exposures tab, you'll see that the larger composition differences are in the categories of Large-cap Growth and Corporate Bonds. Moving down the page, you'll see that VBIAX is more equity heavy, especially in technology stocks, with fixed income heavily tilted in long-term, and next with quite a lot in short-term as compared to intermediate-term. So, IMO, a lot of the performance on the equity side is dependent on the technology sector, which I'm guessing doesn't throw off much income, but you may or may not be too concerned with cash flow. On the fixed income side, the heavy emphasis on long-term is good for income, but also leads to more downside price pressure during periods of rising interest rates. Of course, we're in a falling rate period right now, but bonds have had tremendous upside already this year. This isn't necessarily a problem, but you seem to be concerned about the volatility factor, vs. income generation. The next heavier tilt in short term stifles the fixed income cash flow and may not necessarily compensate for potential volatility of the overweight long-term holdings.

VWINX is less equity heavy and seems to be more equally weighted among some of the categories. Technology doesn't dominate so much. On the fixed income side, there's better representation in all maturity levels, which should help with volatility on that side of things.

I see no concern in the credit rating percentages in either fund.

I do ETFs myself, so maybe others could point towards other mutual funds that might be suitable.
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Old 11-17-2019, 11:51 AM   #3
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Does Fido have a fund or ETF that is similar to VWINX Wellesley fund?
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Old 11-17-2019, 11:58 AM   #4
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The main, maybe the only, reason to be concerned about equity volatility is sequence of returns risk. For those of us who have adequate allocation to fixed income, equity volatility is either a don't care or a buying opportunity. The problem with any blended fund, including target date funds, is that you can't avoid selling equities into a down market if you need to withdraw money from the fund.

So without jumping into the alphabet soup, I would suggest that you separate at least some of your holdings and view the fixed income piece as a buffer against short-term (< 5 year) excitement in equities. Then stop worrying about volatility. Over the long term, historically equities have been the place to be and it seems likely that will continue to be true.
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Old 11-17-2019, 12:21 PM   #5
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Take a look at Fidelity's balanced fund: FBALX. We also have VWELX. Their returns are similar.

I would be game to buy two funds (through Fidelity as it is now our investment home) that would separate the equity and bond pieces of FBALX so that I could easily re-balance. That said, FBALX is in our Roths which are intended to be our last to spend so we can ride out the ups and downs of the markets.

I will not liquidate VWELX except as required by minimum required distributions.
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Old 11-17-2019, 12:40 PM   #6
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...........So without jumping into the alphabet soup, I would suggest that you separate at least some of your holdings and view the fixed income piece as a buffer against short-term (< 5 year) excitement in equities. Then stop worrying about volatility. Over the long term, historically equities have been the place to be and it seems likely that will continue to be true.
Exactly, just get out of the balanced fund and buy 60% Total Stock Market and 40% Total Bond. If stocks crash, sell bonds until the market rebounds.
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Old 11-17-2019, 01:06 PM   #7
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Do you even need a single balanced fund? What kind of account is this fund used for? You wrote "retirement savings", so I will assume an IRA or two.

Just move some (not all) of your VBIAX into VBTLX (Total US Bond Market Index fund) and reduce your risk.

The 30% you saw as a loss arises strictly from the math: Back in 2008-2009, the US stock market was down about 50% (47% may be more exact?), so since VBIAX had 60% US stocks that fell in half, half of 60% is 30% and there's the 30% loss you noticed.

So you can figure out how much you would be willing to lose based on a 50% drop in the US stock market. Last December, the US stock market dropped 20%, so you much have been good with that already. Let's say you can stomach a 20% loss in your retirement savings. That means a 50% drop in the US stock market with 40% of your assets in US stocks would cause a 20% drop. The other 60% of your assets would be in bonds. Do the math to see how much VBTLX (bonds) you need to add to your portfolio of VBIAX only to have 60% in bonds.

Anyways, you don't need VBIAX alone, nor VTSAX and VBTLX. VBIAX plus some VBTLX would work and you would still get the auto-rebalancing of VBIAX for the most part.
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Old 11-17-2019, 03:19 PM   #8
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Why not invest 30% of your portfolio in VWIAX (Wellesley), and the rest in

(1) VBTLX (Vanguard total bond market index fund)
(2) VTSAX (Vanguard total stock market index fund)
(3) VFWAX (FTSE All-World Ex-US index fund), and
(4) money market, cash.

That's what I did, anyway, and I am very happy with it. As far as Wellesley goes, it's sort of like having your cake and eating it too.

But then I am easily pleased so think about it before you take my advice, if you are inclined to do so.
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Old 11-17-2019, 09:46 PM   #9
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Why not invest 30% of your portfolio in VWIAX (Wellesley), and the rest in

(1) VBTLX (Vanguard total bond market index fund)
(2) VTSAX (Vanguard total stock market index fund)
(3) VFWAX (FTSE All-World Ex-US index fund), and
(4) money market, cash.

That's what I did, anyway, and I am very happy with it. As far as Wellesley goes, it's sort of like having your cake and eating it too.

But then I am easily pleased so think about it before you take my advice, if you are inclined to do so.

Combining VWIAX with something else in our IRAs is something I've been thinking about.

Our IRAs are 100% fixed income and we are old mature enough to be taking RMDs. Our taxable account is predominantly equity. I want to increase our overall equity allocation by about 5%. The simple thing to do would be to just buy more VTSAX/VTIAX in taxable. But, as it turns out, if I were to convert 15-20% of our IRAs to equity that would also get me the additional 5% of equity. The balances in the IRAs are such that converting 50% to VWIAX and leaving the rest in fixed income would do the trick. I might even convert the remaining fixed income, mostly VBTLX, to an intermediate treasury fund because most of the bond allocation in VWIAX is corporate. So the treasury fund would moderate that risk a bit, bringing the treasuries and corporates into a more even balance. The addition of the VWIAX equities would juice the IRAs ever so slightly.

Any thoughts/recommendations on this approach?
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Old 11-18-2019, 06:40 PM   #10
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get out of the balanced fund and buy 60% Total Stock Market and 40% Total Bond. If stocks crash, sell bonds until the market rebounds.
After using the Portfolio Visualizer to run a bunch of comparisons over a variety of periods, I decided to switch to a 50% total stock (VTSAX) and 50% total bonds (VBTLX). The returns generally fall somewhere between VBIAX and VWINX. Not too surprising since VBIAX is 60/40 and VWINX is 40/60. More important for me, the volatility is slightly less (25% worst case in 2008/2009, vs 32% for VBIAX).

Granted, I'm talking rather small differences, but it ticks enough boxes in my comfort level to sleep at night. And as you mentioned, I can sell bonds if stocks aren't doing well. I will miss the simplicity of a single fund, but I suppose I can always switch back in the future if I just don't like the two fund approach.

I am keeping Vanguard's VTMFX tax managed fund in my taxable account for now. It's also roughly split 50/50. That account see's more activity since I use it as an intermediate step between my traditional savings account and my IRA's. A single fund just makes it easier to move money around.
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Old 11-18-2019, 07:13 PM   #11
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mountainsoft, since you are getting close to retirement, you may want to consider loading up your cash bucket, re the bucket system. When the downturn comes, you just spend from that bucket instead of your stocks bucket. That way you ride out the storm without selling the stock assets low. You could leave (much of) your money in VBIAX this way.
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Old 11-18-2019, 11:10 PM   #12
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Does Fido have a fund or ETF that is similar to VWINX Wellesley fund?

We have funds at both Vanguard and Fido. While Fidelity has really upped their game over the years in offering very low cost index funds, their balanced funds, especially balanced index, are limited compared to Vanguardís offerings. (Although they do have their Freedom Index funds which are target date based so that might be an option.) Yes, you can own Vanguard balanced funds through Fidelity but, even then, you donít have access to Vanguardís Admiral class funds and their lower fees. And no, they donít really have an equivalent of Vanguardís Wellesley in a single balanced fund. Hence I keep my Wellesley at Vanguard and target date funds at Fido.
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Old 11-19-2019, 06:14 AM   #13
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Does Fido have a fund or ETF that is similar to VWINX Wellesley fund?
No. Nothing close. That group contracted by Vanguard to run Wellesley and Wellington is kind of unique.
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Old 11-19-2019, 09:32 AM   #14
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mountainsoft, since you are getting close to retirement, you may want to consider loading up your cash bucket, re the bucket system. When the downturn comes, you just spend from that bucket instead of your stocks bucket. That way you ride out the storm without selling the stock assets low. You could leave (much of) your money in VBIAX this way.
I currently have enough in our high interest savings account to cover a bit over one years expenses. I might pull some from our taxable account to bump up our regular savings. I'll have to think it over.
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Old 11-19-2019, 09:37 AM   #15
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mountainsoft, it sounds like you've made the right choice for you. Enjoy your more restful sleep!
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Old 11-19-2019, 09:38 AM   #16
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... Yes, you can own Vanguard balanced funds through Fidelity but, even then, you donít have access to Vanguardís Admiral class funds and their lower fees. ...
That has changed, at least for us at Schwab. After years of being stuck in the "Investor" class shares, we were switched to "Admiral" shares last spring. I believe that Vanguard has eliminated the Investor class shares completely. So it is probably the same at Fido.
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