Opinions on the New Income Replacement Funds

[chinaco]

Because they are designed for decumulation rather than accumulation.

With 20 years to go... I would think you would want growth, not income.

IMHO - I think there are other funds better suited to growth.

[Rich_in_Tampa]

Originally Posted by Ronnieboy

O.K. Excuse my naiveté, but why wouldn't this type of investment be good for non-retirees?
If I had 20 years to go, plop down the minimum investment of $25k let it sit around for awhile and have a larger pile (in theory) when I do retire.
I would be getting a monthly check (maybe enough to fill the gas tank).
I get the tax implications of the monthly distributions, but that isn't any worse than interest earned on a CD. And my principal keeps growing.

For one thing, do you know how your money will be allocated? Even how much in stocks v. bonds? So far, I can't find a clue and it makes me nervous investing until I have enough history to have at least a basic sense of asset allocation.

[jIMOh]

My thoughts-

For the 3% withdraw fund, it's clear that equites can be used, where as at 5% withdraw and 7% withdraw, selling of assets will be needed to some degree.

Here are yields of some popular funds:
VBMFX 4.38% (100% bonds)
VFINX 2.06% (100% equities)
VWNFX 2.75% (100% equities)
VWINX 4.52% (40% equities/60% bonds)
RPSIX 4.75% (15% equity/85% bonds)
PRFDX 2.25% (~100% equities)
PRSIX 3.23% (40% equity/40% bonds/20% cash)

I could not find a fund screener to look for funds with a yield higher than 5%.

Here is one I know about:
ADVDX 10.76% (~100% equities)- this fund chases dividends hoping to capture more than 4 quarters of dividends per year.

I would prefer any of these from an asset allocation perspective over a black box.

It's clear to me a 4% yield is possible with little principal risk (note the 15-85 and 40-60 funds listed). The issue is that extra percentage to get 5% or the extra risk to get 7%.

[cute fuzzy bunny]

I agree that the intent of the funds is income, but I dont necessarily agree that they're not growth funds or good for growth.

I also agree that without hard knowledge on the allocations, its also hard to nail down specifics.

Given that I have a certain degree of faith that vanguard wont throw a bunch of idiots at the task and they have a nice selection of asset classes, I expect they'll invest reasonably towards the stated goals.

Most "growth oriented" balanced funds have a dividend in the 1.7-2.7% range...not too far off from the 3% fund.

The stated goals of the 3% fund are to pay 3%, offset inflation (another 2-4%), and capital growth (??%).

The thing that bugs me about most of the growth oriented vanguard balanced funds is that they're almost entirely US equity focused. If the US equity markets have a bad 5 year period, so will your fund.

What appeals to me about the Payout funds is that they have US equities, but they're not going to make up 60%+ of the fund.

So I wouldnt count the 3% fund out as an accumulation/growth option.

In fact, I'm gonna bet its one of the best total return funds over the next year.

And heck, I already made sixty bucks!

[jIMOh]

CFB- a good discussion might be based on the fund calculation of 3%. My understanding is the 3% is either

a) 3% of NAV each year
or
b) 3% of my account balance each year

I am going to assume a), because that is easier for fund to control. The inflation percentage (2-4%) you mentioned is really the need for NAV to appreciate 2-4%, and the yield to be maintained (payout increased) as the NAV goes up. I do not think true capital growth is needed beyond the 2-4% NAV increase to account for inflation.

If we assume b), my thought is the fund would have an accounting nightmare, but just my thought.

[Want2retire]

Originally Posted by cute fuzzy bunny

Given that I have a certain degree of faith that vanguard wont throw a bunch of idiots at the task and they have a nice selection of asset classes, I expect they'll invest reasonably towards the stated goals.

You may have already seen this - - from the VGPDX management page,

Vanguard Quantitative Equity Group
Firm Description
Launched in 1975, The Vanguard Group, Malvern, Pennsylvania, is among the world’s largest equity and fixed income managers. As chief investment officer and managing director, George U. Sauter oversees Vanguard’s Quantitative Equity and Fixed Income Groups. Since joining Vanguard in 1987, he has been a key contributor to the development of Vanguard’s stock indexing and active quantitative investment strategies. The Quantitative Equity Group manages indexed and structured equity portfolios covering U.S. and international markets. It has developed sophisticated portfolio construction methodologies and efficient trading strategies to deliver returns that are highly correlated with benchmarks. The group has advised Vanguard Managed Payout Growth and Distribution Fund since 2008.
Investment Manager Biography

Michael H. Buek, CFA, Principal

• Portfolio manager.
• Advised the fund since 2008.
• Worked in investment management since 1987.
• B.S., University of Vermont.
• M.B.A., Villanova University.

To me it sounds like Buek will manage the fund and make the decisions, and he will be advised by the more general Vanguard Quantitative Equity Group folks. All seem to be experienced and probably not idiots. It would be nice if it more clearly specified what Buek has done during the last 21 years other than "Worked in investment management". Maybe he worked managing another fund at Vanguard.

[cute fuzzy bunny]

He's run quite a few. Googling his name coughs up a ton of articles talking about what he does and how he does it.

Wharton Finance Conference 2006

Just as a point of interest and since nobody else pointed it out yet, I'm speculating just a little bit here in anticipation of picking up a little excess fund startup return. Most folks can just wait until the funds launch and their contents are expressed.

Of course with a fund like this, what is printed on paper one day may be wholly different from what the fund holds a few weeks later.

Especially over the first six months to a year.

I'm not that worried though. Do note that a bunch of vanguards balanced funds give them freedom to range a fair bit in allocations across 4-5 asset classes, and that many of them include the Asset Allocation fund, which could be anywhere from 100% equities to 100% bonds to 100% cash at any particular time.

This fund just has different asset classes than those.

[Want2retire]

Honestly, I am sooooo tempted!!!

"MUST...STICK...WITH...PLAN..."
"MUST...STICK...WITH...PLAN..."
"MUST...STICK...WITH...PLAN..."
"MUST...STICK...WITH...PLAN..."

[cute fuzzy bunny]

Nah, you should wait a while until you see whats what.

The 5% fund might be functionally equal to Wellesley, paying a quasi-swr payout and holding its own with inflation. The 7% fund might be super for people looking for a high initial payout without a forever horizon. The 3% fund might be good for those who dont need as much but want solid capital appreciation, more or less like a traditional US focus 60/40 balanced fund, but perhaps with more reasonable volatility and less US market risk.

All depends on if you buy into the slice and dice, US markets maybe not being what they used to be, and you're not too scared of formerly rare asset classes like commodities.

We'll see. Man, if I lose that sixty bucks though I'm gonna scream!

Of course, throwing in that extra 10% you may have had laying around in cash probably wont hurt. Might beat a lousy 2% MM rate we'll all be getting over the next couple of years...

[Want2retire]

I'm happy with Wellesley. It's just that this 5% fund (VPGDX) is sort of like a new toy, and it would be neat to get in on the ground floor. I can't help but think that Vanguard plans to do what is necessary to make it look really good during its first year, and the early bird will catch the worm. I don't think you're gonna lose your $60.

I do have some cash sitting in VMMXX that eventually I am going to have to do something with, if money market returns don't recover.

Maybe I'll study a little more about boring old bond funds. There is so much to learn but no time like the present.

[chinaco]

Originally Posted by cute fuzzy bunny

...
I'm not that worried though. Do note that a bunch of vanguards balanced funds give them freedom to range a fair bit in allocations across 4-5 asset classes, and that many of them include the Asset Allocation fund, which could be anywhere from 100% equities to 100% bonds to 100% cash at any particular time.
...

I would not be overly concerned about the the advisers or the Manager either.

If these funds are to be managed somewhat like an endowment, I would expect them to be somewhat conservative. I would expect some growth but not a sky rocket.

Still. There is some management risk. I like the idea of having a team sign-off on decisions (instead of one person). That should reduce the chances of somebody making a very risky move.

If the funds work out, I may use them also.

Would you put all of your eggs in that basket (VG MPO 5%) during retirement and use it as your source of income during retirement? It seems to me that this is how they are positioning the fund.

Where are Nords and Brew... they usually have a fairly sober POV and opinion on these matters.

[cute fuzzy bunny]

Originally Posted by chinaco

If these funds are to be managed somewhat like an endowment, I would expect them to be somewhat conservative. I would expect some growth but not a sky rocket.

It might be worthwhile to do some reading up on the Harvard endowment. The vanguard funds were referred to as the 'vanguard harvard endowment funds' internally for a time during their early development, indicating the investment approach they intended for them to follow.

The harvard fund invests in similar asset classes as the proposed vanguard funds and returned 23% in 2007 and have a 16.2% annualized return over the last 15 years and a 14.3% annualized return over the last 30.

And that was dragging around $35B in assets. Which means they had to put some money into some asset classes they werent as fond of, and more into asset classes than they may have felt appropriate.

A smaller version (at least for a while) might do even better.

Originally Posted by chinaco

Where are Nords and Brew... they usually have a fairly sober POV and opinion on these matters.

You saying I'm not sober?

[cute fuzzy bunny]

http://www.hmc.harvard.edu/pdf/johnh...7-%20final.pdf

A very good read on the subjects of asset allocation, returns, the implications of more people/companies jumping on the bandwagon, and future expectations.

The last two paragraphs in particular are of strong pertinence to this discussion.

[cute fuzzy bunny]

The 5% fund went up a penny today, so thats another thirty bucks for me!!! Woo HOO!

Might just be the money market distributions being paid without any transactions posted before the fund goes live next week...

[chinaco]

Originally Posted by cute fuzzy bunny

It might be worthwhile to do some reading up on the Harvard endowment.
...

You saying I'm not sober?

God idea.


No telling what you FIREES do all day.

Just gathering various POVs.

[cute fuzzy bunny]

Originally Posted by chinaco

No telling what you FIREES do all day.

And for some of us, the right or the left hand?

[WilliamG]

Well, my Vanguard rep called yesterday. It's been almost a year since we did a plan with their rep. We will schedule a review in June. While on phone she marketed these new funds. Of course I still remember the planner last year hyping the Diversified Equity fund.

We have settled into our own self-managed "income replacement" approach with Wellesley as a key component. Since Wellesley has such a history AND I understand it, I am thinking it unlikely we want to change much at this time. Most of our assets are in regular IRA and current procedure is to have all dividends and interest routed to money market within IRA. Quarterly we move from this IRA to taxable money market from which we move monthly to bank checking for spending. Vanguard makes it really easy to schedule these types of moves automatically. Also quarterly we review overall for possible re-balancing which we base on tolerance ranges for each allocation. Current allocation which I posted in earlier thread:

7.5% REIT Index
12.5% International
20 % Total Stock Index (mostly)
35 % Wellesley
25 % Cash and Bond

Any comments or suggestions?

[jIMOh]

Originally Posted by WilliamG

Current allocation which I posted in earlier thread:

7.5% REIT Index
12.5% International
20 % Total Stock Index (mostly)
35 % Wellesley
25 % Cash and Bond

Any comments or suggestions?

what does xray suggest your actuall stock-bond-cash allocation is (I am guessing around 40%)- are REITs stocks or bonds when xray is concerned?

what is annual yield of this portfolio?