"Pssst!! Wellesley"

[MGYog]

Quote:

Originally Posted by cute fuzzy bunny or the grammas and grampas who want a cd-like return, some maintenance of purchasing power, and no sudden moves or loud noises.

That's me (Although not a grandpa yet). Thanks to this board I got to change my AA to pssst Wellesley to 30 - 35% in early May. So far, so good.

[ats5g]

I don't know why people still buy that 20-30 stock diversification myth. Eric Haas has a couple of papers on the subject, including How many stocks do you need to be diversified.

- Alec

[unclemick]

Quote:

Originally Posted by ats5g I don't know why people still buy that 20-30 stock diversification myth. Eric Haas has a couple of papers on the subject, including How many stocks do you need to be diversified. - Alec

It's 42 the answer to the universe and/or how many stocks provided you toss in a schoss of hormones as it were.

I always Google up '15 Stock Diversification Myth' by Bernstein assume I'll beat the 6 to 1 odds against me in my quest(lust, greed) for enhanced TWD(terminal wealth dispersion).

Of course in 40 plus years The Saint's haven't made the Superbowl - excitement here and there but no Superbowl. Like stocks with dividends - always bought tickets from the box office not scalpers - got some nice T shirts once in a while.

The Norwegian widow always checks top ten stocks held by Wellesley, Wellington and Dodge&Cox when she is in a buying mood. Of recent years also BRK.

heh heh heh - a little tongue in cheek - but I don't beat index over maybe ten yr periods but dividends like Saint's T shirts and decent seats are almost as good as real money.

[cute fuzzy bunny]

Quote:

Originally Posted by ats5g I don't know why people still buy that 20-30 stock diversification myth. Eric Haas has a couple of papers on the subject, including How many stocks do you need to be diversified.

I just skimmed it, but arent they focused on primarily diversification risk and drift? I'm not sure I've seen a paper that combined diversification risk, volatility risk and returns against average as a function of number of stocks.

I do know that good concentration can make you rich, but you take more diversification and volatility risk as a handcuff to that, and your choices are a lot more important. Good diversification can keep you rich longer, but you may have to give up some upside.

Given the number of stocks isnt horribly low (like one of those 10 or 20 stock funds) and the % of equities in the fund is pretty low as well, is it as much of a problem?

What about bond diversification?

[Dawg52]

Quote:

Originally Posted by unclemick Of course in 40 plus years The Saint's haven't made the Superbowl - excitement here and there but no Superbowl.

Yeah, but it hasn't been all bad. Remember the opening kick off of their very first game in the NFL? I was 13 years old. BTW, the year I got my first set of golf clubs.

From Wikipedia:
"That first season started with a 94 yard opening kickoff return for a touchdown by John Gilliam."

[Nords]

Quote:

Originally Posted by ats5g Eric Haas has a couple of papers on the subject, including How many stocks do you need to be diversified.

In the interests of full confession disclosure, I should point out that Eric is a recovering nuke... About Altruist

I think a better question would be "How many stocks do you want to spend your life tracking?"

[clifp]

I noted that one of the papers, is from my former finance professor at Business school.

He concludes that you (or a fund) need 120 stocks to be justify the additional risk you are taking on for individual stocks. I note that his papers are as dull as lectures. One of the other papers study concentrated portfolios of 20-30 stocks and found they performed 10% better than diversified portfolios but then went on to suggest that should be better diversified.

Finally, while it maybe different at Tier 1 business school, at the two business schools where I knew a fair number of the professors none of them were FIREd, except for those with lucrative consulting businesses!

[unclemick]

The central problem arises every generation when they tear up the data and touch 'the hormone button.'

Ben Graham's Postscript chapter in the many editions of The Intelligent Investor.

Warren Buffett's paraphrase - a few good stocks can make a lifetime of investing or Charlie Munger's - one stock pension fund.

? John Greaney's selection of individual stocks for those that remember when this forum's early days.

Do we not know or think we heard of someone who rode to victory on one great stock. Two from the old rocket plant spring to mind - JNJ, and Home Depot.

There is good rational data - and then hope springs eternal.

Geaux Saints!

heh heh heh - Target 2015 for retirement and a few good stocks cause the Norwegian widow wants to be a Parrothead. .

[ats5g]

Quote:

Originally Posted by cute fuzzy bunny I just skimmed it, but arent they focused on primarily diversification risk and drift? I'm not sure I've seen a paper that combined diversification risk, volatility risk and returns against average as a function of number of stocks.

Finance educators and professionals like to talk about 2 types of risk: market risk [which cannot be diversified], and firm/industry risk [which can be diversified by adding more firms/industries]. Also, individual firm/industry risk is not compensated, or not consistently compensated, with higher returns. So the papers are basically looking for a way to measure the second, diversifiable risk. To quote:

Quote:

The table indicates that a single security selected at random would have an average tracking error in its monthly return of 5.49% from the valueweighted index and 9.23% from the equal-weighted index. The remaining rows demonstrate the familiar decline in diversifiable risk as portfolio size is increased. Most importantly, Table 1 indicates that even a portfolio of 100 stocks will deviate from its target index by an average of 1.13% per month for the equalweighted approach and 0.60% per month for the value-weighted approach. Doesn’t seem like much? A monthly average deviation of 1.13% would correspond to an annualized deviation of approximately 3.9%, and a monthly average deviation of 0.60% would correspond to an annualized deviation of approximately 2.1%. Thus, even a portfolio consisting of as many as 100 stocks deviates substantially from the overall market average. Translation: Investors with portfolios containing 100 stocks are bearing substantial diversifiable risk which, on average, is not rewarded with higher return.

Quote:

I do know that good concentration can make you rich, but you take more diversification and volatility risk as a handcuff to that, and your choices are a lot more important. Good diversification can keep you rich longer, but you may have to give up some upside.

Again, you're not being adequately compensated for taking on firm specific [i.e. non-systematic] risks b/c those risks can be easily diversified away by just owning more stocks of other firms. It's been a while since my last finance class, but perhaps saluki or brewer can give a quick explanation.

I can see holding a smaller number of stocks when transaction costs are high [like in the past], but with transaction costs pretty low nowadays, I think the added benefits from more diversification outway any increased costs.

Quote:

Given the number of stocks isnt horribly low (like one of those 10 or 20 stock funds) and the % of equities in the fund is pretty low as well, is it as much of a problem?

The good news is that the stocks in Wellesley are not randomly chosen, they're spread out across every industry that other value/dividend funds use, one stock doesn't make up more than about 5% of the stock holdings, and it has low turnover. Kind of like an index fund with a smaller sampling of high dividend stocks.

Quote:

What about bond diversification?

I'm not aware of any papers/articles on the optimal number of bonds for issuer diversification, especially in the realm of the corporate bonds in which Wellesley mainly invests. However, with close to 300 investment grade bonds, I'd be more than comfortable with that. It's not the 700-800 bonds that Vanguard's ST or IT investment grade funds hold, but probably pretty good issuer diversification.

[statsman]

Pssst, we can't use Wellesley in taxable, at least not while both of us are working. Upon retirement, that may change, in addition to being able to convert some tax-exempt muni bond funds to taxable bond funds.

[cute fuzzy bunny]

Good info Alec! See how much simpler my life was before I found all you guys and all these studies!

Quote:

Originally Posted by statsman Pssst, we can't use Wellesley in taxable, at least not while both of us are working. Upon retirement, that may change, in addition to being able to convert some tax-exempt muni bond funds to taxable bond funds.

Yeah, wellesley isnt that great of a fund to hold in taxable while you're still working.

When I was a single guy er'd 7 years ago with zero debt to service, the combined ~3.7% dividend from the half wellesley and half wellington didnt make for a large tax footprint. In fact, I shamelessly qualified for low income electric and telephone rates for a couple of years and paid no income taxes at all for three.

Today that 50/50 split would produce a 4.2% dividend with roughly an extra 3% per year capital appreciation annualized over the last 5 years, which is close to to inflation.

Volatility has been pretty good too with the funds only down 5% and 7% ytd even after the minibear.

So good income with no complications, low cost, low volatility, more or less sticks with inflation. Whats not to like?

[RustyShackleford]

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Originally Posted by Want2retire I always pictured her as have fairly short, straight, richly brunette hair with piercing, sea-green eyes and wearing jeans and a bluegreen plaid shawl (for some reason). Age? Maybe 38.

Really ? I kinda thought her hair was blond (seems to be the majority opinion
here) and straight (her hair , that is) and she's really, well, kinda HOT ! Sorta
like your avatar ...

[W2R]

Quote:

Originally Posted by RustyShackleford Really ? I kinda thought her hair was blond (seems to be the majority opinion here) and straight (her hair , that is) and she's really, well, kinda HOT ! Sorta like your avatar ...

(Posts about the woman in my avatar and links to photos of her moved to the "Pin-ups!" thread in Other Topics, where they are more on topic than here.)

[ziggy29]

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Originally Posted by cute fuzzy bunny Yeah, wellesley isnt that great of a fund to hold in taxable while you're still working.

True, that. But if you rely on it for current retirement income and you are down in the 15% federal tax bracket or lower, then it works (he says, trying to steer it back on-topic...)

[W2R]

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Originally Posted by ziggy29 True, that. But if you rely on it for current retirement income and you are down in the 15% federal tax bracket or lower, then it works (he says, trying to steer it back on-topic...)

So true (and thanks). I will probably get clobbered on my taxes this year, since I have a big chunk of Wellesley but won't retire until next year.

One might wonder, "Why?" In my case, I am trying to get my portfolio into its ER configuration in advance. Wellesley dividends will just get plowed back in along with some of my salary, since I still invest a lot of what I earn.

[ziggy29]

Quote:

Originally Posted by Want2retire One might wonder, "Why?" In my case, I am trying to get my portfolio into its ER configuration in advance. Wellesley dividends will just get plowed back in along with some of my salary, since I still invest a lot of what I earn.

I can see that. Unfortunately, with Wellesley many of the dividends come from bond interest instead of stock dividends and are thus taxable at ordinary income tax rates. But I guess for a short time, assuming these will be taxed at a lower rate in a retirement that's not at all far away, no biggie.

In any event, I'm trying to do the same thing eventually -- configure my portfolio to be a "three legged stool" between conventional 401K/IRAs, Roth investment accounts and taxable accounts. I figure having the maximum flexibility to "engineer" my own distribution mix to keep taxes down is a good thing (i.e. withdraw all I can from the 401K/IRA until I bump the top of what is now the 15% bracket, and then tap Roths).

If you put all the eggs in one basket without distributing them this way, it's a lot harder to avoid bumping up into higher tax brackets.

[W2R]

Quote:

Originally Posted by ziggy29 I can see that. Unfortunately, with Wellesley many of the dividends come from bond interest instead of stock dividends and are thus taxable at ordinary income tax rates. But I guess for a short time, assuming these will be taxed at a lower rate in a retirement that's not at all far away, no biggie. In any event, I'm trying to do the same thing eventually -- configure my portfolio to be a "three legged stool" between conventional 401K/IRAs, Roth investment accounts and taxable accounts. I figure having the maximum flexibility to "engineer" my own distribution mix to keep taxes down is a good thing (i.e. withdraw all I can from the 401K/IRA until I bump the top of what is now the 15% bracket, and then tap Roths). If you put all the eggs in one basket without distributing them this way, it's a lot harder to avoid bumping up into higher tax brackets.

Sounds like a good plan! My 401K (TSP) account is all bonds, since I need a lot of them for my 45:55 equities:fixed asset allocation. I plan to withdraw 3% from that account during ER, to feed that taxable money into my income as gradually as I can. Since most of my portfolio is taxable, and my Roth is very small, the rest is pretty well self-explanatory from a tax standpoint. Taxable income from Wellesley won't raise my taxes on my present income, since it will just raise my marginal tax bracket. So, I will probably be fine for this one year while I have Wellesley in taxable (though it may not be the best choice for a working person's taxable account in the long term).

Luckily, Missouri (where I intend to ER) is phasing out taxes on social security. I am so glad they have seen the light!

[RustyShackleford]

This may have been mentioned in this thread already ...

But it seemed to me like a lot of the folks in the Vanguard forums
weren't crazy on Wellesley when I asked. Their rationale was simply
that it was easy to emulate - with some sort of large-cap equity fund
plus a total/intermediate bond fund - and therefore why lock yourself
into not being able to separate these components into taxable vs
nontaxable accounts, and not being able to shift the ratios (re-balance).

[W2R]

Quote:

Originally Posted by RustyShackleford This may have been mentioned in this thread already ... But it seemed to me like a lot of the folks in the Vanguard forums weren't crazy on Wellesley when I asked. Their rationale was simply that it was easy to emulate - with some sort of large-cap equity fund plus a total/intermediate bond fund - and therefore why lock yourself into not being able to separate these components into taxable vs nontaxable accounts, and not being able to shift the ratios (re-balance).

I believe that negative thread on Wellesley was indeed brought up (though not amplified on) on page one of this very same thread.

I would recommend that anybody thinking of buying Wellesley should go to the Bogleheads forum and do a search on Wellesley, and read not one, but ALL of the posts that come up as part of the decision making process. I did, anyway, and what I read strongly encouraged me to buy Wellesley.

[ziggy29]

Quote:

Originally Posted by RustyShackleford This may have been mentioned in this thread already ... But it seemed to me like a lot of the folks in the Vanguard forums weren't crazy on Wellesley when I asked. Their rationale was simply that it was easy to emulate - with some sort of large-cap equity fund plus a total/intermediate bond fund - and therefore why lock yourself into not being able to separate these components into taxable vs nontaxable accounts, and not being able to shift the ratios (re-balance).

For my own portfolio I'd rather have the control of my asset allocation. But for my mom's Vanguard IRA where she has me in control of her investments, I'm slowly DCAing her money market funds into a combination of 2/3 Wellesley and 1/3 Wellington and letting it ride. She doesn't need the income (she's 73 and taking about $8500 in RMDs this year that go into a taxable VG account she doesn't tap either) and can therefore assume more risk than a money market fund -- and I don't really want to micromanage or reallocate it regularly.