Vanguard- Wellsely Fund

[cube_rat]

I want to start out by apologizing in advance for being so green about this stuff.

I just put 10K into the Wellsely Fund account at Vanguard (non-Roth). The yield is 4.53%. My question is: How is this better than placing the cash into HSBC or Emigrant which is paying 5%?

http://tinyurl.com/jnr7t

Thanks

[LovesLife]

Cube-rat

I'll take a stab at this. Wellesley, in addition to providing current income, the fund seeks growth of long-term income, as well as moderate long-term capital appreciation. Cash or CD's, because there is no equity position, cannot have any capital appreciation. Also, I think the current yield will vary depending on the share price and the bond portion of the fund.

[LOL!]

1. The 4.53% from Wellesley is probably taxed at the qualified dividend tax rate while the savings account can be considered taxed at your marginal income tax rate.

2. The NAV of Wellesley has a good chance of going up in value. The dollars in your online savings account have no chance of going up in value. So you have the potential of additional gains with Wellesley that you don't have with your online savings account.

Of course the NAV of Wellesley has a chance of going down in value as well.

[LovesLife]

"1. The 4.53% from Wellesley is probably taxed at the qualified dividend tax rate while the savings account can be considered taxed at your marginal income tax rate."

For the tax year 2005 only 28.43% was qualified. The remaining was taxed at the marginal rate. This fund holds around 70% bonds. The qualified portion is from the remaining 30% equities. FYI: I hold this in a taxable account but am using this for income. Usually this fund is recommended for retirement accounts because of the high percentage that is taxed at your marginal rate.

[justin]

Just guessing here, but the bond portion of dividends (70%) probably has a lot of federal bonds (treasuries) that produce income which is generally exempt from state taxation. That helps a ton when you are in high income tax state (California, NC, etc) and pay 7% state tax on just about else.

[2B]

To answer your question, the benefit (or lack there of) of Wellsely is that it will participate in market moves in the stock and bond market. *Wellsely has a good record of longterm growth. *If you think the stock market will go up and interest rates fall, Wellsely is better than a money market. *

Wellsely is a very conservative balanced fund. *It is about 60% bonds and the balance contains high dividend common stocks. *The bonds are high quality and the stocks are all names you've probably heard.

The tax treatment on your 1099 will reflect the difference between qualified dividends, capital gains and interest income. *It won't all be called "dividends" and get the lower tax rate.

Its fees are 0.24% unless you put in $100K and get the 0.14% for the Admiral shares ($50K if a 10 year Vanguard investor).

It's a good hybrid fund if you want a one stop conservative allocation in your portfolio. *I personally avoid the bond fund aspect and only buy individual bonds where I know that on a certain date I will get my principal back (unless it's an Enron like bond). *

Vanguard Equity Income has a 0.34%/0.19% expense ratio and holds no bonds. *The yield is currently 2.96% but it is all equity exposure in stocks similar to Wellsely's. *You could easily divide your funds between individual bonds most favorable to your tax situation and this mutual fund and do as well or better than Wellsely. *A 60/40 conservative bond/Equity Income split would yield about the same or maybe a little more with assured return of your bond principal on their maturity date. *

The portfolio value will shift as interest rates and the stock market move that will effectively match Wellsely. *This approach would trade a little work for knowing your bond principal will eventually come back to you no matter what interest rates do. *You might also be able to get a slightly higher interest rate. *I wouldn't bother with my approach unless you were looking at at least $100K. *

[cute fuzzy bunny]

That is correct. Wellesley is at this time roughly 30% large cap value and the rest the shorter side of intermediate bonds, of various types. So only about 30% is qualified.

Cube rat...basically wellesley is a bit of an odd animal. In a nutshell it uses a 30-35% chunk of large cap value and the rest in fairly high quality bonds. The bonds provide ballast and income. Large cap value occasionally falls out of favor but in the longer hauls the asset class provides one of the highest returns, along with doling out a fairly substantial qualified dividend.

Sort of like a family car with a small supercharger under the hood. Kinda boring looking but...

You can get capital appreciation from the stocks going up, you can get capital appreciation from the value of the bonds going up, and both produce steady income streams.

You need a very odd and unusual set of circumstances to produce a negative valuation. Very fast, very rapid increase in interest rates coupled with a bear market in stocks and a bear market in bonds. Stable rates, stable markets and you'll keep getting your good yield with a little bit of appreciation on the side. Dropping rates, strong markets in stocks and bonds and you get a double digit return year.

No double digit annualized losses in the fund since its inception, no two losing years in a row, usually after one of those single digit losing years you get a very good year.

When I was a single guy with a 45 year+ investing horizon and the need for current income without selling shares, and a moderately low tax profile, I had most of my money in wellesley.

Last piece of trivia...Wellesleys "sister" fund, Wellington, is pretty much the upside down of wellesley...60-65% large cap value, 35-40% bond. Wellington is the oldest surviving US mutual fund, dating back to just before the depression and is the harbor of a lot of "old money". Rumor has it that wellesley was created as a transitional fund for all these "old money" folks to move their wellington holdings towards something similar in investment ideals and fund management, but with more income and less volatility. I dont know if any of thats true, but its a good story.

And for actively managed funds, they carry pretty cheap ER's especially at the admiral level.

Alec (ats5g here) did an analysis and found that if you mix your own indexes to produce a 'wellesley-like' mix, you can get similar performance at a slightly lower cost, at least historically. You have to do your own rebalancing though.

Nice fund for people who arent in a very high tax bracket, cant take volatility, like getting good consistent returns, and arent swinging for the fences. This is the fund that hits a single and occasionally a double at almost every at bat.

I dropped it because my new wifes income makes the dividends a little bit more expensive for us taxwise, I can stomach more volatility with a small income coming into the household and our health care insurance being paid for through her work, and I with that in mind I can swing for the fences as much as I want.

[LovesLife]

Quote:

Originally Posted by Cute Fuzzy Bunny When I was a single guy with a 45 year+ investing horizon and the need for current income without selling shares, and a moderately low tax profile, I had most of my money in wellesley.

CFB,
When you owned this fund, did you reinvest the capital gains? Why or why not? Thanks.

[cute fuzzy bunny]

I did not. I took them along with the dividends as income to pay the bills. Easier than selling shares and in the mix I had, the dividend throw off was just enough to cover my lifestyle at the time. Which did not include diapers, tiny little clothes and 6 volt electric cars...

I usually go with the strategy that if i'm already paying taxes on something, spend it rather than reinvest it and create an opportunity to pay even more taxes later on. :P

I do something completely different in my Roth and IRA, and always have done so. If I have a high dividend/capital gain thrower, I frequently invest those dividends and capital gains in other higher long term gain funds. Feeding a fire so to speak, or an automatic tax deferred DCA strategy.

When I held them, I had the vanguard REIT fund feeding Small Cap Value and Emerging Markets. These days I have the dividends from Total Stock market feeding Small cap value.

[2B]

Quote:

Originally Posted by LL CFB, When you owned this fund, did you reinvest the capital gains?* Why or why not?* Thanks.

I'll butt in here. If you invest dividends in a taxable account, you have to keep good records for your eventual reconing with the IRS. Some places keep good records for you but all do not. I don't reinvest directly but use accumulated taxable money to reinvest when I rebalance. Like CFB, I reinvest in my 401k, taxable IRA or Roth.

[cube_rat]

Thanks to everyone for the informative replies!

[cute fuzzy bunny]

Quote:

Originally Posted by 2B I'll butt in here. If you invest dividends in a taxable account, you have to keep good records for your eventual reconing with the IRS. Some places keep good records for you but all do not. I don't reinvest directly but use accumulated taxable money to reinvest when I rebalance. Like CFB, I reinvest in my 401k, taxable IRA or Roth.

Another reason why I dont reinvest. My first funds way back when I did reinvest, and trying to figure my basis when I sold was a major pain in the ass. I had a stack of buy/sells up to my knees and eventually had this whole crossword puzzle of little stacks of paper all over the living room floor.

Quicken or some such product would obviously help that, except when I did move to an automated system I discovered that Ameritrade was reporting my dividends and reinvestments improperly. As of three years ago when I left them, that problem still existed and had existed for several years. They kept promising to fix it, but never did. I suspect the number of people holding mutual funds through them at that time was fairly small compared to their equity trading business.

There is SOME loss of appreciation experienced by taking the dividends and gains instead of reinvesting them, and the return figures published usually presume reinvestment. By taking all the thrown off money I was probably not getting enough pure price appreciation to overcome inflation, but I only needed that fund to take me 25 years until I hit social security and started tapping my roth and ira, both of which have always been 100% equity funds, usually of the rocket motor variety.

[virginia]

Are CD's and savings taxed at the dividends rate? If so, what's the difference between taxes on capital gains and taxes on dividends?

[cute fuzzy bunny]

No they are not, they're taxed as ordinary income and increase your AGI, which may boost you into a higher tax bracket.

QUALIFIED dividends are taxed as capital gains. With some obscure exceptions, the only qualified dividends are the dividends paid by stocks.

Taxes on capital gains are a measly 5% if you keep your AGI low enough. 15% above that. Beats the crap out of ordinary non qualified dividend and ordinary interest tax treatment.

Closest thing to a free lunch until (and if) congress changes the rules back to the higher capital gains rates.

[Alan]

I like Wellesley as a good solid performer. Put my money in there from a house sale a few years back. However the stocks in there are 100% US large cap as mentioned earlier so it is far from a fully diversified stock portion.

[cute fuzzy bunny]

Wicked far from diversified.

But you can play that to your advantage if you like a little value tilt. Buy wellesley and wellington in tandem until you get the stock/bond ratio you like, then flavor with a TSM or S&P500 index and a total foreign index until you've got the mix you like.

[Martha]

Quote:

Originally Posted by virginia Are CD's and savings taxed at the dividends rate? If so, what's the difference between taxes on capital gains and taxes on dividends?

CD, savings accounts, and bonds all pay interest. Interest is taxed at ordinary income rates. Some interest is tax exempt. For example, some municipal bonds yield tax exempt interest. Interest on treasuries and US bonds are exempt from state taxes.

[yakers]

I like the Wellesley fund and we are in the process of transferring my wife's 403b funds over into VG and that fund. It will take about another 1 1/2 years to complete the transfer to avoid the surrender fees of her teachers 403b (shark feeding) plan. We will get some AA advice from VG but the current plan is to have about 75% Wellesley and 25% Star fund when the transfer is completed. Just need something with more growth than Welleslsy since we have a long withdrawal period to cover, my wife is 58.