VWINX and Real-Life Retiree Investment Returns

[Ed_The_Gypsy]

I have always been a big fan of John Greaney's work. He got me started.

In 2011 Update: Real-Life Retiree Investment Returns he compares several investment strategies using the classic 4% of original pot withdrawal, adjusted annually for inflation from end-of-year 1994 (when John FIREd) and end-of-year 2011.

Out of curiosity, I compared Wellesley on the same basis using his data. VWINX did very well, with less volatility as well (makes it easier to sleep at night). I also calculated taking a straight 4% of the VWINX portfolio very year. The payouts were higher (+25% to +56%) as the growth exceeds 4% + inflation and the final balance in 2011 was a little less (~ $223,000 vs. ~ $284,000), as you would expect. I tried this because it would be easier than figuring out what inflation was every year.

It outperformed all but three "concentrated portfolios" (Warren Buffett, Harry Brown and Harry Dent--see link for details). Greaney considers these risky.

[FONT=&quot]Continuing to fiddle, a straight 2.58% resulted in the same end amount in the pot in Dec 2011 as the 4% + inflation. The annual withdrawal size ranged from -35% to + 20% of the steady 4% + inflation withdrawal.

Note that John Greaney and Warren Buffett both made their big money on good stock picks but both recommend only index funds for us unwashed masses.

Bottom line: I am comfortable with my instructions to DW to sell everything and buy VWINX after I croak. She can take 4% per year. Now if I can only do as well as VWINX in the accumulation phase.
[/FONT]

 

[Ed_The_Gypsy]

With my new-found Win 7 skills (thanks to REWahoo), here is the data:

 

[Ed_The_Gypsy]

You may notice that VWINX 'lost' 10% from 2007 to 2008. That is, the paper value (NAV) went down 10%.

remember, you don't lose until you sell, so DON'T SELL!

Note also that it more than recovered by 2009.

 

[MichaelB]

remember, you don't lose until you sell, so DON'T SELL!

Easier to do in the accumulation phase. In the withdrawal phase you have to sell - unless distributions provide for 100% of budget.

 

[Ed_The_Gypsy]

Of course you are right. I didn't think of that since both obgyn and I are still in accumulation phase.

Even so, VWINX has a pretty steady NAV. See attached graph (again using my new skills ) comparing its NAV to that of the S&P 500.

The difference is in the dividends.

 

[LitGal]

Thanks for the Confirmation

Ed, this confirms my experience with Wellesley so far, since following some recs from Dan Wiener. It's only ~15% of my IRA, but balanced with ~15% Wellington. The two together have performed better than the funds I'd sold to buy W and W (STAR Con. and Mod. Growth, Target Dates 2010 and 2015). Right now I'm waiting for prices to drop to buy some more W and W.

 

[obgyn65]

Thank you for sharing, Ed. What do you mean by "the difference is in the dividends" ?

Of course you are right. I didn't think of that since both obgyn and I are still in accumulation phase.

Even so, VWINX has a pretty steady NAV. See attached graph (again using my new skills ) comparing its NAV to that of the S&P 500.

The difference is in the dividends.

 

[marc515]

I do have a concern with Wellesley moving forward. While it has performed well in the past, due to good bond returns, how will it hold up if bonds take a dive?

I've actually been thinking about exchanging my Wellesley into Wellington on the next dip/correction.

 

[Texas Proud]

remember, you don't lose until you sell, so DON'T SELL!

Note also that it more than recovered by 2009.

Another falsehood that so many people think is correct.... and is sometimes the worst advice ever.... especially if you have individual stocks.....

 

[Ed_The_Gypsy]

Thank you for sharing, Ed. What do you mean by "the difference is in the dividends" ?

A good question. It took me a long time to get smart enough to ask it myself.

The chart in Post #5 are the net asset values (NAV's) of the S&P 500 and Wellelsey. These are the prices you find in the paper. They do not tell you anything about the dividends. The NAVs only tell you about the potential capital gains or losses you would have if you sold your position today. A true growth stock does not pay dividends so what you see is what you get. With a stock, you don't harvest capital gains until you sell it. Mutual funds harvest capital gains when they sell stocks in their portfolios, so your annual tax documents include dividends and capital gains in different boxes. They are taxed differently. When you sell a stock, you may have short-term capital gains or long-term capital gains, depending on how long you held it, but you don't have them until you actually sell. They are also taxed differently.

The chart in Post #1 is different. The historical data from Yahoo Finance includes a last entry in the table, "Adjusted Close". This value includes the effect of all the dividends payed out over time. This is the real measure of investment returns. The chart in Post #5 shows that the NAV of VWINX doesn't change much over time compared to the S&P, but when you take the dividend distributions into account, the total return is much closer to the S&P (see Post #1). You could have a growth stock with no dividends and a dividend stock with a flat NAV with the same total return, but one is capital gains and the other is in dividends. Capital gains are taxed more advantageously, but you are gambling that the company will invest their income to the benefit of stockholders, which studies show is not something you can depend on. Bonds have dividends but you can have capital gains with them as well; you can sell them for more than you bought them for if interest rates are dropping. Wellesley has a lot of bonds.

Buying equities for the capital gains is close to gambling, IMHO. There is something called "the Greater Fool Theory". The seller is hoping for a "greater fool" than he was who will pay him more for his stock than he did. This gets into stock valuation which is something that is beyond me. IPOs are like that. (For example, Twitter.) Any stock that does not pay a dividend is like that.

For someone like me who has all of his equities in a tax-protected account, there is no difference tax-wise. When I take money out, it will all be taxed as ordinary income; I get no benefits from the lower capital gains tax rates. So, in principle, growth or dividends should make no difference to me, but from what I have read, dividend payers can be more reliable investments than growth stocks. The dividends usually keep coming even in downturns and the NAVs are steadier as well (as you can see).

I hope that explains it a little. I can try again if the explanation still isn't clear.

Cheers,

Ed

 

[Ed_The_Gypsy]

Another falsehood that so many people think is correct.... and is sometimes the worst advice ever.... especially if you have individual stocks.....

Which is the bad advice, "Don't sell"? or not knowing that it recovered so quickly?

There is always a time to sell, but not just because the market dropped. Individual stocks can go bad, going to worthless, as I know first-hand. Buying individual stocks is gambling as far as I am concerned.

Actively managed mutual funds can implode as well. Does anyone remember 44 Wall? Index funds protect us from total loss because they buy everything and it is unlikely that all 6,000 or so US companies listed on the stock exchanges will go bankrupt all at once. They buy the best-managed companies as well as the poorest managed and the outright crooks, but it averages out. In principle, actively managed funds should be able to cull the bad ones, but research shows that actively managed funds do not outperform the indexes over time. Crazy, eh?

I do have small positions in some individual stocks in the Oil & Gas business (I work there) that I believe I have bought at good prices and have decent prospects, but I am gambling on several of them, I admit. I have to keep my eye on BP, for example. But even if the worst happens, I will not lose everything.

 

[Ed_The_Gypsy]

I do have a concern with Wellesley moving forward. While it has performed well in the past, due to good bond returns, how will it hold up if bonds take a dive?

I've actually been thinking about exchanging my Wellesley into Wellington on the next dip/correction.

I have a similar concern. VWINX is 60% bonds, but their average maturity is 8.8 years. They may take a short hit for a year or two, but they have to replace the bonds that they sell or mature and they can buy higher-yielding ones in that case. I would also see it as a buying opportunity for VWINX, but in obgyn's case, it represents diversification away from a 100% fixed income position, so I expect that it will take less of a hit than his FI portfolio.

I would for sure wait to buy an annuity (should I become so inclined later in life) until interest rates increase.

I have a tiny Roth which is 100% VWINX today. DW's Roth will be in VWINX soon. I seeded DD's Roth with VWINX last year and will seed DS's when he has income from his first job as well and I will beat them senseless if they do not do regular contributions.

 

[Alan]

I do have a concern with Wellesley moving forward. While it has performed well in the past, due to good bond returns, how will it hold up if bonds take a dive?

I've actually been thinking about exchanging my Wellesley into Wellington on the next dip/correction.

That is a market timing question, and if you want to change your AA because you think stocks are going to outperform bonds going forward then Wellington would be a decent choice.

I have both Wellington and Wellesley but do not plan on changing my AA. (50% bonds).

 

[Ed_The_Gypsy]

Ed, this confirms my experience with Wellesley so far, since following some recs from Dan Wiener. It's only ~15% of my IRA, but balanced with ~15% Wellington. The two together have performed better than the funds I'd sold to buy W and W (STAR Con. and Mod. Growth, Target Dates 2010 and 2015). Right now I'm waiting for prices to drop to buy some more W and W.

LitGal, I like your thinking. Are you coasting now? (I have not made a contribution for years, just rebalancing and shifting things around with dividends as they come. I am paying off all my debt first for a guaranteed return.) If not, you should go ahead and dollar-cost-average some contributions into your IRA.

I will post a comparison between W, W and VFINX in a bit so we can all see how they compare.

 

[Ed_The_Gypsy]

OK, here are those comparisons:
'Close' means the NAV of the fund at the end of the trading day.
'Adj Close' means the adjusted return relative to 1987 when they all started.
(The 'N' means normalized. In order to put them all on the same basis, the data I plotted was normalized to the value on Aug 19, 1987.)

1. While the Close or NAV (remember, the figure quoted in the paper every day) of VFINX (Vanguard's S&P 500 index fund) just explodes, the adjusted return is actually LESS than VWINX or VWELX since 1987!
2. The adjusted return of VFINX is much more volatile than wither VWINX or VWELX.
3. VWINX adjusted return (total return) is less volatile than that of VWELX although their adjusted returns over time are pretty much the same.

Now you know why Uncle Mick says, "Psst! Wellesley!"

 

[Ed_The_Gypsy]

for Marc515

OK, just for grins, here is the US 10-year Treasury Bond yield from way back. (Remember, VWINX has an average maturity of 8.8 years at the moment.)

Note Black Monday in 1987 is the first red dot. Intermediate-term interest rates HAVE been in decline overall ever since. Note that the charts for the funds only go back to 1987 so we do not know how it things will turn out in a really increasing interest rate environment.

Maybe VWINX's returns will be impacted when interest rates go up permanently again.

Is there an economist in the house? An expert in market history? Where is Marty Zweig when we need him? Oh, yeah. He's dead.

 

[W2R]

Wellesley is a great fund for retirees like me. My 30% Wellesley allocation provides reasonably steady dividends for living expenses. It is not quite so well suited for accumulation phase, IMO, though it is still OK and I did have some during that phase.

The only times when I have sold any Wellesley was when required for rebalancing.

It's best to keep Wellesley in retirement accounts, for tax purposes, but in my case my retirement accounts are already completely full with bond funds. So, my Wellesley is a taxable investment by default. I still like having it, though.

 

[kevink]

Love Greaney and love Wellesley, but reading the tables makes a pretty strong argument in favor of Harry Browne's Permanent Portfolio (unless you don't like a smoother ride and an ending balance of 406K vs. 290K).

Getting back to Wellesley, I have a lot of faith in Vanguard's integrity and doubt they'd monkeywith the fund's investment approach, but as Bob Clyatt (in "Work Less, Live More") and others have pointed out, you could easily duplicate the Wellesely approach with an intermediate-term bond ETF and one for the stocks and elminate the manager risk wile having even lower expenses. Swedroe's 70%/30% is one iteration of this.

 

[W2R]

you could easily duplicate the Wellesely approach with an intermediate-term bond ETF and one for the stocks and elminate the manager risk wile having even lower expenses.

The "oh boy, I can duplicate Wellesley and save money" approach is nothing new - - it is one of the first things I read about before I ever got my first share of Wellesley. It does have tax implications, though, and relies on totally objective judgment. Where are those who did that for over a decade and are thrilled with the results?

 

[target2019]

It is possible to get the chart that makes one feel worse, or feel better. The main problem I see with performance charts is that they are not synced with your own savings, contributions and allocation.

I pay most attention to total dollars, and asset allocation.

 

[ERhoosier]

...remember, you don't lose until you sell, so DON'T SELL!

Blindly followed this can be dangerous advice. Always sell (or buy) when appropriate for your personal risk tolerance.
History is no guarantee of future returns, but it does illustrate there is very real risk in both individual stocks & stock markets. For example several blue chips have severely faded or gone bust over the years (e.g. 'old' GM). And the 'best' capitalized developed market in the world during 70's & 80's (Japan's Nikkei) lost ~2/3rds of its value since it's peak 24yrs ago. Even if you knew 89 was the peak & started accumulating 'wisely' since by buying Nikkei only on 15-20% 'corrections' (e.g. mult dips between '87-2001) you would still be underwater today. FWIW- I don't think such an extended decline in US S&P is likely, but it's certainly possible in future as world markets evolve.

 

[Stanley]

remember, you don't lose until you sell, so DON'T SELL!

I disagree. When an asset goes down in price you have lost money. However, you don't lock in the loss until you actually sell it. The same is true for a higher price. You make money, but you still have to sell to lock in the gain. I am ignoring things some people do with options, etc.

 

[rbmrtn]

Morningstar charts can give you the NAV or the growth. VWINX goes back to 1970 there. This is the NAV 1970 - 1984. The price was fairly stable considering the inflation and rise in rates.

 

[retire2020]

Is this fund suited for Retirement account like 401K/IRA or only buy after you've retired to generate income? Will this fund and PRPFX be better option than bond fund for retirement account?

 

[Ed_The_Gypsy]

Love Greaney and love Wellesley, but reading the tables makes a pretty strong argument in favor of Harry Browne's Permanent Portfolio (unless you don't like a smoother ride and an ending balance of 406K vs. 290K).

Getting back to Wellesley, I have a lot of faith in Vanguard's integrity and doubt they'd monkeywith the fund's investment approach, but as Bob Clyatt (in "Work Less, Live More") and others have pointed out, you could easily duplicate the Wellesely approach with an intermediate-term bond ETF and one for the stocks and elminate the manager risk wile having even lower expenses. Swedroe's 70%/30% is one iteration of this.

Sounds like w*rk to me.

Besides, I want a simple solution to hand over to my bride when my brain falls out or I fall off the perch (AKA the Norwegian Parrot move).