Wellesley vs. everything else in ER

[kevink]

I'd be curious to hear thoughts from both the (many, I believe) here who own this legendary fund as well as those who don't.

First, the context for me (AKA sharing a few of my own many mistakes/"learning opportunities" along the way). ER'd in 2002 (not great timing, market-wise) without a tested/clear idea of risk tolerance. ~100 investing books later and convinced by the arguments-cum-backtesting in Bob Clyatt's "Live More, Work Less," I implemented pretty much the full RIP portfolio (DFA-fund based complicated slice-and-dice). Losses of ~23% during the '08 meltdown (on an allocation that "couldn't" lose more than ~8-9%) showed me my risk tolerance wasn't what I thought it was, and had me looking for a true all-weather portfolio.

Harry Browne's Permanent Portfolio seemed to fit the bill and I certainly did well with it for a number of years, but Bill Bernstein and others finally convinced me that the effects of the "paper gold" market and other factors made the PP a dubious choice going forward.

I've found myself coming full circle to giving up chasing alpha and pretty much just doing the Bogleheads 3 fund portfolio with total stock, bond and (unfortunately?) total international index funds, but as I look at performance of not just my portfolio but many, many others supposedly perfect for retirees wanting to live on ~4% while avoiding major drawdowns I see nothing - not 60:40 or 50:50, not any of the DFA/MPT-based slice and dice plans, Larry Swedroe's no fat tails, Clyatt's stuff, etc. etc. that has offered even two-thirds of the return of Vanguard's Wellesley fund over not just the past couple of decades but for a long time before that.

Of course I'm well aware of the pitfalls of backtesting and recency bias, but after how many decades of an actively-managed fund with only 35% exposure to equity volatility outperforming far riskier allocations does one just throw in the towel and choose the simplicity of this one fund solution (or perhaps a 50-50 mixture of it and Target Retirement Income Fund so as to have some exposure to beaten-down-and-due-to-recover international equities and bonds)?

I appreciate the collective wisdom here and look forward to hearing some thoughts (while apologizing for what has turned into an over-long rant!).

 

[Senator]

I do not own Wellesley. My main holdings are IVV, IVW and DVY. A few other small scatterings of mostly QQQ, IWM, FHLC, GLD. My rentals are my income source and 'bond allocation'

My criteria for a stock these days is, no stocks. It must be a self balancing ETF. As companies get added and removed, I do not want a tax hit. I do not want a stock to give me capital gains unless I want it, think inversion and Medtronic. Too many people had to sell 100% of their stock and purchase the new Medronic.

I do not want to own the largest, most profitable company in the world, and see them go broke. Or stagnate. Think PanAm, Arch Coal, Sun Microsystems, etc. All were great at one time, and went basically broke.

I want a $0 commission trade. As I buy monthly, I need to avoid the trading fees. The same when I sell.

I want to set it and forget it. If I re-balance in an after tax account, I do not want to get hit with capital gains. It's not so bad if I need the sale anyway, but I may be forced to take a gain I do not want quite yet.

I also want low fees. An ETF generally has lower fees than a mutual fund.

I do not want a high flyer. Think VRX. What goes up, will eventually come down.

I want to sleep well, knowing if I go broke, so does every one else.

 

[Ronstar]

I don't have Wellesley. I called Vanguard a few years ago, wanting to buy Wellesley and Wellington. The agent talked me out of these and into the 3 fund portfolio. (Vanguard Total Stock Market Index Fund (VTSMX), Vanguard Total International Stock Index Fund (VGTSX), Vanguard Total Bond Market Fund (VBMFX)). Agent said that the 3 fund was more cost effective- less fees than Wellesley and Wellington. I haven't verified this.


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[MBSC]

I do not own Wellesley.
I do not want to get hit with capital gains. It's not so bad if I need the sale anyway, but I may be forced to take a gain I do not want quite yet.

+1

I do not own Wellesley. I prefer to keep equities in taxable accounts and fixed income in tax-deferred accounts to the extent possible for my overall AA. I don't want something throwing off surprise capital gains I don't need and reducing health insurance subsidies. I do own a little VYM and it seems to replicate the equity portion of Wellesley at a lower ER.

 

[travelover]

I do own Wellesley, but only inside my IRA. My instructions to DW are to put it all in Wellesley when I kick off and just pull out 4% a year.

 

[W2R]

I've found myself coming full circle to giving up chasing alpha and pretty much just doing the Bogleheads 3 fund portfolio with total stock, bond and (unfortunately?) total international index funds

I have 30% Wellesley, and the rest of my portfolio is like yours.

I especially like having Wellesley in retirement because it throws off a lot of dividends. That's convenient in the distribution phase.

I have always loved Wellesley but prefer to invest no more than 30% of my total portfolio in any one fund.

 

[REWahoo]

I own Wellesley in my IRA where it represents about 45% of our total portfolio. I have been very happy with the fund's performance in the 11 years I've owned it. The fund's track record is impressive - only six down years out of the last 45, a performance I know I could never come anywhere close to achieving on my own. Yes, past performance is no guarantee it will continue, but the same holds true of any investment strategy.

Like travelover, I've told DW when I'm gone to move it all to Wellesley and live off SS and RMDs, which should provide her with a comfortable income.

 

[Pbkmaine]

DH's IRA is in Wellesley. He's 67 and risk averse, so it seemed like a good fit for him. I am in the Vanguard 2020 fund. Over the past 5 years, his portfolio has crushed mine. I expect that mine will crush his when there's a big runup in stocks.

 

[RunningBum]

I don't have Wellesley. I called Vanguard a few years ago, wanting to buy Wellesley and Wellington. The agent talked me out of these and into the 3 fund portfolio. (Vanguard Total Stock Market Index Fund (VTSMX), Vanguard Total International Stock Index Fund (VGTSX), Vanguard Total Bond Market Fund (VBMFX)). Agent said that the 3 fund was more cost effective- less fees than Wellesley and Wellington. I haven't verified this.


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It's really simple to verify at Vanguard's site. Wellesley and Wellington both have higher fees than any of those three index funds, so what he said was true.

Fees aren't the only thing you should look at, especially when we are only talking about 1 or 2 tenths of a point. However, most of what I have is in that 3 fund portfolio, with none in Wellesley or Wellington, and I have no plans to change course.


Edit: Actually I am holding some Wellesley in my Roth. I forgot I bought some this year when rebalancing.

 

[UpAnchor]

I do own Wellesley but at only 24% of PF, the balance being comprised of VTINX and various Vgd/Fido index funds with a resulting AA of 50/50.

I guess Wellesley is my one nod to the value, if any, of active management and long-term performance. But I'm just not confident enough in that to want to expose more than 1/4 or 1/3 of my portfolio to that one fund so I happily leave it at that.

Yes, I pay a bit more in expenses for the Wellesley/Tgt Ret Income funds but with the Wellesley being Admiral class and nearly half the portfolio in very low e.r. funds, my overall e.r. stays pretty close to 15 bps. Pretty darn cheap compared to the industry as a whole.

Yes, I like the concept of a one-fund set it and forget it solution but doubt I'll ever quite get there.

 

[Happyras]

My wife and I own VWIAX (Wellesley Admiral) and VWENX (Wellington Admiral) as primary holdings in our IRA accounts. What is left in my last 401K to rollover represents 13%, where there is no great option, so I have a Blackrock 2030 fund which sucks so far this year.

Having been led by the nose over the years by those seeking to take their fair share of our savings, I track 13 FA suggested models including the 3 fund Bogelhead in two allocations, a Creative Planning DFA fund mix, a moderate fee based Modern Portfolio Theory Mutual fund/individual stock balanced mix, and others mentioned by the first post. With just simple tracking the 50/50 Wells mix has by far the lowest volatility, (std deviation), and so far since July last year, the highest returns.

We decided to move from an aggressive portfolio last year, and sought a lower volatility allocation to take us through the first 5 years in retirement. The old man in the cave told me to move to muni bonds, but they do not fit an IRA. Since we are FI, the W/W mix seemed a good course not looking for big gains and has proven well. We are up YTD 6.6%. We do have a small allocation of HY corp individual derivative style bond, which is fairly high risk I am told.

I recently have been testing Paul Merrimans Ultimate Retirement Portfolio. It is more diversified, and his research allows you to pick you risk tolerance with a historic table of allocation/std deviation/returns. His allocation using VG Admiral Index funds in quite good, but no it does not "beat" VWIAX/VWENX over recent history due to his foreign allocations. His research and statistical allocation are "sound advice", and free for the reading. The evidence does not suggest that his conservative allocation is "better" for risk/return.

 

[bingybear]

Wellesley is not a "diversified" portfolio in itself. I have heard that Vanguard would not recommend holding Wellesley or Wellington as the whole portfolio. Don't get me wrong, I like both funds.
There just are other holdings needed to diversify properly.
note - We have a small amount in Wellington... less than 2% of the overall portfolio. I use mostly ETFs, some broad indexes and some more focused indexes.

 

[Happyras]

Wellesley is not a "diversified" portfolio in itself. I have heard that Vanguard would not recommend holding Wellesley or Wellington as the whole portfolio. Don't get me wrong, I like both funds.
There just are other holdings needed to diversify properly.
note - We have a small amount in Wellington... less than 2% of the overall portfolio. I use mostly ETFs, some broad indexes and some more focused indexes.

I agree totally with your point. I would not want to make major changes in our allocations at this point, but.....over the past 4 months I have been evaluating a balance using 1/2 Pauls allocation modeling, conservative, and 1/2 our current 50/50 W/W mix. W/W fulfills the allocations to short term and intermediate term bonds, with a very well managed set of bonds for a low cost. The LCV side is overweighted. Using Pauls suggested VG Index funds to balance the Mid/Small Cap, SCV, Foreign and Reits seems to be a good tool.

VG offers a free FA for Flagship, I have a meeting with one next week to get a full flavor of the current VG allocation plan. As for ETF's, not a fan from being burnt so badly on market spread. My former accountant started the Madrona Fund ETF's, put all of accounts in his own ETF's, charged his normal 0.8%, on top of very high ETF costs and we lost mucho dinero trying to get out of low volume ETFs when we ran away.

 

[Looking4Ward]

Wellesley is 17% of my taxable portfolio, while Wellington is 70% and Vanguard Healthcare (VGHAX) is 13%.

My logic may sound goofy but I considered Wellesley to be my first bucket with 5 years of living expenses since it fairs very well even during the worst of times, Wellington as my second bucket and VGHAX as my third bucket.

 

[bingybear]

VG offers a free FA for Flagship, I have a meeting with one next week to get a full flavor of the current VG allocation plan. As for ETF's, not a fan from being burnt so badly on market spread. My former accountant started the Madrona Fund ETF's, put all of accounts in his own ETF's, charged his normal 0.8%, on top of very high ETF costs and we lost mucho dinero trying to get out of low volume ETFs when we ran away.

I had to look up Madrona Funds. Scary. When I say more narrow index, I was thinking of something like SDY which has $14B in assets. It does not have 500 stocks like an S&P fund or lots more like VTI. Now if you look at last August's freeze (8/24?) where the markets froze up in the AM. Many stocks and ETFs had sharp drops but reverted to a more normal market within a few hours. The market in general was down that day.

I know this just supports a fear of ETFs. But remember if the market freezes in the same way at the end of the day, MF will end up way down at the close.

But any investment as illiquid as your ETFs were will have really problematic issues when trading... unless you can wait for a bigger sucker.

 

[eytonxav]

I hold Wellesley and Wellington admiral shares in an IRA, currently representing about 15% of that port. I may increase Wellesley in the future to raise the combo to 20%, but no more. These two funds under Wellington Management have stood the test of time very well, but who knows what can happen or go wrong in the future, therefore a more limited % for me. Other holdings diversified between indexes, active funds, individual stocks and cash.

 

[ejman]

Wellesley represents 33% of my liquid NW (mostly IRA but some taxable) and is as much as I want to have in a single actively managed fund. It has performed beautifully since I first purchased it in 1987 with great defensive action in severe down markets. The downside to this is that when everybody is bragging about their great investment prowess (as in 1999 for example) one just smiles and thinks -" you just wait..."

 

[eta2020]

I do not own it because with a little patience (10 years ) initial investment into something like VTI will have higher yield on my money taxed at lower rate.


If I would own it would be in my IRA since it is not tax efficient.

 

[Lsbcal]

...
Of course I'm well aware of the pitfalls of backtesting and recency bias, but after how many decades of an actively-managed fund with only 35% exposure to equity volatility outperforming far riskier allocations does one just throw in the towel and choose the simplicity of this one fund solution (or perhaps a 50-50 mixture of it and Target Retirement Income Fund so as to have some exposure to beaten-down-and-due-to-recover international equities and bonds)?
...

Wellesley has been a beneficiary of not only a good period for US large cap value but also the very long term decline in rates (since 1982). I would be a bit concerned about putting too much into bonds at this point. But then my allocation is 60/40 and more like Wellington.

I looked at M* where you can see a chart of VWINX (Wellesley) versus VWELX (Wellington) since 1970. VWELX has somewhat outperformed VWINX since 1970. If the data is correct both funds performed about the same from 1970 to 1982. Interesting and something I would not have expected if they were 35/65 and 65/35 as they are now. So then my question is, were they run similar to now in that rising rate period? Actually I would not expect such a violent rate rise as occurred in the 1970's though.

These are actively managed funds. I guess Wellesley and Wellington are managed by the same managers. I got the impression they were similar but with different AA's. Might not have this exactly right though.

One source for Wellington is Bogles's historical article which might answer the historical variability question a little i.e. what has been happening behind the scenes in this active fund (and possibly in Wellesley too). One can read this here at: https://www.vanguard.com/bogle_site/sp2004wellingtonbth.html

Kevin, I think you are right to consider this as a stable component of a more diversified portfolio. I personally would have some allocation to international and particularly international small cap since international large is so correlated with US large. I personally would not do international bonds.

 

[Alan]

I've held Wellesley since 2003 and now all my IRA and Roth are in Wellesley and Wellington, comprising 36% of total investments.

 

[braumeister]

I'm also a fan.
Wellesley is 12% of my portfolio, and Wellington is another 6%.

Not likely to increase those percentages, but unlikely to decrease them either. I like the stability they provide, and the expense ratios (just slightly higher than the average ER on my whole portfolio) are what I pay for that.

 

[kevink]

Thanks everyone for the thoughtful and insightful replies!

Senator's comments and well thought-out portfolio remind me of other savvy posters at Bogleheads who've pointed out that Wellesley really doesn't have a "secret sauce" and that these days one can pretty much duplicate its performance with a 65:35 large cap value: IT corp. bond ETF approach. I would still choose Wellesley myself, but agree wholeheartedly that it'd be foolish to make such a concentrated portfolio one's whole enchilada. And of course it has no place in a taxable account. I will probably put my IRA (26% of total assets) in it and leave the rest in the Bogleheads 3 fund portfolio (though I have long since substituted Admiral shares of IT Treasury for Total Bond due to consistently better performance, benefitting from flight-to-safety [as we saw big-time this past week] and no state or local taxes]).

I love Paul Merman's generosity and overall investing savvy, but I've run the numbers on his "Ultimate Buy and Hold" and it has yielded around 5% during the entire time I've been ER'd. Other DFA slice-and-dice portfolios (check out Scott Burn's numbers over at AssetBuilder.com) are in the 3-3.5% range over the past 15 years - out of which you have to pay 1% portfolio mgmt/DFA access fees and the costs of a boatload of trades to keep the intricate slices balanced.

John Greaney, probably the earliest (and still one of the sharpest and most irreverent) ER site founders, has a great updated article on real world retiree returns on his site:

2015 Update: Real-Life Retiree Investment Returns

One of the portfolios he backtests is a William Bernstein MPT slice-and-dice, and Greaney's comment says it all, IMHO:

"While the MPT portfolio value has trailed the simple S&P500/fixed income portfolio (No. 1 above) by 21% as of Dec 31, 2015, advocates of this approach like its reduced volatility and sterling academic recommendations. Which brings us to an important investing truism -- it's OK to under perform as long as you're pleased with the results and proud of what you are doing."

Thanks again to everyone for sharing your thoughts. I learn a lot from this forum and am grateful to all of you.

 

[Tadpole]

My husband's 457 has been at Fidelity for years. His employer has just announced that they are changing to Voya Financial. I am a bit disgruntled about this and am considering an IRA rollover to Vanguard. He is also entering RMD/MRD this year. If I do, I will probably split the money inside the IRA rollover between Wellington and Wellesley or put it all in Wellesley. I am clueless what to do with the RMD funds. At first I thought I would just rollover to the same funds but, after reading more, including comments here, I see I need to rethink things. I had wondered what others were doing with after tax money that they don't need.

Does Federal law offer any legal protection for rollover IRAs that were originally part of a retirement plan?

 

[tmm99]

I have Wellesley but from the time I was with Vanguard. I am with Fidelity now and they said they would charge me something like $75 a transaction ... Is everyone who owns Wellesley with Vanguard??


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[rdy2go]

I am 50/50 Wellesley and Wellington in my IRA and my wife's IRA and very happy so far with them. We are with Vanguard. I have a 401K at Schwab that I will be moving shortly and need to decide on whether to leave it with Schwab as an IRA or move it. The company is moving from Schwab to The Principal, which looks like a really bad deal for the employees.