Balanced Index Investing?

[charlie]

Many of the contributors on this forum are convinced
that index investing is superior over the long term.
I am a recent convert myself, having been brain washed
by Bogle and Bernstein.

Recently I ran across the "coffeehouse" asset
allocation which uses 40% bonds and 10% each
in Large Market, Large Value, Small Market, Small
Value, International and REITS. The annualized
return for this mix was 10.848% over the 13 year
period from 1991 through 2003 . I thought to
myself "Self, this is really good".

Then as a sanity check, I looked up Vanguard's
old reliable Wellington and Star funds. Lo and
Behold! The Star had a 11.34% annualized return
while the Wellington had 11.96% !!

As you may know, the STAR is a fund of managed
funds while the Wellington is a value tilting managed
fund.

Granted 13 years may not be "long term" enough for
some, but it seems to be a reasonable test to me.
Maybe Vanguard's monkeys are just smarter than
the market?

Bernstein says the knock on index funds in down
markets is not true but I think his case may be weak.
After all, it is intuitive that a nimble manager should
be able to earn his pay in a down market, if ever.

Just looking at 2000, 2001, 2002 and 2003, the
annualized results were:

Coffeehouse .......... 6.29%
STAR....................... 5.12%
Balanced Index ...... 0.76%
Wellington .............. 6.64%

I know these results don't prove anything but
they are interesting to me.

We know that index = low cost = good long term
returns. But Vanguard's managed balanced funds
have low cost also and they SHINE!!

What do you make of this?

Cheers,

Charlie (aka Chuck-Lyn)

 

[cute fuzzy bunny]

I have a piece in the Wellesley account, Wellingtons "little brother" that is a little bond heavier than wellington but uses the same equity/bond strategies. This is to offset the rest of my portfolio being almost 100% equity, to get me to about a 55/45 stock/bond ratio.

I'm paying .20% for the admiral shares, very comparable to an index.

I think that during certain times funds like Star, Wellington and Wellesley have good performance. Over longer hauls - - 20-30+ years, the indexes catch up.

I like the idea that during times when interest rates are likely to head up, that someone is actively reducing long term bond holdings and fattening up on short termers (and vice versa when rates are higher and likely to head low). I like the idea of large cap value stock picking, as a good picker may be able to concentrate the holdings (as wellington and wellesley do) to improve yield without drastically increasing risk.

My real reason for holding this fund is that the volatility is extremely low, even during "bad times" its only had a few losing years, didnt lose much, and gained it back and then some the next year. The returns over its lifetime are nice (11+%), but during runs where Growth is king and equities are kicking butt, it lags. But all by itself it returns enough dividend for me to live off of it. The average principal capital gain is greater than inflation. So to me its sort of like TIPS, only the fund cost is lower, the dividend yield is higher, and the inflation protection (on a 5 year average) is better.

But then I'm a Dirty Market Timer Without a Mortgage

 

[wabmester]

What do you make of this?

I guess I don't understand your point. I can show you lots of funds/stocks/sectors/whatever that had better long-term returns than you've show here.

The point of passive asset allocation is to get the best return for a given volatility tolerence, but you didn't give any volatility data in your comparison, so I'm not sure what to make of it.

 

[Cut-Throat]

One word that comes to mind is recency. Which equals anything less than 30 years.

 

[unclemick]

Tic tac toe - 60/40 covers the whole Morningstar box/and bond classes and in a left handed way - foreign in the sense that many large caps are 'mutli national' in character.

The others are weighted asset class bets overloading % allocations in selected boxes and in your example - successfully.

My take - stay the course in my balanced index and putz in hobby stocks - same as the last ten years.

BTY - I own quite a few of Wellington and Wellesley top ten in my DRIPs.

 

[charlie]

Wab,

I computed the mean and standard deviation for
the 10 year period ending in 2003 as follows:


Mean Std. Deviation
Wellington................. 11.68%.........11.36%
STAR.......................... 10.95%.........11.25%
Balanced Index..........10.00%.........12.3%
Coffeehouse.............. 9.71%.......... 9.34%

The Wellington goes back to 1929 with an annualized
return of 8.33% while the STAR goes back to 1985
with a return of 11.7%. Of course STAR escaped the
gauntlet of the '30's and late '60's.

Cut, I wish we had data to compare the return of
Balanced Index going back to 1929. Do you suppose
FIREcalc would be a fair representation? I may
play with that a little.

TH, I used both Wellington and Wellesley along
with individual stocks and bonds in my salad years
immediately after ER in '89. In 20/20 hindsight, I
would have been far better off just staying the course
with Wellington and take up sky diving to satisfy my
primal urge.

Cheers,

Charlie (aka Chuck-Lyn)

 

[cute fuzzy bunny]

One thing I wish Vanguard would do is compose a STAR-like fund from indexes rather than managed funds. The target retirement and lifestrategies are low on asset mixes for my tastes, although they're 95% "good enough". I really like the one-stop diversity STAR has and considered putting some money in it early this year but the run-up in equities made me stop short.

What I really like is that my screen name is too short to be abbreviated. Although we've all gotten to know each other well these last few months, so you folks can call me "T" if you like

Charlie...remember to cover yourself in dryer sheets before skydiving to reduce the potential messes.

I used to rollerblade in my old very hilly neighborhood for thrills, or take my pointer to a parking lot with the 25' retractable leash and "water ski" behind her. Unfortunately my new neighborhood is flat as a board, and I broke a toe last night, so no skating for me for a while. Damn dog had *my* dog biscuit and I was chasing her for it and kicked a table leg. Owie.

 

[charlie]

I have to confess that I have been a closet reader
Of Dan Wiener's "The Independent Adviser for Vanguard
Investors" for years. He is a strong proponent of
managed funds and regularly Pooh poohs index
investing. I told you before that I am a recent
convert to Bogleism but have a tendency to
backslide occasionally. Some of his investment ideas are OK, but he is most interesting when discussing the
inner workings at Vanguard.

He posted an article today which explained that
the recent drive for new legislation to clean up
funds may affect Vanguard profoundly. He noted
that many of Vanguard's star managers working
for "sub-advisors" may be forced to choose between
running hedge funds or continue with Vanguard if
new legislation creates a wall. He suggested that
if push comes to shove the allure of hedge funds would
capture many of Vanguard's "names". Vanguard
has testified against creating a wall saying that an
improved code of ethics and more oversight should
suffice.

Of course, those in Index funds would not be
affected by this potential storm.

Avoidance of manager risk may well be the deciding
factor when pondering the merits of "STAR" vs.
"Balanced Index" or "Target Retirement 2025", etc.

Don't shoot the messenger!

Chalie (aka Chuck-Lyn)

 

[unclemick]

Dan sends me his flyers saveral times a year trying to sign me up.

My 'hobby stocks' have not overwhelmed my balanced index with positive alpha in the last ten years. I try to remember that when the itch to add a 'managed fund' to the hobby stock pile strikes. The grass is greener and woulda shoulda is always there is hindsight.

 

[Michael]

...new legislation...

I have noticed that the politicians seldom stop with sensible actions when they regulate something. They often go on to add myriad unnecessary regulations that do little more than cost consumers a lot of money.

 

[John Galt]

I have news for you Michael. Re. legislation, it's
going to get worse; much much worse.

John Galt

 

[wabmester]

It's kind of like entropy, isn't it? The number of laws is ever increasing. One day, everybody in this country will be a lawyer, and we'll have to start over again from scratch.

 

[sgeeeee]

It's kind of like entropy, isn't it?  The number of laws is ever increasing.   One day, everybody in this country will be a lawyer, and we'll have to start over again from scratch.

Usually the barbarians get you before that happens.

And of course, by that point a lot of people are rooting for the barbarians over the lawyers.

 

[John Galt]

I'm rooting for the barbarians now

John Galt

 

[cute fuzzy bunny]

Thats conan the governors thesis. He's trying to revert the state legislature to part time status on the grounds that less time will make them more expedient and reduce "legal inflation" and silly laws.

I think theres some merit to that, but its also a baseball bat to the knees for the legislature playing games and screwing around with him.

I read somewhere that there was some protection, either direct or implied, that members of one of the three branches of government couldnt be members of the other, such that we would retain true separation of intent and direction, supportive of checks and balances. Of course since 95+% of the people in the executive and legislative branches are lawyers and took an oath that effectively makes them part of the judicial branch, this went out the window. Probably not for the better.

 

[bobbee25]

Why don't they start a fund containing law firms, then we wouldn't have to be concerned about ever having a down year.

 

[Martha]

For a number of years, I was a bankruptcy trustee who administered individual bankruptcy cases and was also a bankruptcy lawyer. In those years I saw a number of lawyers file bankruptcy. Just because someone has a professional degree doesn't mean they have money. I saw lawyers earning less than $20,000 a year and this was less then 5 years ago. I saw veterinarians earning even less. I saw Phd college professors who couldn't get full time work and couldn't pay their bills. I saw medical doctors get themselves in trouble by making goofy investments outside their expertise and losing everthing as a result. Most all these professionals had huge student loan debts they couldn't pay and couldn't discharge in bankruptcy. Some were self employed and would get behind in taxes; also a debt that doesn't go away in bankruptcy.

Forget a fund with lawyers as assets.

This is all off the topic I know, but starting my law career as a bankruptcy lawyer made me very conservative with debt and spending. Too many people seem to have no concept of delayed gratification and saving for the future and as a result, spend every dime they make and then borrow to spend more. If there is one slip, a layoff, a divorce, or an illness, the house of cards tumbles down.

Martha

 

[John Galt]

Hi Martha! Excellent post! I agree with almost everything you had to say about saving, spending, bankruptcy, attorneys, etc. In my case though
(here again I am unusual) my divorce enabled me to retire at a time and in a fashion which suited me
just fine. My former spouse was very high maintenance.
I came to a point where I refused to support that lifestyle any longer.

John Galt