Wellesley vs Annuity

[WilliamG]

Over the past year or so we have increased our allocation to the Vanguard Wellesley fund to about 1/3 of our portfolio. We take the dividends via our IRA withdrawal and re-invest any capital gains. Although we have not been interested in an immediate annuity, Wellesley seems to us to be an attractive alternative. Although not guaranteed, it seems likely to throw off a slightly increasing income stream for our retirement while remaining OURS vs an insurance company's. Ie., a self funded long term care policy if needed, and something (if we don't overstay our welcome!) for our heirs.

So. My questions:
1) Does this allocation make sense or is it deeply flawed (40% stock funds, 35% Wellesley, 25% bonds and cash)?
2) For others who hold Wellesley, what percentage of your portfolio does it comprise?

Thanks!

 

[emilylynn]

IMHO, Wellesley is, quite possibly, the perfect fund. In a more stable economic environment, I'd be at least 50 percent in Wellesley, but its significant weighting in financials caused me to pull out almost entirely about two months ago. It is my plan to see how things unfold in the financial sector through next spring, and then reevaluate. I'd like to be back in Wellesley ASAP.

 

[Rich_by_the_Bay]

So. My questions:
1) Does this allocation make sense or is it deeply flawed (40% stock funds, 35% Wellesley, 25% bonds and cash)?
2) For others who hold Wellesley, what percentage of your portfolio does it comprise?

William,

Your allocation is deceptive in this scenario: you have 40% in stock, but you need to add about 35% of your Wellesley total to your stock allocation, since that fund is about 35:65.

I would not look upon Wellesley as a traditional allocation, like large value, small growth, etc. Rather, it is great as a conservative balanced fund with an emphasis on dividends in the stock piece. Fit it into your overall plan as such, if that makes sense, remembering that it's a tad more volatile than a pure bond fund.

Set it aside for income, and burn through it like an annuity (you can use Excel's PV or Present Value function to see how much income the fund's balance will generate for a given period of time at a given interest rate). I think it has been a very good fund historically used properly.

 

[REWahoo]

1) Does this allocation make sense or is it deeply flawed (40% stock funds, 35% Wellesley, 25% bonds and cash)?
2) For others who hold Wellesley, what percentage of your portfolio does it comprise?

I have selfish reasons for sincerely hoping your allocation isn't flawed as my allocation is very similar. To my thinking it's a good conservative mix for someone in the draw down phase. Like you, approximately 35% of my total portfolio is in Wellesley, resulting in an allocation of 47% stock funds, 38% bond funds, and 15% cash.

To Doc's point, your allocation is probably something more in the neighborhood of 52% stock funds, 48% bonds and cash.

 

[twaddle]

Here are the stats for Wellesley from 1972-2006:

CAGR: 10.56% (5.6% real)
SD: 9.21%
Max Drawdown: 9.7%

Here are the stats for 40/60 Large Value/Bond mix for the same period:

CAGR: 10.49% (5.54% real)
SD: 8.83%
Max Drawdown: 5% (balanced)

So, you can see Wellesley behaves pretty much like you'd expect for the 40/60 LV/bond balanced fund that it is.

As far as a steadily increasing dividend: no. The current dividend is about the same as the 20-year average for the fund.

Should you expect it to peform as well as it has in the last 20 years? IMO: no. We were in a 20-year period that gave us above-average returns for both stocks and bonds. Very unlikely to repeat going forward.

Like an annuity? No, but should continue to have fairly low volatility relative to a higher stock allocation.

 

[WilliamG]

Rich and REW -
Should have pointed out that our overall allocation target is 50/50 and the 35/65 allocation of Wellesley made overall allocation 50/50 within a hand grenade as Unclemick would say; ie. 52/48. Fyi, the rest of the portfolio is pretty much taken up by Vanguard's 3 total market index funds.... bill

 

[WilliamG]

Twaddle said:

"As far as a steadily increasing dividend: no. The current dividend is about the same as the 20-year average for the fund."

Rather than dividend rate I was thinking about dividends in nominal dollars. Assuming capital appreciation and re-balancing it seems that dividends in nominal dollars would likely increase over time assuming no adds or withdrawals of original shares. Is this flawed logic?

 

[twaddle]

Rather than dividend rate I was thinking about dividends in nominal dollars.

So was I. Yahoo will give you the dividend payments over the last 20-years. Declining in the last few years as payout ratios decline on stocks and yields decline on bonds, as you'd expect. Currently about the same nominal dividend as 1989.

 

[unclemick]

I answered over at the Bogleheads forum - tongue in cheek.

Obviously you have done some 'thinking it thru.' So why not!

I suppose you could try to isolate some life expectancy/annuity factors - ie what % could I pick up over expenses if I went annuity - but even there you a making a 'exactly when to croak judgement call'. Plus -'dat's a no no,' is a common view of annuities on some forums. .

heh heh heh - but over here - Psst Wellesley!

 

[W2R]

It looks like I may be getting a small to midsized inheritance, which will come in very handy right now. Before reading this thread I had independently decided I would probably put 1/3 of my taxable assets in Wellesley as well, for my withdrawal phase (which will be coming up in just 704 days, so sometime between now and then). So, I am glad to read this thread because it reinforces my thinking.

I don't want to put all my eggs in one basket, so the rest of my assets will be invested in other funds, cash, and so on.

I would put it in my Roth, but the latter will only be $25K so it has to be in taxable if I am going to get it.

I'm counting 2/3 of Wellesley as being bonds, 1/3 equities, as far as my overall asset allocation.

I might or might not get a small ($75K-$100K) lifetime immediate annuity as well. Haven't totally decided yet. I am starting to think that I may not need one if Wellesley is as reliable an income source in the future as it has been in the past, and with the extra $$ from the inheritance giving me a little room in my ER computations. Imagine that? I might be moving from the "get an annuity" to the "no annuity for me" camp. Will wonders never cease.

 

[RetireeRobert]

It looks like I may be getting a small to midsized inheritance, which will come in very handy right now. Before reading this thread I had independently decided I would probably put 1/3 of my taxable assets in Wellesley as well, for my withdrawal phase (which will be coming up in just 704 days, so sometime between now and then). So, I am glad to read this thread because it reinforces my thinking.

I don't want to put all my eggs in one basket, so the rest of my assets will be invested in other funds, cash, and so on.

I would put it in my Roth, but the latter will only be $25K so it has to be in taxable if I am going to get it.

I'm counting 2/3 of Wellesley as being bonds, 1/3 equities, as far as my overall asset allocation.

I might or might not get a small ($75K-$100K) lifetime immediate annuity as well. Haven't totally decided yet. I am starting to think that I may not need one if Wellesley is as reliable an income source in the future as it has been in the past, and with the extra $$ from the inheritance giving me a little room in my ER computations. Imagine that? I might be moving from the "get an annuity" to the "no annuity for me" camp. Will wonders never cease.

Which just goes to point up how important it is for people to be constantly re-evaluating their situation, circumstances, and pending decisions. Staying on top of one's actual resources, rethinking one's possible use of resources, different ways to utilize resources, all helps with decision making.

Makes for better decisions one can be happy with for a long long time.

 

[cute fuzzy bunny]

I have plenty of Wellesley and like it fine for what it is and what I expect it will be.

A thrower off of >4% in dividends with growth thats generally similar to inflation, producing a reliable income stream with limited volatility and risk of loss of principal.

Over most 20 year slices of the funds history, the per share price has doubled, practically matching average inflation (ok, its a little short of inflation), and the current yield is about as low as its been. The fund hasnt done as well in the last 6 years due to falling bond yields. Which is the same frickin problem you'll be having with any bond fund.

I aint gonna get into the tit for tat over wellesley vs an annuity like we did with the "house is a bond" argument where people simply cant set aside the technical fundamentals in exchange for a simple perspective of function.

In this case both produce reliable income streams, both have some perceptible risk, one lets you keep all of your money in case you need a lump sum for something like LTC, the other one assures payment for life as long as the insurance company doesnt go broke. In this instance I'd prefer wellesley to a weak paying CPI adjusted annuity OR a better paying non CPI adjusted annuity.

I doubt we'll see yields lower than what they are right now. Exposure on both the equity and bond side to the financial markets is a bit concerning but I doubt it will create a double digit annual drop in the price and historically the fund is resilient and rebounds from a loss year with a big gain.

For a long haul investment for an early retiree, I can think of few safer, better options that create income and a good shot at offsetting inflation.

And yep, it performs just like a similar index mix, at a ridiculously cheap price point with autobalancing and full fund management. I could probably knock of .01-.03% of the .14% ER by buying ETF's and rebalancing myself. Why bother...

Will it be the best option in the future? I dunno. Same answer for any other investment.

For those who are feeling a bit more intrepid, a 50/50 mix of wellesley and wellington brings you to a roughly 50/50 stock/bond mix with a ~3.8-3.9% yield and better odds of long term capital appreciation.

 

[twaddle]

Which is the same frickin problem you'll be having with any bond fund.

Exactly. It's a frickin bond fund with 40% Large Value mixed in!

It makes a lot of sense if that's what you're looking for.

Oh wait; no it doesn't.

You want your bonds in a tax-sheltered account. And you want to be able to tax-loss harvest your stocks. Oh, well. It looks great on paper, though.

 

[cute fuzzy bunny]

Yes, you seem to like making the point that its just a lcv fund mixed with bonds. Is there some revelation in this oft raised point? Cuz i'm not getting it. Of course it is what it is. Are you regularly expecting something different and then finding yourself filled with surprise?!?

There is also no reason why bonds NEED to be in a tax sheltered account. In fact, I find them rather pointless there...where I cant access the income they produce. I also have no interest in tax loss harvesting my stocks. That would be the traditional place to put them for an accumulator to minimize the tax implications for someone with high earnings, but perhaps not for a retired person.

I want available current income, I want price appreciation that gives me some offset to inflation, I dont want it to be too risky, I want it to be cheap, and I dont want to do a lot of work on it.

Check, check, check, check, check!

 

[twaddle]

I like all those things, too. But I also like minimizing my tax hit. To each their own.

 

[cute fuzzy bunny]

Perhaps someone who wants to manage their own assets is not looking for a conservative income fund.

I sort of screw up that tax management thing by not losing any money in the first place. You might give that a whirl sometime...

 

[twaddle]

I sort of screw up that tax management thing by not losing any money in the first place. You might give that a whirl sometime...

Teach me! Wait a minute; aren't you the guy who used to brag about his multi-year loss carry-forwards?

 

[RetireeRobert]

There is also no reason why bonds NEED to be in a tax sheltered account. In fact, I find them rather pointless there...where I cant access the income they produce.

Why can't one access the income bonds produce, if the bonds are placed in a tax sheltered account? Presumably, if one is at the stage of needing to access the bond income, one is old enough to not have any early withdrawal penalties from tax sheltered accounts. What else "prevents" one from accessing the bonds' income there---why are bonds "pointless" in tax sheltered accounts?

 

[cute fuzzy bunny]

They're pointless in a tax sheltered account for me, because I'm 46 years old and cant access it without a 72t or penalties. I guess I'm still cuing on that "early" part of "early retirement"

And yep, seven years ago I deliberately sold a loss position to offset a gain to avoid shooting myself into an AMT position. I dont think I bragged about it, per se. Does all this have anything to do with the discussion at hand?

Are we back to Twaddling?

 

[W2R]

Are we back to Twaddling?

I dunno, but I'm feeling better about my decision, for after hearing the pros and cons. Thanks a lot, both of you guys.

 

[twaddle]

Ah, so even the great CFB has losses! And sometimes he wants to take advantage of losses for tax planning. Hard to do with a balanced fund.

And by putting the tax-inefficient bonds in your tax-sheltered accounts, you (drum roll, please) avoid taxes!

So, if one wanted the same returns and same low-volatility as Wellesley without the tax hit, one should hold the two components separately. If you happen to need to all of the income Wellesley throws off, you can get it by rebalancing the stock/bond allocation. Cap gains are taxed at a lower rate. Or you can invest in higher dividend payers. And you can throw some TIPS in that bond bucket, while you're at it. In general, you can do the same thing with much more flexibility to suit your particular needs.

 

[cute fuzzy bunny]

For what you want its a perfectly good choice. You'll probably make 1-3% per year more than TIPS or the average CPI adjusted annuity product over the long haul, and you're not really exposing yourself to much more risk to get that premium.

And then there that good part about being able to write a big check for something should the need ever arise.

VASIX is another choice if you want less risk since the AA fund component will swap out of equities and into bonds when the quant computer says to. That could back the fund into a 5/95 fund under some circumstances, or up to a 30/70 under favorable conditions for equities. Expenses are a bit higher.

On the flip side, VTINX has a bit more risk but a lot more diversity, slightly higher expenses and slightly lower yield than wellesley.

 

[cute fuzzy bunny]

And sometimes he wants to take advantage of losses for tax planning.

Yep, in my last year of working when I made over a million dollars and had roughly three million dollars in capital gains, I thought a little loss selling would be handy. Sort of not the traditional problem an early retiree finds themselves in.

And by putting the tax-inefficient bonds in your tax-sheltered accounts, you (drum roll, please) avoid taxes!

And yep, in a traditional 45 year accumulate, 25 year unwind retirement scenario, the books say to put your bonds in a sheltered account. Pretty sure thats not quite so sure a situation for an early retiree.

This IS the "early retirement" forum, not the "investing for 30 year olds" forum, right?

So, if one wanted the same returns and same low-volatility as Wellesley without the tax hit, one should hold the two components separately. If you happen to need to all of the income Wellesley throws off, you can get it by rebalancing the stock/bond allocation. Cap gains are taxed at a lower rate. Or you can invest in higher dividend payers. And you can throw some TIPS in that bond bucket, while you're at it. In general, you can do the same thing with much more flexibility to suit your particular needs.

Wow! That sounds like a lot of work to get basically the same thing I'm getting right now from one cheap fund!

And heres the fun part. The fund is also a good idea for the OP, since I took the time to read their question rather than just pitching into a thread to try and start a fight.

I actually took you off my ignore list a couple of days ago. That was a mistake... :

 

[unclemick]

Psssst - Wellesley!

Have we got a classic in the making here?? - to take it's place beside: SWR, when to take SS, or - drum roll please - to mortgage or not to mortgage.

Just the word Wellesley makes me feel warm and smarmy and valuey and Ben Grahamesque all over.

heh heh heh - I just checked - the Norwegian widow is down to only 5(from 7) of their top ten stock holdings. Maybe add G.E. and U S Bancorp on my Christmas list for Santa.

 

[twaddle]

Well, this early retiree still likes his bonds tax sheltered. And I will change the allocation and type of bonds depending on my tax situation in any given year, room in tax-sheltered accounts, income needs, etc.

It's really not that hard to manage. I can understand somebody wanting a balanced fund for simplicity, but I would think that almost everyone could benefit from the added flexibility of holding separate stock and bond allocations.