Invest for total return or for income?

[nun]

The idea of having balanced funds as the basis of both taxable and tax deferred accounts may be a good plan for us. As was commented on, if it helps us get into sufficient equities in our portfolio and stay there, that may more than offset any tax inefficiencies.

Is there a risk in using the same fund for all investments? I don't want to get into the situation of having a half dozen balanced funds across all accounts, but how risky is using just one?


Wellesley does well in this backtesting. I subbed in Wellington for one of the two Lifestyle funds, and it does quite well for 2000-2009 despite being 64/36. More volatile than the other funds, but better returns than the Lifestyle funds. A bit less than the Wellesley fund.

Funds like

Target Retirement Income VTINX 30/70
LifeStrategy Conservative Growth VSCGX 40/60
LifeStrategy Income VASIX 20/80

are just made up of other Vanguard funds. By investing in them you are getting very broad equity and bond market indexes.

Wellesley and Wellington are different as they are actively managed and hold a range of high quality stocks and bonds, but they are well diversified too. I think you sound like a good Wellesley candidate, you'll get the stability of the bonds (if rates don't go sky high) and some return from high quality dividend paying stocks.

 

[hnzw_rui]

Is there a risk in using the same fund for all investments? I don't want to get into the situation of having a half dozen balanced funds across all accounts, but how risky is using just one?

Vanguard LifeStrategy Funds Components:
Total Stock Market Index
Total Bond Market II Index
Total International Stock Market Index
Total International Bond Market Index

Vanguard Target Retirement Fund Components:
Total Stock Market Index
Total Bond Market II Index
Total International Stock Market Index
Total International Bond Market Index
Short-Term Inflation Protected Securities Index

Those balanced funds are very, very diversified so they're no more riskier than investing in the individual components at similar AA.

Wellesley and Wellington are actively managed but they seem to operate on pixie dust. That said, both are sufficiently diversified that I reckon it should be safe enough to have all investment funds in either.

 

[Chuckanut]

I think you sound like a good Wellesley candidate, you'll get the stability of the bonds (if rates don't go sky high) and some return from high quality dividend paying stocks.

While I don't do this myself, but I know some very conservative investors who have most or all of their $$'s in Wellesly. They get less volatility, and at a 3-4% WR, descent income, and a bit of inflation protection. Mostly, they get to sleep well at night, something they would not do if they had to ride the market's gyrations.

It's very personal.

 

[REWahoo]

Wellesley and Wellington are actively managed but they seem to operate on pixie dust. That said, both are sufficiently diversified that I reckon it should be safe enough to have all investment funds in either.

While I don't do this myself, but I know some very conservative investors who have most or all of their $$'s in Wellesly. They get less volatility, and at a 3-4% WR, descent income, and a bit of inflation protection. Mostly, they get to sleep well at night, something they would not do if they had to ride the market's gyrations.

It's very personal.

+1

I have roughly 1/3 of our portfolio in Wellesley and 1/3 in Wellington. A bit more volatile than 100% Wellesley but the pixie dust those fund managers use is also a sleep aid.

 

[statsman]

While I don't do this myself, but I know some very conservative investors who have most or all of their $$'s in Wellesly. They get less volatility, and at a 3-4% WR, descent income, and a bit of inflation protection. Mostly, they get to sleep well at night, something they would not do if they had to ride the market's gyrations.

It's very personal.

Wellesley and Wellington are different as they are actively managed and hold a range of high quality stocks and bonds, but they are well diversified too. I think you sound like a good Wellesley candidate, you'll get the stability of the bonds (if rates don't go sky high) and some return from high quality dividend paying stocks.

+1

I have roughly 1/3 of our portfolio in Wellesley and 1/3 in Wellington. A bit more volatile than 100% Wellesley but the pixie dust those fund managers use is also a sleep aid.

I have read some suggest both Wellesley and Wellington like you have. I also gather there are some here who are not fans of either. I would imagine the two funds have some overlap. Did you require a blend of the two to achieve your AA? Or was this an availability issue (ie. some 401(k) plans have a limited number of Vanguard funds)?

 

[REWahoo]

Did you require a blend of the two to achieve your AA? Or was this an availability issue (ie. some 401(k) plans have a limited number of Vanguard funds)?

I'm retired for 10+ years and both funds are in an IRA, selected as you suggest, as a blend to achieve an AA of 45/45/10 (equity/bond/cash).

Yes, there is some overlap but the history of both funds - including their performance during the "market unpleasantness" of 08/09 - works for me.

I understand future performance of these funds may not reflect their past success, but there is certainly no guarantee any other fund choice I made would be better. So, I'm going to keep dancing with who brung me...

 

[nun]

Wellesley is Wellington's more conservative cousin and it is more oriented towards income with its 60% bond allocation. Some people don't like these funds because they are actively managed and have slightly higher fees than index funds. But those fees are still far lower than most fund fees. Having everything in a single fund makes things simple, but it also removes the chance to rebalance and play with your money.....and that's something most people on here enjoy.

 

[pb4uski]

I've been wondering it that rule always makes sense given the RMD rules many of us will face. It might be wiser to balance spending between taxable money, Reg IRA, and Roth IRA in some situations. Or maybe not?

The idea of being able to use money I have already paid taxes on to help keep me out of a higher tax bracket seems appealing.

I draw from taxable to live on and use Roth conversions to the top of the 15% tax bracket to minimize future RMDs. IMO, that is more tax efficient in the long run than spending tax-deferred funds because the Roth conversions just effectively transfer tax-deferred to tax-free (and the taxes get paid from taxable funds).

 

[pb4uski]

...Pick an asset allocation, say 30% stocks/70% bonds. In your taxable accounts go 30% VTI and 70% AGG. In your IRA accounts go 30% VTI and 70% AGG. Done and done....

Very suboptimal IMO. Opportunity lost to be more tax efficient and optimize Roth conversions. But I concede it is easy.

IMO it would be much better to go 100% AGG in IRAs and then mix VTI and AGG as needed in taxable to achieve overall AA target.

 

[hnzw_rui]

I have read some suggest both Wellesley and Wellington like you have. I also gather there are some here who are not fans of either. I would imagine the two funds have some overlap. Did you require a blend of the two to achieve your AA? Or was this an availability issue (ie. some 401(k) plans have a limited number of Vanguard funds)?

Wellesley is ~35/65 while Wellington is ~65/35. Mix them up to get AA in between those two.

That said, you strike me as pretty risk averse so do consider if you'll be fine with, say, $2M dropping to $1.5M with Wellington or if $2M dropping to $1.8M with Wellesley is more acceptable. Maybe you're okay with something in between.

 

[ejman]

Interesting how after exploring a number of fascinating rabbit holes and much learned discussion we are back at a sensible W/W approach...

 

[statsman]

Wellesley is ~35/65 while Wellington is ~65/35. Mix them up to get AA in between those two.

That said, you strike me as pretty risk averse so do consider if you'll be fine with, say, $2M dropping to $1.5M with Wellington or if $2M dropping to $1.8M with Wellesley is more acceptable. Maybe you're okay with something in between.

I am pretty well convinced if the portfolio can generate a 1% WR without touching principal, at least in the early years of retirement, I would be fine with Wellesley. I believe I would also be fine with something in between the two balanced funds.

I know many have said to consider total returns over income generation. But in order to stomach the volatility swings, I just need to look at what the portfolio generates as far as income and avoid worrying about the "net worth" of the portfolio.

I now need to convince my wife to make the change. As far as she is concerned, investing in the stock market is like taking a trip to the casinos. What money she invested in stock funds within her 401(k) accounts over the years she just assumed wouldn't be there at retirement.

Interesting how after exploring a number of fascinating rabbit holes and much learned discussion we are back at a sensible W/W approach...

Very true.

 

[daylatedollarshort]

And yes, going bond-heavy means lower returns compared to equities long term but why take the risk if you don't need to?

Here's some interesting reading:

How Do You Know When You Have Enough? - CBS News
Are You Taking Too Much Risk? - CBS News
Are the Rewards Worth the Risks? - CBS News

https://www.portfoliovisualizer.com...&reinvestDividends=true&initialAmount=1000000

I just got around to reading those articles and thought they were well written. Thanks for posting.

 

[statsman]

Interesting how after exploring a number of fascinating rabbit holes and much learned discussion we are back at a sensible W/W approach...

After spending a couple of days backtesting various portfolios with Vanguard index funds vs Wellesley, I can't get close. Using 2000 to the present and picking any time span that includes the late 2007 to mid 2009 recession, with a 35/65 AA using index funds, I see why many recommend Wellesley for the conservative investor.

35% Total Stock Market plus 65% Total Bond Market trailed Wellesley by an average of 2.5% annually for the period of 2000 through 2009. 2007 through 2012, they trailed by 1.25%. 2010 to the present (no recession), they trail by 1.1%.

But I also agree that putting a majority of a portfolio in one fund (or a combination of Wellesley/Wellington) sounds like a risk. I am certainly not one to question whether the portfolio managers at Wellington can continue to top a majority of index-based portfolios going forward.

For those who decided to use Wellesley as a portion of your portfolio (at least 20% but less than 50% of the portfolio), isn't adding index funds to a portfolio along with this fund somewhat conflicting (ie. actively managed vs indexed)?

 

[nun]

But I also agree that putting a majority of a portfolio in one fund (or a combination of Wellesley/Wellington) sounds like a risk. I am certainly not one to question whether the portfolio managers at Wellington can continue to top a majority of index-based portfolios going forward.

For those who decided to use Wellesley as a portion of your portfolio (at least 20% but less than 50% of the portfolio), isn't adding index funds to a portfolio along with this fund somewhat conflicting (ie. actively managed vs indexed)?

Wellington is one of the oldest mutual funds around (about 90 years old) and Wellesley has been around for 40 years. They are both diversified....not as much as a total stock market or total bond index fund though and have low fees. They are the exception that proves the rule for Bogleheads because they are actively managed and don't follow an index, but at least their fees are low. If you are having difficulty putting everything into Wellesley just add the appropriate amounts of Total Bond and Total Stock Index. With your low percentage withdrawal requirement it's hard to go wrong. This isn't the best from a tax point of view, but it gives you a 40/60 overall allocation with almost 50% invested in Wellesley.

Taxable
Total Stock Index $550k
Wellesley $550k

Tax deferred
Total Bond Index $700k
Wellesley $550k

 

[ejman]

For what it's worth, I have been retired living off my portfolio for 12+ years now and started SS a couple years ago. Although Wellesley is my largest holding at 33% it is at my upper limit for an actively managed fund, another 5% in Wellington, 10 % in Vanguard Retirement income, 10% in Vanguard value index for large cap and small cap about 25 % outside of Vanguard (Just my paranoid not all eggs in the same mutual fund company basket) and the balance mostly in vanguard intermediate bond fund index. Overall 50/50 with a wide 10% rebalance band which very rarely gets exercised.

 

[statsman]

For what it's worth, I have been retired living off my portfolio for 12+ years now and started SS a couple years ago. Although Wellesley is my largest holding at 33% it is at my upper limit for an actively managed fund, another 5% in Wellington, 10 % in Vanguard Retirement income, 10% in Vanguard value index for large cap and small cap about 25 % outside of Vanguard (Just my paranoid not all eggs in the same mutual fund company basket) and the balance mostly in vanguard intermediate bond fund index. Overall 50/50 with a wide 10% rebalance band which very rarely gets exercised.

Three different balanced funds totaling almost half of your portfolio? That seems to be a bit unorthodox, especially when 25% small cap are added in. But what do I know? We're sitting on 0/80/20 (stocks/bonds/TIPs) in our tax deferred, and we are getting slammed today and pretty much the whole week. All of the books written up to recently about the safety and smoothness of bond funds should be tossed into a large pile and set ablaze.

I would like to believe I would be better off if I could deal with our portfolio in terms of meeting expenses (yes, income) rather than total return. By doing that I very likely could move the necessary allocation into stocks and just not look at the "net worth" based on fund prices. I realize this is not optimal, but what we're doing now is death by thousands of small cuts.

My apologies. This has not been a good week for me.

 

[daylatedollarshort]

Three different balanced funds totaling almost half of your portfolio? That seems to be a bit unorthodox, especially when 25% small cap are added in. But what do I know? We're sitting on 0/80/20 (stocks/bonds/TIPs) in our tax deferred, and we are getting slammed today and pretty much the whole week. All of the books written up to recently about the safety and smoothness of bond funds should be tossed into a large pile and set ablaze.

You might enjoy reading the latest version of The Bond Book by Annette Thau. She is a former municipal bond analyst and her book has pros and cons of different kinds of bonds and bond funds, and she doesn't seem to have a personal bias in any direction.

Anette Thau article from the AAII Journal -
Bond Market Strategies for a Rising Interest Rate Environment
AAII: The American Association of Individual Investors