Recommend Wellesley to parents: good advice?

[soupcxan]

Some relatives are approaching retirement but still 5-10 years away. They make decent monty but neither is raking in tons of cash. They look to me for financial advice around retirement and I'd like to steer them to Vanguard Wellesley (VWINX) because it's conservative, generates income, and is simple to manage. They're not interested in the complexity of a really diverse portfolio with a bunch of slice-and-dice asset classes that they don't understand (international, small cap, foreign bonds, etc.) and their assets are not so large that it would be practical to hold a substantial position in each of the asset classes anyway.

Questions:

1) From the limited information I've provided here, is this good advice? Is 60/40 bonds/stocks too aggressive for their situation? Would I be better with separate funds for stocks/bonds so that I can manually adjust the asset allocation as they age? My parents are risk-averse and preservation of capital is important. They have some limited investments in real estate and other retirement accounts, but Wellesley would represent ~50% of their total portfolio.

2) Is it ok for them to hold Wellesly in a taxable account? They are not in high enough tax brackets to benefit from muni bonds, and once they enter retirement in 5-10 years their tax rate will drop quite a bit anyway. I've encouraged them to use tax-deferred accounts, with limited success...can't do much about that.

[d]

Wellesley is a fine recommendation, but heavy on bonds. Wellington is equally fine, but titled towards equities. i'd suggest you consider some mix of the two.

[brewer12345]

1) Personally, I think Wellington would be a better choice, but Wellesley would be OK, too, assumng you want to stay simple.

2) Taxable account should be fine. If they won't benefit from Munis now, the tax on Wellesley should be modest and fall even further when they retire.

[REWahoo]

Quote:

Originally Posted by d Wellesley is a fine recommendation, but heavy on bonds. Wellington is equally fine, but titled towards equities. i'd suggest you consider some mix of the two.

I agree. I'm an "aging boomer" myself and I have the majority of our portfolio in Wellesley and a fund similar to Wellington, Dodge & Cox Balanced. I think a mix of those two funds would be a good recommendation: simple, low cost and a good track record.

[yakers]

"aging boomers" ouch, kind of hits home. My wife retired a few weeks back at 58, we are moving her 403b into VG, mostly Wellesley. Lots of folks here seem to like that fund and it is a good fit for a fairly conservative, balanced, income producing fund. We have our Roth in VG Asset Allocation (VAAPX) but that has been nearly 100% stocks lately but has a good record with a bit more volatility.
While this may be more work than you want my recommendation for your situation would be to put 60%+ into an S&P500 or total market index particularly for taxable money. For tax deferred/free put 40%- into a total bond fund. This is a longer term simple solution and you could rebalance or change the AA over time.
I also am a fan of Target Retirement funds for people who want to keep things simple.

[unclemick]

Yep

More than one way to skin a cat.

BTY - has Dodge and Cox reopened any of their closed funds?

heh heh heh - 75% VG Target 2015 here. psst Wellesley one more time.

[Gumby]

Oakmark Equity Income (OAKBX) is a good performing, relatively low fee, balanced fund that may also be good in this situation.

[REWahoo]

Quote:

Originally Posted by unclemick2 BTY - has Dodge and Cox reopened any of their closed funds?

Their Balanced and Stock funds are still closed, only their Income and International funds remain open.

[cute fuzzy bunny]

I had dodge and cox balanced, oakmark equity income wellington and wellesley. I think wellesley is the cheapest from an expense perspective, especially considering the Admiral shares.

OAKBX, DODBX and wellington are similar type funds that own some different assets. They move similarly. Wellesleys more bond than equity. Its a great choice for someone nearing retirement or in retirement that want current income and low volatility without giving up long term capital appreciation.

A mix of wellington and wellesley, which will bring you to close to a 50/50 balance, is a good idea. Gain a little return vs pure wellesley, gain a little volatility but not too much. Rebalance every year or two or three.

[hogwild]

Wellesley is good for income and low volatility, but as far as capital appreciation, it has only grown 1.96% annually averaged over the 19 years ending 12/31/05. So it would not provide as good inflation protection as a fund more heavily weighted in equities would.

[cute fuzzy bunny]

Look at the total return in those years. In years where the capital appreciation was weak, the dividend payout was usually pretty high.

Its been a couple of years since I spent three days digging into the guts of the fund, but from recollection there have been no 5 year periods since inception where total return didnt average 8% or higher. No two sequential calendar years of losses and no double digit losing years.

Although Alec (ats5g) has done quite a bit of modelling on it and says you can replace it with indexes with the right mix of intermediate bond funds and large cap value, at a very slightly lower cost.

[hogwild]

Actually, for the 5 year period ending 12/31/05, it only grew an annualized .7%. That is .7 not 7. Based on a price of 21.07 end of '05 and 20.34 end of 2000.

[d]

Quote:

it only grew an annualized .7%.

this ignores dividends and cap gain distributions ... the actual annual return for this period is 6.54%

[hogwild]

Quote:

Originally Posted by d this ignores dividends

Yes it does. I am just trying to make the point that the fund is great for income, but does not provide a lot of growth of capital.

[d]

Quote:

but does not provide a lot of growth of capital

during this period the capital return exceeded that of the S&P 500

[hogwild]

Quote:

Originally Posted by Cute Fuzzy Bunny Look at the total return in those years. In years where the capital appreciation was weak, the dividend payout was usually pretty high. Its been a couple of years since I spent three days digging into the guts of the fund, but from recollection there have been no 5 year periods since inception where total return didnt average 8% or higher. No two sequential calendar years of losses and no double digit losing years. Although Alec (ats5g) has done quite a bit of modelling on it and says you can replace it with indexes with the right mix of intermediate bond funds and large cap value, at a very slightly lower cost.

d

This is the post I was responding to. I don't dispute your observations, but they are not relevant to the post I was responding to. The 5 year average return was, in fact, less than 8%.

It is, in fact, a great fund, especially for retirees. However, I don't think it is the only fund anyone should own. It just doesn't provide enough inflation protection.

[d]

hw:
indeed, during this period the return was less than 8%, but 6.5% is nowhere near .7%. i would agree that it's not the only fund one should own.

[hogwild]

You are correct; however, the .7% is the growth in the price of the fund. In other words, it is like owning a stock in which the price barely changed over the last 5 years, but paid a good dividend.

[d]

Quote:

In other words, it is like owning a stock in which the price barely changed over the last 5 years

if that stock which doubled and had a 2 for 1 split during that period, your logic would suggest its capital return was 0

[hogwild]

Wellesley's closing price on Dec 31, 2000 was 20.34 if you don't count dividends. It's closing price on Dec 31, 2005 was 21.07. That is a growth rate of .7% annually over 5 years. When you include dividends, the total return was 6.5%. Stock splits do not affect total return. Dividends do not affect growth rate. Dividends are included in total return however.