Vangard Wellesley Fund

[LXEX55]

I know that 99% of what you hear/read on the Internet is about as reliable as the National Enquierer ("Elvis and Liberace Had Torrid Affair") but my wife heard "some financial guy" say that buying Wellesley in a taxable account (not in an IRA) was a mistake. That's all she remembers. It just so happens I was planning on buying into that fund and now she is against it. Is there any truth to this. Not about Elvis, about Wellesley.

 

[homestead]

Wellesley was fine in my after-tax account but it was throwing off a lot of capital gains which boosted my income/taxes a couple years ago. Someone suggested Vanguard Tax-Managed Balanced Adm VTMFX and I switched last year it has dividends but so far no capital gains.
It has also come back well during the pandemic. (5.61% YTD)

 

[MichaelB]

I know that 99% of what you hear/read on the Internet is about as reliable as the National Enquierer ("Elvis and Liberace Had Torrid Affair") but my wife heard "some financial guy" say that buying Wellesley in a taxable account (not in an IRA) was a mistake. That's all she remembers. It just so happens I was planning on buying into that fund and now she is against it. Is there any truth to this. Not about Elvis, about Wellesley.

Wellesley’s primary objective is to provide income, all of which is taxable, so if your marginal tax rate is high the after tax return may be low. It’s not tax efficient. That doesn’t mean it’s a mistake in a taxable account.

 

[FANOFJESUS]

It all depends on your tax bracket. If you are in the 12% bracket it is not that bad.

 

[FANOFJESUS]

One could also buy another 40/60 fund the LifeStrategy Conservative Growth it has about half the taxes of the Vangard Wellesley Fund.

 

[yakers]

I like the idea of Wellington in taxable and Wellesley in tax advantaged, but it still depends on tax bracket.

 

[Chuckanut]

Wellesley’s primary objective is to provide income, all of which is taxable, so if your marginal tax rate is high the after tax return may be low. It’s not tax efficient. That doesn’t mean it’s a mistake in a taxable account.

+1

It's not a mistake if it meets your needs. Only you know that.

Most of the cognoscenti would put an income fund in tax advantaged accounts, and stock funds (with their lower taxed capital gains) in taxable accounts - all things being equal. But, often they aren't equal. If you need the income to meet monthly expenses, Wellesley is as good an income fund as I can think of. FWIW, my 'bond' allocation is made up of the bonds in Wellesly, CD's and short term investment grade bonds.

 

[Toocold]

This is similar to the concept of putting stocks (minus REITs) in your taxable account and bonds in your tax deferred accounts, because dividends / capital gains are taxed at a potentially lower rate and interest is taxed as ordinary income. Wellesley is 35/65 so it's bond heavy.

It all depends on your tax bracket. I personally think Wellesley is a great fund.

 

[kevink]

I'm a great admirer of Wellesley too, though I don't own it at the moment.

I wanted to raise a couple of issues - not with the intention of discouraging anyone from investing in W but in the interest of encouraging consideration of other alternatives as well as as a reminder that even such an incredible record of success over many decades is no guarantee for the future.

Historically W generates its alpha mostly through careful selection of the mostly corporate bonds that make up 60-65% of its assets. That part of the bond market has historically been a lot less transparent than Treasuries and Wellington has done an outstanding job of adding value. Ditto to a perhaps somewhat lesser degree with high-dividend stocks - which are obviously far rarer today than they were through most of W's history.

Darrow Kirkpatrick, founder of the "Can I Retire Yet" site and author of the eponymous book has owned Wellesley as a mainstay of his retirement portfolio for years and has this to say about it in his review of his portfolio's performance in 2019:

"Though I have written in favor of Wellesley in my article on balanced funds, and still own a substantial position, I’ve grown disenchanted with the managers’ attempts to actively outguess the market.*

Reading the annual report has become a depressing exercise. This year there were numerous mentions of “out-of-benchmark” allocations and a healthy laundry list of the fund’s winners and losers. Sure, the returns have been good, but it all makes me wonder what the fund stands for anymore. I just see another group of fund managers making bets, trying to outperform their peers. And haven’t we learned that doesn’t work?"

https://www.caniretireyet.com/investment-portfolio-2020/

There's also an interesting recent thread on the Bogleheads where someone without access to Vanguard funds in their IRA is trying to "clone" Wellesley. The results are interesting (IMHO) because they show (a) that it's relatively easy to do, and (b) just what a narrow sector bet (a handful of corporate bonds and stocks, no international) W is.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&benchmark=-1&benchmarkSymbol=VWIAX&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VIG&allocation1_1=40&symbol2=VYM&allocation2_2=40&symbol3=VBIIX&allocation3_1=60&allocation3_2=60&symbol4=VSCGX&allocation4_3=100

 

[Koolau]

Pssssst! Where's unclemick?

 

[eytonxav]

Pssssst! Where's unclemick?

Didn't he switch to something else after years of Psssst!

 

[Koolau]

Didn't he switch to something else after years of Psssst!

Maybe I missed that. In any case, I talked DW into putting one of her Roths into Wellesley several years back. Have been satisfied with the results though YMMV.

 

[Eucerin]

I like the idea of Wellington in taxable and Wellesley in tax advantaged, but it still depends on tax bracket.

+1
that's what we did. Enough income to be in 12% tax bracket or no tax.

 

[OldShooter]

... Darrow Kirkpatrick, founder of the "Can I Retire Yet" site and author of the eponymous book has owned Wellesley as a mainstay of his retirement portfolio for years and has this to say about it in his review of his portfolio's performance in 2019:

"Though I have written in favor of Wellesley in my article on balanced funds, and still own a substantial position, I’ve grown disenchanted with the managers’ attempts to actively outguess the market.*

Reading the annual report has become a depressing exercise. This year there were numerous mentions of “out-of-benchmark” allocations and a healthy laundry list of the fund’s winners and losers. Sure, the returns have been good, but it all makes me wonder what the fund stands for anymore. I just see another group of fund managers making bets, trying to outperform their peers. And haven’t we learned that doesn’t work?"

https://www.caniretireyet.com/investment-portfolio-2020/ ...

This commentary points up the reason I don't like blended funds. I call it the "Kool-Aid Problem." When you pour the red Kool-Aid and the green Kool-Aid into the same glass you cannot tell where the resulting taste and color came from. Same problem with blended funds. Without a lot of work and maybe it's even impossible, you can't tell how the equity portion is performing. Nor the fixed income.

If you're not looking in the box, you are also vulnerable to fraud: https://www.reuters.com/article/us-...ers-on-risky-path-to-retirement-idUSKBN1GH1SI

And then there are the tax issues mentioned above when you mix the green and the red Kool-Aid.

To me, a simulation as described by @kevink would be vastly superior.

 

[Koolau]

This commentary points up the reason I don't like blended funds. I call it the "Kool-Aid Problem." When you pour the red Kool-Aid and the green Kool-Aid into the same glass you cannot tell where the resulting taste and color came from. Same problem with blended funds. Without a lot of work and maybe it's even impossible, you can't tell how the equity portion is performing. Nor the fixed income.

If you're not looking in the box, you are also vulnerable to fraud: https://www.reuters.com/article/us-...ers-on-risky-path-to-retirement-idUSKBN1GH1SI

And then there are the tax issues mentioned above when you mix the green and the red Kool-Aid.

To me, a simulation as described by @kevink would be vastly superior.

I guess that's why I do like Wellesley. I don't really care about HOW it works. Most of the time, it DOES seem to work (for DW and me). Since it's in a Roth, the taxes don't matter. I'm much more the set-and-forget type than a "fiddler" in my own Port. Probably not the best way to maximize results BUT I do sleep well. That's way more important to me, but YMMV.

 

[mh]

Didn't he switch to something else after years of Psssst!

Yes another vanguard fund . Maybe a target date fund ?

 

[kevink]

Yes another vanguard fund . Maybe a target date fund ?

Did a search of Uncle Mick posts and found this comment in one from June of this year:

"Full auto with a Target Retirement fund since 2006. 26th year of ER and counting."

He's always been one of my favorite posters on these forums and "psst...Wellesley" will forever be ingrained in my mind thanks to him. Could do a whole lot worse than 100% of the Big W or any of the Target Date Funds (though the latter have suffered for many years from their high allocation to interntional. But heck, the tide may be changing on that too. Wonder if Uncle Mick's reasons for switching from Wellesley to the Target Date all-index-fund world parallelled Darrow Kirkpatrick's).

 

[OldShooter]

I guess that's why I do like Wellesley. I don't really care about HOW it works. Most of the time, it DOES seem to work (for DW and me). Since it's in a Roth, the taxes don't matter. I'm much more the set-and-forget type than a "fiddler" in my own Port. Probably not the best way to maximize results BUT I do sleep well. That's way more important to me, but YMMV.

... "Full auto with a Target Retirement fund since 2006. 26th year of ER and counting." ...

Yes, I think that's why the various flavors of blended funds are popular. They may not be completely optimized but they are safe and hands-off for the most part. I know many people who prioritize hands-off above everything else, often to the point of hiring an FA and paying AUM fees. And certainly that is less optimal than just buying a well-managed blended fund directly.

In my post I said "why I don't like blended funds." I didn't (and wouldn't) say that no one should buy them

 

[FANOFJESUS]

It is a great fund I almost bought it in my taxable.

 

[kevink]

I can see the appeal of blended funds but I'm not a fan of the Vanguard Lifestrategy Series. Their 40% allocation to international equity has hurt their returns for many years, total bond market has no advantages over an intermediate Treasury fund (and performs much worse during market crises) and the international bond allocation adds useless complexity.

Comparative performance of W, the comparable Lifestrategy fund and a simple 40:60 TSM/TBM says Uncle Mick would've been much better off sticking with Wellesley. That said, I'd go with a simple 30-40% TSM/ITT going forward over any of these alternatives.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2000&firstMonth=1&endYear=2020&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VWINX&allocation1_1=100&symbol2=VSCGX&allocation2_2=100&symbol3=VITSX&allocation3_3=40&symbol4=VBTIX&allocation4_3=60

 

[rsingh6675]

What other funds are in your retirement account, just curious?
I, for example have
VWIAX
FCNTX
PRHSX
VIG
VYM
VHT

 

[Koolau]

What other funds are in your retirement account, just curious?
I, for example have
VWIAX
FCNTX
PRHSX
VIG
VYM
VHT

I assume anyone can answer?

Continuing with my "set and forget" strategy, I have Vanguard (forget the abbreviations) intermediate term bonds, S&P500, All World ex US, and emerging markets. BORING! YMMV

 

[jazz4cash]

If you're not looking in the box, you are also vulnerable to fraud: https://www.reuters.com/article/us-...ers-on-risky-path-to-retirement-idUSKBN1GH1SI

Fraud?

 

[OldShooter]

Fraud?

Choose your own word. They didn't do what they told their customers they were going to do, substantially increasing the risk in the portfolios. I'm sure there were words in the prospectus sufficient to CYA, of course.

 

[RobLJ]

I think this is the point; for many (not most here on the blawg), blended funds are pretty much a no-thought option.
I always looked down my nose at it, unfairly since I think Wellesley's track record is superb. But I'm now considering what DW should do when I go (I'm 5 years older), and either a simple list of ETFs or that plus something like Wellesley probably makes the most sense. First I need to combine all the accounts into one for her and one for me.

I'm trying to avoid dying before I make up my mind.

Yes, I think that's why the various flavors of blended funds are popular. They may not be completely optimized but they are safe and hands-off for the most part. I know many people who prioritize hands-off above everything else, often to the point of hiring an FA and paying AUM fees. And certainly that is less optimal than just buying a well-managed blended fund directly.

In my post I said "why I don't like blended funds." I didn't (and wouldn't) say that no one should buy them