Recommend Wellesley to parents: good advice?

[LovesLife]

There was a posting over at M* that discussed this somewhat. I would be appreciative if anyone here would care to read it and give their opinion. Thanks.

http://tinyurl.com/j7vu2

 

[wabmester]

I guess I never understood the fascination with Wellesley.   It's fine if you're looking for large cap value and bonds.

Alec did a study a while back that basically showed there was no value added by the fund's management.   All the fund's returns are what you'd expect for its asset class mix.

link

 

[d]

what Alex said:

Wellington or Wellesley ... have certainly done a good job ... of sticking to their investment objectives [large value dividend paying stocks and high quality corporate bonds]... if an investor wants a value tilted balanced fund, either of these would do nicely, especially if one qualifies for admiral shares

 

It's fine if you're looking for large cap value and bonds.

which is what OP was looking for

 

[REWahoo]

There was a posting over at M* that discussed this somewhat. I would be appreciative if anyone here would care to read it and give their opinion. Thanks.

http://tinyurl.com/j7vu2

My initial take was that CFB and SG had migrated their mortgage payoff debate over to M*.

As a retired Wellesley investor (40% of my portfolio), I see nothing that would cause me to question my choice of funds or allocation percentage. The discussion reinforced what was pointed out above, that it is probably prudent to include additional equity funds in addition to Wellesley if you expect to maintain a 4% + inflation SWR over a 30 year time frame.

 

[cute fuzzy bunny]

I guess I never understood the fascination with Wellesley. It's fine if you're looking for large cap value and bonds.

Lets see, its cheap, simple and you dont have to do any rebalancing. Returns provide more than 4% income and if you reinvest the residual, you would have beaten inflation from 1970-today. You invest and cash the checks.

For folks that dont understand how to dig into the guts of a variety of funds, piece together their own composite index and then balance/manage it going forward, I guess it might be a LITTLE fascinating

As far as Hogwilds efforts go, my original post on the fund said that my analysis that produced the "no 5 year period since inception below 8%" had been done several years ago, hence the period from 2000-2005 wasnt one that I looked at.

Fairly understandable for a fund with 65% of its holdings in intermediate bonds to not do so well given what was done with interest rates in that period.

It still paid the 4% SWR and gave some capital appreciation. If you look at the full history of the fund since inception, you'll also see that periods where the fund had some slow years were usually preceded by and followed with very good periods. This is the first time one of those 'slow' periods went on for 5 years. Long term investors in the fund would still be well rewarded.

Case in point: I'll bet the folks that got 11%+ a year out of the fund from 1995-2000 didnt feel totally unhappy with the measly 6.5% they got for the next 5 years while the S&P 500 produced no meaningful net gain, as the minimalist "d" points out above. What? You couldnt afford to spring for the upper case "D"?

Oh yeah, and they completely missed that gut wrenching drop and rebound of most of the equity markets. They did have to contend with two 4% annual losses in the entire 15 year period quoted above, which must have been extremely painful!

I do agree that holding more equities is a good idea for people with less concern about volatility risk, but in looking at wellesleys numbers I frankly cant explain why. I keep wanting to buy back into it again. Aside from missing some long term upside of holding higher equities and some tax implication of taking most of your income as unqualified dividends...

I think for a retiree, early or otherwise, who doesnt like volatility and wants simple and cheap, its perfectly fine for one stop shopping. I think for people considering annuities or other income contraptions, it'd be a grave mistake to not take a hard look at buying this fund instead.

 

[Alan]

I think for a retiree, early or otherwise, who doesnt like volatility and wants simple and cheap, its perfectly fine for one stop shopping.  I think for people considering annuities or other income contraptions, it'd be a grave mistake to not take a hard look at buying this fund instead.

I agree and have owned Wellesley for a number of years.  I'm glad you pointed out that it is actually a target of 35% stocks, not 40, so if you really want a 60/40 mix then you need to add some other stock funds, and choosing international and/or small and mid caps would increase diversity.  (Just used the Portfolio Analysis tool on my Wellesley holdings and it is 35/65 )

 

[wabmester]

The OP said preservation of capital is important, and they are looking at a 5-10 year horizon before retirement.

So far, everybody who loves Wellesley is basing their love on past behavior.   Yes, it's true -- in a 20-year-long dropping interest rate environment coupled with a 20-year-long stock market bull run, a 60/40 (or 65/35) mix of bonds/stock can't go wrong.    The bond allocation saved the fund in the last bear market.

Any guesses as to what the fund would do in a rising interest rate environment coupled with a secular bear market?

Hint: it won't preserve capital.

If they are OK with a mix of large-cap value and bonds, Wellesley is a fine pick.    The fund is not magic.   The historical returns of the fund are meaningless.

If they want to ensure that their capital is preserved over the next 5 or 10 years, I would go with a smaller allocation of stocks and either buy TIPS that mature when they retire or buy a fund like Vanguard's Target 2015, which seems like a better fit than Wellesley for their situation, but might just as easily drop in value over the next 5-10 years.

 

[unclemick]

Wab's got some good points.

Wellesley - duration 5.2 on the bonds, 2.4 price to book on the stock side. So things could get chewy in a 'stagflation' or rising interest scenario going forward.

I still would be happy to buy it - provided it fit my needs(like da current dividend heh heh) and with full knowledge of 5.2 duration  in a rising rate envoronment and that 2.4 P/B might erode to to a lower number over 5-10 yrs.

Target Retirement 2015 came closer for me - and I'm lazy - they shift the asset balance as I get older.

I had an experience with my Depression era Mom - put her in a high yield Fidelity fund circa 1989 for current income - she panicked and sold due to NAV/price fluctuation - even though I was under the illusion that I had thoroughly explained bond price movements. Silly me. It of course went on to become their best performing fund the year after she sold it.

The why you own is as important as what you own.

heh heh heh

 

[Alan]

I agree with the comments of the last 2 posts which is why Wellesly only holds about 25% of my assets (it's where I put the proceeds of my house sale late in in 2002). In my limited experience of the fund I have had 2 years of 11 and 12.5% ROI, then 2005 was 3.65 and 2006 is heading towards 2.25 - 2.5% although only 6 months so far. (I reinvest the divends). I think the US stock market is down a little for the year so I would expect that a real bear market PLUS rising interest rates would see a loss in this particular fund.

Also, I am still in an accumulation phase so no experience of returns while making withdrawals.

 

[2B]

I avoid "balanced" funds. I'd recommend buying a conservative equity income type fund and then buying CDs or laddered bonds individually.

 

[Dawg52]

I avoid "balanced" funds. I'd recommend buying a conservative equity income type fund and then buying CDs or laddered bonds individually.

What fund do you recommend for your conservative equity income allocation?

 

[cute fuzzy bunny]

The OP said preservation of capital is important, and they are looking at a 5-10 year horizon before retirement.

So far, everybody who loves Wellesley is basing their love on past behavior. Yes, it's true -- in a 20-year-long dropping interest rate environment coupled with a 20-year-long stock market bull run, a 60/40 (or 65/35) mix of bonds/stock can't go wrong. The bond allocation saved the fund in the last bear market.

Any guesses as to what the fund would do in a rising interest rate environment coupled with a secular bear market?

Hint: it won't preserve capital.

If they are OK with a mix of large-cap value and bonds, Wellesley is a fine pick. The fund is not magic. The historical returns of the fund are meaningless.

If they want to ensure that their capital is preserved over the next 5 or 10 years, I would go with a smaller allocation of stocks and either buy TIPS that mature when they retire or buy a fund like Vanguard's Target 2015, which seems like a better fit than Wellesley for their situation, but might just as easily drop in value over the next 5-10 years.

So if we throw historic data out then what do you go by? Crystal ball? This isnt like we're looking at 5 or 10 years worth of data. Aside from the depression and stagflation, the last 35 years have had a little bit of everything.

Presume a worst case market scenario, i'm not sure that anything the average investor buys would do well.

35% dividend paying large cap value in wellesley is more dangerous than 50% Total Stock Market in the 2015 fund in a secular bear?

Looking at the OP's request, he's got aging conservative parents that want capital preservation and growth, but they also dont have a huge portfolio. I'd be concerned that a primarily TIPS portfolio wouldnt throw off enough cash for them to live on and might not hold up for a (hopefully) lengthy retirement.

There is certainly nothing "magical" about the fund...it couples a high return, high dividend, somewhat volatile sector (LCV) with a big ballast of good quality intermediate bonds that are at the low end of intermediate. You get decent dividends and qualified dividends from the stocks and the bonds dampen the stocks volatility. No magic.

But its cheap, its simple, its easy to understand, and its sellable to the less investment/financially adept. There are few scenarios where it would blow up in their faces when other reasonable picks wouldnt. I would imagine every single target retirement and lifestrategy fund would suck to own in a rising interest rate environment coupled with a long term bear market.

Certainly a case can be made for something like target retirement income or 2005. I dont think I'd go to 2015 or a TIPS heavy portfolio unless they had a little more appetite for risk for the 2015 fund or a big porfolio like you do for the TIPS heavy port.

Now if you throw out the OP's post and just make this a thread about general investing, maybe some different answers.

Those were already pretty well thrashed out here
http://early-retirement.org/forums/index.php?topic=2317.0 and here
http://early-retirement.org/forums/index.php?topic=1387.0 and here
http://early-retirement.org/forums/index.php?topic=5058.0

 

[wabmester]

35% dividend paying large cap value in wellesley is more dangerous than 50% Total Stock Market in the 2015 fund in a secular bear?

LCV doesn't behave much differently than LC, except that value stocks tend to get hit harder in economic downturns. Doesn't the percentage of stock go down each year in the 2015 fund? And stays the same in Wellesley?

Yes, things are different this time. The biggest test for Wellesley probably came in the late 70's when bonds were wiped out and stocks were pretty flat. I'm sure it helped that stocks back then paid nearly twice the dividends they do today. If we had the same environment today, it would be uglier from a returns perspective.

 

[cute fuzzy bunny]

The "new" target retirement fund strategy unwinds the stock component a lot more slowly than the "old" strategy did. It'd be 10-15 years before the 2015 fund would drop down to or below 35%.

By your point, that fund would do much worse in an environment like the late 70's. Lots of longer bonds in the TBM, more stocks, and lower stock dividends from TSM than from LCV.

Got some data showing that LCV doesnt behave much different from LC over the long haul? Everything I'm looking at shows higher dividends from LCV and higher overall returns. What am I missing? Last stuff I looked at showed that higher interest rates are far more harmful to growth/blend than to value, which again to your point would make value a better choice.

 

[unclemick]

Good debate - lets wag the dog - since I own/have owned both.

For the parent's income stream in retirement - me being old school(Norwegian widow) and all:

Wellesley - current yield 4.6% or so. Target 2015 - 2.8%

Make some assumptions about span time. I think the break point centers around whether and when they want to take out more than the current yield. Do we know that?

Man - I could go either way on this one - given my current yield bias. I have RMD looming closer sooooo - it colors my vision.

heh heh heh - got's to think more on this one.

 

[d]

he's got aging conservative parents

watch it! they are obviously younger than i, and i'm not over the hill!!  bet you're aging too (even Gabe is aging).

 

[wabmester]

Got some data showing that LCV doesnt behave much different from LC over the long haul?

Are we talking about long-term or over the next 10 years?   In the long-term, historically you would have gotten some small value premium.   Will that premium persist going forward now that the value premium cat is out of the bag?   Got me.

In the short-term, value is more sensitive to the economy.    The theory is that a stock becomes a "value" when it is having a hard time and is burdened with debt.   If the economy tanks, the stocks that were hurting get hurt even more and some of them die.    If the economy does well, they can be "rescued" and that's when you get paid your value premium.

As I said before, the 2015 fund is just as likely to lose value in the short-term, but it seems to have more diverse holdings and it is designed to reduce risk as you age, which seems like a better fit for the OP's criteria.

 

[cute fuzzy bunny]

Still would like to see the data you're looking at. The stuff I'm looking at shows more than a 'small' premium. Term doesnt seem relevant given a probably 30-40 year investment period and we dont know what the next 30-40 years will bring. I dont see any lessening of the 'value premium' given that the LCG indexes at vanguard are whomping the LCB and LCG indexes in YTD, one year and five year returns.

The 2015 fund starts off with substantially higher equity exposure than wellesley and doesnt get down to the same exposure level for 15+ years. So i'm not seeing the fit with the OP's concern about volatility and risk of loss. Maybe I'm just reading things differently from you.

Given the set of criteria as I read them, a choice between wellesley and 2015 is hands down wellesley. Wellesley or target retirement income or 2005, maybe my answer is to buy both or all three in even amounts and see what happens.

Different question, perhaps a different answer.

 

[wabmester]

I dont see any lessening of the 'value premium'  given that the LCV indexes at vanguard are whomping the LCB and LCG indexes in YTD, one year and five year returns.

(I took the liberty to correct your first LCG to LCV.)

That's exactly why I think the value premium may not persist.    The recent outperformance of value relative to non-value is historically unprecedented.   And it corresponds with the popularization of the value premium.   Basically, I think it'll revert to the mean, which should make it go away (or worse) in the coming decade.   But I could be wrong.

I personally own a chunk of LCV.   I also own a large chunk of bonds (a mix of short-term nominal and longer-term TIPS).   I don't think it's a bad long-term mix, but I think we're trying to answer several different questions here:

1) What's the best way to preserve principal for somebody who plans to retire in the next 10 years, without knowing anything else about their expenses, etc?    I'd say TIPS.

2) What's a good simple low-cost fund for a conservative investor over the long-term?   I'd say Wellesley's not a bad pick.

3) What's a good simple low-cost fund for somebody planning to retire in the next 10 years at the traditional retirement age?   Target 2015 looks like a reasonable pick.

4) What's not quite as simple, but might better preserve spending power over the next 20-30 years?   I'd say TIPS and a smaller initial allocation of stocks than either of the above funds, with prudent market timing rebalancing.

 

[2B]

What fund do you recommend for your conservative equity income allocation?

DOG51,

Fidelity or Vanguard Equity Income Fund -- They are both Large/Value stock funds about the same holdings as either Wellington or Wellesley. I'm just trying to avoid exposing the fixed income portion to interesest rate changes. If they buy a $10,000 CD that matures in 5 years they will get their $10,000 back in 5 years. They'll get their interest too. A bond fund could be worth more or less. They'd be happy it were more but getting less wouldn't be very good for preservation of capital.

 

[cute fuzzy bunny]

Yeah, i'm not a huge bond fan right now either with cd's paying as well as they are and MM's right behind them.

Wab, I'd agree with everything you said if it werent for the 'assets not so large' piece of the original puzzle. When you're sitting on $3-5M+ tips @2.5% sound great. When you're sitting on less than that, committing a big piece to a low/zero equity, low rate+low cpi bond holding just sounds like playing to not lose too badly too quickly, but to lose nonetheless.

Not to mention they'd have to deal with the tax implications of holding TIPS and paying taxes on the inflation adjustment every year on top of still being employed, without seeing any of that inflation adjustment income until they sell the bonds. Thats swell for a rich ER...maybe not so good for someone trying to 'keep it simple' and wind up their career.

I also just cant square 2015's holdings of 61% in equities when the OP was concerned that a sub 40% equity holding was too aggressive for a couple who are risk averse and trying to avoid losses.

But we're now recycling the same discussion without any probability of meeting minds. Without further input from soup we're just guessing. I'm guessing that the other three threads I referenced can answer any and all questions about the fund choices, if this dialog didnt already.

 

[Dawg52]

DOG51,

Fidelity or Vanguard Equity Income Fund -- They are both Large/Value stock funds about the same holdings as either Wellington or Wellesley. I'm just trying to avoid exposing the fixed income portion to interesest rate changes. If they buy a $10,000 CD that matures in 5 years they will get their $10,000 back in 5 years. They'll get their interest too. A bond fund could be worth more or less. They'd be happy it were more but getting less wouldn't be very good for preservation of capital.

I like your thinking on laddering cd's. I plan to do that. On the equity side, how about DVY? I believe it is yielding arounding 3.7%.

 

[2B]

I like your thinking on laddering cd's. I plan to do that. On the equity side, how about DVY? I believe it is yielding arounding 3.7%. 

You're getting the CDs/bonds for income and stability. I didn't look at it's holdings but if it's really the high dividend paying Dow stocks this would be a very narrow selection of stocks. I'd avoid it as being not deversified enough.

 

[Dawg52]

You're getting the CDs/bonds for income and stability.  I didn't look at it's holdings but if it's really the high dividend paying Dow stocks this would be a very narrow selection of stocks.  I'd avoid it as being not deversified enough.

I didn't mean that would be my only fund for stocks. When I roll my 401k into my IRA later next year, I plan for that to be made up of mostly stocks. I won't touch that until I'm 70(18 years) and plan to put it a target fund that is plenty diversified. I was talking about using my taxable account for the cd's and a fund like DVY for additional income and with growth potential. My overall mix would be about 40/60. Fairly conservative but should do the job.

As Unclemick would say, more than one way to skin a cat.

 

[soupcxan]

Hmm, so maybe I should mix Wellesley with one of Vanguard's Target Retirement funds (2015 VTXVX?) to get some international exposure + a little bit of TIPS. However, is there too much overlap between VTXVX's holding in the total stk mkt index and the equities that Wellesly holds? Would there be another fund that would make a better partner for Wellesly to help provide a little more growth without too much risk, perhaps Vanguard's STAR fund (VGSTX)? It would be ideal if I can generate a sensible portfolio with only two or three Vanguard funds.

The key things here are:

- simplicity, the fewer funds the better
- the portfolio doesn't blow up

It would be nice to slice and dice with individual mutual funds for each asset class but knowing my parents, if one of them has a bad couple of quarters, they will want to sell it, despite my exhortations about asset allocation plans and long-term performance blah blah blah.

I have been telling them that 4% is what they can expect to annually withdraw from their porfolios, however I have not done a thorough review of their estimated expenses in retirement yet. Neither of them has enough money to retire in the next few years so all I can do is enourage them to save and keep away the vultures (unscrupulous financial advisors and annuity salesmen...they've already been hit by one of each).

A CD ladder is a non-starter for them because they don't have the desire to follow it to make sure the money is reinvested, and I don't have the time to do it on their behalf. They need a hands-off strategy that can be adjusted once a year and otherwise forgotten about.

The fun of being an only child.