Vanguard Asset Allocation Fund

[WilliamG]

I am settled into a modified slice and dice equity allocation; however, I have held onto Total Stock Market as my "large blend" fund. I am seriously thinking of switching to Vanguard's Asset Allocation fund. I know Chuck-Lyn considered this, but I can't find the conversation. I believe I saw where he is now in Vanguard's large cap fund which uses the MSCI prime 750 index.

Any thoughts on this fund as a large cap blend surrogate?... thanks, bill

 

[unclemick]

Chasing alpha. Time before last I looked - they were 100% stocks. I just looked - now 90%. I believe - they use some kind of quant model.

Buried in my Lifestrategy is 25% Asset Allocation Fund.

The positive alpha of Lifestrategy mod vs say Vanguard Balanced Index is debatible as to whether 'you' think it's worth going after.

Go to Vanguard's site and use the compare funds function and then check Yahoo for their alpha number.

? I'm not sure you are buying much. I bought Lifestrategy back when they first came out as a 'lifecycle fund' with a tad international.

 

[charlie]

Hi WilliamG,

Yes, I considered using AA as the large blend
component of my coffeehouse allocation. It
would indeed reduce the volatility of that
corner and might capture most of the gain.

But the coffeehouse creed is to capture ALL
the gain of each component and depend on
overall reduction of your portfolio volatility even
if individual components go crazy. One just
hopes that they do not all commit suicide at the
same time

The smooth climb AA showed during the last
Index 500 bubble was both a blessing and a
curse. You missed the big run up of large blend
and missed most of the crash as well.

I decided on balance to endure the volatility,
but who knows ..... as I grow older I reserve
the right to change my mind .... again.

Cheers,

Charlie

 

[yakers]

I like the AA fund. My RothIRA and my wife's are in it. I have not done the detailed studies some of the finance majors on this site have but I like its lesser volitility than the S&P 500 index and whenever I figured I should be moving in to or out of bonds I checked the AA allocation and they were headed that way already. Right now 90% stocks sounds OK to me. But I do have my work 401k type funds (a Govt TSP, actually) in index funds including 40% in a S&P500 index so having something else looked right to me. When my wife retires from teaching next year I expect to recommend a Vanguard Lifecycle fund to roll over her 403b. But I expect we will both add to our Vanguard RothIRA AA fund any year we can.

 

[ESRBob]

Chasing alpha. Time before last I looked - they were 100% stocks. I just looked - now 90%. I believe - they use some kind of quant model.

.

Unclemick,
Am trying to get my arms around how people are using the term "alpha' these days -- I understand it is the portfolio's deviation from the broad stock market over time, right? So does your post mean they are trying to get an edge over the broad stock market by deviating from the index from time to time?

Also, Is it reasonable to talk about a single stock having alpha or is it only valid to talk about a fund or a whole portfolio?

my fund mgr buddies seem to throw 'alpha' around a lot to mean the cleverness of their model to produce index-beating returns butI've been too embarrassed to ask them for an alpha tutorial -- maybe you can help? thx!

 

[unclemick]

Alpha like my long time use of SEC yield - is likely to be mangled by me - I kinda know what I'm trying to say even though I'm guilty of a goofing up proper definitions.

In the case of Asset Allocation - I'm assuming they are testing themselves against a preselected benchmark.

Yahoo risk is quoting against an index(S&P 500?).

Alpha used loosely to imply improved performance(however you define it) though skill over average (again however you define it) is what I was referring to.

A more precise definition of alpha - I would have to look up - unless someone posts it.

? I don't know about alpha for a single stock - I suppose one could run the math - but why?

 

[Nords]

Alpha may be good... or maybe not.

... but I've been too embarrassed to ask them for an alpha tutorial -- maybe you can help?  thx!

Bob, try Investopedia's definition, and then peruse the article links at the bottom of the page.

 

[unclemick]

Thanks Nords - good link.

 

[brewer12345]

Bob, alpha comes from the CAPM formula. In theory, an equity's expected return under CAPM is equal to:

a + (b * (Rm - Rf)) +Rf + E

Where:

a = alpha

b = beta (as in, the beta of a stock)

Rm = market expected return

Rf = risk free rate (e.g. treasury rate)

E = error

So alpha is the excess return a manager adds by their efforts. An index portfolio has alpha of zero. In the case of most actively managed mutual funds, alpha is low or negative.

 

[eleighj]

Interesting concept, I looked up the Morningstar Risk Measures, specfically the Alpha, for VAAPX, VFINX and FMAGX and got the following numbers compared to the S&P 500:

VAAPX = 2.20
VFINX = -0.11
FMAGX = -1.92

I wonder if the high number has to do with the manager’s stock picking abilities or the fact that they move some of their gains to bonds when the model tells them to do so.

Guess I will just hold on my VAAPX.

eleighj

 

[Sylvie]

Have you looked at the Vanguard Wellesley fund? Low volatility, steady growth, very decent yield which provides a quarterly dividend. I have this fund and like it very much. What has impressed is how well it did during the period which covered the stock market correction of March 2000 and the recovery. I call it my Steady Eddy. It has a very conservative allocation so it lags behind when the stockmarket outperforms. BUT it does not experience those incredible dips. The long term return before taxes!!!!! (over 10 years) is around 11%.

 

[cute fuzzy bunny]

I have a sizeable holding in wellesley as well, for most of the same reasons.

Just note that there have been some terrific times for bonds in recent years that have really bolstered returns, and since wellesley holds about 65% bonds, thats been good for it. Large cap value has also had its day (except for 97-00) and thats contributed.

For a core ER holding though, its a good choice...the high dividends from the stock portion go well with the quality short and intermediate term bonds, and the value stocks volatility is well keeled by the big dollop of bonds. Cant beat the admiral share fund costs of ~.19-.20 with a stick...dang good for a managed fund with a great track record.

 

[unclemick]

TH

I wish you would quit mentioning Wellesley - sold my rather large position in the 90's to go all Lifestrategy - one of few I still miss - sniffle, sniffle.

Hmmm - since I may continue a series of partial Roth conversions the next nine years(taxes willing) - may crack and go back to Wellesley.

 

[cute fuzzy bunny]

I figure whispering "denny crane" into your ear will have little effect.

But "wellesley" always does wonders for you...

 

[unclemick]

TH

? O.k. - I'll bite - who the heck is "denny crane"?

 

[cute fuzzy bunny]

crap...reference too obscure...

http://abc.go.com/primetime/bostonlegal/show.html

William Shatners lawyer character on boston legal. Candace Bergen plays his former love interest and current combative partner in the firm. When she wants to put him off his game, she whispers his name into his ear and he goes weak in the knees.

It would have been amusing if you watched the show...which is pretty dang funny by the way.

 

[WilliamG]

Thanks for the conversation. I have decided to go with the Asset Allocation Fund. Charlie, I hear what you are saying about capturing the full action of each asset class, but right how the less volatility is very appealing. I too reserve the right to change my mind .

For Wellsley fans, I too think this is a great fund and have considered using it in the past. Have decided to keep slice and dice so don't want a balanced fund right now. Was looking for large blend alternative to TSM and came down to Vanguard S&P 500, Large Cap Blend, or Growth and Income as well as the Asset Allocation.

Many of you using slice and dice also speak well of Frank Armstrong's two bucket approach to retirement withdrawals to avoid selling stock in down market. The following thread is the best detail I have seen in the mechanics of such a withdrawal strategy. It includes examples of an annual 4% withdrawal with rebalancing including actually using performance data for 2000-2004 to simulate withdrawing from a $1 million portfolio.

http://www.suite101.com/discussion.cfm/investing/113753/1-10#message_1