Vanguard Wellesley have an ETF?

[mozart522]

What is interesting to me is that Mustang's 50/50 W/W portfolio since 2013 has higher income almost every year if distributions are not reinvested than 100% Wellesley. And 100% Wellington produces more income than 100% Wellesley. I have to believe that this is because PV includes CGs as income and since Wellington has a lot more equity, it will generate a lot more CGs. Since both funds set target prices for their equities and sell when they reach that goal, there always seem to be large CG distributions.

[yogibearbull]

mozart522, I have added 50-50 W&W to my previous post. AS expected, it is in between VWINX and VWELX.

PV income is indeed income + CGs; there is an option to turn its display ON/OFF (default). In most cases, high yearend CGs are undesirable due to their associated tax liabilities; moreover, CGs can vary a lot from various factors (down markets, outflows, manager changes). So, most withdrawal studies assume reinvestment of all distributions and then use a definite pattern for withdrawals - uniform or w/COLA or % of annual balances.

PV footnote, "The annual income is calculated from the difference between monthly total returns and split adjusted monthly price changes and thus includes both dividends and capital gains distributions."

[Norbert]

"There is a lesson in all this - TR is great for accumulators, but the SOR risks are more important for decumulators." - yogibearbull

I think this is a profound observation. Don't recall seeing SOR identified elsewhere as an important risk for retirees to consider.

Of course, some retirees have great pensions and perhaps RE income to supplement investment and SS income. That would allow for a greater risk tolerance.

[liftlock]

Dec 17, 2023 16:30:28 GMT Norbert said:

"There is a lesson in all this - TR is great for accumulators, but the SOR risks are more important for decumulators." - yogibearbull

I think this is a profound observation. Don't recall seeing SOR identified elsewhere as an important risk for retirees to consider.

Of course, some retirees have great pensions and perhaps RE income to supplement investment and SS income. That would allow for a greater risk tolerance.

Sequence of returns risk has been understood by retirement income planning professionals for many years, but the potential impact may not be very well publicized or known to new retirees.

Here is a link to an older Fidelity document which discusses it along with the other major risks faced by retirees.

www.retirementplanblog.com/wp-content/uploads/sites/304/2008/02/structuring-income-for-retirement-fidelity.pdf

The following book provides a more in depth discussion for those who may be interested in reading more.


www.wiley.com/en-us/Pensionize+Your+Nest+Egg%3A+How+to+Use+Product+Allocation+to+Create+a+Gu...

[yogibearbull]

There has been a lot written on the SOR risks, so people know about it and of ad-hoc disasters. Unfortunately, the standard measures of SD, beta, Sharpe Ratios, U/D CR, etc don't capture it.

Of course, historical withdrawal studies of various timeframes (historical, or randomized Monte Carlo trials) capture it but not concisely. But those cannot be run bu ordinary investors.

Only concise measures I know of are SWR, SWRM, PWR. These are withdrawal-based measures and show the SOR risks clearly. They are gaining popularity but are not yet widely known.

This makes sense. The accumulation point-to-point TRs are commutative, so they simply cannot show SOR risks.

[anitya]

SOR = Source of Revenue?

[yogibearbull]

SOR = Sequence of returns.

If one rearranges monthly returns, the TR (as geometric combo) isn't affected. But if there are withdrawals, then that changes the situation completely (the same for additions, but those are more forgiving).

[Mustang]

Look at Norbert's chart. Because of the negative returns during the first few years the 100% stock fund could not catch up with the conservative fund that is only 40% stocks and 60% bonds during a period of time that completely favored stocks.

Here is a good article about SOR: www.forbes.com/advisor/retirement/sequence-of-returns-risk/

[retiredat48]

So, one approach to sequence of return risk has been, for marginal wealth people, have an allocation that favors more bonds/fixed income vs equities during first five to ten years. IF no SOR problem, then increase equity allocation.

I suggest such retirees consider two things. First, to what degree does your stock side have high dividend themes? You get downside protection from the yields.

Second, where is the market historically at its price level? Bad SOR outcomes tend to coincide with retiring at market tops/highs. Such times also means a persons portfolio is at new highs, and perhaps the total value marginally allows for retiring. In that case, do SOR portfolio strategy.

If we just had a stock bear market, or even one down 10-20%, that is a more favorable time to retire, and SOR has already occurred---that is, if your reduced value portfolio still supports retirement.

Let's take today...if you are retiring now.  Magnificent Seven growth stocks have dominated returns in last decade.  They make up a large portion of S&P500.  Other 493 stocks have lagged or are reasonably priced with lower PEs and backed by dividends.  So, minimize S&P500 funds, bias to Value Funds, to reduce SOR risk.

That is, unless you lived in France, like Norbert, where SOR apparently meant "Sorbet in Sorbonne!"

R48

[Norbert]

Dec 18, 2023 19:27:11 GMT retiredat48 said:

So, one approach to sequence of return risk has been, for marginal wealth people, have an allocation that favors more bonds/fixed income vs equities during first five to ten years. IF no SOR problem, then increase equity allocation.

I suggest such retirees consider two things. First, to what degree does your stock side have high dividend themes? You get downside protection from the yields.

Second, where is the market historically at its price level? Bad SOR outcomes tend to coincide with retiring at market tops/highs. Such times also means a persons portfolio is at new highs, and perhaps the total value marginally allows for retiring. In that case, do SOR portfolio strategy.

If we just had a stock bear market, or even one down 10-20%, that is a more favorable time to retire, and SOR has already occurred---that is, if your reduced value portfolio still supports retirement.

Let's take today...if you are retiring now.  Magnificent Seven growth stocks have dominated returns in last decade.  They make up a large portion of S&P500.  Other 493 stocks have lagged or are reasonably priced with lower PEs and backed by dividends.  So, minimize S&P500 funds, bias to Value Funds, to reduce SOR risk.

That is, unless you lived in France, like Norbert, where SOR apparently meant "Sorbet in Sorbonne!"

R48

I replaced VFINX with a dividend-focused fund VDIGX, leaving everything else the same as my earlier test. Unfortunately, things look even worse for an all-stock portfolio vs. Wellesley:



Your second idea is to attempt some form of market timing instead of running with a Wellesley-type bond-heavy asset allocation. Yes, that might work, but it's more easily done with the benefit of hindsight.

The Sequence of Returns issue represents a major risk for retirees truly dependent on portfolio withdrawals, but who elect to run with a stock-heavy portfolio with the aim of obtaining higher returns.

Yes, if portfolio withdrawals are optional thanks to R48's real estate empire's income, no problem with an aggressive stock portfolio.

N.

[retiredat48]

Norbert,...I have posted often the 100% stocks or 100% fixed income portfolios have failures to survive. The sweet spot is wide, between 85/0 and 0/85 to last 30 years on 4% SWR.

Second, I don't see where taking into account where the market is when one retires, is much market timing. You set your allocation. So if retiring in 2020, with stock bear market tthen, go ahead and keep stock allocation that you had going in. With a market hitting new highs (oh, like today) consider adjusting your stock holding themes, or do some SOR risk reduction with a higher bond allocation...or both.

R48

[Norbert]

Dec 18, 2023 21:11:50 GMT retiredat48 said:

Norbert ,...I have posted often the 100% stocks or 100% fixed income portfolios have failures to survive. The sweet spot is wide, between 85/0 and 0/85 to last 30 years on 4% SWR.

Second, I don't see where taking into account where the market is when one retires, is much market timing. You set your allocation. So if retiring in 2020, with stock bear market tthen, go ahead and keep stock allocation that you had going in. With a market hitting new highs (oh, like today) consider adjusting your stock holding themes, or do some SOR risk reduction with a higher bond allocation...or both.

R48

An 80/20 portfolio reduces risk, though I see that Wellesley is still the big winner for the scenario I'm testing. Most of one's capital is lost to inflation, while Wellesley supports both a $40,000 annual withdrawal and capital preservation (with respect to inflation).

(I used VBMFX paired with VDIGX.)



"Taking into account where the market is at" definitely involves making some kind of judgement about the likelihood of future market gains vs. losses. It's market timing. I don't have any problem with that, but I think it's hard to do except with the benefit of hindsight.

Think Dirty Harry: "Do you feel lucky?"

[anitya]

Dec 18, 2023 17:10:48 GMT yogibearbull said:

SOR = Sequence of returns.

If one rearranges monthly returns, the TR (as geometric combo) isn't affected. But if there are withdrawals, then that changes the situation completely (the same for additions, but those are more forgiving).

Sorry, I was not reading this thread.  Even though I try to read all of your posts, I have to skip some threads altogether.  But I think with your answer and Norbert's post where he quoted you, I sort of caught up.

[steadyeddy]

Dec 18, 2023 19:27:11 GMT retiredat48 said:

So, one approach to sequence of return risk has been, for marginal wealth people, have an allocation that favors more bonds/fixed income vs equities during first five to ten years. IF no SOR problem, then increase equity allocation.

I suggest such retirees consider two things. First, to what degree does your stock side have high dividend themes? You get downside protection from the yields.

Second, where is the market historically at its price level? Bad SOR outcomes tend to coincide with retiring at market tops/highs. Such times also means a persons portfolio is at new highs, and perhaps the total value marginally allows for retiring. In that case, do SOR portfolio strategy.

If we just had a stock bear market, or even one down 10-20%, that is a more favorable time to retire, and SOR has already occurred---that is, if your reduced value portfolio still supports retirement.

Let's take today...if you are retiring now.  Magnificent Seven growth stocks have dominated returns in last decade.  They make up a large portion of S&P500.  Other 493 stocks have lagged or are reasonably priced with lower PEs and backed by dividends.  So, minimize S&P500 funds, bias to Value Funds, to reduce SOR risk.

That is, unless you lived in France, like Norbert, where SOR apparently meant "Sorbet in Sorbonne!"

R48

Kitces recommends entering retirement with higher FI allocation and after a few years of experience with retirement then add more equity exposure. Along the lines of what you are saying here. I am getting close to retirement. I have about 30% in Wellington/Wellesley combo and about 25% in PIMCO income fund. The rest is simply sprinklings in a few holdings - with a bunch of cash on the sidelines.

[retiredat48]

Dec 19, 2023 0:41:15 GMT steadyeddy said:

Dec 18, 2023 19:27:11 GMT retiredat48 said:

So, one approach to sequence of return risk has been, for marginal wealth people, have an allocation that favors more bonds/fixed income vs equities during first five to ten years. IF no SOR problem, then increase equity allocation.

I suggest such retirees consider two things. First, to what degree does your stock side have high dividend themes? You get downside protection from the yields.

Second, where is the market historically at its price level? Bad SOR outcomes tend to coincide with retiring at market tops/highs. Such times also means a persons portfolio is at new highs, and perhaps the total value marginally allows for retiring. In that case, do SOR portfolio strategy.

If we just had a stock bear market, or even one down 10-20%, that is a more favorable time to retire, and SOR has already occurred---that is, if your reduced value portfolio still supports retirement.

Let's take today...if you are retiring now.  Magnificent Seven growth stocks have dominated returns in last decade.  They make up a large portion of S&P500.  Other 493 stocks have lagged or are reasonably priced with lower PEs and backed by dividends.  So, minimize S&P500 funds, bias to Value Funds, to reduce SOR risk.

That is, unless you lived in France, like Norbert, where SOR apparently meant "Sorbet in Sorbonne!"

R48

Kitces recommends entering retirement with higher FI allocation and after a few years of experience with retirement then add more equity exposure. Along the lines of what you are saying here. I am getting close to retirement. I have about 30% in Wellington/Wellesley combo and about 25% in PIMCO income fund. The rest is simply sprinklings in a few holdings - with a bunch of cash on the sidelines.

So the final driver is the SIZE of your portfolio.  Such as, are your spending needs BELOW the 4% SWR rate?  Like if you only need 2 or 3% draw, then SOR is not so important.  Example: Some have annual pension, social security, annuities, with the rest coming from their portfolio.  Not unusual to  need less than 4%.  If marginal size,  consider SOR aspects discussed above.  You don't need to answer this personally to me.  Keep it private if you like.

R48

[Norbert]

Looking at this some more, I realize that asset allocation (stocks vs. bonds) is only one aspect of a sustainable withdrawal rate. Fund/securities selection is also critical.

The following 2000-2023 backtest also assumes a $1,000,000 starting portfolio with an inflation-adjusted $40,000 annual withdrawal.

Blue = Wellesley
Red = Wellington
Yellow = 70% Primecap + 30% Vanguard Total Bond index.



In both cases a higher stock allocation does better by 2023 than Wellesley. Why? No indexing! Wellington and Primecap are competently managed, low-fee, team-managed funds that avoided the S&P 500's huge dot-com and subprime crisis declines. All three of these portfolios easily support a $40,000 annual withdrawal while preserving capital.

In this run we see that Wellesley fades near the end. Why? Bond yields collapsed thanks to ZIRP.

To illustrate the power of great fund management, check out the performance of PRWCX (yellow) vs. Wellesley and Wellington:



So, sustainable withdrawal rates are clearly not simply linked to stock vs. bond exposure. Smart investing is also a major driver.

And, R48 is right. We don't need to lock ourselves into a 4% annual withdrawal. Be creative about alternative income and spending "needs". Picking the right fund investment involves a degree of luck, but spending is entirely under our control.

N.

[Mustang]

Dec 19, 2023 6:29:23 GMT Norbert said:

In both cases a higher stock allocation does better by 2023 than Wellesley. Why? No indexing! Wellington and Primecap are competently managed, low-fee, team-managed funds that avoided the S&P 500's huge dot-com and subprime crisis declines. All three of these portfolios easily support a $40,000 annual withdrawal while preserving capital.

I have read in some articles that stock index funds outperform but balanced index funds don't.  There are several balanced funds that consistently outperform balanced index funds.  That includes roll-your-own balanced portfolios using stock and bond index funds.  Both were eliminated as contenders in the Horse Race thread.

Portfolio visualizer doesn't go back far enough to stress test during the worst economic period for retirement funds.  The worst time to retire were the stagflation years.  Starting with $500,000 and using a1968 retirement date Wellington failed to make 30 years. It suffered losses in 1969, 1973 and 1974 (-7.8%, -11.8% and -17.7%)  The fund ran out of money in 24th year.  It couldn't over come the SOR losses coupled with double digit inflation.  An initial $20,000 withdrawal grew ti $81,000 in 1992.

Wellesley didn't exist until 1971 so I changed the start date to 1971 to compare the two funds.  Just avoiding the 1969 loss made Wellington successful with an ending balance of  $1.4M.  Everything else was the same. Only the retirement start date changed.  Wellesley ended the 30 year comparison test with an ending balance of $3.0M (ending balances were not adjusted for inflation).   Changing the start dates to 1990 for both funds,  Wellington ended with $3.8M and Wellesley $2.6M.

Picking well managed fund may have a bit of luck involved but funds that have consistently performed over decades are pretty good bets.  Will they be the best in the short run?  Most likely not.  But, in the long run being good all the time will beat the funds that are sometimes best and sometimes worst.

As others have mentioned spending is the one thing retirees can control.  Withdrawals and spending are two different things.  RMDs are required but a retirees don't  have to spend them. They can reinvest them.

If a stable, income is needed then as Benz and Rickenthaler recommended in their 2021 study start with a lower initial withdrawal.  They suggested 3.3%.  But some people don't have pensions to fill in the gaps and social security might not be enough.  For those needing more income research has shown that we spend 1% less per year in our 60s, 2% less per year in our 70s and 1% less per year in our 80s.  We spend on different stuff , such as health care instead of travel, but overall spending goes down,  Take the 4% and use smaller inflation increases.  Use CPI minus one percentage point.  Wellington failed using the 1968 start date.  Smaller inflation increases allowed it to last 30 years.

Their are ways of controlling spending without destroying quality of life.

[yogibearbull]

Mustang , try Fido Puritan/FPURX (1947- ) that did OK with 1960s starts. Those were bad times but VG Wellington/VWELX had its own unique issues in those times.

[mozart522]

Dec 19, 2023 6:29:23 GMT Norbert said:

Looking at this some more, I realize that asset allocation (stocks vs. bonds) is only one aspect of a sustainable withdrawal rate. Fund/securities selection is also critical.

The following 2000-2023 backtest also assumes a $1,000,000 starting portfolio with an inflation-adjusted $40,000 annual withdrawal.

Blue = Wellesley
Red = Wellington
Yellow = 70% Primecap + 30% Vanguard Total Bond index.

View Attachment

In both cases a higher stock allocation does better by 2023 than Wellesley. Why? No indexing! Wellington and Primecap are competently managed, low-fee, team-managed funds that avoided the S&P 500's huge dot-com and subprime crisis declines. All three of these portfolios easily support a $40,000 annual withdrawal while preserving capital.

In this run we see that Wellesley fades near the end. Why? Bond yields collapsed thanks to ZIRP.

To illustrate the power of great fund management, check out the performance of PRWCX (yellow) vs. Wellesley and Wellington:

View Attachment

So, sustainable withdrawal rates are clearly not simply linked to stock vs. bond exposure. Smart investing is also a major driver.

And, R48 is right. We don't need to lock ourselves into a 4% annual withdrawal. Be creative about alternative income and spending "needs". Picking the right fund investment involves a degree of luck, but spending is entirely under our control.

N.

So someone retiring in 2000 at 65 and passing at 86 would have been just as well of with 100% Wellesley as with either 100% Wellington or 50/50 W/W.  I have notice in the past that Wellesley catches up to Wellington from time to time.  Of course, we can't know in advance when this might happen.

[Mustang]

Dec 19, 2023 14:41:07 GMT yogibearbull said:

Mustang , try Fido Puritan/FPURX (1947- ) that did OK with 1960s starts. Those were bad times but VG Wellington/VWELX had its own unique issues in those times.

I've owned FPURX before.  It is a good fund.  Here is a comparison to some of the moderate-allocation funds we've been stress testing without withdrawals.  www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=o5GjHvOdauPbH02aPhmFX

Balanced Index funds are out.  I don't recommend anyone use them.

Adding Wellesley back in without withdrawals we find it lags behind a little at the end, more starting in 2020.  www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=74YjQhpnGLVnuO1NZx4N3e

But that is not its purpose in a portfolio.  It's a rainy day fund providing stability in the decumulation (withdrawal) phase. www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5bPhUisZE9daFEgvpRFH9q

It takes 17 years for Wellington to catch up to Wellesley after a bad sequence-of-returns. 20 years for it to move ahead and Wellington is the best of the three. Wellington (blue), Puritan (red), Fidelity Balanced (yellow) and Wellesley (green).

If a retiree is relying on fixed dollar withdrawals they have to have a rainy day plan.  In the W+W part of my portfolio I'm planing to withdrawal from the fund with the highest previous end of year balance.  Portfolio Visualizer will not do this.  Using spreadsheets I've found that the portfolio rebalances itself every two to three years so no forced rebalancing is required.

For a retiree, portfolio allocations starts with goals.  Goals determine the withdrawal method used.  Asset allocation not only meet those goals but should be the best for that withdrawal method. (a income withdrawal method would require a different asset allocation than the 4% Rule withdrawal method).

P.S.  My goals for this part of my portfolio is 1) stable, reliable income, and 2) simple to use and maintain.

[Mustang]

This is something we've not paid much attention to: variable or dynamic withdrawal methods. Portfolio Visualizer has only one, the fixed percent method. Wellington (blue), Puritan (red) Fidelity Balanced (yellow) and Balanced Index (Green). The order didn't really change. Index did terrible. But the ending balances did. They are significantly higher.  www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5ZHCYgBvzNR4uSp4kdAJks

Replacing Index with Wellesley: It takes Wellington 14 years to catch up with Wellesley. Fidelity Balanced manages to inch ahead of Wellington at the very end. www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=56Fcwdv7urTFTXuOXY3R3

Variable withdrawal methods are designed to protect the portfolio.  Designed to survive bad SORs.  That is why the ending balances are higher.  The disadvantage of a variable withdrawal method is that less is taken when the portfolio does bad.  A lot less when it does really bad.  Vanguard testing showed that it provided less than desired income almost half the time.  The FIRE (Financial Independence Retire Early) articles showed significantly less.  Ending balances are a lot higher but its hard to live on 50% of planned income. (RMDs are a type of variable withdrawals.)  earlyretirementnow.com/safe-withdrawal-rate-series/

The less the retiree takes out the higher the ending balance.