Wellesley

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Desert
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Wellesley

Post by Desert » Fri Jun 08, 2018 10:49 am

I hope this is worth a new topic ... I think it will be. With more time on my hands, and all investments finally under my own control (no company 401k's, etc.), I have taken another look at portfolio options. I'm very impressed with the GB; in particular, the 40% equities and 20% gold looks like a sweet spot for an ER portfolio.

Also, for years, I've looked at the Wellesley fund from a distance. It has performed very well since its inception in 1970 (a very bad time to start a fund!). When I backtest, I give a bit extra mental weight to the fact that this fund actually existed in 1970, and real people actually invested in it back then. In other words, it's not a theoretical allocation like my own current mix. However, when I look at a hypothetical mix of 80% Wellesley along with 20% gold, the performance would have been exceptional. It's almost indistinguishable from the performance of the GB, including real return and sustainable withdrawal rate. So it does invite comparison with that excellent portfolio choice.

I see the benefits of the Wellesley + gold as simplicity and track record. In my case, I could go with a single fund in my investment accounts, along with a slice of gold, likely split half between physical and ETF. The benefits of the GB are numerous, including treasury holdings rather than corporate bonds, along with greater equity diversification. Also, the GB does depend on the persistence of the SV premium, while Wellesley depends on the persistence of the LV premium.

I welcome any thoughts on this. I haven't made any decision yet, and am sitting now with about 35% of relatively high risk equity, 10% gold, and the remainder fixed income.
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Tyler
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Re: Wellesley

Post by Tyler » Fri Jun 08, 2018 12:13 pm

Thanks for starting this topic, Desert. Believe it or not, after researching simple investing options for my in-laws I was considering launching the same discussion for the exact same portfolio idea. I know VWIAX has historically been somewhat popular here, so I think many people will find the idea valuable.

Here are a few charts for reference (and you can compare them to other portfolios here: https://portfoliocharts.com/portfolios/):

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Long story short -- you're exactly right that the 80/20 Wellesley/Gold portfolio has historically been very competitive with the Golden Butterfly. The returns were about half a percent lower on average, but the overall performance was equally consistent with similarly manageable drawdowns. IMHO, anyone interested in a very simple high-quality and hands-off asset allocation would do just fine putting their money in VWIAX and buying some gold on the side.
PortfolioCharts.com : a picture is worth a thousand calculations
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Desert
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Re: Wellesley

Post by Desert » Fri Jun 08, 2018 3:05 pm

Wow, thanks Tyler! I really appreciate all the data. Do you have Wellesley data available on your site now?

For some reason, I'm not seeing the 0.5% difference in CAGR when I use the latest Bogle backtesting spreadsheet. From 1970 through 2017, I see the following real CAGR and Sustainable Withdrawal for the two portfolios:
1. GB: 5.56%, 5.59%
2. W+G: 5.67%, 5.71%

I wonder if I have GB formulated the same way you do. I have GB setup as 20% in Gold, TSM, SCV, LTT, and T bills. Is that how you have it modeled?

In any case, they're very similar. But I want to make sure I'm using the correct numbers. Thanks again.
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Re: Wellesley

Post by Tyler » Fri Jun 08, 2018 3:33 pm

I use short term treasuries instead of Tbills for the GB. I imagine that makes up part of the difference, although you should note that the Simba spreadsheet will never perfectly match my numbers as we use different data sources these days.

No Wellesley on Portfolio Charts at the moment, but I have plenty of my own tools to play with. ;) Let me know if you have a specific request and I'll see what I can do.
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Dieter
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Re: Wellesley

Post by Dieter » Fri Jun 08, 2018 5:25 pm

Although to make it more fair, shouldn't at least some cash (5%?) be included in Wellesley+Gold? Can't imagine being retired without some cash.

I do own some Wellesley - good for what it is. I'd be worried going all in on LCV and. Corporage bonds. I'd also look at Global Wellesley -- Intl as well as US value stocks.

[Edit for multiple typos]
Last edited by Dieter on Sat Jun 09, 2018 11:43 am, edited 1 time in total.
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Desert
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Re: Wellesley

Post by Desert » Sat Jun 09, 2018 7:32 am

Tyler wrote:
Fri Jun 08, 2018 3:33 pm
I use short term treasuries instead of Tbills for the GB. I imagine that makes up part of the difference, although you should note that the Simba spreadsheet will never perfectly match my numbers as we use different data sources these days.

No Wellesley on Portfolio Charts at the moment, but I have plenty of my own tools to play with. ;) Let me know if you have a specific request and I'll see what I can do.
Your site is looking great, by the way.

I re-ran with STT, and the updated CAGR's are:
1. GB: 5.83%
2. W+G: 5.67%

I didn't realize you were using different data sources than the Simba sheet, but I can see how it would be impractical to maintain a match between the two sites as the years and iterations go by. For my own thoughts on this comparison, I'll think of the two portfolios as roughly equal, in terms of past returns. I still haven't decided whether to take any action yet. Both look pretty similar to my current portfolio, depending greatly on the year I start the comparison.


Dieter, regarding cash, I think it's equally easy to convert Wellesley or an STT fund into cash. Once I started treating my portfolio as a whole, rather than thinking about it in slices for different uses, I found that cash holdings are not important for me. I don't have anything against cash, and I understand and appreciate the role it plays in the barbell treasury holding in the PP, I just don't require it as a significant holding in my own situation.
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I Shrugged
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Re: Wellesley

Post by I Shrugged » Sat Jun 09, 2018 8:49 am

Does tax efficiency matter to the investors in question? If so, is Wellesley tax efficient, or not as efficient as a pair of index funds?
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Re: Wellesley

Post by Desert » Sat Jun 09, 2018 9:26 am

I Shrugged wrote:
Sat Jun 09, 2018 8:49 am
Does tax efficiency matter to the investors in question? If so, is Wellesley tax efficient, or not as efficient as a pair of index funds?
Good point, Wellesley is not tax efficient. For me that's not important, but for many investors, the separable allocations in something like the GB could likely be placed to deliver better tax efficiency.
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Re: Wellesley

Post by sophie » Sat Jun 09, 2018 9:57 am

I remember Medium Tex proposing something very similar back in the epic Bogleheads thread. I don't exactly remember how much gold he was talking about - maybe 10%, but I think that was based more on the idea that people who are looking for simple might be skittish about holding more gold than that.

I had the same reservations as Dieter though: With the GB (or PP for that matter), your cash savings counts as part of the cash allocation, and it's there to fund your living expenses during a drawdown. With a non-cash portfolio, you will still end up holding some cash, because nobody likes bouncing checks or selling investments at a loss. Not counting that cash as part of the allocation artificially inflates the expected returns.
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Re: Wellesley

Post by Desert » Sat Jun 09, 2018 11:23 am

Cash allocations that are used for regular expenses are an interesting topic we could probably discuss for several pages. Here is one example that I think will illustrate how I think about cash:

Scenario: $1 million portfolio, retired, living on 4% withdrawals ($40,000 per year). 2 withdrawals are made each year, at 2% each. The average cash holding over the entire year is less that 2%, but let's assume 2%. If we backtest the Wellesley + Gold, but including 2% cash, the real CAGR is reduced from 5.67 to 5.58 percent.

For small portfolios, where the monthly cash flows constitute a major portion of the cash allocation in the GB or PP, the allocation will be fluctuating significantly. I'm not sure how to backtest that type of scenario.

My conclusion: If cash flows are a significant portion of the portfolio allocation, then one is not holding the theoretical allocation, and shouldn't expect the return/drawdown behavior of that portfolio. If cash flows are a small percentage of the intended allocation, then the relatively small cash holdings required for daily life have a negligible effect on returns.

Obviously this all goes against HBPP orthodoxy, which is why I put this discussion in the VP section.
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Re: Wellesley

Post by sophie » Sat Jun 09, 2018 5:41 pm

We've had discussions on this in the past and definitely it's time for another one!

Starting with your example: Let's assume that you're just starting retirement, and your portfolio is exactly 25x annual expenses, i.e. expenses are 4% of the portfolio size. So your 2% assumes that you keep no more than 6 months expenses in cash. That seems a bit thin and I personally wouldn't be comfortable with that. This cash is not just for routine expenses, it's also for things like financing a new roof or an unforeseeable medical incident, and also to ride out market corrections. Most people probably head into retirement with at least 1 year in cash (4%), and many financial advisor/gurus recommend 5 years (20%). Notice that at the 5 year level, you are talking quite a significant slice of the portfolio.

Maybe it's mathematically better to stay invested at all times and sell as needed, but I kinda doubt it. I ran some simulations once, and there are definitely CAGR penalties for selling too often, or during a downturn. There's also the sleep at night factor. Skimping on cash works better if your portfolio is significantly more than 25x expenses, but if you're right at that 4% edge, I don't think you can afford it.
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Re: Wellesley

Post by ochotona » Sat Jun 09, 2018 6:22 pm

Wellesley really looks like it uses some kind of trend-following risk management. The ascent over the decades is so clean, the drawdowns shallower than a 60/40. I'll wager there is effectively 1/4 - 1/2 trend-following in the investment policy, even if that terminology isn't used. These practices have been known for a long time.
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