Wellesley

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Desert
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Re: Wellesley

Post by Desert » Sun Jun 10, 2018 7:51 am

sophie wrote:
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.
For any portfolio that's expected to increase over time, it's better to stay invested. That's why dollar-cost averaging a lump sum (a bonus, for example) into a portfolio rather than investing it all immediately is not a good decision. There are definitely not CAGR penalties for investing early and often or selling late and often. In hindsight, one can figure out the best days to buy and sell, but it's impossible to do so in advance. It's another example of market timing not being possible. I'll say it again: if one expects a portfolio to rise over time (and we all do, or we would not invest in it), it's mathematically optimum to keep dollars invested in said portfolio for the maximum time possible.

Regarding the roof-replacement example, the solution is simple: Withdraw the funds from the portfolio. This is one of the main purposes of low volatility portfolios, to support withdrawals with minimum sequence-of-return risk. Why would I unbalance my portfolio by taking my roof funds from one of the four asset classes? Does a roof replacement justify increasing one's average bond duration by withdrawing solely from cash? I'd simply withdraw the funds from the portfolio. I would probably use the withdrawal to balance the portfolio, drawing from the highest allocation. This is simply the inverse of buying the lagging asset when in accumulation mode. If the portfolio was already perfectly balanced, I'd sell equal amounts of each asset. And of course this is where a single fund or two-fund portfolio makes things even simpler.

I think a lot of this discussion stems from essential differences in how we view portfolios. For example, I see a lot of discussion on this board (not by you, Sophie), agonizing over the performance of one of the asset classes. If we all could step back and view our portfolios as a whole, much of this anxiety could be avoided. Also, while we might be able to mentally separate our 401k portfolios from our taxable portfolios, etc., our wealth doesn't care. It's going to grow/fluctuate based on our overall asset allocation. My goal has always been to stay as close to my target allocation across a variety of accounts. And I hope to continue that in the future years, especially if I'm in withdrawal mode.

In summary, I find large cash allocations unnecessary, and counterproductive, unless they are part of a portfolio structure.
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Desert
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Re: Wellesley

Post by Desert » Sun Jun 10, 2018 7:54 am

ochotona wrote:
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.
That's an interesting comment. I confess I don't know enough about trend-following to spot the signs of such behavior in a fund.

It has had an unusually stable performance over time. This fund is about 35/65 though, so we'd expect it to be more stable than a 60/40. Also, the focus on large value may have produced more stable behavior (and higher returns) than a cap-weighted index like TSM in a typical 60/40.
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Re: Wellesley

Post by pugchief » Sun Jun 10, 2018 8:33 am

Desert wrote:
Sun Jun 10, 2018 7:51 am
In summary, I find large cash allocations unnecessary, and counterproductive, unless they are part of a portfolio structure.
While I would tend to agree, it is nice to have a big slug of cash available if one of the other assets crashes to pick up a bunch on the cheap.
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Re: Wellesley

Post by sophie » Sun Jun 10, 2018 9:17 am

It depends how often you have to sell assets during a drawdown. The math gets really nasty when that happens:

Starting portfolio = $100,000; let's say there's an immediate 20% drawdown so it's now worth $80,000.
You now withdraw $5,000 --> portfolio now stands at $75,000.
In order for the portfolio to recover back to $100,000, it now needs to grow 34%. If it grows 20% (the amount of the drawdown), it will only recover to $90,000.
If you didn't make that withdrawal, the portfolio would have to grow 25% to recover its initial value. So that 5% withdrawal cost you a difference of 9% in portfolio growth - almost double the amount of your withdrawal. The numbers would be more extreme with larger drawdowns, of course.

Anyway just my POV here...the numbers in backtests may still work out in favor of not holding cash, but I think that's entirely dependent on frequency/severity of market corrections. Those long stretches where the stock market kept going up and up make a big difference, and you'd have to bank on that continuing to happen in the future.

Incidentally - totally agree about the need to view any portfolio as a whole entity, instead of focusing on the one asset that's in the doghouse.
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Desert
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Re: Wellesley

Post by Desert » Sun Jun 10, 2018 9:32 am

I totally agree with that painful drawdown/withdrawal math, Sophie. By the way, it's a VERY strange experience to be withdrawing from accounts, for the first time in my life. I'm a very long-time saver; I remember hoarding quarters when I was about 5 years old. Even my own grandparents thought I was weird. :) So now to actually be spending savings, it is a very odd feeling. Also, I fully expect a painful downturn any day now. This equity bull market is the longest in my lifetime, and can't go on forever.

So, we can discuss cash again, during the coming downturn! :)

Thanks for your thoughts on this. I do appreciate your thoughts on cash holdings. Even if we don't agree 100%, it helps me to at least fully examine my own decisions on the matter.
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Re: Wellesley

Post by sophie » Sun Jun 10, 2018 10:25 am

Thanks Desert!

Let's hope that the bull market continues long enough to build up your portfolio for an extra safety margin. And then the crash will come just as I'm getting ready to retire, of course ;D

Your posts make me think about strategies too. Like, I have an idea that if my portfolio grows larger than is needed to finance expenses, I can put the extra into 100% stocks and enjoy both the dividends and the long-term (15 year+) growth.
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Re: Wellesley

Post by hardlawjockey » Sun Jun 10, 2018 12:58 pm

I remember a heated debate between Wellesley and the PP on another forum but I don't think it was Bogleheads. I do remember that somebody named Medium Tex was the main PP protagonist however.

I went all in with Wellessly for a while because the PP seemed a bit too exotic for my tastes at the time but after I read Harry Browne's book I became convinced that the PP was a better strategy for covering all the bases. And if I remember correctly, he was not a fan of corporate bonds at all which I understand is what makes up most, if not all, of Welleslly's bond allocation.
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Re: Wellesley

Post by Alanw » Sun Jun 10, 2018 1:07 pm

Have not posted for sometime but wanted to comment on Wellesley, HBPP and withdrawal rates. We finally discovered HBPP in 2009 and implemented in early 2011 with a chunk of Wellesley in VP. Currently have about 60% in HBPP with 30% in Wellesley with 10% in misc. old accounts and extra cash. I have been retired for 10 years and GF for 6 years. We do not have a set withdrawal rate for our portfolio but take money out as needed. For example, we withdrew 6-7% in several major travel years and 4-5% when not travelling as much. Our portfolios are now at the same amount as when we started. I know we are losing money to inflation but our reasoning is to spend more now when we are able and not as much when we can't. We also both draw SS in a fair amount. Time will tell how this will all turn out, but for now, if we can keep out portfolio balances stable, we should be okay.
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Re: Wellesley

Post by barrett » Sun Jun 10, 2018 8:08 pm

So it looks like Wellesley is currently at 36.5% is stocks, 63.1% in bonds and .4% in cash.

Desert, if you go your proposed 80/20 route, you'd be about 51% in bonds, 29% in stocks and 20% in gold. If I remember your percentages correctly (60/30/10, right?) you'd essentially be ditching 1/6th of your bonds and doubling the gold portion. Has something basic changed in your view regarding gold? Just curious.
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Re: Wellesley

Post by Desert » Mon Jun 11, 2018 8:57 am

sophie wrote:
Sun Jun 10, 2018 10:25 am
Thanks Desert!

Let's hope that the bull market continues long enough to build up your portfolio for an extra safety margin. And then the crash will come just as I'm getting ready to retire, of course ;D

Your posts make me think about strategies too. Like, I have an idea that if my portfolio grows larger than is needed to finance expenses, I can put the extra into 100% stocks and enjoy both the dividends and the long-term (15 year+) growth.
I like that idea! Sort of a "Sophie endowment." :)
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Re: Wellesley

Post by Desert » Mon Jun 11, 2018 9:19 am

barrett wrote:
Sun Jun 10, 2018 8:08 pm
So it looks like Wellesley is currently at 36.5% is stocks, 63.1% in bonds and .4% in cash.

Desert, if you go your proposed 80/20 route, you'd be about 51% in bonds, 29% in stocks and 20% in gold. If I remember your percentages correctly (60/30/10, right?) you'd essentially be ditching 1/6th of your bonds and doubling the gold portion. Has something basic changed in your view regarding gold? Just curious.
Barrett, right now I'm just evaluating each piece of my portfolio, and trying to figure out if I want to make any changes, given my recent departure from the workforce. For this comparison (GB vs. Wellesley+Gold) I decided to look at 20% gold, so I could see how the non-gold assets compare. My default plan is to change nothing about my 60/30/10 mix, but I want to evaluate again and make sure I'm comfortable with each choice. Regarding gold specifically, I will probably stay at 10 percent, due to my view of its performance in the 70's (I don't want to repeat that debate in this thread though).

I still haven't decided anything regarding Wellesley. Obviously that would be a huge departure from my current mix. I'm attracted to it for one reason that's a bit morbid: when I die, and assuming my wife outlives me by a decade or two (she's a bit younger, smaller, saner, and female, all of which predict a longer lifespan), I think a one-fund or two-fund solution would be great. It's not that she couldn't handle the complexity of my current mix, it's just that she wouldn't want to, and would prefer to keep things simple. Now hopefully I'll be around to annoy y'all with inane posts for another few decades, but I've watched a couple acquaintances depart this world early and without warning in recent years, so it's one more factor in the back of my mind. Another alternative would be to simply leave instructions to liquidate everything and buy Wellesley. I'm also thinking of my parents ... I manage their investments, and currently my Mom's account is all in intermediate treasuries (she doesn't want any stock at this point in her life) and my Dad's account is all in Wellesley (he thinks it's too conservative). The total mix is about 50/50, which lands them around 20/80 equity/FI, which isn't unreasonable for their age. I'm also thinking of a plan I'm working on with a local non-profit, working with setting up IRA's for low income folks with zero personal or family experience with investing. If some institution puts them in an 80/20 fund right before an equity crash, they'll never touch investing again. Anyway, there are a few reasons I'm interested in Wellesley beyond my own person investments.
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Re: Wellesley

Post by WhiteElephant » Tue Jun 12, 2018 12:32 am

Good point about the possible need for simplicity when for some reason you cannot do that yourself anymore.
Setting up and maintaining the PP seems very easy to me, but I know most people around me have have zero experience or interest in maintaining such a portfolio.
A one-fund solution like Wellesley would be ideal, although I think any conservative low-cost and passive fund would be a good PP alternative in such a case.
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