It’s always hard to recommend something that will be “the best” for someone else. But today I’ll jump in and take this risk anyway.
If you’re a retiree who’s not especially knowledgeable about investing and you want a simple way to avoid running out of money, I’m not taking much risk by recommending Vanguard’s Wellington VWENX and Wellesley Income VWIAX funds.
I believe millions of retirees could benefit from having their portfolios in either of these funds – or in a 50/50 combination of them.
Why I like Vanguard
Over the last 50 years, Vanguard has thoroughly earned the respect of millions of investors, advisers, academics and writers.
Many businesses like to claim that their customers are the highest priority. We’re all smart enough to know that’s a neat advertising slogan but ultimately, in real life, taking care of the company’s shareholders is really the highest priority.
But in the case of Vanguard, the company is actually owned by its mutual funds. That means anyone who invests in a Vanguard fund is an owner of Vanguard itself.
Vanguard has no other parties to answer to. Not Wall Street. Not hedge funds. Not some distant “headquarters” with a name nobody knows.
If you were suddenly put in charge of Vanguard, your job might seem pretty simple:
· Keep the company healthy.
· Keep expenses low.
· Let the company’s success flow through to the shareholders.
It’s an unusual business model in the financial world, and it works.
Vanguard is the world’s largest provider of mutual funds and manages more than $7.5 trillion in assets for more than 50 million investors. The company’s former chairman and CEO, John Bogle, created the first index fund that was publicly available to individual investors; that fund, Vanguard 500 Index (VFINX) now has approximately $900 billion in assets.
Why I like these two funds
Wellington and Wellesley are balanced funds, meaning their portfolios never stray far from a target balance of stocks vs. bonds.
There’s plenty of evidence that people who own balanced funds are more likely to stay the course during rough times and that they’re more content.
These two funds’ stock portfolios are made up of large companies that are familiar to retirees. In addition, the minimum initial investment requirement of $3,000 for investor shares makes them available to almost all retirees. Admiral shares, available for a minimum of $50,000, are identical except for lower expense ratios.
These two funds are much more affordable (and therefore much more productive) now than when they were brought into the Vanguard family.
In 1970, investors had to pay a sales commission to buy either fund. Wellesley Income’s annual expenses were a whopping 1.34%; Wellington’s were 0.47%. Now, investor shares’ annual expenses are 0.25% at Wellington and 0.23% for Wellesley Income. For Admiral shares, those figures are lower: 0.17% for Wellington, 0.16% for Wellesley Income.
Finally, the results speak for themselves. Over the past 15 years, according to Morningstar, these two funds’ returns have been in the top 10% of all funds in their categories.
Why I like Vanguard Wellington
Wellington’s target mix is 60% equities and 40% bonds. Over many decades, this 60/40 allocation has come to be regarded as a standard comparable to the way many prudent insurance companies and pension funds invest their money.
While these companies know their portfolios must grow, above all else they know they must be able to pay policyholders and pensioners – no matter what.
That is exactly the mind-set that a prudent retiree should adopt.
Wellington has a 93-year track record; you can look up its annual returns going back to 1930 (using the ticker for investor shares, VWELX). If you do that, you’ll find 20 losing years; in nine of those years, the losses were less than 5%.
Over the past 15 years, Wellington’s compound average growth rate was 8.1%, nearly 20% higher than the average in its category, according to Morningstar.
Why I like Wellesley Income
Wellesley Income, with a target allocation of 40% equities and 60% bonds, is considerably more conservative. This makes it a very comfortable fit for many retirees.
It’s a smaller fund, with “only” $55.4 billion in assets, and a track record of annual returns going back “only” about half a century.
From 1970 through 2022, you’ll find eight losing years; the majority of those losses were less than 5%. Over the past 15 years, Wellesley’s compound average growth rate was 6.6%, exceeding its category average by 37%.
Those returns, as well as the ones I cited for Wellington, are for investor-class shares. Retirees who meet the $50,000 minimum would have received about one-tenth of a percent more per year.
How these two funds compare
The biggest difference by far is the equities target allocation of 60% in Wellington and 40% in Wellesley Income.
Wellesley Income’s stockholdings are oriented more to large-cap value stocks, and Wellington’s more to large-cap growth.
And that gives retirees a great opportunity to split their money between these two.
A 50/50 combination of Wellington and Wellesley Income results in an overall target allocation of 50% equities, 50% bonds, which should fall squarely into the comfort zone of many retirees.
Over the past 15 years, that combination had a compound average growth rate of 7.4%, 32% higher than the average of their two categories.
Obviously, you can mix these funds in other combinations in order to put more or less emphasis on equities vs. bonds.
Active management and tax considerations
The portfolios of Wellington and Wellesley Income are actively managed. Almost always, I recommend passive management (index funds in other words) instead of active. But for the reasons I stated above, I think Wellington and Wellesley are good choices for many retirees in tax-deferred accounts.
For taxable accounts, depending on your tax bracket, you may do better using index funds for equities along with municipal bond funds.
Americans love winners, and when we’re older, we like the comfort of depending on things with long histories of success. No matter how you use them, these two funds have turned in winning performance decade after decade after decade.
At the end of the day, that’s what’s going to matter.
These aren’t the only Vanguard balanced funds I recommend. For that discussion, check out my latest podcast “Better than Wellesley and Wellington? and 19 other questions.”
You can also check out a video presentation: My Favorite 12 Vanguard Funds For Retirees.
Richard Buck contributed to this article.
Paul Merriman and Richard Buck are the authors of We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement. Get your free copy.