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Vanguard Wellington Fund: Can One Fund Do It All?

VWELX is one of the oldest balanced funds around. It has a great track record of success and is dirt cheap to own. This could be the cornerstone on which you built a portfolio, or even your entire portfolio. Vanguard Wellington Fund (MUTF: VWELX ) dates back to 1929, that puts it among an elite group of funds in the pooled investment world. And, unlike many of Vanguard’s funds, it isn’t an index fund. If you are looking for a single fund to be your portfolio or to be your portfolio’s backstop, this fund should be on your short list. What’s it do? Vanguard Wellington Fund is a balanced fund, placing roughly two-thirds of its assets in stocks and the rest in bonds. Its primary goal is long-term capital appreciation with a moderate amount of income. When selecting securities Wellington Management uses a value approach. In practice that means buying “established large companies” in which earnings, or earnings potential, is not fully reflected in share prices. On the bond side, Wellington Management, “…selects investment-grade bonds that it believes will generate a moderate level of current income.” That’s not very exciting, but the true value of the bond assets is diversification. So boring is good here. How’s that working out? So far, Vanguard Wellington’s done a great job for investors. Over the trailing 15-year period through June, the fund has an annualized total return of roughly 8%, including reinvested distributions. That may not sound all that exciting, but that’s pretty much the point of a balanced fund. Solid, but boring. That 8%, by the way, puts the fund in the top 4% of all similar funds tracked by Morningstar. But the risk/reward trade off deserves more examination than this. For example, over that trailing 15-year period Vanguard Wellington’s standard deviation, a measure of volatility, was roughly 9.5. Compare that to the S&P 500 500 Index’s 15 and you start to see the benefit. Oh, and the S&P returned roughly 4.5% a year annualized over that 15 year span… Now that makes Vanguard Wellington start to look pretty good. And, perhaps the best part, the fund is dirt cheap to own with an expense ratio of just 0.26%. That’s active management for a price that’s not much higher than an index fund. Not a bad deal at all. So what? That brings us back to what you might want to do with this fund. For starters, it’s a fund that’s appropriate for just about any investor to own, aggressive or not. For those who don’t want to bother with the work of investing it could easily be the only fund you every need to buy. A true one and you’re done offering. However, there’s a small problem here if you are looking for income. Vanguard Wellington’s trailing yield is just 2.4%. Unless you have a lot of money, that’s not going to be enough to live on. That leaves two options. First is to set up an automatic withdrawal program so that you get regular checks from the fund. In good times Vanguard Wellington’s gains will more than make up for a modest withdrawal program (say the old rule of thumb 4%). However, in bad years, you’ll be drawing down capital. Despite the fact that past performance is no guarantee of future returns, historically speaking the fund would have more than made up for its lean years. The other option, and perhaps the better choice for more active investors, is to use Vanguard Wellington as your core holding. That means you don’t have to worry too much about the base of your portfolio, allowing you to spend more time finding other investments that can provide you with more income. A core and explore type portfolio structure. And one that would allow you to take on more risk with the explore portion because of the relatively low risk of the core. For example you might pair higher distribution closed-end funds with Vanguard Wellington. In the end, Vanguard Wellington is a great fund. It isn’t right for everyone, but it could have a place in almost any portfolio. That includes being the only holding all the way to being a cornerstone of a more diverse portfolio. If you are trying to simplify, take a moment to look at Vanguard Wellington Fund. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Vanguard Short-Term Bond ETF Is A Great Replacement For Cash

Summary The Vanguard Short-Term Bond ETF delivers excellent diversification benefits relative to the equity market without being as miserable as a savings account. The bonds in the Vanguard Short-Term Bond ETF are focused on very high credit quality but there is a small selection of lower rated bonds to enhance returns. The Vanguard Short-Term Bond ETF bond selections contain some diversification in maturity to give investors a focus on short term investments without giving up on yield. The Vanguard Short-Term Bond ETF (NYSEARCA: BSV ) is a solid bond fund for the very conservative investor that wants a place to park while earning a better return than a savings account will offer. Lately I’ve been concerned about the market being relatively highly valued. I don’t intend to retire for quite a while (measured in decades), so I’m willing to be more aggressive with my portfolio. Despite being willing to accept additional risk on my portfolio, I want to be compensated for taking risk. While I still like certain parts of the market (as shown by buying diversified REIT ETFs), I’m looking for ways to get better diversification in the portfolio. The desire for better diversification across asset classes has pushed me to make a few hard decisions. For instance, it is pushing me to slow my rate of purchases on additional equity so I can have more money on hand to buy in if we see a significant retreat in equity prices. Those expectations and desires bring to me look for some solid bond ETFs so I can at least get a little interest on the money that I would otherwise have to hold in cash. Low volatility and low correlation with the domestic stock market are major concerns, but I also want something with reasonable liquidity and low expense ratios. When the yields on bonds are terrible, and I believe that is a fair statement today, a high expense ratio would eat a substantial portion of the returns. In this case, the expense ratio is only .10%. It is in my nature to be cheap and I have to admit, that .10% sounds fair to me. It thoroughly beats many bond funds on expense ratio. How volatile is the Vanguard Short-Term Bond ETF? I started by checking for correlation with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) by comparing the monthly changes in dividend adjusted closes over the last 8 years. The correlation was 3.34%, which is beautiful. By virtually any measure, incorporating BSV into a portfolio is going to materially reduce the risk of the portfolio. While SPY had a standard deviation of 4.6% in monthly returns, BSV only had a deviation of .777%. Low correlation and low volatility is exactly what we should expect for a fund invested in short-term high quality bonds, but it is always worth double checking. Sources of Return With the returns on short term maturities being very low, investors should consider having at least a little bit of credit risk or duration in their portfolio even if they want to focus on short term holdings. I checked both of those areas to see how the Vanguard Short-Term Bond ETF was doing on internal diversification. Credit The following chart shows the credit quality breakdown: In my opinion, this is a fairly reasonable allocation for an ETF that an investor might want to use as a substitute for cash in their portfolio if they expect to be holding that cash for a few months at a time. The ETF portfolio drops down to ratings as low as Baa but keeps the majority of their holdings in very high credit quality bonds. Maturity The next chart shows the maturity of the various bonds Again the maturity distribution looks good for short term holdings. By dividing the holdings between the different maturities rather than focusing them around a specific point there is more diversification across the short term yield curves which should produce a slight decrease in the expected level of volatility for the expected level of income. A Potential Cash Replacement Looking at the monthly returns over 8 years, I found there was only one month where the change in the dividend adjusted close was equal to 2% or greater. In that one month, it was precisely at 2%. Due to the positive returns from interest and low levels of duration and credit and risk the downside risk is fairly low. Of course, if an investor is using it as a replacement for cash they’ll need to use a brokerage that lets them buy and sell it with no commissions. Conclusion I like the portfolio for the Vanguard Short-Term Bond ETF. The yields are still weak, but that is an issue with high quality short term yields being very low rather than a problem with the underlying ETF. Given the low risk of the bond ETF, I like this fund as a source of diversification in the portfolio. It’s too bad free trading on the ETF is not more widely available, because this looks like a solid place to park cash when the market gets too rich or when investors are just looking for new options. The combination of a small amount of duration with a little credit risk makes this option more appealing to me than a fund that refused to take on any risk in those categories. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

USA

My key takeaway from the events over the last several months is that there is no place like home. It is apparent that U.S. economy is doing better than most and that U.S. based companies are more rapidly adapting to the global competitive landscape and are making the hard and needed strategic changes in their businesses to thrive, no matter what the economic landscape may be. Yes, that may be an overly simplistic generalization but it is by and large true. You cannot look in the rearview mirror any longer as these companies are changing so rapidly in front of your eyes. Take GE (NYSE: GE ) for example as it exits nearly half its businesses, namely finance related, and focuses entirely on its rapidly growing and higher return industrial businesses. Over $350 billion in assets are being sold off in the process. On the other side of the spectrum, take a look at Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) which announced on Thursday a new strategic focus moving forward. Its stock added a record $65 billion to its value in one day. I will discuss the banks later as there is no sector going through greater strategic changes to adapt to Dodd-Frank and a new global financial environment. Banks and financials remain the largest part of our portfolio and achieved multi-year highs last week. My investment process combines a top down global macroeconomic outlook with bottom up microanalysis of each region, industry and company. Quite frankly, in years past, I spent a lot more of my time deciding on asset allocation and sector emphasis based on my view of the global economy but now the dynamics of each region and each company within a sector are more complicated. I have to drill down further into each region, industry and company. I tend to run a more concentrated portfolio than most, as I must have first hand in-depth knowledge of each investment. I am an analyst at heart. Also my turnover tends to be low as I invest rather than trade. Once I understand a company’s strategy and buy into it, I monitor closely to see if it is adhered to. If so, I gain added confidence in the investment and if not, I pare back the position as there are many fish in the sea. My long-term objective is to double the value of each portfolio every 5 years including dividends and maintain liquidity at all times. I have successfully exceeded this objective for 35 years after fees. Recognizing and taking advantage of change is my greatest strength. Tomorrow is not today nor yesterday. I tend to look for long-term trends. Simplistically, I invest long in companies increasing volumes/revenues with rising margins and rates of return on capital as well as a competitive advantage and short those on the other side of the spectrum. This investment strategy is time tested and works. Now let’s take a look at what happened last week by region and consider the investment implications going forward. Approval of the third bailout by Greece and members of the Eurozone was the main news out of the region last week. It is clear to many members of the Eurozone, the IMF and to me that Greece’s economic and financial problems are far worse than initially believed and probability of success even with this bailout is very low. The IMF chimed in that the Euro just does not work in its current form and that the Eurozone needs major financial and regulatory reforms to succeed. Sound familiar? It was obvious that the ECB granting Greece another 85 billion euros over three years would weaken the euro and it did falling below 109 to the dollar. Germany ironically is the clear winner of a weaker euro benefiting exports although the government won’t admit it. The European stock markets rose and interest rates fell in Spain and Italy but rose in Germany. Basically the can was kicked down the road and Greece exiting the Euro was postponed for another day. Major change is needed in the Eurozone to succeed and be a meaningful global economic unit. Doubts remain about China despite the continued rally in the stock market and a reported 7% gain in its economy in the second quarter. Chinese banks lent a staggering $209 billion to margin lenders to stabilize the markets. My concern is that the government is resorting to short-term fixes that run counter to long-term goals. Secondly, I was bothered that outstanding loans for companies and households rose to 207% of GNP at the end of June up from 125% only 7 years ago. China has not de-leveraged like in the United States and Europe. I still hope that the government enacts programs to reduce leverage and excessive risk to build a sounder foundation for the future. Fortunately, the government has the resources to smooth the transition to a consumer led economy. It will take time and patience but I am confident that China can sustain long-term growth over 6% per annum. The economic outlook for the United States seems pretty good. The Fed’s Beige Book was released last week confirming a continued improvement in the domestic economy with a pick-up in employment. Important data points reported last week included a 0.3% increase in industrial production, capacity utilization rose to 78.4%, housing starts rose 9.8%, consumer prices rose 0.3% in June but only 0.1% over the last year, producer prices rose 0.4% while import prices fell 0.1%, the budget deficit remained near a seven year low and finally retail sales, the big one, fell a disappointing 0.3% in June. Janet Yellen, Fed Chair, during both sessions before Congress reiterated her view that the first rate increase will come this year and that future increases will be scattered and moderate depending on the economic data points. I believe that the Fed is hamstrung by problems overseas, strength in the dollar and weakness in commodity prices. The dollar hit a 10-year high last week. Finally, if it matters, the White House cut its projections for growth in 2015 and 2016 to 2.0% and 2.6% respectively and lowered its inflation forecast, too. I should add that the nuclear deal with Iran appears to be moving forward and its impact on oil prices declining was seen right away. In addition, Japan lowered its growth targets for 2015 and 2016 and maintained its commitment to expanding the monetary base by $648 billion over the next year. My core beliefs remain intact so I see no reason to change my positive fundamental outlook for stock markets while remaining negative on bond markets as the yield curve steepens. But what became crystal clear last week was that all stocks are not alike and there are tremendous opportunities to make money if you recognize and invest in change. I mentioned earlier GE, Google and the banks. But the list could go on and on as their managements are acting as their own activists and are dramatically altering their business plans to succeed in a slow growth competitive world. I have never seen such broad based movement in companies large and small. And it is starting to happen overseas, too. The bottom line is that United States domiciled companies are leading the way in change. In addition, our economy is acting better than most others and has also built a strong foundation for the future. The dollar is showing the way. A successful investor needs to be patient and let change play out, as the benefits over time will be enormous. My biggest concern remains lack of growth and politics. But the positives far outweigh the negatives. If there ever was a time to review all the facts, step back and reflect, pause once again and then decide on asset allocation and do hard research on specific investments, it is now. Change is everywhere and as Soros would say “play the trend until it ends.” Invest Accordingly!