VFIFX v.s VWELX v.s. VWINX for roth IRA

goals^n^dreams

Level 2 Member
I am investing in roth IRA for Vanguard Target Retirement 2050 Fund (VFIFX). I have around $14,000 in VFIFX. When I look in a web bogleheads, most people are investing in Vanguard Wellesley Income Fund (VWINX) and Vanguard Wellington fund (VWELX). I am 33 years old. Would you please let me know is it better if I transfer all my money to VWINX? or VWELX? would you please give me some suggestion!

Thank you very much for your help!
 

Matt

Administrator
Staff member
I am investing in roth IRA for Vanguard Target Retirement 2050 Fund (VFIFX). I have around $14,000 in VFIFX. When I look in a web bogleheads, most people are investing in Vanguard Wellesley Income Fund (VWINX) and Vanguard Wellington fund (VWELX). I am 33 years old. Would you please let me know is it better if I transfer all my money to VWINX? or VWELX? would you please give me some suggestion!

Thank you very much for your help!
Most people on Bogleheads are not in those funds, they are in index funds. For your situation, focus to earn and save more money, at $14k your rate of return doesn't mean much.

Note that a target date 2050 is quite risky, and a lower date reduces exposure to equities.
 
@goals^n^dreams Bogleheads is a big site so I suspect you stumbled across a very weird corner of it where people are investing in those two funds. Most Bogleheads use some version of a three-fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio

When @Matt says TD 2050 is "risky" I assume he means it has a lot of equities so will be relatively price-volatile. At your age this is a good feature of your retirement savings. I would suggest the real risk of investing in a Target Date fund is that it has any bonds in it at all (currently 10.1% of holdings). See my rant about the subject here (and Matt's thoughtful-as-always replies): https://saverocity.com/forum/threads/why-hold-bonds-for-the-long-term.501069/

I think Target Date funds are absolutely spectacular if you have no interest whatsoever in managing your investments. Keep the TD 2050, contribute the maximum every year, and you'll be fine. When you decide to start saving in a taxable account, buy the TD 2050 there too (in order to keep from undermining the diversification of your portfolio), invest as much as possible, and you'll be fine.

But since you've already shown some interest in managing your investments, that suggests you are already the kind of person who needs to be "involved" in their investments, and that is an extremely dangerous thing to be if you don't have a base level of knowledge.

You've already indicated you're the kind of guy who would move from a diversified target retirement date portfolio of passive mostly-equity indexed funds to an actively managed mostly-bonds income fund ("Balanced funds typically offer a higher allocation to stocks; however, this fund is unique in allocating about one-third to stocks and two-thirds to bonds.").

So here are my action items for you:

1) DO NOTHING. This is the best idea of all, but you do not give me the impression that you are the kind of person willing to do nothing for 40 years.

2) Read. Pick any one or two of "Common Sense on Mutual Funds," "Winning the Loser's Game," "A Random Walk Down Wall Street" and "Stocks For the Long Run." Any one or two of those will convince you that you need to be in passive, indexed, low-cost funds. Then, once you know you need to be in passive, indexed, low-cost funds, you can decide how much of your retirement savings should be in domestic equities, how much should be in international equities, and how much should be in bonds.

3) Do nothing. You already own a diversified portfolio of domestic equities, international equities, domestic bonds, and a small sliver of international bonds. After completing step 2, you may decide that you are already invested in the correct asset mix and just need to continue making regular contributions (as much as possible, in both IRA and taxable accounts) to your Target Date 2050 fund. Reinvest all dividends and capital gains.

4) Consider doing something. On the other hand, after completing step 2, you might want to to change that asset mix somewhat. For example, I only own US equities, but I'm an asshole like that. You may decide that you're best off in a different mix of domestic equities, international equities, domestic bonds, and international bonds (for example, I see no reason anyone in America should own a foreign bond fund. That's just currency speculation).

5) Do something. Finally, once you've decided to do something, be sure you understand exactly WHY you're doing it, and establish IN ADVANCE what you will do going forward. Will you rebalance your portfolio quarterly or annually (both are good, but pick one now)? How often will you shift your asset allocation away from equities towards bonds, if at all (every year, every 5 years, starting today, or starting a certain number of years from retirement?). The answers to these questions don't matter a great deal as long as you answer them IN ADVANCE. The risk of "playing it by ear" is that you, like everyone, are terrible at timing the market and will destroy your returns over time by buying high and selling low. No offense — I'm terrible at timing the market too.

Hope that helps.
 

goals^n^dreams

Level 2 Member
Thank you Matt and Free-quent Flyer. It really helps for me. I really dont understand about stock. That's why I chose 2050. I will keep this stock for my investment. The maximum is $5500 a year. Do you think that it is better to make 1 contribution of $5500 on Jan 2017? or should I just contribute around $460 each month?
 
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Matt

Administrator
Staff member
Thank you Matt and Free-quent Flyer. It really helps for me. I really dont understand about stock. That's why I chose 2050. I will keep this stock for my investment. The maximum is $5500 a year. Do you think that it is better to make 1 contribution of $5500 on Jan 2017? or should I just contribute around $460 each month?
On Average... it is better to contribute the max on Jan 1st... but when you actually invest, it is rarely average.. so if you get unlucky and the market drops right after you put in a lump sum, you'd be better off going monthly...

There have been some studies on the matter, and it is generally accepted that lump sum out performs 'on average' dollar cost averaging (monthly).. but its all about luck and timing.

Personally I bring in a third factor - the Repair Ratio™ where if I have a person with strong (and consistent0 income to assets I lean towards lump sum, but if I have someone with erratic income (a contractor/freelancer) then I lean towards stability via dollar cost averaging.
 
@goals^n^dreams think of it this way: the goal is to buy as many shares as possible of your chosen mutual fund. Since you have a fixed amount of money you can contribute each year, that means paying as little as possible per share of your chosen mutual fund. If you buy $5,500 worth every January, you are betting that the price in January will be the same or lower than the average price over the course of the year. If you buy $458 on the first of every month, you're betting that the price on the first of the month will be the same or lower than the average price over the course of the year. If you buy $229 every two weeks, you're betting that the price every two weeks will be the same or lower than the average price over the course of the year.

Every year the price will on average be the average price. But the more times you buy, the more likely you are to pay, on average, that average price (this is a good thing). That's why I choose to make biweekly contributions. Vanguard has a setting for this if you go to "Account maintenance," then "Automatic investment." You can tell Vanguard to maximize your annual IRA contributions with biweekly or bimonthly contributions. Set it and forget it (just make sure you have the money in your bank account!).
 

Matt

Administrator
Staff member
Check out these two reports, just for hypotheticals... the underlying concept I think is missed in the 'averaging' approach is that you are longer out of the market, and therefore have less exposure to growth and to dividends. While price varies, growth is seen to be a broadly upward trend (despite the down times)

Report 9 is VFIFX with a Dollar cost average of $458. I started it on 12/1/2013, the start date chosen to represent the present account value stated of $14000.

  • Contributions to date from that were $13741
  • I then ran another report, lump summing $13741 into the same fund on the same 12/1/2013 [report 12]
If you review both reports you might find some insights into this.

And of course, if you invest $13741 tomorrow, and the market drops 50%, you lose a lot more than if you invested $458 :)
 

Attachments

Good thread guys.

One technical quibble with @Matt re: "being out of the market." Vanguard's Target Retirement Date funds actually only distribute dividends and capital gains once per year, with the record date in late December each year. So as long as you're fully invested by mid-December you share in the fund's dividends and capital gains for the year. That means your contribution decisions should only be based on whether you think, in your heart of hearts, that the value of the fund at the beginning of the year is higher, lower, or the same as its average price during the year. On the other hand, biweekly contributions guarantee you will pay almost exactly the average price of the fund throughout the year.
 

Matt

Administrator
Staff member
Good thread guys.

One technical quibble with @Matt re: "being out of the market." Vanguard's Target Retirement Date funds actually only distribute dividends and capital gains once per year, with the record date in late December each year. So as long as you're fully invested by mid-December you share in the fund's dividends and capital gains for the year. That means your contribution decisions should only be based on whether you think, in your heart of hearts, that the value of the fund at the beginning of the year is higher, lower, or the same as its average price during the year. On the other hand, biweekly contributions guarantee you will pay almost exactly the average price of the fund throughout the year.
True, in the case of a $5500 limit imposed by a retirement account, you could be fully funded by the time that the dividend came around, but conceptually, if you had a bigger amount, and were putting in money in a DCA vs Lump Sum then it would come into play.

Also, let's think about the granular. The Target Date Fund is a Fund of Funds.. within those Funds are companies, and those companies are producing income/growing/ etc... of course there is the concept of being over priced, but if you are out of the market you do lose that upside.

EG Matt and FQF

Matt invests $5500 on Month 1
FQF invests $5500 by 12

Both get the dividend. But who gets more growth? FQF could argue that his final December payment of $458 means his price is averaged.. but Matt could have paid whatever price was on the day, and then have had 12 months of growth.. whereas FQF would have only had 1 month on the final payment.

Growth doesn't only come with dividend but a broad general direction, fueled by many factors. The reports I attached show that in action - though we can pick different dates if you wish.
 

volker

Level 2 Member
  • Contributions to date from that were $13741
  • I then ran another report, lump summing $13741 into the same fund on the same 12/1/2013 [report 12]
For me you compare here apples with bananas. Splitting over 3 years difference is a big time frame. Also investing in 2013 resulted in hitting mainly an upward trend. The numbers would have looked different if you would have started in 2000 or 2007.

Some people did the math for lump sum vs. dollar cost average with a rolling window. You might want to look at
Code:
http://www.efficientfrontier.com/ef/997/dca.htm
Vanguard did also their own numbers with a portfolio. Should be easy to find in google.

It's a question of opportunity cost and how you think the market will behave the next 12months. We are high, we might get an adjustment. Maybe the adjustment comes in 12months (then DCA makes sense) or in 2-3years (then a lump sum would probably make more sense).
 

Matt

Administrator
Staff member
For me you compare here apples with bananas. Splitting over 3 years difference is a big time frame. Also investing in 2013 resulted in hitting mainly an upward trend. The numbers would have looked different if you would have started in 2000 or 2007.
I just took $14K (today's given number) and reverse engineered it. I didn't pick a period.
 
Yep any short-term approach will show the market's short-term results. Unlike Matt I think investing decisions matter even at what he would call "low" total asset accumulation levels, but part of thinking that investing decisions matter at low asset values is getting those decisions right early! So I hope some of my remarks help folks get those early asset allocation decisions right (for them).
 

Matt

Administrator
Staff member
Unlike Matt I think investing decisions matter even at what he would call "low" total asset accumulation levels,
They really don't matter that much. Money is a metric to prove that, and it doesn't care. Look at the difference between:

VFIFX v.s VWELX v.s. VWINX

Look at the comparative gains/losses on an account of $14K and compare it to what you could do by earning more, saving more, or being more tax savvy. As you yourself say, you'd be better off MSing with your time than squeezing pennies out of these 3 options :)

Now... I like the learning, but it doesn't matter so much, and you can fix it when it does without much harm.
 

carlos

Level 2 Member
some funds that I have and like VISGX, PRBLX, YACKX, IJT, VIOG, I am 52 and I am looking at 10+ year horizon
 
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