VTINX (Vanguard Target Retirement Income) vs. VWINX (Vanguard Wellesley)

Worth $233,000?

Look at this image:

What jumps out at you there?

Hopefully, you can see the two numbers in the blue box. The one on the left is $1,070,000. The one on the right is $837,000.

In  running a financial plan for a couple, Lanny and Maggie, I am showing them the TRUE cost of paying a 1% per year investment management fee on their $487,000 portfolio.  NOTHING else in the plan changed, mind you. I simply clicked on 1 button and added a 1% management fee.

And, as you can see, the cost is $233,000. This is $233,000 they will NOT have in which to leave to their heirs, their church, or even better yet, to enjoy in their retirement together.

Ultimately, this is what the REAL cost of paying someone to manage your money comes to; YOU have less.

Now, some will argue you are actually receiving MORE of a benefit from the professional advice than the cost you’re paying. They’ll try to quantify this with such studies as from Vanguard, “Advisor’s Alpha.”

According to Vanguard, paying that 1% fee may be worth it if an advisor can help you by “focusing on behavioral coaching”. i.e., keeping your emotions in check during bear markets.

I ALWAYS chuckle at this idea that the average investor is ready to throw in the towel at the first evidence of a bear market.  I’m sure some are.  But in my experience it’s the PROS, not the clients themselves, who are nervous Nellies.  See my video here on a recent example of this exact thing.

Now, to Vanguard’s credit, they don’t make an argument that superior investment selection is something advisors can do in order to earn their 1% fee.  The days of that even being debated are LONG gone thanks to folks like the founder of Vanguard himself, John Bogle, and others such as Burton Malkiel.

“A Random Walk Down Wall Street” by Malkiel remains a classic to this day.

Of course, I’d be remiss not to mention my all time classic favorite investment book from John Bogle, “Common Sense on Mutual Funds.”

So, if superior investment performance is not to be obtained by hiring a professional and you aren’t jumping off a bridge when the Dow drops 100 points, tell me again the reason for paying someone an annual investment management fee?

Oh, right, tax, estate planning, diversification and asset LOCATION. Those are ALSO benefits a professional advisor brings to the table for which he/she needs to be compensated for. Indeed, indeed.

Then why don’t they simply charge for those services as opposed to the 1% management fee which costs $233.000 in total?   Seems a steep price to pay, no?

Of course it is!  And EVERYONE knows this.

In fact, in late March a VERY prominent guy in my business posted on LinkedIN that he’d never seen as many advisors reach out to him to discuss pay-for-service fees instead of the typical 1%.

The reason?

The 35% drop in assets were killing the advisors income stream!  The advisors wanted to find a better way to bill clients to avoid such a dramatic hit.

Notice though, these purported “fiduciaries” weren’t reaching out to this guy when the money was flowing in.  And they certainly weren’t asking how they could reduce the expense to their CLIENTS during these trying times….

NO!  They were reaching out to inquire how they could bill a higher fee!  (Side note: That’s why I could care less about a “fiduciary” standard.  It’s a meaningless sales pitch.)

Ultimately, advisor’s compensation should be disclosed similar to when you go close on a home for a mortgage.  You see very clearly your amortization schedule and thus the amount of interest you’ll pay over the course of that loan.  YIKES!!!

I guarantee you, if advisors and had to say to the Lanny’s and Maggie’s of the world, “my services are going to cost you $233,000 over the course of our relationship”, there’d be a heck of a lot less fees paid out to advisors.  And THAT, my friend, IS a fiduciary standard I could live with.

You’d like to get some income off your portfolio, be it in retirement or otherwise.  You are also a fan of Vanguard. So, you’re sitting around looking at two funds that seem appealing, the Vanguard Target Retirement Income Fund (VTINX) and the Vanguard Wellesley Fund (VWINX). 

Both have roughly the same mix between stocks and bonds.  As of this writing (2/2020), VTINX is 30% stocks and 67% bonds. Whereas the Wellesley Fund is 36/58.  Wellesley has nearly 4% cash while VTINX carries about 2.50%.

Both funds maintain the low expense ratios of which Vanguard is known for; VTINX at .11% and VWINX at .23%.  VTINX has a turnover of 10% and VWINX 28%, so both rather funds have quite low turnover rates. 

But that is where the similarities end.  VTINX is a fund of funds of sorts. It’s diversified among 5 Vanguard index funds, to include roughly 30% exposure to international stock and bond markets. 

The Wellesley Fund is all domestic positions of individual stocks and bonds.  And is actively managed. 

It appears the exposure to the international markets for the Vanguard Target Retirement Income Fund has really hurt performance. In the 16 years since inception, VWINX has beat VTINX in annual performance 14 of those years.   Wellesley has averaged 7.19% in that time period vs. 5.44% with the Target Fund. 

That difference of 1.50% annually over 16 years turns out to have been worth $72,000 MORE for someone who invested in Wellesley than someone who invested in the Target Retirement Fund.  See the two charts below.

One could explain the difference in GROWTH to the fact Wellesley does have more stocks, right? I mean the Target Retirement Income Fund is for INCOME after all.  (Well the Wellesley Fund is actually called the Wellesley INCOME fund but we’ll let that slide for a moment.)

Check out these two charts:

In these tables, I have you starting with $100,000 invested in both funds in 2004. I also have you taking 5% a year in income at the end of each year.  Notice, the Vanguard Target Retirement Income Fund paid out a total of $83,099 over the course of that time, averaging around $5,200 a year. 

Wellesley, on the other hand, paid out nearly $95,000, about $5,900 a year. So, in the Wellesley Fund you would have received an extra $700 a year, on average, in income over the course of those 16 years. Oh, but the fun doesn’t stop there. 

Even after the higher income amounts Wellesely paid out, you also had $31,000 MORE in your portfolio balance at the end of the 2019!  THe Wellesley Fund left you with $136,000. The Vanguard Retirement Income Fund $105,000, just a fraction over what your starting value was. 

Not sure I need to say more here, actually.  Yes indeed, past performance is not indicative of future results and all that.  The facts are the international markets hurt the performance of VTINX. Again, nearly 30% of the fund was invested in the Total International Stock and Bond funds. 

So, the ONLY reason I can see investing in VTINX over VWELX is if you believe the International markets will bounce back relative to the domestic markets.  Many people, it seems the vast majority of prognosticators actually, think this. I did a video on this just yesterday where we look at some of the largest firms projections over the next 10 years, from BlackRock to Vanguard.   They ALL believe international and emerging markets will dwarf the returns of domestic. 

If you agree with the professionals by all means go with VTINX.  As for me, I’d stay with Wellesely. I simply don’t trust the international markets as much as these other folks do. 

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