I think that all of us who just purchased Wellington within the last year can see a silver lining in all of this market turmoil. That's right, Wellington hit its 52 week low today!
I am going to take this for what it is worth. I am 30 years old and I have lost a great deal in the short run because I bought Wellington in October of 2007. However, this is a long term investment that pays a really nice dividend, so I am buying as much as I possibly can.
Down markets stink but I am thrilled that I can buy my favorite fund and get paid a dividend while its is declining. I would recommend that all of you who are Wellington investors, you know, the people who hate day traders and believe that buy and hold is smarter than sell and regret, go ahead and dollar cost into this while the price is attractive for long term gains.
I have approx 1/2 of my retirement assets in index funds, a modified Swenson allocation (10% REIT instead of his recommended 20%) a bit heavier in equities. Most of remainder is in Wellington. Basically Swenson asset allocation versus Wellington. Too early to tell. Taxable stuff is a self managed account and OAKBX with some long term stocks such as XOM, PG and BXP thrown in. Overall my take on this since very early 1990 is to be patient and try to be disciplined. Asset allocation is a savior.
An afterthought to my earlier post, which reflected my rage at our tax system. Everyone outside the ruling oligarchy should look closely at the blatant unfairness of being taxed on inflationaly "profits." Investments held for a long period (20-50 years) have been hugely affected by the steady devaluation of our currency - and the corresponding increase in the supposed "value" of your holding (gasoline I once bought for $.22/gal. is now about $4).
Yet, if/when you sell, you are taxed on all "CG" that is due to inflation. I have had investments that clearly lost, if measured in REAL VALUE, but were taxed as large CGs when I sold! Anyone in the Congress that ignores this obvious criminality should, at a minimum, be voted out of office. That would include most all now holding office.
If I may comment on the tax efficiency of Wellington, I don't recall that tax efficiency is listed as one of Wellington's investment goals. It may be a perfectly laudable goal, and I believe that there are funds that do make tax efficiency a stated goal, but it isn't one of Wellington's goals. I suggest that, if tax efficiency is so important to you, then you really should seek a fund that strives for that or one of the more highly rated funds in the ranking you cited.
A secondary question is, why did Wellington have such a high capital gains payout in 2007 after a dismal final quarter? It seems like adding insult to injury. But there are reasons.
The law requires mutual funds to pay out essentially all of the dividends and realized capital gains during the year. Dividend and capital gain payouts are not based on appreciation of NAV. Thus, Wellington sold shares at a profit during 2007 and accumulated hefty capital gains as a result. The NAV may have wilted during the final quarter, but accumulated capital gains remained. Wellington was not unique. Many other funds experienced the same thing and, if you look at the tops of earlier bull markets (and early 2007 could be described that way), Wellington and many other funds paid outsized capital gains during the year that the market turned.
So, why is that? Well, Wellington is a balanced fund with approximately 35% bonds and 65% stocks. The stocks are described as "value" stocks. Value investing involves buying stocks that are undervalued and selling them when they are fairly valued or overvalued. As a bull market ages, more and more formerly undervalued stocks become candidates for sale. At the same time, rising stock valuations, often accompanied by falling bonds, results in fund assets tending to become too tilted toward stocks. The result is that there is a strong tendency for the fund to sell stocks with large price appreciation (large capital gains) and buy bonds. The result is the accumulation of realized capital gains which must be paid out even after the market starts heading south.
If it's any consolation, past experience suggests that we have a few years of below average capital gains to look forward to. I don't know what we will see this December, but lower realized capital gains during bear markets and the early stages of a bull market are to be expected.
I read the profile of the above listed poster and I can see how he does not like taxes. That's fine but I think that capital gains is the least of anyone's worries particularly as their bracket goes higher.
How does this sound? The long term capital gains rate, correct me if I am wrong, is a maximum of 15% for something like a mutual fund. Now, would you rather be taxed at the long term capital gain of 15% or would your rather have that money counted as ordinary income and pay it at whatever your rate is currently?
Let me be more precise...the couple making 65K per year is going to pay the same capital gain percentage, 15%, as someone in Warren Buffet's tax bracket the way that I read the rules on irs.gov. I know that Buffet thinks that is not a good idea and I would venture to guess that Bogle wouldn't think much of it either. Certainly balance the budget types that I read and admire, such as Pete Peterson, would question any idea that capital gains taxes are too high.
Here's a clue about capital gains....they are lower now than they have been in the lifetime of most adults. However, despite these lower rates, the market has simply stunk this decade. Read John Brennan's article on Vanguard.com. This decade could be the first negative decade in recent memory for the S & P 500. Yes, the return in the 1930's was 0% so this would mean that the S & P would underperform that horrible period.
Would does this all mean? It means that capital gains have very little impact on the margins as to whether investors make money. Whether they are 15% or 25% is irrelevant to me. What I need is for the government, per John Bogle's book The Battle For The Soul of Capitalism, to start enforcing accounting rules and regulating industries so that they do not extend themselves into economic activies that endanger all of us at the expense of their greed (see subprime mortgage mess). I could make more money at a 20% or 25% tax if these steps were taken than if we refuse to regulate the financial markets and we have a lower capital gains tax rate.
The only way to properly evaluate your claims of outrageous capital gains taxes is for you to be open and give the people on this posting some real numbers as to how much you or your spouse make (both investment and retirement income) and then how much you paid in taxes. Context matters here so much...as a side note I think that people in the lowest brackets should at least pay some sort of token capital gains taxes.
We have had it your way for eight years and it has left us with a mountain of federal debt and an unstable finanical system. I would rather have a tax increase on myself and corresponding spending cuts that would balance our budget and pay down the debt. This would open up more money for public and private investment in the long term.
Indeed, I have refused to take several deductions that I consider unwarranted. My wife, age 30, has RA and the medical bills are so high that I could deduct them from my taxes. Nope, I passed on that because that is my problem and not that of society. I could have taken the public transit deduction for all of the years that I took the train in DC but I passed because it was my choice to commute. The only one that I take is the one for my IRA as the 401K at work is sadly loaded with high priced funds with 1.70% expense rations and I have no pension.
Please read John Bogle and Peter Peterson and then tell me if you take the smae position. We, the investors of the US, are not being oppressed by high capital gains taxes. Rather, we are being oppressed by high fees in 401(K) plans that we are forced to use and a corrupt financial industry that is leading our economy down the wrong path.
Any comments out there on the poor tax-efficiency of this fund (MarketWatch rates it 1 out of 5) if held in taxable accounts? I foolishly did not account for this factor in my 1/08 purchase and now having second thoughts. Althouh my loss is now only a few perecnt, I may cash out while my loss is short-term and fully deductable and get into a more TE fund while the market is down. I was killed by income taxes this year due entirely to huge CG dividends I had to pay tax on - while my real fund values were actually DOWN due to market loss (a double whammy - I lost value but still had to pay taxes on CG). This situation will get much worse if/when GC rates are increased after the '08 electtion.
Bit of a follow-up if you are interested.
Some Vanguard wisdom--gotta love the bear.
And, Bogle invented the index fund. I have a lot of respect for him and I think I understand why he touts the index fund idea. But, to my way of thinking, index funds are too rigid. Long term, a fund like Wellington should do better particularly since Wellington's costs aren't that much higher than the 500 Index Fund. That, too, is a result of Bogle.
I agree you have the right take on this. Dividends do make all the difference. Just look at the diparity between Wellington fund and Index 500 for long term (10 year) total return. 6.86% for Wellington vs. a dismal 2.81 percent for Index 500. This is a huge difference. Even a broader stock market index like Vanguard's Total Stock Market fund has done only slightly better.
I used to be a big fan of stock index funds back in the 1990's. They did pretty well back then. Not any more. If we assume John Bogle is correct with his forecast that U.S. stocks on average will return only between 6% to 7% at best for the next 10 to 20 years, then a combination of bonds and high paying dividend stocks is a better way to go. You can achieve an equal or better return with lower risk and volatility. To my way of thinking as long term investor, the risk premium vs total return of a 100% stock index fund is no longer worth it.
True, stocks and bonds aren't locked into mirror images of each other--unlike bonds and interest rates. But bonds, and dividend stocks, are still helping even in this environment. Dividends mean reinvestments--at a lower price under curent market conditions. Long term is the only way to view this fund. The losses so far this year, though painful, lay the groundwork for future profits. And, yes, I like the way this fund is managed.
On another note: I am hopeful after this week. No predictions--crystal ball cloudy--but I am reminded of the week that began the long term 80s bull market. Just maybe...
This fund is absolutley rock solid. The type you can put your mother in and sleep at night. But it also does a pretty darn good job of growing principal. My foray into something a bit more exciting (MGM) after some easy money last year has turned into a disaster by comparison. Wellington protects me from myself.
Oh, I can beat that one.
In September 1987 I bought into Fidelity's Magellan Fund--at that time run by Peter Lynch, one of the all time great fund managers. In a little over a month, Lynch's fund lost almost 40%. There's nothing quite like the experience of seeing the stock market drop over 20% in a single day. A similar drop today would be a one day decline of the Dow of about 2500 points. Rather scary. A year and a half later, though, I had a tidy profit.
So, yeah, don't panic.