The Vanguard Wellington Fund: The Best Mutual Fund Of All-Time

Out of all the nearly one million publicly traded mutual funds that have existed in the history of the United States, there are maybe ten of them that are worthy of historical reverence. People often ask: “What is something that would be a suitable building block for a portfolio, a true core holding whose compounding you can count on?” In terms of longevity, there is nothing out there like The Vanguard Wellington Fund, which was launched in July of 1929. It has delivered 8.18% annual returns since its launch date, which is remarkable for two reasons: (1) The fund was launched immediately on the eve of the Great Depression, and (2) the fund is classified as “balanced” meaning it keeps the bond portion of the portfolio between 30% and 40%.

For most of its history, Vanguard Wellington has been a mixture of the bluest of blue chip stock and medium-term issues of US government bonds. It is the height of conservatism. For heaven’s sake, it is the preferred investment strategy given as an example on Thurman W. Arnold’s contribution to the Restatement on Trusts–a contribution that is now part of the Yale Law School Legal Scholarship Repository. It is a pretty darn effective way to enter the markets without being fully immune to volatility or being in a stage of life when asset protection is a big deal.

It’s like the “Boy Meets World” of the mutual fund universe–people of all ages can get something out of it. If you want asset protection, you’re covered. If you fear volatility, you’re covered. If you want to increase your purchasing power at a rate that is nearly 2.5x the inflation rate in a high probability way, you’re covered. It’s the best negotiation between principal protection and wealth creation I have ever studied.

Since 1980, there have only been four years when Vanguard Wellington investors suffered a principal loss over a twelve-month stretch. In 1990, Vanguard Wellington declined by 2.81%. In 1994, investors lost 0.49%. In 2002, the fund declined by 6.90%, and then lost 22.30% in 2008. Thirty-six years of investing, and only one year of losses greater than 10%.

It’s just the nature of the math when you combine stocks and bonds that make it difficult to incur a loss. Although the bond payouts are lower now, since 1929, the bond payout at Vanguard Wellington averaged 5.3%. And the average dividend yield of the portfolio has historically been 2.8%. In a typical year since 1929, think about what needs to happen in the equity markets for you to sustain a meaningful loss.

Say you put $100,000 into Vanguard Wellington. Historically, $37,337 would be in bonds yielding 5.3%. That gives you $1,978 in income. The remaining $62,663 is in stocks generating $1,754 in dividend income. The portfolio, then, creates $3,732 in annual income. To sustain a 10% loss over the course of the year, you would need that equity portion to decline by $10,000+$3,732 in income that the portfolio organically generates. So the equity base would need to decline in nominal value from $62,663 to $48,931. One way to characterize the historically average composition of the Vanguard Wellington would be this: The stocks selected would need to decline by 21% to deliver a 10% loss to the nominal value of the portfolio.

As a result, in the 87 years of the Vanguard Wellington Fund’s existence, there have only been 18 years in which the portfolio value declined. Seven of those 18 down years came during The Great Depression and its aftermath.

I also happen to really like the stock selections that comprise a significant portion of the fund’s assets. For every $100 you put into Vanguard Wellington, you are putting $2.49 into Wells Fargo. Wells Fargo has returned nearly 16% annually since 1980, and still has a low dividend payout ratio coupled with a loan portfolio that is growing at 7% (and Wells Fargo’s portfolio has the fewest defaults among the major banks).

It’s responded to the oil slide by loading up on Chevron; has been a long-term holder in the artist formerly known as Google and now goes by Alphabet; and The Wellington Management team deserves credit for recognizing the strength of CVS as an investment well before the rest of the investor community did. Other top holdings include Merck, Comcast, and Intel, of which I’m agnostic.

In short, if you own The Vanguard Wellington Fund, you’re sitting on a goldmine–the worst-three year performance in the history of the fund amounted to a 1.5% annualized loss. The expense ratio of 0.26% is quite low, costing you about $33 per year over a ten-year period on a $10,000 investment (projecting 8.18% annual growth-0.29% in annual fees so that the fee base in year ten is somewhere in the $21,000 range).

However, despite the fact that The Vanguard Wellington Fund is the quintessential Exhibit A for approaching the stock market in a way that dips your toes in the water of volatility compared to something like the S&P 500 Index or individual stock picking, I have come to recognize that the safety offered by a 35% high-quality bond allocation is still not enough for some people who still can’t quite convert the abstraction of the VWELX into recognition of what is specifically owned–the residue of the Google complex, the CVS machine, the oil wells of Chevron in 46 countries, the debt backed by the U.S. government, the loan portfolio of all those borrowing money from Wells Fargo, and so much more.

The most recent Yahoo message board forum post for The Vanguard Wellington Fund came from judiallison1966, who titled her post “Falling NAV” and said this: “Does anyone know why this fund is falling so much lower than all the others? I have lost 9.3% already and am in a panic”. The phrase “so much lower than all the others” I don’t think is an accurate descriptor, as I am assuming she bought Vanguard Wellington right before Christmas 2015 because that’s the only way I could calculate a 9.3% loss through January 11, 2016. The S&P 500 fell between 7.3% and 7.9% over the same period.

Reading a post like that bothers me a lot because I don’t have many things left to say about equity investing if The Vanguard Wellington is something that bothers you. If owning Deere or Aflac during The Great Recession affected your gait a little bit, I get it. But the most plain vanilla collection of high-quality bonds and blue-chip stocks mixed into a single fund is not something that should ever be triggering the phrase “I am in a panic” nor should something as routine as a 10% loss which is the classical definition of normal volatility.

I think the broader issue with posts like that is the decline of the U.S. Pension System. It forces people that have no inherent passion or skill set for financial literacy to be forced into understanding the capital markets when it is not something they care about beyond the ends of ending up with “enough” (the mechanics and variables of getting there have little excitement for a large portion of the population).

What should you do with stories like this? First, it doesn’t matter who you are, my rule number one that should never be forgotten is this: Don’t buy into something you don’t understand. If that means making do with 3% yields from government bonds, so be it. Maybe it’ll go up to 5% and you’ll get a percentage point gain over inflation over the long haul. That life outcome of glacially growing purchasing power is preferable to the life outcome of purchasing assets you don’t understand that functions as a gamble because you will sell upon incurring a loss because you don’t understand the variables and the ordinariness of your loss.

And secondly, the limitations on your knowledge are not static. Naivete, ignorance, just generally not knowing or understanding things–none of that has to be etched in stone. There was a time when Benjamin Graham didn’t know the difference between a stock and a bond. There was a time when Charlie Munger didn’t know what double taxation meant. Heck, Warren Buffett explicitly mentioned thinking that stock splits meant doubling your money when he first started studying markets. If you focus on the task and find the right financial sources to study, you can get a lot smarter in a short period of time. And the mistakes will never stop–the best you can hope for is that the intelligent things you do dwarf the unintelligent and the quality of your mistakes improve over time.

The posts from judiallison1966 speak to the danger of following the stock markets daily. If you visited webmd every day looking at symptoms, you will start diagnosing yourself with ailments that don’t exist in reality. If you pay attention to the volatility of the stock market every day, you will start identifying causes and problems with your stocks that probably, in fact, do not exist. There’s something to be said about the old-school approach of receiving a 401(k) statement in the mail, taking a quick glance at it, and then tossing it in a drawer.

Although it is not going to protect the true newbies or those in the early stages of acquiring financial literacy, The Vanguard Wellington Fund (VWELX) is about the best place to find a mutual fund that serves as an anchor for the portfolio. The composition of the holdings is first class, and the strength of the long-term record coupled with the very strong stocks owned right now and the 35% allocation towards bonds with medium-term maturity is the very definition of prudence.

I got an e-mail from a guy a while back that is really into stock-picking, but added that he bought $3,000 of VWELX years ago and then adds $200 per month to it. He calls it his “Just In Case” portfolio. I get where he is coming from–this fund is like a stock market insurance policy. I call it the best mutual fund of all time as a nod to its longevity, but also because it harnesses the human psychological need for consistency. This psychological need is a hazard in investing, but the Vanguard Wellington Fund seems to accept investors as they are rather than what they ought to be. That understanding helps explain why balanced funds succeed in accumulating so much investor capital–in the Wellington case, nearly $20 billion for this fund alone.

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