Last Updated Jul 9, 2010 9:27 AM EDT
There are two simple, cost-effective ways for you to meet the asset allocation guidelines described in my previous post. You can invest in either:
- Vanguard's Wellington fund (VWELX), invested roughly two-thirds in stocks and the rest in bonds, or
- Vanguard's Wellesley fund (VWINX), invested roughly one-third in stocks and two-thirds in bonds.
Vanguard Wellington Fund
By the end of the decade, your initial investment of $200,000 would have grown to $209,210, just on the appreciation of the fund's share price, for a modest gain of 4.6% over 10 years. During 2000, your first year, your interest and dividend payments would have been $7,739, for a yield on investment income of 3.9%. Over the decade, you would have received a stream of income with a modest roller-coaster ride, as shown by this graph.
Throughout the decade, you would have also received $53,002 of capital gains distributions. You could have used these distributions to boost your retirement savings at the end of the decade, or to fill in the dips in the dividend income stream, or some combination thereof.
By the way, if the 2009 dollar amounts of the fund's dividends and interest payments are repeated in 2010, you'd realize an annual yield of 3.1%, based on the fund's price at the beginning of 2010.
Vanguard Wellesley Fund
By the end of the decade, your initial investment of $200,000 would have grown to $219,032, just on the appreciation of the fund's share price, for a modest gain of 9.5% over 10 years. During 2000, your first year, your interest and dividend payments would have been $11,398, for a yield on investment income of 5.7%. Over the decade, you would have received a fairly steady stream of income, with a less volatile roller-coaster ride compared to the Wellington fund, as shown by this graph.
Throughout the decade, you would have also received $31,559 of capital gains distributions.
Once again, if the 2009 dollar amounts of the fund's dividends and interest payments are repeated in 2010, you'd realize an annual yield of 4.4%, based on the fund's price at the beginning of 2010.
When you compare the performance of these two funds, the underlying asset allocation of these two funds explains the results. The Wellesley fund has a higher allocation to bonds than the Wellington fund. This is the reason for the higher amount of income for that fund, and the reduced volatility in the stream of investment income over the decade.
More importantly, just think about the results for either fund. If you had invested in either one of these funds and lived off the income stream, you would have survived one of the worst decades for investing with a relatively steady stream of income and your retirement savings intact. Many retirement investors fared a lot worse.
During a market crash, your goal is to survive. It's unrealistic to expect significant growth in your retirement savings. The very simple investment and drawdown strategy described in this post would have enabled you to survive not one, but two stock market crashes. You wouldn't have been wiped out, and you wouldn't have needed to make drastic changes in your life. Not bad!
You can learn about other strategies to help protect your retirement security during economic downturns with my book, Recession-Proof Your Retirement Years: Simple Retirement Planning Strategies That Work Through Thick or Thin.
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