Investment lessons from an 80-year-old legend

The Vanguard Wellington fund (VWELX) turns 80 today. No worries, this is not going to be some trip down nostalgia lane -- who cares about old for old’s sake? Rather, what’s compelling about the $40-billion geezer is that it encapsulates the key factors that are the foundation of successful fund investing.

Before I run through those fine points, let me cough up a big, impressive stat: If you had invested $10,000 in Vanguard Wellington at its launch on July 1, 1929, you (or perhaps your heirs) would have more than $4.7 million saved up today -- an annualized gain of 8% over the 80 years. (Precisely speaking, it was the Industrial and Power Securities Company that launched back then; the name was changed to Wellington Fund in 1935, and the Vanguard Group, of which it was a cornerstone, was formed in 1974.)

Wellington's performance, though, isn’t a matter of great returns decades ago obscuring a poor recent record; Wellington has managed a 4.4% annualized gain over the past 10 years. Now, before you scoff that 4.4% isn’t exactly the stuff retirement dreams are made of -- you're right -- it is in fact a heck of a lot better than if you had parked all your money in the Vanguard 500 index fund (-1.8% annualized over the 10-year stretch).

There’s no secret to Wellington’s success. And that’s its charm. It just plugs along, putting some very old investing principles to work:

• Start with stocks, season with bonds. Let marinate. When I started covering mutual funds more than 20 years ago, Wellington was a balanced fund; now Morningstar has it categorized as Moderate Allocation. Whatever you want to call it, the important takeaway is that a stock-heavy portfolio with a complement of bonds works. Wellington keeps about 60%-70% in stocks and 30%-40% in bonds. Even with the risk-dampening slug of bonds, the fund's 8% annualized gain over the 80-year stretch captured about 90% of the return of an all-stock index over the same stretch, with less risk. And in periods of great volatility, such as the past 10 years, those bonds provide a great cushion to soften the pain of stock-market losses.
• Dividends are your friend. During the 1990s, dividends accounted for just 16% of the S&P 500’s total return; blame the Internet bubble for that. But what happened in the 90s was both unsustainable and an aberration. The long term trend is that dividends have delivered more than 40% of the S&P 500’s total return; going forward it's likely that dividends will once again matter, a lot. It’s not just Wellington’s bonds that provide steady income; the fund’s 4% yield is in part powered by dividend-paying stocks.
• Don’t Chase. In the late 1960s Wellington’s management decided to “modernize” the fund’s investment approach; it let the stock portion rise form 62% in 1966 to 77% in 1971, and at the same time shifted a chunk of money from staid blue chips to smaller stocks that carried the luster of greater growth potential. It was a disaster; the fund fell way behind its peers. So much so, that the guy who greenlighted that push -- none other than John Bogle -- was booted. Yep, even legends have lessons to learn. By the early 1980s Wellington righted the ship and returned to its roots.
• Cheap is Good. I know you’ve heard this one before, but Wellington sure tells it in a powerful way: The no-load fund’s annual expense ratio today is a miserly 0.35%. For a managed fund, that's a pittance -- about one full percentage point less than the average expense ratio. In an environment where the bulls expect 8% a year to be a great return, you better believe 1 percentage point is a very big deal.

None of that is meant as an ad for Wellington. A low-cost target retirement fund is actually a better next-generation riff on balanced funds like Wellington. With a target you get a mix of stocks and bonds with the added benefit of the allocation mix shifting as you age. And, hey, if you’re into building your own multi-fund, or multi-ETF portfolio, that works too. Just keep in mind the key pieces of what has made Wellington work: Include a mix of stocks and bonds, give props to the power of dividends, avoid performance chasing and keep your costs low. That’ll work this year and most probably for the next 80 as well.