(PUB) Investing 2015

growth China experiences isn’t mean- ingful, because it is—even if China only grows 3.5%, well below policymakers’ target of 7.5%, that would add enough to GDP to equal the size of the Swedish economy. It does, however, represent a downshift in the pace of growth of the second-largest economy in the world. The decline in oil prices, while a boon to some countries (like China, Japan and Germany) is a serious head- wind to others (like Russia, Brazil, Venezuela and those in the Middle East). That’s why I think that it’s impor- tant to let an active portfolio manager make decisions about where to invest and what to invest in overseas, and why I advise you to stay diversified and to hold onto—or add to—foreign stock holdings. >

ward-looking measures in an attempt to see where the economy is heading. It currently points to continued growth in the year ahead. Overseas Values? In comparison to the U.S., foreign economies are currently beset by a bevy of headwinds. Europe remains on the edge of recession as its central bankers promise action but struggle to imple- ment a stimulus policy similar to our own bond purchasing program. In stark contrast to Europe, Japan’s “Abenomics” implementation has seen the expansion of a massive quantitative easing program that has yet to find a way out of the coun- try’s more than two decades of malaise. China’s pace of growth continues to slow. This doesn’t mean that whatever

Leading Economic Index

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Blue bars indicate recessions.

One last chart that gives a broad view of the gains made by the U.S. economy is the Conference Board’s leading eco- nomic indicators index printed above, which encompasses a number of for-

LOOKING BACK

2014 Report Card LIKE MANY BEFORE ME, my predictions about the course of long-term interest rates and the dangers in Treasurys and bond funds that owned them, like Total Bond Market Index , were way off the mark. I did bet- ter when it came to the stock market, and to the active managers that put index funds to shame. As always, I feel it’s my duty to look back and give an honest apprais- al of just how close my thinking was, or how wide of the mark I ranged when I wrote to you one year ago. You may not agree with all of my grades, and I am sure to have made some other boneheaded comments over the course of the year that you’ll hold me accountable for, but usu- ally I own up to them pretty quickly. One can always hope that the light will finally shine through on the myriad financial advisers, writers, pun- dits and glory-chasers who make wild and wacky predictions all year long, yet I still seem to be one of the few who actually fesses up on an annual basis. Last year, I gave myself two thumbs-up, one thumbs-down and one up-and-down rating for my 2013 predictions and comments. This year, well, take a read. “Just because stocks were strong last year doesn’t mean we can’t make more gains in 2014—but prepare for a bumpier jour- ney. While I think yields can still go higher, the pace of accel- eration should slow.” gains we earned in the stock market in 2014. But like so many others, I also tried to extrapolate what was going on in the bond markets and the economy and figured interest rates had further to rise. Wrong. And while I can’t forecast the weather any better than the profession- als (and we know how good they are), the U.S. economy’s surprising Well, had I just kept my prognosticating to the stock market, I’d be able to show a big thumbs up on the

contraction in Q1 certainly took the stuffing out of concerns that speedy economic growth would send interest rates ever higher.

“The Federal Reserve is not going to raise short-term interest rates in 2014. Period.…In fact, there’s a good chance short rates could stay pegged to the floor through 2015 as well, but I’ll hold off making predictions without a better sense of where the economy is a year from now.” Okay. While I thought long rates would go higher, I certainly was right about the Fed keeping its throttle hand pushed well for- ward. The market determines where long rates go, but the Fed holds the policy key on short rates. As for 2015, I’ll go with the consensus and suggest we’ll begin to see short rates rising around the middle of the coming year. “I remain a huge fan of Health Care…I think smaller-cap stocks, which have outpaced larger ones this year, are significantly overvalued when compared to larger fare…I know we’ll be safer than the average bull (or bear) in Dividend Growth…I prefer investment-grade corporate bonds, as well as funds like High-Yield Corporate.” I get a big thumbs up on this one. Small-caps continued to roar early in the year and then collapsed. Large-caps were the win- ners in 2014. SmallCap Index , for example, ended the year with a gain of 7.4% while LargeCap Index gained 13.2%. And yes, Health Care killed it with a gain of 28.5%. Dividend Growth gained 11.8%, outpacing its index-fund competitor Dividend Appreciation Index , which was up 10.0%. And despite tremors caused by falling oil prices and worries about the strength of many energy companies in the junk sector, High-Yield Corporate gave us a 4.6% gain—not as good as I’d hoped, but still solid.

The Independent Adviser for Vanguard Investors • January 2015 • 5

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