(PUB) Investing 2015

I continue to hold International Growth in my Model Portfolios as a diversified approach to foreign markets, with top-notch managers helping to separate the winners from the losers. If you are an aggressive investor, you may even want to consider allocating from what has done well (U.S. stocks) to what hasn’t done well (foreign stocks). It is only a question of when, not if, foreign stocks will take the performance baton from U.S. stocks. We could see the turn in 2015, though we won’t know it’s happened until months or years later.

a yield of only 3.57% but returned a total 25.3% as its yield declined to 2.51% at year-end. It would be a mistake to look at the bond market’s recent strength and extend it forward into 2015. While a bond fund’s return can and will vary in the short term, the fund’s starting yield is a good predictor of returns over longer periods of, say, five years or more. You can get a vivid example of this in the second chart on page 13,

BondsThat Attract Recency bias was in evidence when I and countless others sug- gested that rising yields at the end of 2013 presaged even higher yields in 2014. Wrong. Interest rates did just the opposite, with the yield on the 10-year Treasury falling from 3.03% to 2.17% by year-end. Last year proved that despite low starting yields, bonds can still deliver strong returns, especially if those bonds have long maturities. Consider that Long- Term Treasury entered the year with

SEE OUTLOOK PAGE 12

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OCTOBER: Ebola and ISIS fears ratchet up, and small stocks cor- rect early in the month, with the Russell 2000 closing 13.2% below its March 2014 high on the 13th. But large stocks narrowly miss a 10% correction and rebound…Oil prices continue falling on worries about global demand. Energy , down 7.4% in September, falls another 5.1% in October…Gold prices also tumble, closing the month under $1,200 per ounce. Precious Metals & Mining loses more than one-quarter of its value in September and October…Vanguard experiences website “failures,” possibly as it begins a transition to a newer design slated for launch before year-end…TOP FUND: REIT Index , 9.9%, WORST: Precious Metals & Mining , -13.7%. NOVEMBER: The GOP takes control of Congress by winning the Senate from the Democrats…Vanguard unveils an online “swag shop” selling logoed T-shirts, golf-club covers and the like…Plans for Ultra-Short-Term Bond are revealed, and Vanguard waffles on whether it is or isn’t a substitute for a money market fund…Q3 GDP is revised up to give the U.S. economy the best six-month gain in over a decade…Oil prices plummet, and Vanguard’s two energy sector funds dive…TOP FUND: Consumer Discretionary ETF , 5.6%, WORST: Energy Index , -9.3%. DECEMBER: Oil prices continue to drop, putting additional pres- sure on Russia, where the ruble sinks despite a hike in the policy interest rate to 17.0%…Pressure is also on any emerging economies dependent on oil revenues, and Emerging Markets Stock Index and Emerging Markets Select Stock drop 5.0% and 6.1%, respectively…An alleged North Korean hack of Sony Pictures’ computers reveals damning emails and financial data, but more importantly causes the studio to halt, then restart the release of The Interview . The Obama administration promises retaliation while opening doors to another communist country, Cuba…A steep but short market decline turns around as the Fed says rate hikes are still in the future, and the Dow crosses 18000 for the first time… Vanguard lowers the minimum on Market Neutral to $0 (for financial advisers) to gin up interest in a laggard offering…Vanguard also says it will launch a strategy to encourage boards of companies it invests in to better engage with shareholders. They should look in the mirror first…TOP FUND: Extended Duration Treasury ETF , 5.3%, WORST: Emerging Markets Select Stock , -6.1%.

return for the period versus a 1.9% loss for Emerging Markets Stock Index …TOP FUND: Precious Metals & Mining , 7.6%, WORST: Market Neutral , -1.6%. JULY: U.S. stocks end the month at a loss for the first time since January, and the bears come out of hibernation once again. Total Stock Market declines 2.0%…The SEC decides that consumer money market funds will be allowed to maintain a $1.00 NAV despite the actual daily fractional changes to values, but institutional funds will have to let their NAVs float, a win for you and me…Vanguard removes the front-end and back-end loads on World ex-U.S. SmallCap Index …Updated reports show Vanguard’s costs for running 500 Index and Total Stock Market , including all share classes plus the Institutional versions, at $400 million, up from $16.8 million in 1993…A lawsuit filed in 2013 alleging Vanguard has manipulated its earnings and underpaid taxes is unsealed in New York…TOP FUND: Extended Duration Treasury ETF , 1.5%, WORST: Utilities Index , -6.9%. AUGUST: While bonds are strong, so are stocks, and the S&P 500 index hits multiple record highs….Yields drop, with the 10-year Treasury’s falling from 2.56% to 2.34% at month’s end…The U.S. begins an aerial bombing campaign against ISIS in Syria…Africa’s Ebola crisis becomes more pronounced…Vanguard begins a push to consolidate all fund inves- tors’ accounts into a single brokerage account…TOP FUND: Extended Duration Treasury ETF , 7.1%, WORST: Telecom Services Index , -0.6%. SEPTEMBER: On the last day of the month, Vanguard surprises with a special capital gain for Health Care . The reason: A “corporate action…initially classified as a non-taxable event” was deemed taxable. No further explanation is given… Total Bond Market and its many share classes take the title of largest bond fund in the world as assets continue to gush from PIMCO’s Total Return Fund when its manager, Bill Gross, abandons ship…In the largest initial public offering in history, Alibaba debuts on the NYSE and sees its first trade at $92.70, 36.3% above the $68 offering price…An insider reports that Windsor II’s Jim Barrow will make his retirement official during the summer of 2015…Vanguard causes confu- sion when it changes something that causes Quicken financial software to stop working with the company’s data…TOP FUND: Consumer Staples Index , 0.3%, WORST: Precious Metals & Mining , -13.5%.

The Independent Adviser for Vanguard Investors • January 2015 • 7

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