(PUB) Investing 2015

tors expect from a core bond fund. I continue to prefer Intermediate-Term Investment-Grade , which focuses on corporate bonds, where a higher yield can offer a little more protection when interest rates rise. A lot of ink was spilled over the Fed’s final statement in 2014 as market pundits and participants tried to interpret the importance of three words: “patient” and “considerable time.” Rather than get bogged down in the nuances, to me this is a small step toward the Fed rais- ing the fed funds rate while still giving itself plenty of wiggle room to adjust. With the U.S. economy expanding, as discussed above, it is only natural that the Fed continues to reverse the emer- gency policies it put in place during the financial crisis and tries to return to what it calls a “normalized” interest rate environment. A higher fed funds rate doesn’t auto- matically translate into higher yields for all bonds, though it does mean that money market fund investors may finally earn a few pennies in 2015. Wrap-up It’s only natural to review your port- folio and re-evaluate your investment plan as the new year kicks off. Again, let me warn you to keep your recency bias in check. If you’ve got a diversi- fied or balanced portfolio, you may be wondering why you shouldn’t just sell everything and buy 500 Index. And you may be kicking yourself for not piling into long-maturity bond funds. But the recent past may not repeat in the year

Yield Predicts Longer-TermReturns

Changing Leadership

2.10

rising line = U.S. stocks outperforming international stocks

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

SEC Yield Return Over Next 5 Years

1.90

1.70

1.50

1.30

1.10

0.90

11/94

11/96

11/98

11/00

11/02

11/04

11/06

11/08

11/10

11/12

11/14

11/96

11/98

11/00

11/02

11/04

11/06

11/08

11/10

11/12

11/14

ahead—so if you’ve got a long-term plan, stick with it. A quick rundown on a few of our top holdings: A couple of FFSA mem- bers have complained that they are ready to throw in the towel on Don Kilbride’s Dividend Growth after lag- ging 500 Index by 0.7% a year over the past five years. This would be a huge mistake. Just because investors haven’t rewarded his strategy of late— Dividend Appreciation Index lagged 500 Index by even more (1.4% a year) over that stretch—Kilbride’s approach, which he consistently plies, shows its stripes through a full market cycle. And if U.S. stocks have a bumpier ride in 2015, you’ll be glad to have Dividend Growth as ballast. Health Care and the PRIMECAP- run funds have powered the returns of my Model Portfolios over the past three years. Health Care has more than doubled, returning 111.8%! Capital Opportunity doubled too,

gaining 100.8% over the same peri- od ( PRIMECAP Odyssey Aggressive Growth did even better, return- ing 118.8%). The management team behind these funds is among the best in the business, and if you don’t own them already, well, I don’t know what you are waiting for. However, keep your expectations in check—returns approaching 30% annually, which is what these funds have delivered over the past three years, aren’t sustainable. Focus on the long term, something which has done all FFSA members well over the 24 years that I’ve been writing this newsletter and recommend- ing which Vanguard funds to buy and which to avoid. With annualized returns since inception ranging from 12.2% for the Growth Model Portfolio to 9.0% for the Income Model Portfolio , compared to returns of 10.1% for 500 Index and 6.2% for Total Bond Market over the same period, I’d say taking the long view has paid off. n

RETIREMENT Contribute Sooner, Retire Earlier

desire in retirement is to save long and hard, well before you get there. How much is enough? Well, that’s going to depend on your individual situation. Fidelity offers a guideline for retirement savings that suggests you need to have put away eight times your annual income by the time you hit age 67 to have a shot at 85% of >

to saving for retirement, especially for those who regularly add to their accounts through the markets’ ups and downs. While there will always be a lot of debate around different retire- ment spending strategies, I don’t think there’s much to argue about when it comes to saving. One of the best ways to ensure you can live the lifestyle you

2015 MAY BE UNDERWAY, but don’t close the door on 2014 just yet, espe- cially if you haven’t reached the contri- bution limits on your retirement savings accounts. I bring this up each new year because it bears repeating that tax-deferred accounts such as 401(k)s, 403(b)s and IRAs are unmatched when it comes

The Independent Adviser for Vanguard Investors • January 2015 • 13

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