(PUB) Investing 2015

S P E C I A L E X P A N D E D 1 6 - P A G E I S S U E

Model Portfolios................................................................ 2 Model Numbers................................................................ 4 What Price Glory?............................................................. 5 Investing at a (Potential) Top............................................. 6 Performance Review.................................................... 8-11 Another Stab at a Muni Index ETF.................................. 12 Watch Those Vanguard Calculations................................ 12 Dan’s Do-It-Now Action Recommendations.................... 16 F EBRUARY 2015

Opening Scenes LIKE THE ACADEMY AWARD-WINNING 2007 FILM Juno , Winter Storm Juno was preg- nant with possibilities, including initial concerns that Wall Street might operate with a skeleton crew if transportation was shut down by two feet or more of the wintry white stuff. But like the movie, which won the award for Best Original Screenplay, not Best Picture, the storm had a negligible impact on NewYork. Rather than a storm-related drama on January 27, markets went into spasms over a host of lousy earnings reports and uncertainty surrounding Greece’s turn to a newly elected leftist government. So, after a down-again, up-again month, January saw the Dow Jones index decline 3.7%, off 4.9% from the high reached at the end of December. This isn’t even close to a meaningful pullback, let alone a correction of 10% or more. One trend that has persisted into 2015 is falling interest rates, as the 30-year Treasury bond yield hit a historical low of 2.22% at month-end. Falling yields mean higher bond prices, and strong returns for Extended-Duration Treasury ETF , up 14.2%, and Long-Term Treasury , up 9.0% in January. Falling rates also continue to benefit interest-rate sensitive stocks like those found in Utilities Index (up 2.2%) and REIT Index (up 6.7%). Health Care ’s 2.1% gain had it picking up right where it left off in 2014, as did Energy Index ’s 4.8% loss as oil continued its slide. However, not all of 2014’s storylines carried over into the new year. In a reversal, foreign stocks outperformed U.S. stocks, with Total International Stock Index gaining 0.1% while Total Stock Market Index lost 2.8%. This change in fortunes comes at

AVERAGEVANGUARD INVESTOR* January: -0.7% YTD: -0.7%

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

JDNOSAJ JMAMF

*See the footnotes on page 2.

DOW JONES INDUSTRIALS January Close: 17164.95

15600 16275 16950 17625 18300

JD NOS AJ JMAM F

STANDARD & POOR’S 500 January Close: 1994.99

1750 1850 1950 2050 2150

JD NOS AJ JMAM F

NASDAQ COMPOSITE January Close: 4635.24

SEE OPENING PAGE 3 >

3900 4150 4400 4650 4900

MOMENTUM From Sizzle to Fizzle

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WHEN HOT HANDS ARE HOT, they sizzle; when they’re not, they fizzle. And that’s what happened with the annual Hot Hands strategy in 2014. After a blistering 2013, when Hot Hands fund Capital Value posted a 43.9% return in a year when Total Stock Market Index gained 33.3% and 500 Index returned 32.2%, our 2014 fund, Explorer , died on the vine. With a top-notch 44.4% gain in 2013, marking it the fund to own in the com- ing year, Explorer entered 2014 on a high note and promptly fell off a cliff, gaining just 3.9% by year’s end. Though small stocks took the lead early in 2014, by late March they’d fallen behind and never caught back up to the returns being generated by their larger-cap brethren. To be clear, I did express quite a few reservations about Explorer one year ago, and everything I said then, I still believe today. (See excerpt on page 13.)

3-MO.TREASURY BILLYIELD January Close: 0.00%

0.00% 0.01% 0.02% 0.03% 0.04% 0.05%

JD NOS AJ JMAM F

10-YR.TREASURY NOTE YIELD January Close: 1.67%

1.6% 2.0% 2.4% 2.8% 3.2%

JD NOS AJ JMAM F

SEE FIZZLE PAGE 13

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 25, NO. 2 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.