(PUB) Investing 2015

WHO SAYS ACTIVE management doesn’t work? After 24 years of providing inde- pendent commentary on how to invest at Vanguard, the numbers are in, and from my vantage point they look pretty darned good. Of course, I’ll let you make your own decisions, but I think this is a great time to reflect on where we’ve been, and yes, to use past per- formance as a guide to what lies ahead, SEC warnings be damned. This is a particularly good time to talk about performance, because my Growth Model Portfolio has underper- formed stock market benchmark 500 Index in five of the last seven years. Not by that much, mind you, but it’s lagged. Of course, that same portfo- lio outperformed 500 Index for nine straight years previously. So let’s talk about the long-term record as well as what’s been happening lately. First, I don’t think you can argue with the long-term performance of the model portfolios, in particular the stock- heavy Growth Model Portfolio and Conservative Growth Model Portfolio . Since inception, those models are up at annual compounded rates of 12.2% and 10.5%, respectively, versus 500 Index’s 10.1% return. (By the way, Total Stock Market Index didn’t exist when I started my newsletter, and the Growth Index Model Portfolio hasn’t been around for the entire 24 years either, so I’ve gener- PORTFOLIOS Model Numbers

Annualized Model Performance Over 24 Years 3-year

5-year 7-year 10-year 15-year 20-year Inception 19.4% 13.9% 6.8% 8.7% 8.2% 12.2% 12.2% 17.9% 13.1% 6.8% 8.1% 7.4% 10.2% 10.5% 13.7% 11.4% 6.8% 6.8% 5.6% 8.9% 9.0% 18.4% 14.5% 6.6% 8.5% 5.7% — — 20.2% 15.3% 7.2% 7.6% 4.1% 9.8% 10.1% 20.3% 15.6% 7.6% 8.0% 4.7% 8.8% — 2.5% 4.2% 4.6% 4.6% 5.4% 6.0% 6.2%

Growth Model Portfolio

Cons. Growth Model Portfolio

Income Model Portfolio

Growth Index Model Portfolio

500 Index

Total Stock Market Index Total Bond Market Index

ally left them out of this review, but you can see their results in the table above.) As you can see in the chart below, when you compound an annualized dif- ference of more than 2% over 24 years, the Growth Model Portfolio ’s level of outperformance really shows its stuff. Heck, the Conservative Growth Model Portfolio , which has been just 83% as “risky” as 500 Index, using relative volatility as a measure, has also outper- formed nicely. Now, the Income Model Portfolio, which holds a good helping of equities in its mix at all times, is obviously not the same thing as Total Bond Market Index . Yet, while the increased volatility that stocks add to that mix means that your year-to-year performance will differ greatly, over the long haul, the Income Model ’s returns have been quite healthy. You can find the Models’ long- and short-term performance in the table above. In addition, I’ve put together a rolling-return analysis that looks at all the one-, three- and five-year returns for the Model Portfolios since inception along with the same returns for 500 Index and Total Bond Market Index. In addition, I’ve shown the worst one-, three- and five-year returns to give you a sense of the biggest losses suffered over the last two dozen years. Okay, let’s dig a little deeper. On a calendar-year basis, the Growth Model Portfolio , which I told you hasn’t out- performed 500 Index too often these last few years, has actually only outper- formed the index fund in 12 of the last 24 years, or just 50% of the time. And on a monthly basis, looking at all 288

months since the model’s inception, it has only managed to beat the index fund 54% of the time. So how is it that with a record that is barely above a 50% average the Growth Model Portfolio manages to outperform so substantially? It’s the same reason that the PRIMECAP Management team is able to outperform even though its own record of monthly returns doesn’t beat the index more than 55% to 60% of the time—the months of outper- formance more than make up for the months of underperformance. For one thing, the managers that you and I have invested with in the Model Portfolios have outperformed. Not all of them, mind you, and not every month and every year. But they’ve done well for us, and our strategy of owning a diversified portfolio of managers in the Model Portfolios has worked in our Rolling Model Performance Rolling one-year returns Average Worst Growth Model Portfolio 13.4% -42.1% Cons. Growth Model Portfolio 11.3% -37.3% 500 Index 11.1% -43.3% Income Model Portfolio 9.3% -27.3% Total Bond Market Index 6.2% -3.7% Rolling three-year returns Average Worst Growth Model Portfolio 11.8% -12.5% Cons. Growth Model Portfolio 9.9% -10.7% 500 Index 9.5% -16.1% Income Model Portfolio 8.5% -7.8% Total Bond Market Index 6.1% 1.8% Rolling five-year returns Average Worst Growth Model Portfolio 11.5% -3.1% Cons. Growth Model Portfolio 9.5% -2.9% 500 Index 8.8% -6.7% Income Model Portfolio 8.2% -2.2% Total Bond Market Index 6.2% 3.4%

24 Years of Portfolio Performance

10,000 12,000 14,000 16,000

500 Index Total Bond Market Index Adviser Growth Model Adviser Cons. Growth Model Adviser Income Model

0 2,000 4,000 6,000 8,000

12/90

12/92

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12/00

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12/14

4 • Fund Family Shareholder Association

www.adviseronline.com