(PUB) Investing 2015

Bond fund. This isn’t a money market fund, so the NAV will fluctuate, but those changes should be minimal, and you’ll pick up more yield than in a money market fund. Gold, not Treasurys, is considered by some to be the ultimate safe-haven asset. While I have my doubts about the metal itself being of much use in an end-of-days-type scenario, the only way to “play” the metal at Vanguard is through Precious Metals &Mining , so let’s focus our attention there. This fund has been anything but a bastion of safe- ty. In fact, six years into a bull market for stocks, this fund is fast approaching a new record maximum drawdown. The fund’s previous max drawdown of -68.9% was reached in November 2008 in the midst of the credit crisis. It never recovered that loss, climbing to within 8.5% of its previous high at the end of April 2011 before tumbling again. As of the end of March, it was at -67.1%. The chart on this page of the fund’s maximum drawdowns over the past nearly 25 years isn’t exactly a picture of safety and smooth sailing. Defensive Stocks Another way to tackle this question of how to stick with stocks through all the noise is to seek out stock funds and A RECENT STUDY by Standard & Poor’s that has been getting a lot of play in the press over the past couple of weeks purports to show that active management can’t succeed. But this study and others like it choose expediency over experience. Investors who blindly follow their con- clusions will be the poorer for it. I probably don’t have to remind you of that, since you know how the Model Portfolios in this newsletter, based on active management, have creamed the stock market indexes over time. Actively managed mutual funds have come increasingly and repeatedly under fire, as researchers trot out studies show-

for a deeper dive into this newish fund. Keep in mind that these funds, while showing defensive characteristics, are still baskets of stocks—it is reasonable to expect them to be down less, but if stock prices are falling, they will still decline, too. Engage Less Often Adding a “flight-to-safety” fund like Short-Term Investment-Grade to a stock-heavy portfolio can reduce the intensity of your flight response, as you’ll have already prepared for some trouble ahead of time. But another strategy to consider is that you do have some control over how often you have to wrestle with that response. When you watch (or read) the finan- cial media, you are constantly bom- barded by forecasts and warnings of danger ahead. If you simply cut back the frequency with which you engage the financial media outlets (or better yet, cut them off entirely), your flight-or-flight instinct will be triggered far less often. And, as we saw earlier, most headlines don’t actually warrant a response in your diversified portfolio. Rather than having to resist the strong impulse to flee every time you turn on CNBC, you can avoid facing the response altogether by not tuning in at all. n or the six-year period since the start of the current bull market. The presump- tion is that the investor has invested his or her money at the start of this period and simply stayed the course. Nothing could be further from real- ity. Consider the typical investor in a company-sponsored 401(k) retirement account. Contributions taken from bi- weekly paychecks are added to the workers’ accounts regularly for months at a time. Hence, some of that money may be invested for five years from January through January, but more dol- lars will be invested over other time periods from, say, February through February, or April through April. To >

PreciousMetals &Mining Losing Big Again

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managers with a history of doing rela- tively well in bear markets. If, when the markets sell off, your portfolio sells off less, it may be easier for you to stay the course. Dividend Growth , managed by Don Kilbride, and Health Care , run by Jean Hynes and the health care team at Wellington, are two of my longtime favorites and have weathered past mar- ket storms quite well. In the financial crisis, as 500 Index fell -51.0% from its prior peak, Dividend Growth’s maxi- mum decline was -41.5%, and Health Care’s steepest loss was -33.2%. Global Minimum Volatility is another stock fund that offers the pros- pect of a relatively shallow decline dur- ing bear markets. Take a look at page 6 ing that, en masse, mutual funds run by human portfolio managers don’t per- form as well as the stock market. Those that do outperform, they say, cannot be chosen in advance, because the winners in the performance race are random. The takeaway from these studies is that investors should simply buy index funds to satisfy their portfolio needs, sit back, and let the markets hand them whatever returns they produce. The studies may be correct on their face, but they are wrong in their conclu- sions. First, almost all studies of mutual fund performance base their findings on static time periods, such as the five-year period ending in the most recent quarter,

ACTIVE MANAGEMENT Buy the Manager, Not the Fund

The Independent Adviser for Vanguard Investors • April 2015 • 13

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