(PUB) Investing 2015

It is not a miracle fund, though, so if stocks are declining, expect this fund to be down as well. In bull markets, expect the fund to lag—if it does keep up with traditional indexes in a bull market, consider that a bonus. I do think the currency hedging is a bit of overkill, and probably is a drag on performance in the long run. Be aware that the currency hedge is also going to cause the fund to look out of step with most non-hedging peers. At Vanguard, the logical comparison fund is Total World Stock Index, but as we showed, Global Minimum Volatility is managed and allocated differently, so we should expect performance to be different, too. That means that even if the fund delivers on its objective of gen- erating stock-like returns with less risk, it will take discipline for an investor to stick with it. Flying in the face of conventional investment wisdom that lower risk results in lower returns and higher risk leads to higher returns, back-tested data on a minimum volatility strategy has shown an ability to deliver returns in line with the broad stock indexes with less risk over a full market cycle . I’m not quite ready to dive in deep and buy the fund for my Models , but Global Minimum Volatility may be the best of Vanguard’s global fund options today. n With the first quarter now in the rearview mirror, are there any trends or insights that we can take away? The clearest one to me is the value of diversification, which is something I’ve harped on again and again and again over the years. Despite the strong dol- lar, our investments in foreign stocks— mostly through International Growth , which is up 5.5% this year—have helped the Model Portfolios produce returns ranging from 2.4% to 3.8% for the year versus Total Stock Market ’s 1.8% gain. Looking ahead, I’m expecting a fairly lousy earnings-reporting season. The reason: Given the fact that the S&P 500 is, by definition, top-heavy with the largest companies in the market and that many of these companies are >

always have both oars in the water, but I still think it could be a practical, lower-risk option for adding foreign stock exposure to a portfolio, particu- larly for a conservative investor—and I am upgrading it to a Buy . As always, coming in with the right expectations is crucial. Global Minimum Volatility aims to win by losing less, and like Dividend Growth , looks to earn its keep in bear markets.

ten off on the right foot. It has had a tailwind behind both components of its approach as lower-volatility sectors and stocks have been in favor and the dollar has strengthened. (Technically, the fund doesn’t actually benefit from a strengthening dollar—it should be agnostic to changes in currencies—but it is a relative benefit, as its peers, which do not hedge currencies, are hurt by a strengthening dollar.) The fund won’t

Currency Hedging WHEN YOU BUY A STOCK on a foreign exchange, there are two components to the return you’ll receive. One, of course, is how the stock performs, just like buying a stock here at home. But the second component is how the currency in which the stock is valued performs against your home currency, which for most of us is the almighty U.S. dollar. Say we have two investors, a Japanese investor and a U.S. investor. Both buy stock in Toyota—the Japanese automaker—on the Tokyo stock exchange at the end of 2013 at a price of 6,420 yen per share. Given the exchange rate, the U.S. investor pays the equivalent of $60.97. They both sell the stock a year later for 7,558 yen. The Japanese investor made 17.7% on the stock—end of story. But for the U.S. investor, that 7,558-yen share price is now equivalent to $63.14, because the dollar has appreciated over the course of the year against the yen. The U.S. investor only earns a total return of 3.6%. This is where the currency risk factors in. Currency hedging is an attempt to remove (or at least reduce) the impact of changes in the currency from the equation. Mutual fund managers can do this by entering into an agreement to exchange a certain amount of one currency at an agreed-upon rate at a specified time in the future for another currency. With the exchange-rate risk eliminated, the returns will only depend on the stock’s performance. Vanguard has not said how much currency hedging added to the performance of Global Minimum Volatility since it was launched, but I think it behooves them to disclose this data, given the fund’s objectives.

doesn’t mean we are poised for a crash. Whatever the crystal-ball gazers tell us, you won’t see me changing my stripes. I’m not about to become a mar- ket-timer, jumping in and out of stocks and cash. I’ll continue to partner with the best managers at Vanguard. And while I’ll occasionally shift the portfolio toward areas where I see relative value (see page 3 for the details of several trades I recommended in the March 19 Hotline to boost our allocations to over- seas shares), I know that the best way to build wealth is to spend time in the markets, not time the markets. This approach has served you and me well over the more than 24 years I’ve been writing this newsletter, and will continue to, regardless of whether the current bull continues to run or takes a breather.

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Foreign stocks look even less bub- bly. Over the same bullish period, Total International Stock is up 15.4% per annum, but since its own 2007 peak, it’s actually produced an annual- ized loss of 1.2%. I’m not surprised if you’re feeling pushed and pulled by the myriad com- mentaries about market peaks that per- meate the media. Many commentators already have a view, bullish or bearish, and then pick the data point that sup- ports their stance. I would say it’s a fair guess that the next six years won’t see returns as strong as the last six—in fact, it’s probable there will be a bear market sometime during the next six years. But just because we’ve had a good run

The Independent Adviser for Vanguard Investors • April 2015 • 15

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