(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 Vanguard Doth Protest Too Much..................................... 4 Vanguard’s Call on U.S. Growth........................................ 4 Sell in May? No Way!........................................................ 5 Tax-Efficiency: What About ETFs?..................................... 6 Performance Review.................................................... 8-11 Lots of Funds, Lots of Distributions. .............................. 15 Dan’s Do-It-Now Action Recommendations.................... 16 JUNE 2015

Stay Seated Until… THE U.S. ECONOMY IS AIRBORNE, but it’s not at cruising altitude yet. That’s why I’m betting our policy pilots at the Federal Reserve, which meets mid-month, will decide to continue their ZIRP (zero interest-rate policy) a while longer. What should you do about it? Zip! Keep your seatbelt on and tune out the nattering of the fellows in the row behind you (or the pundits on TV) who think they know how to fly the plane better. Why do I think ZIRP will live on? Well, most recently, the initial revision to first- quarter economic growth figures signaled that our marginally positive GDP actually con- tracted by 0.7%. Inflation is being held down by lower energy costs, and while oil prices have stabilized recently, they are still meaningfully lower than a year ago. Headline CPI, which includes energy prices, is down 0.1% over the past 12 months. The Fed’s preferred measure of inflation, core personal consumption expenditures (PCE), has been remark- ably stable around the 1.5% level for nearly three years. Despite savings at the pump, consumer spending remains lackluster. For a data-dependent Fed, the data doesn’t signal a need to change course. Vanguard economist Joe Davis agrees, telling Bloomberg that central bankers will begin raising the fed funds rate in September and will stop when that rate hits 1%, some- time in 2016. “The ceiling is 1 percent,” he says. “[The Fed] may be hard pressed to get above 1 percent over the next three years.” While Davis is probably right on the September call, I’m not so sure about his predic- tion of where the data will take us; it’s a stretch to say the funds rate will top out at 1%.

AVERAGEVANGUARD INVESTOR* May: 0.5% YTD: 3.3%

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

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*See the footnotes on page 2.

DOW JONES INDUSTRIALS May Close: 18010.68

16000 16600 17200 17800 18400

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STANDARD & POOR’S 500 May Close: 2107.39

1800 1900 2000 2100 2200

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NASDAQ COMPOSITE May Close: 5070.03

SEE SEATED PAGE 3 >

4000 4300 4600 4900 5200

FUNDS FOCUS > VANGUARD SELECT FUNDS For the Select Few

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THE SELECT FUNDS are Vanguard’s top picks among its family of mutual funds. As Vanguard puts it, you can “build your portfolio with a few of our well-established, broad- ly diversified, low-cost funds selected by our Portfolio Review Department.” Vanguard uses what they call a “proprietary screening process and criteria” of both qualitative and quantitative measures to determine this select list of funds, so the funds must be good, right? I don’t think so. Dig a little, and you’ll find that Vanguard isn’t that forthcoming about exactly what their rationale is for choosing them, and it narrows its choices dramatically by excluding all manner of funds, such as sector or specialty funds, or those where it deems cash flows need some control. Vanguard also likes large funds, I think, since they say that all of their choices were made in part based on assets, with a minimum of $5 billion for active funds and $10 billion for index funds. Why?

3-MO.TREASURY BILLYIELD May Close: 0.00%

0.00% 0.01% 0.02% 0.03% 0.04%

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10-YR.TREASURY NOTE YIELD May Close: 2.10%

1.6% 2.0% 2.4% 2.8% 3.2%

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SEE FOCUS PAGE 12

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 25, NO. 6 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.