(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

Funds Focus: Taxable Bonds............................................. 1 Model Portfolios................................................................ 2 Performance Review.................................................... 8-11 How Do You Spell “Security”?........................................ 13 A Muni Index Fund at Long Last?................................... 14 Horizon Job..................................................................... 15 More Funds Go Quarterly............................................... 15 Dan’s Do-It-Now Action Recommendations.................... 16 S EPT EMBER 2015

China Syndrome II IN JULY 2010, I led this newsletter with a story titled China Syndrome . At the time, investors were giddy over the prospects for fairer trade and higher stock prices as a result of China’s announcement that it would let its currency, the yuan, begin to float higher against the dol- lar. Morgan Stanley said they expected China stocks to rally 65% over the coming year. Not quite. The Shanghai market gained 1.4%, and optimism about China, its growth prospects and its stock market cratered. Sound familiar? By the end of August this year, Shanghai’s market, up just shy of 60% for the year in June, melted down 37.9%. Sparking the fireworks was a surprise move to devalue the yuan. The magnitude of the change was small—only 4% or so—but it caught investors off guard, raising uncertainty about China’s economic growth prospects—something investors abhor. A quick aside on China’s currency move: You may remember a video making the rounds on the web warn- ing of a looming dollar collapse as the yuan became a reserve currency. Well, the IMF has tabled that idea for at least a year. So much for trading on irrational currency fears. U.S. investors reacted to this China syndrome by selling stocks, which fell into their first official correction since 2011. The Dow was down 14.4% from its May 19 high before it rebounded to end the month only 9.7% below it, while the S&P 500 index hit a low 12.4% below its own May 21 high, then rebounded to just 7.4% below the high. Volatility, both down and up, saw the Dow and the S&P moving in wide ranges intraday. This recent focus on China, supplanting our focus earlier this year on Greece, has again raised the bears from their slumber. But as Jeff and I have been saying over the past

AVERAGEVANGUARD INVESTOR* August: -4.5% YTD: -2.1%

-5.0% -4.0% -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 August Close: 16528.03

16000 16600 17200 17800 18400

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STANDARD & POOR’S 500 August Close: 1972.18

1800 1900 2000 2100 2200

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NASDAQ COMPOSITE August Close: 4776.51

SEE CHINA PAGE 3 >

4200 4500 4800 5100 5400

FUNDS FOCUS > TAXABLE BONDS Still a Role to Play

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WHEN IT COMES TO BONDS, Jeff and I have covered a lot of ground over the past two months. The primary aim was to educate, giving you the knowledge you need before the Chicken-Little headlines and articles about the coming bond bust start to make an appearance, so you can stick with your long-term investing plan. As I’ve said many times, rising yields are good for long-term investors’ portfolios. Still, there is one topic we both want to emphasize and explore more thoroughly before applying all we’ve talked about to Vanguard’s stable of bond funds. Despite the low yields investors face today and the expectation for rising rates in the future, bonds maintain a critical role as a volatility buffer . The past three decades have been kind to income investors whether they bought individual bonds or bond funds. Total Bond Market compounded at a 7.5% rate in the

3-MO.TREASURY BILLYIELD August Close: 0.00%

0.00% 0.02% 0.04% 0.06% 0.08%

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10-YR.TREASURY NOTE YIELD August Close: 2.20%

1.6% 2.0% 2.4% 2.8% 3.2%

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 25, NO. 9 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.