(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 Interview: Donald Kilbride................................................. 4 Performance Review.................................................... 8-11 An Actively Passive Distraction....................................... 12 Vanguard Looks Overseas for Income............................ 14 Special Distributions....................................................... 14 Liquidity and Safety. ....................................................... 15 Dan’s Do-It-Now Action Recommendations.................... 16 OCTOBER 2015

It Isn’t a Loss Unless You Sell ALL BEAR MARKETS are preceded by 10% to 15% corrections. But most 10% to 15% corrections do not lead to bear markets. While the markets’ daily fluctuations may have you thinking you’re losing money, the fact is if you’re a long-term investor like me, you’re still sitting on some pretty significant gains even after this recent retrenchment. Despite a bit of a rally on September 30, the month ended with stock markets around the globe lower than where they started. Very few of the major stock markets are in positive territory for 2015, and emerging markets have taken it on the chin. Emerging Markets Stock Index , with a 3.2% fall this past month, is off 15.2% for the year, put- ting it in league with Energy (down 21.0%) and Precious Metals & Mining (down 25.2%) as the worst performers among Vanguard’s mutual funds. By contrast, Total Stock Market is off 5.6% for the year, and Total International Stock is down 6.9%. Total Bond Market has managed a 0.9% gain. Last month, we talked about the increased volatility in the stock market, the unremit- ting and to some extent unreasonable focus on China, and the fact that a 10% to 15% stock market correction was entirely within the realm of the possible and well overdue. The Dow and S&P indexes were actually lower in August, and ended September down 11.1% and 9.9% from their May highs. That’s hardly harrowing. It’s been a while since we’ve seen paper losses in our portfolios like those suffered over the past few months, and the fact that the calendar quarter has just ended means there’ll be an inordinate focus on the past few months’ returns. Actually, what we’ve FUNDS FOCUS > TAX-FREE FUNDS Tax-Free Income: Good, Not Always Best OUR CONVERSATION ABOUT BONDS has now spanned many months, but there’s one topic still left on the table, and it’s a big one: Taxes. Taxes are a cost—reducing the amount of income and gains you and I keep at the end of the day—and as with all costs, keeping them low is just good practice. Tax-exempt bond funds are a useful tool for reducing your tax bill, and Vanguard’s muni bond team, which manages every single one of the firm’s tax-exempt bond offerings, is top-notch. All of this being said, I don’t want you to focus only on minimizing your tax bill when the real aim is to maximize your after-tax returns. They are not always the same thing. I’ll explain, but let’s start at the beginning. Just like the U.S. government and businesses, which issue bonds for a wide range of purposes, states and local governments (cities and towns) have their own funding needs for SEE LOSS PAGE 3 >

AVERAGEVANGUARD INVESTOR* September: -1.8% YTD: -3.8%

-5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

SAJ JMAMF JDNO

*See the footnotes on page 2.

DOW JONES INDUSTRIALS September Close: 16284.70

16000 16600 17200 17800 18400

SA J JMAM F JD NO

STANDARD & POOR’S 500 September Close: 1920.03

1800 1900 2000 2100 2200

SA J JMAM F JD NO

NASDAQ COMPOSITE September Close: 4620.16

4200 4500 4800 5100 5400

SA J JMAM F JD NO

3-MO.TREASURY BILLYIELD September Close: 0.00%

0.00% 0.02% 0.04% 0.06% 0.08%

SA J JMAM F JD NO

10-YR.TREASURY NOTE YIELD September Close: 2.06%

1.6% 1.9% 2.2% 2.5% 2.8%

SA J JMAM F JD NO

SEE FOCUS PAGE 4

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 25, NO. 10 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.