(PUB) Investing 2016

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

Eking Out Another Win..................................................... 1 Model Portfolios................................................................ 2 Vanguard Trims Its Ranks.................................................. 7 Performance Review.................................................... 8-11 To Re or Not to Re, That Is the Question........................ 12 Do-It-Now Action Recommendations............................. 16 F EBRUARY 2016

Faulty Barometer AN OLD MARKET CHESTNUT says that “as goes January, so goes the rest of the year.” This so-called “January Barometer” gets trotted out every time the year starts with a decline (you almost never read about it when January is in an uptrend). But just because 500 Index fell 5.0%, its worst start to a year since 2009, you shouldn’t pay it much heed. If there’s one stat that debunks the January Barometer in my mind, it’s this: Since 500 Index’s 1976 inception, the January Barometer correctly predicted when the market would finish the year with a gain or a loss 72% of the time. That’s better than a coin flip! But if you “naively” expected stocks to notch gains each year (based on the assumption that stocks go up over time), you would have been correct 82% of the time. This isn’t to say I’m blasé about the start of the year. I get it. Investing in stocks today doesn’t feel great. So let’s take a step back and take stock of where we are. After a ho- hum year last year, stocks of all shapes and sizes have stumbled out of the gate. The S&P 500 index is 8.9% below its May 2015 high. Small-cap stocks have fared worse, with the Russell 2000 index falling 8.8% in January and now technically in bear territory, down 20.1% from its June 2015 high. The Euro Stoxx 600 index, akin to our S&P 500 index, fell 6.4% in January, and is less than 3% from finding itself in a bear market. Emerging market stocks have seen prices fall even further. Those are the indexes, but what about the managers you and I invest with? Well, Don Kilbride at Dividend Growth is holding up relatively well, as we’d expect, down only 2.9% in January. Our buffer positions in Short-Term Investment-Grade and Intermediate-Term Investment-Grade continue to fill that role well, gaining 0.5% and

AVERAGEVANGUARD INVESTOR* January: -3.6% YTD: -3.6%

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

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*See the footnotes on page 2.

DOW JONES INDUSTRIALS January Close: 16466.30

16000 16600 17200 17800 18400

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STANDARD & POOR’S 500 January Close: 1940.24

1850 1900 1950 2000 2050 2100 2150

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NASDAQ COMPOSITE January Close: 4613.95

4400 4650 4900 5150 5400

SEE BAROMETER PAGE 3 >

MOMENTUM Eking Out Another Win

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3-MO.TREASURY BILLYIELD January Close: 0.30%

IN AYEAR WHEN MOST STOCK FUNDS’ returns hovered around zero, inking a win in any investment competition was tough. PRIMECAP Core , our 2015 Hot Hands fund, just managed to outperform Total Stock Market Index with a 0.9% gain, edg- ing the index fund’s 0.3% rise. PRIMECAP Odyssey Stock , the near-clone of the closed PRIMECAP Core and the alternative suggested one year ago, gained 1.7%. But what may surprise you the most (it certainly surprised me) is the fact that while it came down to the wire, the 2016 Hot Hands fund, International Explorer , is the first foreign stock fund to make it into the Hot Hands derby since capturing that crown four years running, from 2003 through 2006. In every one of those years, the fund sailed past the domestic index fund benchmark. Are we setting up for a repeat? Read on.

0.00% 0.08% 0.16% 0.24% 0.32%

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10-YR.TREASURY NOTE YIELD January Close: 1.93%

1.6% 1.8% 2.0% 2.2% 2.4% 2.6%

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SEE MOMENTUM PAGE 4

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 26, NO. 2 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.