(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

Selling Selected Value....................................................... 1 Model Portfolios................................................................ 2 After-Tax Tales.................................................................... 6 Mailbox: Equity Allocations............................................... 7 Performance Review.................................................... 8-11 10 Things Vanguard Won’t Tell You (Part 1)....................... 14 Do-It-Now Action Recommendations............................. 16 MAY 2016

Q1 Blues, Ver. 3.0 AFTER A ROUGH START TO 2016, a relative calm seems to have settled over Wall Street. Volatility is down; stocks are up; and high yield is back in favor. Since quarter- end, the VIX, a gauge of investor anxiety, has fallen, and its year-to-date average is below its long-term average. If that trend sticks, this will be the fifth year in a row of below-average volatility. The Dow and S&P 500 indexes, despite tumbles near April’s end, are within 3.1% and 2.9% of their all-time highs, respectively. Add in dividends, and the Dow hit five all-time highs this month. 500 Index hit an all-time high on April 20 but fell 1.8% from there. And High-Yield Corporate was up 2.6% this month, put- ting it up 5.0% on the year. Compare that to Total Bond Market Index ’s 0.4% April gain and 3.5% rise this year. Though expected, the report that first-quarter economic growth was extremely light for the third year in a row, at 0.5% growth, raised anxiety. Economists complain there are problems with the way the BEA collects data in the first quarter of each year, but to me, the issue is that consumers aren’t spending—they’re saving. Household balance sheets are in the best shape they’ve been in decades. U.S. consumers have plenty of steam to keep the economic train chugging ahead, but economic growth won’t reach a higher level until consumers start spending more. Look at the graph on page 3, which shows GDP growth has been a bit steadier than quarterly numbers would suggest. Over the past 16 years, year-over-year growth has averaged 1.9%. That includes 17 first quarters. (I counted from the beginning of 2000 through this past quarter.) Would I like to see stronger economic growth? Absolutely. Do

AVERAGEVANGUARD INVESTOR* April: 0.9% YTD: 1.8%

-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

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*See the footnotes on page 2.

DOW JONES INDUSTRIALS April Close: 17773.64

15900 16400 16900 17400 17900 18400

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STANDARD & POOR’S 500 April Close: 2065.30

1850 1900 1950 2000 2050 2100 2150

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NASDAQ COMPOSITE April Close: 4775.36

4300 4550 4800 5050 5300

SEE BLUES PAGE 3 >

MID-CAP VALUE Selling Selected Value

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3-MO.TREASURY BILLYIELD April Close: 0.19%

I’VE ALWAYS BEEN a big fan of mid-caps—they tend to be solid companies with real businesses, real balance sheets and real history. Unlike small companies, the mid-cap arena’s denizens are a bit more grown up. Yet, they tend to be overlooked by Wall Street, where the bulk of the attention is focused on S&P 500 companies, the behe- moths of the market. I’ve also always believed in smart diversification, so rather than own a mid-cap index fund, I’ve preferred to allocate money to managers with different views of what growth and value are. That’s why you and I have owned Selected Value for years. But after almost 17 years, I think it’s time to bid Selected Value adieu. As I recommended in the April 28 Hotline , we’re trading out of the fund in both the Growth and Conservative

0.00% 0.08% 0.16% 0.24% 0.32%

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10-YR.TREASURY NOTE YIELD April Close: 1.82%

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

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SEE VALUE PAGE 3

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 26, NO. 5 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.