(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

Model Portfolios................................................................ 2 10 Things Vanguard Won’t Tell You—Part II........................ 4 Are ETFs Best on Taxes?. ................................................. 6 Performance Review.................................................... 8-11 Vanguard Makes the Case (Poorly)................................. 12 Taking Risk to Zero?........................................................ 13 Distributions to Come..................................................... 14 Will They or Won’t They?................................................. 15 JUNE 2016

Rate Hike Reversals ANTICIPATION AHEAD of the Federal Reserve’s June 15 decision on whether to hike short-term interest rates sent markets on a roller-coaster ride in May. Bipolar traders switched between a “risk off” and a “risk on” posture, depending on whether they saw another rate hike as a bad thing or a good one for the economy and the markets. That’s nuts. The overwhelming rationale for another rate hike will be that the U.S. economy is functioning properly, expanding well, and is showing some signs of a steady increase in inflation—all positives for you, me and stock prices. Employment is strong. The unemployment rate is holding at 5.0%—what’s gener- ally considered “full employment.” The U-6 rate, which is a broader measure including people who’ve given up looking for work but say they would work if they could find a job, fell to 9.7% in April. The 4.7% gap between the U-6 and the headline unemploy- ment rate is the lowest since August 2008 and right in line with its average over the past 20 years. We’ve finally got a whiff of inflation in the air, but it isn’t more than a scent. The Fed’s favorite inflation gauge showed a 1.1% rise over the year ending in April, up from the prior two months but slower than in January. Even as oil has risen, inflation has remained in check. I’d give the chance of a June rate rise 50/50 odds right now. What tips my thinking a bit, though, is the incredibly strong income and spending report that was released as May ended. Year-over-year income gains, after adjusting for inflation, are at a steady rate of more than 4.0%. Rising incomes have allowed consumption to grow at the same time that savings rates are up as well. At 5.4% in May, the consumer saving

AVERAGEVANGUARD INVESTOR* May: 0.8% YTD: 2.7%

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

MAMF JDNOSAJ JM

*See the footnotes on page 2.

DOW JONES INDUSTRIALS May Close: 17787.20

15900 16400 16900 17400 17900 18400

MAMF JDN OSA J J

STANDARD & POOR’S 500 May Close: 2096.96

1850 1900 1950 2000 2050 2100 2150

MAMF JDN OSA J J

NASDAQ COMPOSITE May Close: 4948.05

4300 4550 4800 5050 5300

SEE REVERSALS PAGE 12 >

MARKET HISTORY No New Highs, No Worries

MAMF JDN OSA J J

3-MO.TREASURY BILLYIELD May Close: 0.28%

SO IT’S BEEN a year since U.S. stock indexes hit their all-time highs. The lack of new highs over the past 12 months is excellent fodder for alarmist headlines, but should investors be concerned? Absolutely not. First, while the S&P 500’s price level last hit a high on May 21, 2015, on a total return basis, the index hit an all-time high just two trading days ago—on May 27, to be specific. But the media and most investors don’t focus on total returns. They focus on the index prices, and yes, we’ve gone that full year without a record. Is this unusual? Not at all. In fact, drawdowns are normal when investing in stocks. Allow me to paint a picture. The first chart on page 3 shows the growth in price of the S&P 500 Index since its March 1957 start date. The shaded regions show when the index was below its previous

0.00% 0.08% 0.16% 0.24% 0.32%

MAMF JDN OSA J J

10-YR.TREASURY NOTE YIELD May Close: 1.83%

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

MAMF JDN OSA J J

SEE HISTORY PAGE 3

>

A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 26, NO. 6 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.