(PUB) Investing 2016

HISTORY FROM PAGE 1 >

S&P 500 Index Drawdown FromPrior High

Vanguard 500 Index Drawdown FromPrior High

high point to varying degrees. Despite all the color on the chart, over the near- ly 60-year-long stretch, the S&P 500 Index grew at a 6.7% annual pace—for a price return of 4,659%. On just 6% of trading days was the index actually making a new high. And 37% of the time, the index was within 5% of an all-time high. Flipping that around, it means that more than half of the time—57%, to be precise—the S&P 500 Index was off its high by 5% or more. Think about that. Even though a long-term investment in the stock market has paid off nicely, more than 90% of the time, an investor would have been feeling some level of regret. One other stat: The S&P 500 Index (on a price-only basis) has actually spent three times as many days at levels 20% or more below its highs as it has hitting a new high . (It was 20% or more below its high 20% of the time, com- pared to hitting a new high on just 6% of all trading days.) We’ve all heard the disclaimer that you can’t invest directly in the index, and dividends do very much matter to flesh-and-blood investors, so let’s look at a real-world, investable example.

2500

$100 $120 $140 $160 $180 $200

5% down or more 10% down or more 20% down or more S&P 500 Index

5% down or more 10% down or more 20% down or more 500 Index

2000

1500

1000

$0 $20 $40 $60 $80

500

0

5/61

5/66

5/71

5/76

5/81

5/86

5/91

5/96

5/01

5/06

5/11

5/16

5/84

5/86

5/88

5/90

5/92

5/94

5/96

5/98

5/00

5/02

5/04

5/06

5/08

5/10

5/12

5/14

5/16

spent most days below a previous high point. (I also ran the analysis on the S&P 500 price index since June

The top right chart shows the growth of 500 Index , including dividends, since the end of June 1983. (There’s nothing special about that date; it’s just as far back as my daily total return data goes.) Over the past 33 years or so, 500 Index grew at a 10.5% annual pace— for a total return of 2,564%. Including dividends in return calcu- lations always paints a more realistic picture, but in this case, it doesn’t change the image much. As you can see in the table below, when I include dividends, the index fund spends more time at or near highs and less time materially below those highs. But still, an investor in 500 Index would have

A long-term investment in stocks has paid off, but investors felt regret more than 90% of the time.

1983 for reference—you can see how including dividends boosted returns and cut back on drawdowns over time.) Whether you look at price return or total return, U.S. large-cap stocks have been treading water for the last year, with some periods, like the early part of this year, giving investors a fright. But, if you are investing in the stock market, you need to accept that you will be below your most recent high point with great regularity. To my way of thinking, pull- backs and corrections just create oppor- tunities to put money to work. With the market off its highs, this is an excellent time to add to accounts. I’d rather buy below the highs than at the highs. n

Being Down From Highs Is Normal

Vanguard 500 Index Total Return (Includes Dividends) Since June 1983

S&P 500 Index Price Only Since March 1957

S&P 500 Index Price Only Since June 1983

% of Time… At new high

6%

7%

9%

Within 5% of high 5% down or more 10% down or more 20% down or more Cumulative return Annualized return

37% 57% 42% 20%

41% 53% 40% 24%

45% 46% 32% 18%

4659%

1158%

2564% 10.5%

6.7%

8.0%

Daniel P. Wiener - Senior Editor Jeffrey D. DeMaso - Editor/Research Director Seth H. Kennedy - Assistant Editor Amy Long - Vice President and Publisher Billy Currano - Senior Managing Editor David Clarfield - Managing Editor Rachel Johnsen - Editorial Assistant Louisa Dorado - Marketing Director Mary Southard - Marketing Director John Hall Design Group - Design and Production Fund Family Shareholder Association Member, Newsletter Publishers Association Daniel P. Wiener - Chairman James H. Lowell - President (www.FidelityInvestor.com)

The Independent Adviser for Vanguard Investors (ISSN 1093-4200) is published monthly for members of the Fund Family Shareholder Association by InvestorPlace Media, LLC, 9201 Corporate Blvd., Suite 200 Rockville MD 20850. A one-year membership is $229 (foreign, add $18). POSTMASTER: Send address changes to The Independent Adviser for Vanguard Investors /Fund Family Shareholder Association, c/o InvestorPlace Media, LLC, 9201 Corporate Blvd., Suite 200 Rockville MD 20850. The FFSA is an independent organization dedicated to providing investors with intelligent and objective advice about the Vanguard family of mutual funds and services. If you have questions regarding your membership, call 800/211-7641 (service@adviseronline.com). While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can the publication be considered liable for the future investment performance of any securities or strategies discussed. The newsletter, hotline and associated publications provide information of general interest and are not intended to provide individualized investment advice for any subscriber or specific portfolio. Subscribers are urged to review the full disclaimer and securities holdings disclosure policy associated with this publication at www.adviseronline.com/disclosure-disclaimer. html or call 800-219-8592 to receive a copy via mail. Vanguard and The Vanguard Group are service marks of The Vanguard Group, Inc. FFSA and InvestorPlace Media, LLC are not affiliated in any way with The Vanguard Group and receive no compensation from The Vanguard Group, Inc. Copyright 2016 by Fund Family Shareholder Association. Reproduction in whole or in part is prohibited except by written permission of FFSA.

The Independent Adviser for Vanguard Investors • June 2016 • 3

FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641