(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 Billions In, Billions Out at Vanguard.................................. 3 A Strong Start, Still in the Shadows................................. 4 Watch Out for the Gold Bugs........................................... 5 Funds for Investors. ETFs for Traders................................ 6 October Omens?.............................................................. 7 Performance Review.................................................... 8-11 Dan’s Do-It-Now Action Recommendations.................... 16 S EPT EMBER 2016

Wake Up! AUGUST IS OVER, and with it ends one of the most mellow summer months that long- term investors like us have ever experienced. And that’s saying something, given how abnormally mellow the stock markets have been since 2011. Over the past five years, the average level of the VIX, which is one measure of market volatility, has been well below its long-term average, and despite a pickup in early 2016, as August ended, the VIX’s average level for the year had dropped to the same level as 2015’s, more than 15% below the long-term average. Prior to Memorial Day, the average daily move in the S&P 500 index was 0.7%, but since Memorial Day it’s been just 0.5%, and in August it’s been 0.3%. It’s a safe bet that as traders return from the beach, we’ll see volatility pick up. If volatility is coming, and with markets now below the highs hit mid-month, should we be selling, having already missed the top? No way! Consider that since the end of the Great Recession and the bear market it spawned, investors have had 118 opportunities to sell at an S&P 500 high. That’s right. Since the market hit its high in 2007 before the financial crisis and recession, there have been 118 new highs for the S&P 500 index. But if you’ve been watching your portfolio, rather than the index, then you may have seen something on the order of 174 all-time highs. Why? Because of dividends. On a total return basis, the S&P has hit 174 all-time highs since the 2007 bull market came to an end. Should you have sold when the market hit a high to avoid being “down?” The answer is self-evident. I know that there are some pundits out there that say the bull market is getting long in

AVERAGEVANGUARD INVESTOR* August: 0.1% YTD: 6.4%

-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 August Close: 18400.88

15700 16300 16900 17500 18100 18700

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STANDARD & POOR’S 500 August Close: 2170.95

1820 1900 1980 2060 2140 2220

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NASDAQ COMPOSITE August Close: 5213.22

4300 4550 4800 5050 5300

SEE WAKE PAGE 3 >

FUNDS FOCUS > AGGRESSIVE GROWTH FUNDS In Praise of the Middle Ground SOMETIMES TOO MUCH OF A GOOD THING can be a bad thing.

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3-MO.TREASURY BILLYIELD August Close: 0.32%

0.00% 0.07% 0.14% 0.21% 0.28% 0.35%

Take asset accumulation for instance. Vanguard’s success in gathering tens of billions of new investment dollars every month means that if you want to add an aggressive stock fund to your portfolio—one that focuses on the more volatile small- and mid-cap areas of the market—your best option may be to focus on index funds, or begin looking out- side the Vanguard stable. I suspect some readers may be wondering if Dan and I have lost the active-manage- ment script, so allow me to explain. While there are exceptions, dramatic growth in fund assets is the enemy of good active management, particularly for managers buying mid- and small-cap stocks. Consider two fund managers seeking to buy stock

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10-YR.TREASURY NOTE YIELD August Close: 1.57%

1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4%

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SEE FOCUS PAGE 12

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 26, NO. 9 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.