(PUB) Investing 2016

you have to ask yourself if the benefit of trading throughout the day is (a) worth the added complexity and (b) actually something that you need. If you are a trader, maybe that extra liquidity is nec- essary. But if you’re a long-term inves- tor, measuring success in years, not days or hours, it is hard to see how being able to trade during the day helps—though I can see how it might hurt. If you’re a trader, ETFs have been a nice addition to your toolkit. But inves- tors shouldn’t believe the rumors that mutual funds are a dying breed. In fact, for many investors, an index mutual fund may actually be the smarter option over an ETF. n

And some investors may pay a com- mission to trade ETFs. Vanguard does not charge a commission if you trade Vanguard ETFs through its brokerage platform, but you may face commission charges when trading ETFs elsewhere. Also, mutual funds allow you to buy fractional shares, making it easy to invest a full $10,000 and to set up auto- matic investment plans. With ETFs, you have to buy whole shares, so you may not be able invest that entire $10,000. If the ETF you want to buy is selling at $53.41 per share, you’ll only be able to buy 187 shares for $9,987.67. The remaining $12.33 doesn’t get invested. So yes, ETFs are more liquid, but

leveraged strategies such as these, but that’s another story.) However, that added liquidity and trading flexibility comes with some costs. When you trade ETFs, you aren’t buying or selling at net asset value, as you do with typical mutual funds. The price of an ETF can become unhinged from the value of its holdings—called trading at a premium or a discount. Bid- ask spreads (the difference between the price at which the broker is willing to sell and the price the broker is willing to buy at) mean that you, the investor, could end up paying slightly more or less than net asset value, but more likely you’ll pay slightly more or sell at slightly less. OCTOBER’S JUST AROUND the corner, and I want you to be prepared for all the dire warnings that will herald its arrival. You remember October, don’t you? In 1987, we had the great crash that took the Dow down 508 points (or 22.6%) on what came to be known as Black Monday. 500 Index fell 21.7% for the month. And ever since then, it’s been “common wisdom” that Octobers were bad for your health and your wealth. Of course, the minute everyone agreed that Octobers were to be avoid- ed, well, they turned out not to be so bad, with positive returns in 19 (68%) of the past 28 Octobers. October 2008 may have set the tone for further worries about this particular month. Following on Lehman Bros.’ September 2008 bankruptcy, the credit markets seized up, the Fed slashed interest rates, TARP was unveiled and the stock market dove 17.6% in October 2008, the single worst month of the entire 2008 to 2009 bear market. 500 Index dropped 16.8% that month. It sounds pretty dismal. But I’ve got some good news and some bad news. The good news is that October isn’t the worst month of the year for investors. The bad news is that the worst month is the one that’ll get here sooner—September. MYTHS October Omens?

500 Index September Returns

500 Index October Returns

15%

15%

10%

10%

5%

5%

0%

0%

-5%

-5%

-10%

-10%

-15%

-15%

-20%

-20%

1989

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2005

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2009

2011

2013

2015

1989

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2001

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2011

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2015

Since 1987, 500 Index has aver- aged a 1.8% gain during October. Septembers are another story. Over the same period, 500 Index has averaged a 0.3% loss during September. Over just the past 10 years, for all Vanguard equity and balanced funds that have been around that long, the average September return was a fractional gain of 0.1%. The average October return: 1.0%. I’m sure you’re wondering if this means that, given the recent market highs, we should sell everything today and buy it back after September is over? Absolutely not. I’m not a market timer, and you shouldn’t be, either. Market tim-

ing costs you money (taxes), wasted ener- gy, anxiety and pain—and the occasional redemption fee. And you never know when you’ll have a September like the one in 2010, when the average Vanguard fund gained 9.2%, or an October like the ones in 2011 or 2015, when the average fund was up 10.8% and 6.2%, respective- ly. Monthly returns are random, despite what the media tells you. So remember, in the next few weeks you’re going to be hearing plenty about how terrible October will be for inves- tors. Armed with the numbers I’ve just laid out, and prepared for September rather than October, you may sleep a bit better at night. I know I will. n

The Independent Adviser for Vanguard Investors • September 2016 • 7

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