(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

Funds Focus: Growth Funds—Large-Caps........................ 1 Model Portfolios................................................................ 2 Performance Review.................................................... 8-11 Interview: Jean Hynes.................................................... 12 Growth & Income Is Back............................................... 14 Early Success for Tax-Exempt Index Fund....................... 15 Special Distributions....................................................... 15 Dan’s Do-It-Now Action Recommendations.................... 16 OCTOBER 2016

A Record Quarter FORGET ALL THE EXCITEMENT around the first presidential debate or OPEC’s late-month decision to try again to rein in overproduction and boost the price of oil once and for all. The great distraction in September was the “will they or won’t they” prospect of a Fed interest-rate hike. They didn’t, and that almost certainly means that it will be December 14 at the earliest before we see even a quarter-point boost to the fed funds rate. Uncertainty around the Fed brought volatility back to the stock market following a very sleepy summer. After only a single day in all of July and August when the S&P 500 rose or fell by more than 1%, September held five such days. I’m not going out on a limb to predict that volatility will continue—the Presidential election just five weeks away and a likely Fed rate hike a month later virtually guarantees it. But even without those headline events on the calendar, remember that volatility, defined as rapidly rising and falling prices, is par for the course when it comes to investing in the wealth-building engine that is the stock market. Still, September defied expectations. I told you that September, not October, has his- torically been the worst month for the stock market. Well, 500 Index actually gained a microscopic 0.01%, and S&P 400 MidCap Growth ETF , the worst performer of the more narrowly-focused index funds, dropped just 1.4%. Take a somewhat longer perspec- tive, and U.S. and foreign stocks and bonds are all showing gains ranging from 5.2% to 14.9% over the past 12 months. Financial stocks, along with health care stocks, have been particular losers this year, and September was a doozy, with Financials ETF the worst performing fund in FUNDS FOCUS > GROWTH FUNDS—LARGE-CAPS Walk Softly and Hire a Great Manager SINCE STOCKS REACHED THEIR LOWS in February 2009, even the worst-performing of Vanguard’s large-cap growth funds has doubled in value. So it’s fair to ask if there is still room for growth funds to continue growing. The answer is yes, but climbing valua- tions have me treading carefully. When Dan and I looked at large-cap growth funds three years ago, the message was, “Opportunity remains, but check your expectations at the door.” Our concern at the time was that these funds had been on a hot streak, with annual returns over three years approaching 20%, and that investors might be expecting that level of return moving for- ward. We didn’t think these funds were facing an imminent drawdown, but also didn’t see them maintaining that blistering pace of gains. That wasn’t a particularly difficult call SEE RECORD PAGE 3 >

AVERAGEVANGUARD INVESTOR* September: 0.3% YTD: 6.7%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

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*See the footnotes on page 2.

DOW JONES INDUSTRIALS September Close: 18308.15

15700 16300 16900 17500 18100 18700

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STANDARD & POOR’S 500 September Close: 2168.27

1820 1900 1980 2060 2140 2220

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NASDAQ COMPOSITE September Close: 5312.00

4200 4500 4800 5100 5400

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3-MO.TREASURY BILLYIELD September Close: 0.26%

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

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10-YR.TREASURY NOTE YIELD September Close: 1.61%

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

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SEE FOCUS PAGE 4

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 26, NO. 10 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.