(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: Mid-Cap Growth Funds............................... 1 Model Portfolios................................................................ 2 Performance Review.................................................... 8-11 Proper Expectations........................................................ 12 Tech Winter: A Cold Wind Blows.................................... 13 Law of Small Numbers................................................... 15 Dan’s Do-It-Now Action Recommendations.................... 16 NOVEMBER 2016

Single-Digit Math OCTOBER LIVED UP TO ITS REPUTATION as the worst month to invest in stocks. (That reputation is undeserved, by the way—September has been the worst month on average.) In October, the Dow index fell 0.9%, while the S&P 500 index dropped 1.9%. But it was a divided market, with the tech-heavy NASDAQ 100 hitting a high late in the month before succumbing to selling pressure. Small stocks were particularly hard hit, with the Russell 2000 falling 4.8%. Most funds fell, including bond funds, which reacted to rising interest rates. But the biggest headaches were reserved for health care stocks. Some investors fear that bio- technology and pharmaceutical companies will be unable to continue to raise prices at the rate they’ve done in the past, hurting earnings growth. Health Care and Health Care ETF fell 7.7% and 7.2%, respectively. I can’t say it enough—these are buying opportunities, not reasons to sell. The active fund’s managers are actively responding by selectively purchasing additional shares of the best bargains this market dislocation has created. While there are no guarantees when it comes to investing, I believe any dollar you add to the pressured sector now, particularly to Health Care, will yield robust returns over the next three to five years. Speaking of pressure, you may notice a change in the Performance Review on pages 8 through 11 this month. No, we didn’t change anything, but the three-year return num- bers for many equity funds did change—falling into the single digits. With a drop in its three-year return from 11.0% last month to 8.7% this month, 500 Index has returned to a single-digit percentage for the first time since September 2011. Other funds seeing

AVERAGEVANGUARD INVESTOR* October: -1.8% YTD: 4.8%

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 October Close: 18142.42

15700 16300 16900 17500 18100 18700

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STANDARD & POOR’S 500 October Close: 2126.15

1820 1900 1980 2060 2140 2220

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NASDAQ COMPOSITE October Close: 5189.13

4200 4500 4800 5100 5400

SEE MATH PAGE 3 >

FUNDS FOCUS > MID-CAP GROWTH FUNDS Don’t Overlook the Middle Child

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3-MO.TREASURY BILLYIELD October Close: 0.30%

COMMON WISDOM SAYS that the stocks of smaller companies outperform those of larger ones and that achieving those higher returns requires you to take on more risk. But stocks of mid-sized companies turn both those chestnuts upside down. Longtime FFSA members know that Dan and I consider the stocks of mid-sized compa- nies to be in the sweet spot for growth. Newer members heard this story in the September newsletter as well, but when battling accepted narratives, a little repetition is required. We’ll start at the top: Do small-cap stocks outperform? Let’s go to the videotape, or the table on page 5, where I’ve compared return and risk stats for the Russell indexes over the past 38 years. Over this stretch, small-cap stocks (represented by the Russell 2000 index) have indeed outpaced large-cap stocks (the Russell Top 200 index).

0.15% 0.19% 0.23% 0.27% 0.31% 0.35%

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

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

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 26, NO. 11 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.