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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION VOL. 24, NO.
9
Turbulent Times
THE WORLDS A MESS. Russia has now, with no uncertainty, invaded Ukraine; the long-
simmering issues in the Middle East are being fanned into a roaring fire by ISIS; the
Ebola virus is becoming a larger health issue in Africa than was originally thought; and
Europe seems on the verge of deflation if not outright recession.
We are not immune. From aerial tiffs with the Chinese to cyber attacks emanating
from who-knows-where, and the broader issue of our presumed role as the cop on the
global beat and how we respond to that, we cant exactly erect barriers to insulate our-
selves from conflicts seemingly far from our shores.
So maybe it isnt so surprising that new highs posted by U.S. stocks reflect a continu-
ously strengthening economy at home, while our bond market suggests that investors
here remain nervous (money keeps pouring into bond funds) and overseas investors
see us as both a safe haven and, yes, even an island of relative value. In Germany, for
instance, the yield on the 10-year bund has fallen below 0.90%, making our 10-years
2.34% yield look positively wunderbar.
Let the naysayers and bears keep growling. Last month, I told you that I thought all
the chatter about the stock markets imminent demise, having fallen a few percentage
points from its mid-July peak, was a bunch of hooey. Well, the S&P 500 index hit multi-
ple new highs in August, while at the same time, more and more economic data confirms
that the U.S. economy is growing nicely, with corporate profits also moving higher. Total
Stock Market gained 4.2% for the month, while Total International Stock and Total
Bond Market both added 1.1%.
The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.
FUNDS FOCUS > MONEY MARKET FUNDS
Zero Yield, But Still Valuable
INVESTORS HAVE TWO COMMON, YET OPPOSING SAYINGS about cash: Cash is
trash, and Cash is king. Well, which one is it? Neither, actually. In my view, cash is a
cornerstone of any investment portfolio and a vital money management tool, but it is not
a long-term investment itself.
For most fund investors, the equivalent to cash is a money market fund. If all goes
according to plan, a money market funds price will sit at $1.00 as we earn a little bit
of income day in and day out without reading about the fund in the headlines. (Yawn.)
Unfortunately for investors, that yield has been hard to come by for some time now, and
money market funds have been making headlines.
Lets start with the headlines. As I mentioned last month, the SEC recently changed
some rules when it comes to money market fundsthough for you and me, the changes
DOW JONES INDUSTRIALS
August Close: 17098.45
STANDARD & POORS 500
3600
3900
4200
4500
4800
A J J M A M F J D N O S
NASDAQ COMPOSITE
0.00%
0.02%
0.04%
0.06%
0.08%
3-MO. TREASURY BILL YIELD
August Close: 0.02%
2.0%
2.3%
2.6%
2.9%
3.2%
10-YR. TREASURY NOTE YIELD
August Close: 2.34%
14600
15200
15800
16400
17000
17600
1650
1750
1850
1950
2050
AVERAGE VANGUARD INVESTOR*
August: 2.6% YTD: 7.4%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
*See the footnotes on page 2.
Model Portfolios ............................................................... 2
Performance Review ................................................... 8-11
The Investment Tipping Point ......................................... 12
Ghost in the Machine ..................................................... 14
When One Fund Acts Like Another ................................ 14
Vanguard Speak .............................................................. 15
Quarterly Payouts ........................................................... 15
Dans Do-It-Now Action Recommendations ................... 16
PIN: SEE PAGE 16
SEPTEMBER 2014
SEE TURBULENT PAGE 3 >
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
> SEE ZERO PAGE 4
2 Fund Family Shareholder Association www.adviseronline.com
THIS MONTHS CHANGES
None.
About our Model Portfolios The Growth
portfolio is aimed at investors with long
time horizons who can withstand a certain
amount of monthly volatility in exchange for
above-average returns. Most appropriate for
younger investors who continue to add money
as markets gyrate. Since inception the model
has been slightly less volatile than the stock
market. The Conservative Growth portfolio
is appropriate for investors seeking to match
the markets risk-adjusted returns over time.
Since inception it has been just 80% as volatile
as the stock market. The Income portfolio is
designed for investors who desire a higher
level of income plus the opportunity for capital
growth with low risk, such as retirees or near-
retirees. Since inception the model has been
only two-thirds as volatile as the stock market.
Returns have been substantially higher than
the bond market. The Growth Index model is
designed for young investors who wish to index
exclusively. All Model relative volatility figures
are measured against the stock market.
When trades are recommended we will
announce them on our Hotline and they will
also appear on this page.
Our Average Vanguard Investor index (see
page 1) measures the monthly performance of
the typical Vanguard fund investor. The aver-
age Vanguard Investor index (VII) is a dollar-
weighted performance measure for the entire
Vanguard fund group, including stock, bond,
balanced and money market funds. It provides
a yardstick against which to measure an indi-
vidual portfolios performance.
NOTE: All returns are total returns with
distributions reinvested. Flagship investors
may open new accounts in all closed funds in
the model portfolios, though some may only
allow a maximum of $25,000 per year. If you
dont qualify, here are some alternatives. With
Capital Opportunity (and PRIMECAP Odyssey
Aggressive Growth) closed I recommend
investors consider PRIMECAP Odyssey Growth
(POGRX) as a replacement. PRIMECAP Odyssey
Stock (POSKX) is the preferred replacement
for PRIMECAP Core. Both can be purchased
directly at www.OdysseyFunds.com or for a fee
through Vanguard Brokerage.
MODEL PORTFOLI OS
The Alternative Funds in the table to the left
are both current and past recommendations
Ive made for Vanguard funds that either closed
or were saddled with high minimums. Some
of these funds have subsequently closed, but
many of you own them, so Ive provided this
performance data for your interest. Note that
HGHAX is typically sold with a front-end load,
though clients of private money managers can
sometimes buy the fund no-load. Please refer
to the note above for my current alternative
recommendations.
PAST ALTERNATIVES TO CLOSED/HIGH MINIMUM FUNDS
Fund Ticker
8/29
Price
August
Return
YTD
Return
12-Mo.
Return
3-Year
Return
5-Year
Return Alternative For
Artisan MidCap ARTMX $49.56 5.8% 4.1% 19.4% 18.3% 19.9% Capital Opp.
Artisan MidCap Value ARTQX $28.36 3.6% 5.0% 17.5% 18.5% 16.6% Selected Value
Polaris Global Value PGVFX $21.72 2.0% 5.2% 20.5% 18.9% 14.7% Global Equity
Fidelity International SmallCap FISMX $26.96 0.1% 0.6% 15.8% 12.5% 12.9% International Expl.
Fidelity International SmallCap Opp. FSCOX $14.67 1.2% 5.1% 19.7% 15.1% 15.1% International Expl.
T. Rowe International Discovery PRIDX $58.24 1.3% 4.5% 19.6% 13.7% 13.3% International Expl.
Hartford Healthcare HGHAX $34.70 4.3% 14.7% 33.5% 27.3% 20.8% Health Care
ICON Healthcare ICHCX $22.31 3.4% 16.5% 36.0% 27.8% 20.1% Health Care
PRIMECAP Odyssey Growth POGRX $26.07 5.9% 10.4% 22.2% 22.3% 17.7% PRIMECAP
PRIMECAP Odyssey Aggressive Growth POAGX $33.50 7.0% 13.0% 28.9% 29.3% 24.0% Capital Opp.
PRIMECAP Odyssey Stock POSKX $23.36 4.0% 10.4% 24.1% 20.1% 16.7% PRIMECAP Core
Fidelity High Income SPHIX $9.43 1.6% 4.2% 8.4% 9.3% 10.8% High-Yield Corporate
GROWTH MODEL
Ticker Shares NAV Value % Mo. Return
Selected Value VASVX 6,064 $30.41 $184,409 24% 3.8%
S&P MidCap 400 Growth ETF IVOG 1,773 $97.18 $172,324 22% 4.7%
Dividend Growth VDIGX 6,980 $22.50 $157,048 20% 3.8%
Capital Opportunity VHCOX 2,914 $52.31 $152,450 20% 5.1%
Health Care VGHCX 250 $213.46 $53,292 7% 4.1%
International Growth VWIGX 1,146 $23.79 $27,271 4% 1.1%
Short-Term Inv.-Grade VFSTX 2,299 $10.75 $24,719 3% 0.3%
TOTAL $771,513
PAST
PERFORMANCE
2013: 34.2% 2001: -6.4%
2012: 14.3% 2000: 20.4%
2011: -1.4% 1999: 36.3%
2010: 14.3% 1998: 23.5%
2009: 34.4% 1997: 23.2%
2008: -38.4% 1996: 16.6%
2007: 10.0% 1995 26.1%
2006: 18.4% 1994: -0.2%
2005: 11.4% 1993: 16.6%
2004: 15.7% 1992: 6.1%
2003: 32.0% 1991: 28.9%
2002: -17.8%
CURRENT
PERFORMANCE
Aug. 4.1% YTD 8.3% 1-yr 23.2% 3-yr 19.1% 5-yr 15.7%
Risk last 24 months 1.04 Risk since inception 0.97
Beg. Value: $50,000 (1/1/91)
CONSERVATIVE GROWTH MODEL
Capital Opportunity VHCOX 2,210 $52.31 $115,597 22% 5.1%
S&P MidCap 400 ETF IVOO 835 $97.21 $81,142 15% 5.1%
Selected Value VASVX 2,435 $30.41 $74,046 14% 3.8%
High-Yield Corporate VWEHX 6,916 $6.13 $42,397 8% 1.6%
International Growth VWIGX 1,468 $23.79 $34,921 6% 1.1%
TOTAL $535,034
PAST
PERFORMANCE
2013: 29.8% 2001: -3.5%
2012: 13.8% 2000: 14.0%
2011: 1.0% 1999: 19.7%
2010: 12.0% 1998: 15.2%
2009: 29.1% 1997: 22.6%
2008: -33.6% 1996: 17.6%
2007: 8.6% 1995 21.5%
2006: 15.8% 1994: 1.1%
2005: 8.8% 1993: 14.9%
2004: 13.0% 1992: 6.5%
2003: 28.9% 1991: 26.0%
2002: -16.4%
CURRENT
PERFORMANCE
Aug. 3.7% YTD 8.4% 1-yr 21.7% 3-yr 18.0% 5-yr 14.7%
Beg. Value: $50,000 (1/1/91)
INCOME MODEL
PRIMECAP Core VPCCX 3,873 $22.05 $85,405 22% 4.4%
Int-Term Investment-Grade VFICX 7,256 $9.98 $72,412 19% 1.1%
High-Yield Corporate VWEHX 6,461 $6.13 $39,608 10% 1.6%
MidCap Index VIMSX 672 $33.04 $22,189 6% 4.7%
International Growth VWIGX 601 $23.79 $14,298 4% 1.1%
TOTAL $381,844
PAST
PERFORMANCE
2013: 18.6% 2001: -1.1%
2012: 11.5% 2000: -3.5%
2011: 5.1% 1999: 9.9%
2010: 11.2% 1998: 18.2%
2009: 21.9% 1997: 22.5%
2008: -24.1% 1996: 18.4%
2007: 3.8% 1995 28.4%
2006: 10.6% 1994: -1.2%
2005: 6.2% 1993: 10.8%
2004: 8.4% 1992: 6.3%
2003: 19.1% 1991: 22.4%
2002: -4.5%
CURRENT
PERFORMANCE
Aug. 2.9% YTD 8.1% 1-yr 17.7% 3-yr 13.7% 5-yr 12.3%
Beg. Value: $50,000 (1/1/91)
GROWTH INDEX MODEL
S&P MidCap 400 Growth ETF IVOG 910 $97.18 $88,387 28% 4.7%
S&P MidCap 400 Value ETF IVOV 790 $96.77 $76,446 24% 5.2%
Dividend Appreciation ETF VIG 802 $78.12 $62,652 20% 3.6%
S&P 500 Growth ETF VOOG 492 $97.04 $47,740 15% 4.3%
Health Care ETF VHT 191 $117.17 $22,383 7% 5.2%
Total International Stock ETF VXUS 207 $53.97 $11,190 3% 1.2%
Short-Term Corporate ETF VCSH 136 $80.24 $10,895 3% 0.3%
TOTAL $319,695
CURRENT
PERFORMANCE
Aug. 4.3% YTD 7.8% 1-yr 22.7% 3-yr 17.6% 5-yr 16.3%
Beg. Value: $50,000 (3/1/95)
PAST
PERFORMANCE
2013: 30.7% 2004: 15.1%
2012: 14.8% 2003: 28.2%
2011: -0.3% 2002: -16.9%
2010: 18.8% 2001: -2.4%
2009: 33.2% 2000: -15.6%
2008: -40.3% 1999: 21.4%
2007: 11.7% 1998: 26.7%
2006: 16.0% 1997: 25.8%
2005: 12.1% 1996: 19.9%
The Independent Adviser for Vanguard Investors September 2014 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
Whats particularly interesting to me
is the broad rotation weve experienced
in the first eight months of this year.
During the first quarter, U.S. small
stocks were by far the best performers,
and now they are the laggards. Foreign
developed stock markets took the lead
for a while. And after an almost 10%
decline, emerging markets have come
roaring back and are now outperform-
ing by a wide margin, as the chart to the
right shows.
Dont forget what the naysayers
were shouting about junk bonds, either.
High-Yield Corporate, which dropped
1.2% in July (its first losing month in
11), came back with a 1.6% gain in
August as sentiment suddenly shifted
and Wall Street started buying again.
You and I didnt panic, and weve
made good money in the sector. And
for all the claims that health care stocks
would begin to falter after their robust
performance early this year, Health
Care remains up 19.0% after generat-
ing a further 4.1% gain this past month.
I expect diversified portfolios such as
ours, with year-to-date gains of 7.8% to
8.4% and allocations to great managers
in the large-cap, mid-cap and health
sectors, among others, to continue to
provide a good ride through the global
turmoil, whether its geopolitical or
market-induced.
Going for Brokerage
Vanguard has taken a page from
my playbook and has a push on to get
investors to merge their individual fund
accounts under a brokerage account
umbrella (with separate accounts for
IRAs, joint accounts, and so on). Youll
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 - Assistant Managing Editor
Louisa Dorado - Marketing Director
Mary Taylor - 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., Rockville MD 20850. A one-year membership is $229 (foreign, add $18).
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The FFSA is an independent organization dedicated to providing investors with intelligent and objective advice about the Vanguard family of mutual
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is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can the publication be considered liable for
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Copyright 2014 by Fund Family Shareholder Association. Reproduction in whole or in part is prohibited except by written permission of FFSA.
TURBULENT FROM PAGE 1 >
have SIPC protection for your fund
assets up to $500,000 (which you didnt
have with the regular fund account),
and it will make transacting business
speedier (they say). Plus, the year after
you make the switch, youll receive a
consolidated tax document for invest-
ments held at Vanguard.
But there are several devils in the
details. They arent deal-killers, but this
isnt seamless either. For instance, if
you have given someone like a trustee
or investment adviser access to your
account, youll have to redo those
permissions on your new brokerage
accounts. The permissions dont carry
over. Also, if youve been taking dis-
tributions from one fund and having
them deposited into another fund, that
service is going away. You will have to
make all of those trades manually.
With the new brokerage account,
youll receive a new money market
fundeither Prime Money Market
or Tax-Exempt Money Market
that will become your settlement
account even though you may already
be investing in a state tax-free money
fund, Admiral Treasury Money
Market or Federal Money Market.
Sell a fund or ETF, or receive interest
on a bond, and that money will go into
the new settlement account. Want to
write a check on it? Youll need new
checks. Vanguard says that you can
still hold onto your old money fund
and designate it as an alternative
redemption fund, which means itll
be your backup if you write a check
and overdraw your new settlement
account. Thanks, but aside from the
confusion, that doesnt really help the
investor who wants all her cash in the
Treasury fund, for instance, and not
something else.
Ultimately, having all your Vanguard-
held assets under a brokerage umbrella
makes sense to me. The problem is
the path from here to there is riddled
with potholes. Vanguards new broker-
age account pamphlet, which you can
find online, isnt completely clear. You
wont be required to make this switch
now, but eventually it sounds like all
Vanguard shareholders will be moving
to this brokerage model.
Finally, I wanted to let you know
that yes, my team and I do read all
of the emails and letters you write
to us at AdviserOnline, and yes, I do
want to respond to as many as I can.
Of course, as you may suspect, the
number of questions and comments
(including some very nice ones, thank
you) is quite large. One thing I am
learning from your questions is that
its important to keep returning to the
basicswith a Vanguard flavor. Jeff
and I will continue to do that in the
weeks and months ahead. Our story
on compounding, which begins on
page 12, is an effort in that direction.
Enjoy. n
Leadership Has Rotated in 2014
(Year-to-Date Returns Through August)
SmallCap Index
Total Stock Market
Emerging Markets Index
Total Intl. Stock Index
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-10%
-5%
0%
5%
10%
15%
are minimal. Why the need for new
regulations in the first place?
Money funds aim to maintain a con-
stant net asset value (NAV) of $1.00.
While the NAV reported in the paper
and in your statement shows a stable
$1.00, there is actually some movement
below the surface. Money funds record
shadow NAVs daily, which estimate
the current market value of their secu-
rities. Those daily NAVs often dance
around $1.00 by a few thousandths of
a dollar as the prices of the short-term
securities held by the funds fluctuate
day-to-day. But we rarely see these
fluctuations, as the price for buying and
selling shares is rounded to two decimal
places. In a few rare instances, a money
markets reported NAV (or price) has
dropped below $1.00. This is called
breaking the buck. When that hap-
pens, Wall Street shakes. Luckily, its a
rare occurrence. The last fund to break
the buck was the Reserve Fund during
2008s credit-market lockup. Its fall
prompted the SEC to review the rules
applied to money market fundsin
particular, whether money funds should
begin reporting floating (or variable)
NAVs rather than $1.00 per share.
Fortunately, you and I can continue
to rely on our funds being priced at
$1.00 per shareno variable pricing
for us individual investors. Institutional
prime money funds, however, will shift
to floating NAVs (showing prices out
to four decimal places) by the end of
a two-year transition period. The SEC
also gave money funds (investor and
institutional) the ability to charge a fee
for redemptions or to suspend redemp-
tions entirely for up to 10 days if theres
a run on assets during a crisis and
liquidity dries up.
None of the regulationsfloat-
ing NAVs or the emergency fees and
gatesapply to government money
market funds. So if you wanted to com-
pletely avoid the issue, you could con-
sider something like Admiral Treasury
Money Marketthough as that fund is
closed to new investors, youll have to
look outside of Vanguard. But Im not
losing any sleep over the changes. For
Vanguard investors like us, I think this
is a non-event. We keep the $1.00 NAV
price, and Vanguards money funds
continue to be safe and well-run.
Thats the good news. Unfortunately,
the yield or income were getting from
our money funds these days is a serious
problem.
The Federal Reserve, which, as we
discussed in last months issue, essen-
tially sets short-term interest rates,
last cut its fed funds rate to a range
of 0.00% to 0.25% on Dec. 16, 2008,
over five years ago. Money markets
yields are generated by very short-
term bonds that peg their own rates to
what the Fed does. If the fed funds rate
is low, so are money market yields.
And money market yields are cur-
rently so low you almost have to look
up to see bottom.
Ill bet you never thought much
of a money market fund yielding
1.00%. Big deal, right? Well, you and I
havent seen a yield of 1.00% on any of
Vanguards money market funds since
March 2009and Vanguards the low-
cost leader, right? It has been nearly
five years since their money market
funds sported yields above 0.25%, and
over two years since I could find a
0.10% yield. Its been almost a year
since there was a yield above 0.01%, or
one basis point.
The fact that Vanguard is going to
great lengthssubsidizing some of the
costs on a temporary basis to keep
yields above zeroshows the toll that
the Feds zero-interest-rate policy has
taken on yields. The ultra-short-term
bond market is fairly high quality, so
theres not much more a great fund man-
ager can do than a mediocre manager to
select great securities for a money mar-
ket fund. In the end, it mainly comes
down to costs. The lower your operat-
ing expenses, presumably, the higher
your money funds yield. Yet Vanguard,
which has some of the lowest costs in
the industry, still cant get the yields on
its money funds up over 0.01%.
Annuity investors face a special
case. See the box on page 6 for more
on Money Market Annuity, but as the
table above shows, Vanguard cant keep
investors yields in the black. Its been
losing value since Dec. 1, 2009.
With core inflation running between
1.5% and 1.9%, money market assets
arent coming anywhere close to
keeping up with inflationmeaning
the value of cash is slowly eroding.
Consider the graph to the left, which
plots the return of 500 Index, Total
Bond Market and Prime Money
Market as well as inflation over the
past 25 years. Cash does give you
a smooth ride, and at times like the
market crash in 2008 and early 2009,
simply holding cash at a then-bountiful
yield above 1% looked like a smart
movebut over an investment lifetime,
returns from cash have fallen well short
of those from stocks or bonds, and are
only narrowly ahead of inflation. Over
the last five years, inflation has sped
well ahead of cash, up more than 10%
cumulatively to Prime Money Markets
0.2% gain. Given where we are today,
with yields at zero, its almost certain
that returns from money market funds
will continue to fall short of inflation.
ZERO FROM PAGE 1
>
Cash Doesnt Pay
Over a Lifetime
500 Index
Total Bond Market Index
Prime Money Market
Core CPI
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
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8
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9
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Rock Bottom Yields
Current
Yield
First Date
Yield
Hit 0.01%
Admiral Treas. Money Mkt. 0.01% 12/7/2009
Federal Money Mkt. 0.01% 1/6/2010
Prime Money Mkt. 0.01% 2/18/2010
Tax-Exempt Money Mkt. 0.01% 6/20/2011
CA Tax-Exempt Money Mkt. 0.01% 6/14/2011
NJ Tax-Exempt Money Mkt. 0.01% 6/14/2011
NY Tax-Exempt Money Mkt. 0.01% 6/14/2011
OH Tax-Exempt Money Mkt. 0.01% 7/5/2011
PA Tax-Exempt Money Mkt. 0.01% 6/8/2011
Money Market Annuity -0.21% *
* Value began falling Dec. 1, 2009.
Why Bother?
This leads to the obvious question of
why one would bother owning a money
market fund at all.
As Ive said many times in the past,
I keep a substantial amount of my own
cash in New York Tax-Exempt Money
Market. Heres why: Even if Im barely
earning any interest and I know Im not
going to keep up with inflation, I always
want to have a Vanguard money fund as
a repository for rainy day money, as
well as a conduit for my other investing
activities. Notice I do not view this as an
investment, but as a practical and useful
asset-management tool.
First, every investor should have an
emergency fund. Life happens! Some
eventslike an unexpected medical
expense, or a downsizing at work,
or a suddenly leaking roofdont
AS I HINT ON PAGE 6, there are times when short-term bond funds make
sense as a substitute for money markets. Remember, a money market
fund is a money management tool for your immediate (within the next 12
months) cash needs. A short-term bond fund can work as a vehicle for
cash that you wont need for two or three years. The idea is to earn a bet-
ter return without taking on too much additional risk of capital loss.
I have long been a big proponent of this strategywell before money
market yields hit bottom. But anytime we are in a position to get more
return, its important to keep in mind that there is a greater potential for
loss.
Lets start with the risk, because if you cant live with the risks, you
shouldnt reach for extra potential returns. While Im not aiming to
take on lots of risk in recommending a short-term bond fund, the credit
market freeze in 2008 put all types of funds, short-term bond and money
markets included, to the test. With the crisis several years behind us, we
know that Vanguards funds have been battle-tested and all survived to
fight another day. And as long as you didnt need that money and stuck
with your short-term bond positionremember, this is for cash you dont
need immediatelyany losses were short-lived.
For tax-sensitive investors, I recommend extending out beyond a
money market with Short-Term Tax-Exempt, which I liken to a money
fund on steroids. I have used this one myself. Going back nearly 20
years, the worst three-month loss for the fund was just 0.5%, as the
table to the right indicates. Thats something I can live with.
If taxes are not a concern, Ive always recommended Short-Term
Investment-Grade. That advice proved to be terrific until the credit cri-
sis of 2008, when Short-Term Investment-Grade suffered huge short-term
losses as credit markets locked up. The depth of the drawdownShort-
Term Investment-Grade lost 6.8% in three monthswas greater than I
had expected. Before the credit crisis, the worst three-month loss in the
fund was about 2.2%. Even though the loss was recovered quickly, I can
tell you that those few months were nerve-racking.
This is why I emphasize using a short-term bond fund for cash you
dont need to spend immediately. Even after the 2008 experience, though,
I still have confidence in Short-Term Investment-Grade as an alternative
for cashparticularly in the current low interest-rate environment.
For a broader sense of the risks and rewards involved, in the table to
the right, Ive applied my rolling returns analysis to Vanguards money
funds and short-term bond funds, listing the worst three-month, six-month
and 12-month returns over the past nearly 20 years, as well as the best
and average returns over those periods. Short-Term Investment-Grades
worst is pretty bad, but its best returns are also pretty darned good.
That said, I completely understand if you want something a bit calmer.
Any of Vanguards other short-term funds would have proven a safer bet
in 2008, and all are solid options.
Another option as a cash substitute is Short-Term Inflation Protected
Index. The fund is not yet two years old, so I did not include it in the table
with the other cash substitutes, but with a short maturity profile it is a
viable option for this roleparticularly if you are concerned about infla-
tion. This is how Vanguard appears to be using the fund within the Target
Retirement series of funds. Note that the fund last paid out a dividend in
December 2013, so you arent earning any current income right now.
There is a final alternative for what Ill call longer-term cash that
you may find of interest. Paul Kaplan, former manager of GNMA
and Wellesley Incomes bond portfolio and the now-retired chief of
Wellington Managements bond shop, told me many years ago that he
considered GNMA a cash substitute. The data both backs Kaplan up
and highlights why this is for your longer-term cash. Had I stopped
the analysis in the table below at the end of 2012, the worst six-month
decline for GNMA would have been a drop of 1.8%. However, GNMA is
more sensitive to interest rates than most of the other funds in the table,
and when interest rates rose in 2013, this fund felt more of the pain
experiencing its largest decline over a six-month period, 3.2%.
Have no doubts: Interest rates will rise, and money markets will pro-
duce some income again, just as short-term bond funds will show some
short-term losses. In the end, it is really up to you how much (potential)
short-term pain youre willing to suffer for the prospect of longer-term
gains. Just keep in mind that there is no free lunch, and reaching for that
extra return does court some extra risk.
>
Risk and Reward for Money Funds
and Short Substitutes
Rolling Returns Since 12/31/94
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Worst -1.3% -1.5% -6.8% -1.8% -3.7% 0.0% 0.0% 0.0% -0.5% -1.6%
Average 1.1% 1.1% 1.2% 1.2% 1.5% 0.7% 0.7% 0.5% 0.7% 0.9%
Best 4.5% 4.3% 6.0% 4.2% 5.6% 1.6% 1.6% 1.0% 2.1% 3.5%
6-Month
Worst -0.6% -0.9% -6.9% -1.3% -3.2% 0.0% 0.0% 0.0% -0.2% -1.1%
Average 2.2% 2.3% 2.4% 2.4% 3.0% 1.4% 1.5% 1.0% 1.4% 1.8%
Best 7.6% 7.6% 10.4% 8.0% 10.6% 3.1% 3.2% 2.1% 3.5% 5.3%
12-month
Worst -0.5% -0.7% -5.8% -0.7% -3.4% 0.0% 0.0% 0.0% 0.2% -0.3%
Average 4.3% 4.6% 4.9% 4.7% 5.9% 2.8% 2.9% 2.0% 2.9% 3.6%
Best 12.1% 12.4% 15.7% 12.9% 17.0% 6.1% 6.3% 4.0% 6.1% 8.6%
Short-Term Bonds Lend a Hand
happen according to plan or a regu-
lar schedule. Just this past month, I had
to have a tree taken out of my backyard
in an emergency. That cost me a pretty
penny. Having money set aside for the
unexpected isnt pessimistic; its pru-
dent. Not only will having ready cash
make a stressful situation less stressful,
it also means youll be less likely to
disrupt your carefully made long-range
investment plans.
In my mind, an emergency fund
equivalent to six to 12 or even 24
months of living expenses is the foun-
dation of any savings and investment
plan. The safety and liquidity of money
market funds, particularly Vanguards,
make them ideal vehicles for this role.
You may have to top up your emer-
gency fund from time to time, as infla-
tion or a change in lifestyle may have
caused your expenses to rise, but that
is far better than finding your safety net
has been cut out from under you by a
tumbling stock market.
Hopefully youll never have to tap
your rainy day fund, kind of like insur-
ance. But a money market fund is also
useful for near-term expenses you are
already expecting. I am often asked
questions like, Where should I invest
the $200,000 I have for buying a house
this year? If your time horizon is short
and you cant make up the difference
if you lose any of the money youve
saved, then the answer really is to keep
it in casha money market fund or
FDIC-insured bank account. Its the
only place where you can put a dollar
in and get a dollar out on a daily basis.
(A certificate of deposit, or CD, could
work as well, but your money will be
locked up for whatever period youve
chosen for that CD.) I cant recommend
anything else in good conscience. If
your time horizon is longersay, two
or three yearsyou may have more
options, like a short-duration bond
fund. (See the box on page 5 for more
on short-term funds.) But again, its a
matter of knowing how much money
youre willing to risk losing, even if its
a small amount. Every dollar counts
when youre house-hunting in a hot
market, for instance.
Plus, money funds are incredibly
convenient and simple to use. As a
conduit, money funds are a power-
ful money-management tool. You can
write checks on them. You can wire
money into and out of them. You can
use them to move money into and out
of your Vanguard funds. You can direct
distributions from other funds into your
money market fund.
If youre like me, you occasionally
need to extract some money from your
Vanguard investments to help pay the
bills. You dont need to transfer money
to a checking account. Writing a check
from your money market account is
easy. I do it all the time. Unlike writing
a check on a bond fund, a check written
on a money market fund doesnt create
a taxable event that must be reported
to the IRS. Just confirm you have
enough assets in your money market
fund first, otherwise youll need to sell
some bond or stock fund shares (which
could impact your tax bill) and have
the money transferred into your money
market.
Money market funds are practical
for systematic investment plans, like
dollar-cost averaging or value-averag-
ing. Your money continues to earn a
smidge of interest, remains completely
safe, and can be moved with ease into
another fund when the time comes.
In taxable accounts, I have long
recommended (and practiced) having
distributions, whether they are monthly
income from your bond fund or year-
end capital gains, deposited automati-
cally into your money market fund.
This money becomes instantly avail-
able should you need to write a check
on it. It allows you to reallocate or
rebalance without having to sell fund
shares. This is helpful if you rebalance
Expense Headwind Pushes Money Market
Annuity in Reverse
MONEY MARKET ANNUITY IS A BIT OF A DIFFERENT ANIMAL. The portfolio is run, like
Vanguards other money funds, with the goal of a stable $1.00 NAV, safety and liquidity first.
However, unlike its other money funds, Vanguard Money Market Annuity has additional insur-
ance-related expenses to contend with. And for several years now, its portfolios meager yields
have been overwhelmed by those expenses, resulting in negative returns for investors.
By Vanguards account, in the most recent annual report for its annuity products, the Money
Market Portfolio delivered positive performance of 0.11% in 2013. This beat peers and an
expense-free benchmark, all while maintaining a $1.00 NAV. However, that return was not
enough to cover the cost of the annuity contract investors must pay for. As a result, after
accounting for fees, Money Market Annuity lost -0.19% in 2013. This year isnt shaping up to
be much better, with the annuity off 0.13% so
far. (This is also reflected in the negative yield
shown in the table on page 4.)
Its been a tough five-year stretch for Money
Market Annuity. The annuity product is priced
at AUV, or accumulated unit value, which adds
all income and subtracts all expenses from its
share price on a daily basis. As you can see in
the chart to the right, Money Market Annuitys
AUV has been gradually slipping since Dec.
2009. In fact, Money Market Annuitys three-
year return turned negative on January 24,
2012, and its five-year return fell into the red
on November 29, 2013.
The underlying portfolio may have met
Vanguards expectations, but the actual client experience has been disappointingto say the
least. Performance-eroding expenses combined with near-zero yields make this an unattractive
option. I do not recommend using Money Market Annuity. Period.
MM Annuitys Tumble
2
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0
9
8
/
0
9
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8
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1
1
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2
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1
4
8
/
1
4
Value
tops out
8/14/09
Stops
falling
7/19/10
Value starts falling 12/1/09
3-year return
goes negative
1/24/12
$1.900
$1.902
$1.904
$1.906
$1.908
$1.910
$1.912
$1.914
$1.916
Value falling again
9/15/10
5-year
return goes
negative
11/29/13
>
annually or are executing a gradual
shift in your portfolios allocation.
A fourth and final reason to hold
a money market fund is that cash is a
shock-absorber, taking the edge off of
the volatility in your portfolio. I have
often allocated a percentage of my
private clients accounts to a money
market or slightly higher-yielding alter-
native like Short-Term Investment-
Grade. Your money market fund or
short-term bond fund isnt going to
make you rich on its own, but it should
help keep your portfolio above water
when the storm hits while putting you
in a position to buy when everyone else
is rushing for the exits.
What Is an Investor to Do?
Yes, yields are at rock bottom right
now, and as much as anyone else, I
would like to earn more on my cash, if
only to help offset the impact of infla-
tion. But as I said, my primary concern
with my cash holdings is the return of
my capital, not the return on my capital.
Usually, this is where I provide some
advice to taxable investors about the
advantages of a tax-exempt money
fund. But right now, with the yields
on all of Vanguards funds essentially
pinned at zero, there isnt much income
to worry about. At some point that will
change, and tax-conscious investors
will need to pay attention to the differ-
ence between taxable and tax-exempt
money fund yields. Today, the differ-
ences are almost rounding errors.
Of course, for some investors, the
added value of the U.S. Treasurys
full faith and credit may allow them to
sleep better at night, even if the yield
is next to nothing, hence the appeal of
Vanguards Treasury or Federal funds.
For me, though, the high credit qual-
ity of all of Vanguards money market
funds and the research skills employed
by Vanguards money market team give
me enough confidence to predict that
none of Vanguards money funds are
going to break the buck. And, as I
said, Vanguard is currently waiving
some expenses in order to keep its
yields in the black and prices at $1.00.
Ill say it one more time: Cash is a
money management tool, not an invest-
ment. Vanguard is probably the best
hardware store in town. Though it is
frustrating to be earning next to noth-
ing on our money funds, as long as the
objective is to have some safe, liquid
money available to us, then Vanguards
funds are the ultimate cash-holding
vehicle. n
A Non-Fund Option?
THOSE ADS PROMISING HIGH YIELDS on your cash are everywhere. I get it. Earning essentially
zero on our money funds isnt fun. And some non-mutual-fund companies are trying to come to
the rescue. If you are looking for a place to stash cash that offers some yield and is still safe, you
may want to consider a high-yield savings account.
As I write this, a quick internet search readily reveals a number of saving accounts offering
yields well above those found on Vanguards money market funds. The table below lists a hand-
ful of options. (Please do not consider this a recommendation or endorsement of these banks or
accounts. I am merely showing them for illustrative purposes.)
Lets put some numbers on how much
more you can earn with a high-yield savings
account versus a Vanguard money market fund
today. A yield of 0.95% on $10,000 generates
$95 dollars in income. That wont make you
rich, but its far better than the $1 of income
youll get from a 0.01% yield on $10,000.
Many of these accounts are FDIC-insured
so there is a high level of safety to go with
the yield. Whats not to like?
First, note that many high-yield saving
accounts are offered by online banks. Having
lower costs and few brick-and-mortar locations is one way these banks are able to offer
even lower expenses than Vanguards, with higher yields to boot. There is nothing inherently
wrong with an online bank (Jeff DeMaso uses one), but recognize that all of the customer
service is provided over the internet, phone or your mobile device. The bank may not offer all
the same services, or they may just take longer to execute a transaction compared to a physi-
cal bank. This will work for some, and not others.
Other things to keep in mind are each banks monthly fees and account minimums.
Importantly, savings accounts are not as flexible as a money market fund. You are limited to
six withdrawals a month in a savings account. If you want to spend the money in this type of
account, you may have to transfer the assets to your checking account or another bank. In short,
utilizing a savings account may take a little more planning on your behalf.
If you are going to explore a high-yield savings account, you should be aware that the rate
you see isnt exactly the same thing as the yield reported for money market funds. Money
market funds typically report an SEC yield, which looks at the interest paid less any expenses
over the past seven days, and assumes that level of interest continues over the rest of the year.
Notably, this does not take compounding into account. The annual percentage yield (APY) com-
monly reported on savings accounts does factor in compounding. To compare apples to apples,
you need to look for a money market funds compound (or effective) yield. Vanguard reports
both the SEC and compound yields for its money market funds in the individual fund profiles on
its website. The difference between a funds SEC yield and its compound yield typically isnt
greatand at todays rock bottom yields there is no appreciable differencebut it is something
to be aware of if you are comparison shopping.
Wrapping this all together suggests that if you are looking for a safe place with a little yield to
stash your emergency fund, a high-yield savings account may be worth considering. The savings
account wont work as well for handling distributions from your stock and bond funds or offer the
same flexibility for near-term purchases, but those are separate issues from maintaining a rainy
day fund. Keep in mind that there is no guarantee your account will always be high yielding,
and Vanguards money markets wont yield one basis point forever, either.
A Sample of Higher
Yields Out There
Bank Account Name
8/29
APY
GE Capital Bank Online Savings 0.95%
Synchrony Bank Optimizer Plus High
Yield Savings
0.95%
CIT Bank CIT Bank Savings 0.95%
Ally Bank Online Savings 0.87%
American Express Personal Savings 0.80%
Capital One 360 360 Savings 0.75%
PERFORMANCE REVI EW
VANGUARD EQUITY FUNDS
Fund (fund #) Ticker Minimum Loads Advice
8/29
Price
August
Return
YTD
Return
12-Mo.
Return
3-Year
Return
5-Year
Return
12-Mo.
Yield Risk
SECTOR
Energy (51) VGENX $3K Hold $74.32 1.8% 10.7% 20.7% 9.8% 11.4% 1.5% 1.32
Precious Metals & Mining (53) VGPMX $3K Sell $11.67 0.0% 12.9% 5.9% -20.4% -4.1% 0.0% 2.50
Health Care (52) VGHCX $3K Buy $213.46 4.1% 19.0% 37.1% 26.1% 20.4% 1.1% 1.15
REIT Index (123) VGSIX $3K Hold $25.62 3.0% 21.1% 24.2% 14.3% 18.7% 3.5% 1.42
Global ex-U.S. Real Estate Index (738) VGXRX $3K 0.25%f/0.25%r Hold $23.51 0.3% 8.8% 16.0% 11.3% 3.3% 1.52
AGGRESSIVE GROWTH
Capital Opportunity (111) (CLOSED) VHCOX $3K Buy $52.31 5.1% 13.3% 28.6% 24.8% 17.7% 0.1% 1.26
Explorer (24) VEXPX $3K Hold $105.26 5.1% 1.8% 18.1% 20.0% 18.6% 0.0% 1.40
Explorer Value (1690) VEVFX $3K Hold $32.97 3.2% 4.7% 20.3% 20.7% 0.5% 1.23
MidCap Growth (301) VMGRX $3K Sell $26.26 4.5% 6.2% 20.2% 18.8% 18.2% 0.0% 1.21
SmallCap Growth Index (861) VISGX $3K Buy $35.55 4.8% 3.4% 18.0% 19.5% 19.3% 0.5% 1.38
SmallCap Index (48) NAESX $3K Hold $55.93 5.0% 6.2% 22.1% 20.9% 18.8% 1.1% 1.31
SmallCap Value Index (860) VISVX $3K Hold $25.31 5.2% 8.5% 25.5% 21.8% 18.1% 1.6% 1.29
Strategic Equity (114) VSEQX $3K Hold $33.33 4.8% 11.1% 30.4% 23.8% 20.8% 1.1% 1.22
Strategic SmallCap Equity (615) VSTCX $3K Hold $32.70 5.2% 7.9% 26.4% 22.6% 20.7% 0.7% 1.38
Admiral Tax-Managed SmallCap (116) VTMSX $10K Sell $44.34 4.3% 1.9% 18.7% 20.5% 18.6% 0.9% 1.36
GROWTH
Capital Value (328) VCVLX $3K Buy $16.00 4.1% 11.1% 28.3% 23.8% 18.6% 0.6% 1.33
Extended Market Index (98) VEXMX $3K Sell $66.76 4.9% 6.4% 22.4% 20.7% 18.9% 0.9% 1.29
Growth Index (9) VIGRX $3K Buy $52.45 4.7% 10.1% 27.2% 20.4% 17.9% 1.0% 1.10
MidCap Growth Index (832) VMGIX $3K Buy $38.98 5.6% 9.9% 23.0% 18.2% 19.0% 0.4% 1.20
MidCap Index (859) VIMSX $3K Hold $33.04 4.7% 10.1% 24.9% 20.2% 19.0% 0.9% 1.10
MidCap Value Index (835) VMVIX $3K Hold $34.60 3.9% 10.3% 26.7% 22.2% 19.0% 1.3% 1.07
Morgan Growth (26) VMRGX $3K Hold $27.58 4.8% 7.7% 24.6% 18.8% 16.9% 0.6% 1.16
PRIMECAP (59) (CLOSED) VPMCX Buy $104.52 3.9% 13.2% 31.4% 22.9% 17.9% 0.8% 1.02
PRIMECAP Core (1220) (CLOSED) VPCCX Buy $22.05 4.4% 13.4% 28.9% 21.6% 17.6% 0.8% 0.98
Selected Value (934) VASVX $3K Buy $30.41 3.8% 7.8% 24.5% 22.4% 18.7% 1.0% 1.05
Social Index (213) VFTSX $3K Buy $12.74 4.1% 9.8% 25.6% 22.0% 16.9% 1.2% 1.04
STAR Growth (122) VASGX $3K Sell $29.37 2.8% 7.4% 19.2% 14.2% 12.6% 2.0% 0.81
Admiral Tax-Mgd. Capital App. (5102) VTCLX $10K Sell $102.74 4.1% 9.7% 25.6% 20.8% 17.2% 1.4% 1.02
U.S. Growth (23) VWUSX $3K Sell $31.03 4.1% 8.2% 26.3% 20.2% 16.5% 0.4% 1.20
GROWTH & INCOME
500 Index (40) VFINX $3K Buy $185.43 4.0% 9.8% 25.0% 20.4% 16.7% 1.7% 1.00
Convertible Securities (82) VCVSX $3K Buy $14.37 1.4% 6.2% 13.5% 12.6% 12.1% 2.8% 0.68
Diversified Equity (608) VDEQX $3K Sell $33.13 4.2% 8.4% 24.2% 20.8% 17.1% 0.8% 1.07
Dividend Appreciation Index (602) VDAIX $3K Buy $31.24 3.6% 4.7% 18.2% 16.7% 14.9% 1.8% 1.13
Dividend Growth (57) VDIGX $3K Buy $22.50 3.8% 6.5% 19.9% 18.3% 15.9% 1.9% 0.98
Equity Income (65) VEIPX $3K Buy $31.91 3.6% 8.7% 21.7% 20.2% 17.2% 2.4% 0.98
Growth & Income (93) VQNPX $3K Sell $43.33 4.2% 10.4% 25.8% 21.0% 17.1% 1.5% 1.00
High Dividend Yield Index (623) VHDYX $3K Hold $26.80 3.8% 10.0% 23.1% 20.3% 16.8% 2.7% 1.00
LargeCap Index (307) VLACX $3K Buy $37.28 4.0% 9.8% 25.0% 20.4% 16.9% 1.6% 1.00
Market Neutral (634) VMNFX $250K Sell $11.44 0.0% 3.7% 9.0% 3.2% 3.3% 0.0% 0.42
STAR Moderate Growth (914) VSMGX $3K Sell $24.45 2.4% 6.9% 15.8% 11.4% 10.7% 2.0% 0.63
Total Stock Market Index (85) VTSMX $3K Hold $50.56 4.2% 9.2% 24.6% 20.5% 17.2% 1.6% 1.03
U.S. Value (124) VUVLX $3K Hold $17.34 4.3% 11.2% 25.7% 22.8% 17.6% 1.7% 1.10
Value Index (6) VIVAX $3K Hold $32.27 3.5% 9.5% 23.1% 20.5% 15.8% 2.0% 1.01
Windsor (22) VWNDX $3K Hold $22.28 3.9% 10.3% 25.0% 23.1% 17.2% 1.2% 1.08
Windsor II (73) VWNFX $3K Buy $39.68 3.6% 9.2% 22.5% 20.5% 15.8% 2.1% 0.97
BALANCED
Balanced Index (2) VBINX $3K Hold $29.31 3.0% 7.4% 16.6% 13.2% 12.1% 1.7% 0.64
Managed Payout (1498) VPGDX $25K Sell $19.38 2.1% 7.0% 16.3% 10.9% 11.3% 5.0% 0.70
STAR (56) VGSTX $1K Hold $25.38 2.4% 7.0% 17.3% 13.2% 11.6% 1.8% 0.68
STAR Conservative Growth (724) VSCGX $3K Sell $18.99 1.9% 6.3% 12.5% 8.5% 8.5% 2.0% 0.47
STAR Income (723) VASIX $3K Sell $15.00 1.6% 5.8% 9.2% 5.7% 6.4% 2.0% 0.35
Admiral Tax-Managed Balanced (103) VTMFX $10K Sell $26.58 2.5% 7.8% 16.5% 12.0% 10.8% 2.0% 0.57
Wellesley Income (27) VWINX $3K Hold $26.16 2.0% 6.9% 12.7% 10.3% 10.4% 2.9% 0.47
Wellington (21) VWELX $3K Buy $40.46 2.5% 7.9% 17.4% 14.7% 12.4% 2.3% 0.64
TARGET RETIREMENT
Target Retirement 2060 (1691) VTTSX $1K $28.82 3.0% 7.7% 20.9% 1.3% 0.90
Target Retirement 2055 (1487) VFFVX $1K $32.70 3.0% 7.7% 20.9% 15.7% 1.5% 0.90
Target Retirement 2050 (699) VFIFX $1K $30.37 3.0% 7.7% 20.9% 15.7% 13.7% 1.7% 0.90
Target Retirement 2045 (306) VTIVX $1K $19.14 3.1% 7.8% 21.0% 15.7% 13.7% 1.7% 0.91
Target Retirement 2040 (696) VFORX $1K $30.51 3.0% 7.7% 20.9% 15.7% 13.7% 1.6% 0.91
Target Retirement 2035 (305) VTTHX $1K $18.27 2.9% 7.6% 20.1% 15.0% 13.3% 1.8% 0.86
Target Retirement 2030 (695) VTHRX $1K $29.67 2.7% 7.3% 18.7% 14.0% 12.6% 1.7% 0.79
Target Retirement 2025 (304) VTTVX $1K $16.88 2.6% 7.2% 17.5% 13.0% 11.9% 1.7% 0.72
Target Retirement 2020 (682) VTWNX $1K $28.99 2.4% 6.9% 16.2% 11.9% 11.2% 1.7% 0.65
Target Retirement 2015 (303) VTXVX $1K $15.73 2.1% 6.5% 14.4% 10.6% 10.3% 1.7% 0.58
Target Retirement 2010 (681) VTENX $1K $27.09 1.8% 5.8% 11.9% 8.8% 9.2% 1.5% 0.47
Target Retirement Income (308) VTINX $1K $13.06 1.5% 5.3% 10.0% 7.0% 7.7% 1.6% 0.40
Our ratings: BUY: Best choice. Generally funds held in our Model Portfolios or funds with similar objectives. HOLD: Current prospects for the fund are not as good as those with a Buy rating. However, investors
who own shares in the fund may wish to assess tax costs of trading into a Buy-rated fund. SELL: The funds long-term prospects are not as compelling as other funds, or other factors may make the fund unattract-
ive compared to alternatives. + is a rating upgrade over the previous month; - is a downgrade.
Investors should weigh all tax implications of fund switches before making a sale or purchase. Some closed funds are available for purchase by high-net-worth investors. All funds charge a $20 annual account fee
unless you have $10,000 in the fund, $100,000 with Vanguard or accept all paperwork through online means.
PERFORMANCE REVI EW
VANGUARD EQUITY FUNDS (CONT.)
Fund (fund #) Ticker Minimum Loads Advice
8/29
Price
August
Return
YTD
Return
12-Mo.
Return
3-Year
Return
5-Year
Return
12-Mo.
Yield Risk
INTERNATIONAL/GLOBAL
Developed Markets Index (1397) VDVIX $3K Sell $10.37 0.3% 2.6% 2.9% 1.27
Emerging Markets Stock Index (533) VEIEX $3K Hold $28.73 3.6% 12.4% 22.3% 3.9% 7.6% 2.2% 1.50
Emerging Markets Select Stock (752) VMMSX $3K Hold $22.04 2.9% 10.9% 23.9% 6.6% 1.2% 1.49
European Index (79) VEURX $3K Hold $31.06 0.6% 1.9% 17.6% 12.9% 8.9% 3.8% 1.40
Global Equity (129) VHGEX $3K Buy $25.17 2.7% 7.2% 23.1% 16.1% 13.5% 1.4% 1.02
Global Minimum Volatility (1194) VMVFX $3K Hold $11.15 3.0% 8.3%
International Explorer (126) VINEX $3K Hold $19.40 0.6% 5.3% 21.7% 12.7% 11.4% 2.1% 1.07
International Growth (81) VWIGX $3K Buy $23.79 1.1% 1.9% 18.3% 11.2% 10.5% 1.4% 1.32
International Value (46) VTRIX $3K Hold $38.40 0.0% 2.7% 18.1% 12.1% 8.2% 1.8% 1.27
Pacific Index (72) VPACX $3K Hold $11.92 -0.2% 3.6% 14.4% 8.9% 7.4% 2.4% 1.35
Total International Stock Index (113) VGTSX $3K Hold $17.31 1.1% 5.2% 18.3% 9.3% 8.1% 3.0% 1.19
Total World Stock Index (628) VTWSX $3K Hold $25.54 2.6% 7.3% 21.3% 14.3% 11.9% 2.2% 1.02
World ex-U.S. Index (770) VFWIX $3K Sell $20.52 1.0% 5.0% 17.9% 9.2% 8.1% 3.0% 1.20
World ex-U.S. SmallCap Index (1684) VFSVX $3K Hold $41.59 1.3% 6.9% 20.9% 8.9% 10.8% 2.3% 1.24
Minimum refers to the dollar amount (e.g., $3K means
$3,000) needed to open a new taxable account. Loads are
denoted with an f for front-end and r for back-end.
Holding periods are noted for loads imposed on sales of
shares held less than two months (<2 mo.) or one year (<1).
3-year and 5-year returns are compound, annualized
returns. Average maturity is in years for bond funds and
days for money market funds. 12-month yields are based
on trailing 12-month dividend/income distributions. SEC
yields are reported 30-day yields. Taxable equivalent
yields are based on SEC yields. For state funds, taxable
equivalent yields incorporate state taxes. Risk is fund vola-
tility measured over the previous 24 months. Equity fund risk
is measured against the S&P 500 index. Bond fund risk is
measured against the Barclays Aggregate Bond index.
Annuity ratings May differ from taxable funds since choices
in the annuity area are more limited.
* Tax equivalent yields incorporate the 3.8% health care sur-
tax into the 33%, 35% and 39.6% tax rates.
** Fund sold with a 0.75% front-end load
VANGUARD VARIABLE ANNUITIES
Fund (fund #) Advice
8/29
Price
August
Return
YTD
Return
12-Mo.
Return
3-Year
Return
5-Year
Return Risk
Money Market Annuity (64) $1.90 -0.0% -0.1% -0.2% -0.2% -0.1%
Short-Term Inv.-Grade Annuity (144) Buy $18.37 0.3% 1.6% 2.8% 2.2% 3.0% 0.45
Total Bond Market Annuity (67) Hold $36.50 1.1% 4.6% 5.3% 2.5% 4.0% 1.01
High-Yield Bond Annuity (146) Buy $29.66 1.5% 5.0% 9.1% 8.9% 10.2% 1.42
Conservative Allocation Annuity (801) Hold $25.67 1.9% 6.1% 12.2% 0.47
Moderate Allocation Annuity (803) Hold $27.90 2.4% 6.7% 15.4% 0.64
Balanced Annuity (69) Buy $81.27 2.5% 7.8% 17.2% 14.4% 12.1% 0.65
Capital Growth Annuity (603) Buy $37.16 3.7% 12.8% 30.2% 22.3% 17.6% 1.00
Diversified Value Annuity (145) Buy $28.65 3.3% 8.8% 21.4% 19.8% 15.3% 0.94
Equity Income Annuity (8) Buy $68.74 3.6% 8.5% 21.3% 19.8% 16.7% 0.98
Equity Index Annuity (68) Buy $77.06 3.9% 9.5% 24.7% 20.1% 16.4% 1.00
Growth Annuity (10) Sell $37.79 4.2% 8.5% 26.5% 20.2% 16.3% 1.19
MidCap Index Annuity (143) Buy $45.66 4.7% 9.9% 24.6% 19.9% 18.7% 1.10
REIT Index Annuity (147) Hold $49.81 2.9% 20.9% 23.8% 13.9% 18.3% 1.41
Small Company Growth Annuity (160) Hold $61.87 5.1% -1.9% 16.2% 18.8% 19.3% 1.48
Total Stock Market Annuity (604) Hold $28.36 4.1% 8.9% 24.1% 20.1% 16.7% 1.03
International Annuity (86) Buy $40.21 1.1% 1.5% 17.9% 10.9% 10.3% 1.32
VANGUARD INCOME FUNDS
Fund (fund #) Ticker Advice
Avg.
Mat.
8/29
Price
August
Return
YTD
Return
12-Mo.
Return
3-Year
Return
5-Year
Return
12-Mo.
Yield
SEC
Yield
Tax Equivalent Yield
Risk 25% 28% 36.8%
*
38.8%
*
43.4%
*
TAXABLE INCOME
Short-Term Treasury (32) VFISX Sell 2.2 $10.70 0.1% 0.5% 0.9% 0.4% 1.3% 0.4% 0.43% 0.24
Short-Term Federal (49) VSGBX Sell 2.4 $10.75 0.1% 0.8% 1.3% 0.7% 1.7% 0.6% 0.53% 0.34
Short-Term Inflation Index (1967) VTIPX Hold 2.6 $24.97 -0.2% 1.2% 1.4% 0.0% -0.94% 0.56
Short-Term Investment-Grade (39) VFSTX Buy 3.2 $10.75 0.3% 1.8% 3.1% 2.5% 3.3% 1.9% 1.44% 0.43
Short-Term Bond Index (132) VBISX Hold 2.8 $10.52 0.3% 1.0% 1.7% 1.1% 2.1% 1.1% 0.80% 0.37
Inflation-Protected Sec. (119) VIPSX Hold 8.6 $13.68 0.5% 6.3% 5.7% 2.0% 5.2% 2.3% -0.25% 1.94
Intermed. Treasury (35) VFITX Sell 5.6 $11.34 1.0% 3.3% 3.7% 1.5% 3.9% 1.6% 1.54% 1.13
Intermed. Investment-Grade (71) VFICX Buy 6.5 $9.98 1.1% 5.5% 7.4% 4.8% 6.8% 3.1% 2.49% 1.26
Intermed.-Term Bond Index (314) VBIIX Hold 7.2 $11.54 1.4% 6.1% 7.1% 3.7% 6.0% 2.8% 2.36% 1.52
Total Bond Market (84) VBMFX Hold 7.9 $10.88 1.1% 4.8% 5.5% 2.8% 4.3% 2.5% 1.92% 1.00
GNMA (36) VFIIX Sell 7.7 $10.74 1.0% 4.9% 6.1% 2.1% 4.1% 2.6% 2.45% 1.15
Long-Term Treasury (83) VUSTX Sell 24.1 $12.57 4.2% 17.8% 14.6% 5.8% 7.6% 3.0% 2.80% 3.39
Long-Term Investment-Grade (28) VWESX Hold 23.5 $10.76 3.1% 15.1% 17.1% 9.0% 9.6% 4.4% 3.91% 2.70
Long-Term Bond Index (522) VBLTX Sell 24.1 $14.05 3.5% 16.4% 16.7% 7.7% 9.0% 4.0% 3.75% 2.91
High-Yield Corporate (29) VWEHX Buy 6.6 $6.13 1.6% 5.4% 9.8% 9.5% 10.7% 5.5% 4.40% 1.43
Emerging Mkts. Govt Bond Idx. (1120)** VGOVX Buy 10.5 $10.07 0.7% 8.9% 12.6% 4.1% 4.27% 2.43
Total International Bond Index (1231) VTIBX Hold 8.5 $10.42 1.3% 6.3% 7.5% 1.7% 1.16% 0.89
MONEY MARKET
Admiral Treasury MM (11) (CLOSED) VUSXX 58 $1.00 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.01%
Federal MM (33) (CLOSED) VMFXX 54 $1.00 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.01%
Prime MM (30) VMMXX 55 $1.00 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.01%
Tax-Exempt Money Market (45) VMSXX 46 $1.00 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0%
CA Tax-Exempt MM (62) VCTXX 42 $1.00 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0%
NJ Tax-Exempt MM (95) VNJXX 46 $1.00 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0%
NY Tax-Exempt MM (163) VYFXX 36 $1.00 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0%
OH Tax-Exempt MM (96) VOHXX 36 $1.00 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0%
PA Tax-Exempt MM (63) VPTXX 35 $1.00 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0%
TAX-FREE INCOME
Short-Term Tax-Exempt (41) VWSTX Buy 1.3 $15.87 0.1% 0.6% 1.1% 0.8% 1.1% 0.7% 0.27% 0.4% 0.4% 0.4% 0.4% 0.5% 0.15
Limited-Term Tax-Exempt (31) VMLTX Buy 2.9 $11.09 0.3% 1.7% 2.9% 1.6% 2.2% 1.6% 0.73% 1.0% 1.0% 1.2% 1.2% 1.3% 0.45
Intermed.-Term Tax-Exempt (42) VWITX Buy 5.0 $14.25 1.1% 6.0% 8.7% 4.3% 4.7% 3.1% 1.66% 2.2% 2.3% 2.6% 2.7% 2.9% 1.29
Long-Term Tax-Exempt (43) VWLTX Hold 6.3 $11.69 1.4% 9.0% 12.2% 5.7% 5.7% 3.9% 2.46% 3.3% 3.4% 3.9% 4.0% 4.3% 1.72
High-Yield Tax-Exempt (44) VWAHX Hold 6.8 $11.19 1.5% 9.4% 12.5% 6.3% 6.5% 3.9% 2.79% 3.7% 3.9% 4.4% 4.6% 4.9% 1.75
STATE TAX-FREE
CA Intermed. Tax-Exempt (100) VCAIX Buy 5.5 $11.78 1.1% 6.7% 9.6% 5.2% 5.4% 3.1% 1.59% 2.4% 2.5% 2.8% 2.9% 3.1% 1.37
CA Long-T. Tax-Exempt (75) VCITX Sell 6.2 $12.02 1.5% 9.6% 13.4% 6.5% 6.2% 3.7% 2.30% 3.4% 3.6% 4.1% 4.2% 4.5% 1.85
MA Tax-Exempt (168) VMATX Sell 6.5 $10.86 1.5% 8.6% 12.0% 4.8% 5.0% 3.2% 2.25% 3.2% 3.3% 3.8% 3.9% 4.2% 1.74
NJ Long-T. Tax-Exempt (14) VNJTX Sell 6.6 $12.24 1.5% 8.3% 11.6% 5.4% 5.2% 3.5% 2.49% 3.6% 3.8% 4.3% 4.5% 4.8% 1.68
NY Long-T. Tax-Exempt (76) VNYTX Sell 5.9 $11.76 1.5% 9.0% 12.1% 5.2% 5.2% 3.5% 2.22% 3.2% 3.4% 3.9% 4.0% 4.3% 1.68
OH Long-T. Tax-Exempt (97) VOHIX Sell 6.1 $12.59 1.4% 9.2% 12.9% 5.5% 5.4% 3.6% 2.53% 3.6% 3.8% 4.3% 4.4% 4.8% 1.81
PA Long-T. Tax-Exempt (77) VPAIX Sell 5.6 $11.64 1.4% 8.6% 11.9% 5.2% 5.3% 3.7% 2.46% 3.4% 3.5% 4.0% 4.1% 4.5% 1.64
PERFORMANCE REVI EW
VANGUARD ADMIRAL FUNDS
Admiral Fund (fund #) Ticker Min. Loads Advice
8/29
Price
August
Return
YTD
Return
12-Mo.
Return
3-Year
Return
5-Year
Return
12-Mo.
Yield
SEC
Yield Risk
ADMIRAL SECTOR SHARES
Consumer Discret. Index (5483) VCDAX $100K NA $57.87 4.4% 3.4% 20.8% 24.4% 23.4% 0.8% 1.29
Consumer Staples Index (5484) VCSAX $100K NA $57.74 4.7% 6.4% 17.4% 16.9% 16.4% 2.1% 1.26
Energy (551) VGELX $50K NA $139.52 1.8% 10.8% 20.7% 9.8% 11.4% 1.6% 1.32
Energy Index (5480) VENAX $100K NA $71.06 2.7% 12.5% 24.3% 14.3% 15.6% 1.5% 1.37
Financials Index (5486) VFAIX $100K NA $23.72 4.0% 7.3% 21.2% 21.3% 12.1% 1.8% 1.13
Health Care (552) VGHAX $50K NA $90.06 4.1% 19.0% 37.2% 26.1% 20.4% 1.1% 1.15
Health Care Index (5485) VHCIX $100K NA $58.61 5.3% 15.9% 31.8% 27.2% 20.5% 1.0% 1.24
Industrials Index (5482) VINAX $100K NA $53.40 4.4% 4.0% 24.8% 22.1% 19.3% 1.0% 1.26
Info.Technology Index (5487) VITAX $100K NA $51.93 4.3% 13.3% 32.1% 20.9% 17.3% 0.9% 1.16
Materials Index (5481) VMIAX $100K NA $57.84 4.2% 10.0% 27.2% 15.8% 15.7% 1.7% 1.23
REIT Index (5123) VGSLX $10K Hold $109.31 2.9% 21.3% 24.3% 14.5% 18.9% 3.6% 1.42
Global ex-U.S. Real Estate Index (1758) VGRLX $10K 0.25%f/0.25%r Hold $35.61 0.3% 8.9% 16.1% 11.4% 3.4% 1.52
Telecom Svcs. Index (5488) VTCAX $100K NA $45.07 -0.6% 5.7% 17.1% 14.7% 15.5% 3.7% 1.40
Utilities Index (5489) VUIAX $100K NA $47.47 5.1% 15.4% 20.6% 13.4% 13.3% 3.3% 1.59
ADMIRAL EQUITY SHARES
Capital Opportunity (5111) (CLOSED) VHCAX Buy $120.82 5.1% 13.3% 28.7% 24.8% 17.8% 0.2% 1.26
Explorer (5024) VEXRX $50K Hold $97.99 5.1% 1.9% 18.3% 20.2% 18.8% 0.2% 1.40
SmallCap Growth Index (5861) VSGAX $10K Buy $44.49 4.8% 3.5% 18.2% 0.6% 1.38
SmallCap Index (548) VSMAX $10K Hold $56.02 5.0% 6.3% 22.3% 21.0% 19.0% 1.2% 1.31
SmallCap Value Index (5860) VSIAX $10K Hold $45.40 5.1% 8.6% 25.7% 1.7% 1.29
Extended Mkt. Index (598) VEXAX $10K Sell $66.81 5.0% 6.5% 22.5% 20.8% 19.1% 1.1% 1.29
Growth Index (509) VIGAX $10K Buy $52.45 4.7% 10.2% 27.4% 20.5% 18.1% 1.2% 1.10
MidCap Growth Index (5832) VMGMX $10K Buy $42.71 5.6% 10.0% 23.2% 0.6% 1.20
MidCap Index (5859) VIMAX $10K Hold $150.06 4.7% 10.2% 25.1% 20.4% 19.2% 1.1% 1.10
MidCap Value Index VMVAX $10K Hold $45.56 3.9% 10.3% 26.9% 1.4% 1.07
Morgan Growth (526) VMRAX $50K Hold $85.53 4.8% 7.8% 24.8% 18.9% 17.1% 0.7% 1.16
PRIMECAP (559) (CLOSED) VPMAX Buy $108.44 3.9% 13.3% 31.5% 23.0% 18.1% 0.9% 1.02
U.S. Growth (523) VWUAX $50K Sell $80.37 4.1% 8.2% 26.4% 20.4% 16.7% 0.5% 1.19
500 Index (540) VFIAX $10K Buy $185.46 4.0% 9.9% 25.2% 20.6% 16.8% 1.8% 1.00
Dividend Appreciation Index (5702) VDADX $10K Buy $21.19 3.6% 4.7% 1.12
Equity Income (565) VEIRX $50K Buy $66.90 3.6% 8.8% 21.8% 20.3% 17.3% 2.5% 0.98
Growth & Income (593) VGIAX $50K Sell $70.75 4.2% 10.5% 25.9% 21.1% 17.3% 1.6% 1.00
LargeCap Index (5307) VLCAX $10K Buy $46.62 4.0% 9.9% 25.1% 20.5% 17.0% 1.7% 1.00
Total Stock Market Index (585) VTSAX $10K Hold $50.58 4.2% 9.3% 24.7% 20.7% 17.3% 1.7% 1.03
Value Index (506) VVIAX $10K Hold $32.27 3.5% 9.6% 23.3% 20.6% 16.0% 2.2% 1.02
Windsor (5022) VWNEX $50K Hold $75.18 4.0% 10.3% 25.2% 23.2% 17.4% 1.3% 1.08
Windsor II (573) VWNAX $50K Buy $70.41 3.6% 9.2% 22.5% 20.6% 15.9% 2.2% 0.97
Balanced Index (502) VBIAX $10K Hold $29.31 3.0% 7.5% 16.7% 13.4% 12.3% 1.8% 0.64
Wellesley Income (527) VWIAX $50K Hold $63.38 2.0% 7.0% 12.8% 10.4% 10.4% 3.0% 0.47
Wellington (521) VWENX $50K Buy $69.89 2.5% 8.0% 17.5% 14.8% 12.5% 2.4% 0.64
Developed Markets Index (127) VTMGX $10K Sell $13.40 0.3% 2.7% 16.6% 11.5% 8.3% 3.2% 1.25
Emerging Markets Stock Index (5533) VEMAX $10K Hold $37.74 3.6% 12.5% 22.5% 4.1% 7.8% 2.4% 1.50
European Index (579) VEUSX $10K Hold $72.34 0.6% 1.9% 17.7% 13.0% 9.0% 4.0% 1.39
Global Minimum Volatility (594) VMNVX $50K Hold $22.32 3.0% 8.4%
International Growth (581) VWILX $50K Buy $75.71 1.1% 2.0% 18.4% 11.3% 10.7% 1.5% 1.32
Pacific Index (572) VPADX $10K Hold $77.39 -0.1% 3.7% 14.6% 9.1% 7.6% 2.5% 1.35
Total International Stock Index (569) VTIAX $10K Hold $28.96 1.0% 5.3% 18.4% 9.4% 3.1% 1.19
World ex-U.S. Index (570) VFWAX $10K Sell $32.33 1.0% 5.1% 18.1% 3.1% 1.21
ADMIRAL INCOME SHARES
Short-Term Treasury (532) VFIRX $50K Sell $10.70 0.1% 0.6% 1.0% 0.5% 1.4% 0.5% 0.53% 0.24
Short-Term Federal (549) VSGDX $50K Sell $10.75 0.1% 0.9% 1.4% 0.8% 1.8% 0.7% 0.63% 0.34
Short-Term Govt Index (1942) VSBSX $10K Sell $20.32 0.1% 0.4% 0.7% 0.4% 0.3% 0.37% 0.13
Short-Term Inflation Index (567) VTAPX $10K Hold $25.01 -0.2% 1.3% 1.5% 0.1% -0.84% 0.57
Short-Term Inv.-Grade (539) VFSUX $50K Buy $10.75 0.3% 1.9% 3.2% 2.6% 3.4% 2.0% 1.54% 0.43
Short-Term Corp. Index (1945) VSCSX $10K Buy $21.81 0.4% 2.0% 3.5% 3.1% 1.8% 1.40% 0.54
Short-Term Bond Idx. (5132) VBIRX $10K Hold $10.52 0.3% 1.1% 1.8% 1.2% 2.3% 1.2% 0.90% 0.37
Inflation-Protected Securities (5119) VAIPX $50K Hold $26.86 0.5% 6.4% 5.8% 2.1% 5.3% 2.4% -0.15% 1.95
Interm.-Term Treasury (535) VFIUX $50K Sell $11.34 1.0% 3.4% 3.8% 1.6% 4.0% 1.7% 1.64% 1.13
Interm-Term Govt Index (1943) VSIGX $10K Sell $21.64 1.0% 3.2% 3.6% 1.5% 1.4% 1.59% 1.07
Interm.-Term Inv.-Grade (571) VFIDX $50K Buy $9.98 1.1% 5.6% 7.5% 4.9% 6.9% 3.2% 2.59% 1.25
Interm-Term Corp. Index (1946) VICSX $10K 0.25%f Buy $23.40 1.4% 7.3% 9.6% 6.0% 3.1% 3.00% 1.58
Intermed.-Term Bond Idx. (5314) VBILX $10K Hold $11.54 1.4% 6.1% 7.2% 3.8% 6.2% 2.9% 2.46% 1.52
Total Bond Market (584) VBTLX $10K Hold $10.88 1.1% 4.9% 5.7% 2.9% 4.4% 2.6% 2.05% 1.00
GNMA (536) VFIJX $50K Sell $10.74 1.0% 5.0% 6.2% 2.2% 4.2% 2.7% 2.55% 1.15
Mortgage-Backed Sec. Idx (1948) VMBSX $10K Sell $21.04 0.8% 4.2% 5.2% 2.1% 1.7% 1.40% 0.89
Long-Term Treasury (583) VUSUX $50K Sell $12.57 4.2% 17.9% 14.7% 5.9% 7.7% 3.1% 2.90% 3.39
Long-Term Govt Index (1944) VLGSX $10K Sell $24.81 4.2% 17.7% 14.6% 5.8% 2.9% 2.90% 3.33
Long-Term Inv.-Grade (568) VWETX $50K Hold $10.76 3.2% 15.2% 17.2% 9.2% 9.7% 4.5% 4.01% 2.70
Long-Term Corp. Index (1947) VLTCX $10K 1.00%f Hold $24.71 3.1% 15.5% 17.4% 9.4% 4.3% 4.32% 2.75
High-Yield Corporate (529) VWEAX $50K Buy $6.13 1.6% 5.5% 9.9% 9.6% 10.8% 5.6% 4.50% 1.43
Emerging Markets Govt Bond Index (520)** VGAVX $10K 0.75%f Buy $20.15 0.9% 9.1% 12.9% 4.3% 4.42% 2.46
Total International Bond Index (511) VTABX $10K Hold $20.83 1.3% 6.2% 7.5% 1.5% 1.21% 0.88
Short-Term Tax-Exempt (541) VWSUX $50K Buy $15.87 0.1% 0.7% 1.1% 0.8% 1.2% 0.8% 0.35% 0.15
Limited-Term Tax-Exempt (531) VMLUX $50K Buy $11.09 0.3% 1.8% 2.9% 1.6% 2.3% 1.7% 0.81% 0.45
Interm.-Term Tax-Exempt (542) VWIUX $50K Buy $14.25 1.1% 6.1% 8.7% 4.4% 4.8% 3.2% 1.74% 1.29
Long-Term Tax-Exempt (543) VWLUX $50K Hold $11.69 1.5% 9.0% 12.3% 5.8% 5.8% 4.0% 2.54% 1.72
High-Yield Tax-Exempt (5044) VWALX $50K Hold $11.19 1.5% 9.4% 12.6% 6.4% 6.6% 4.0% 2.87% 1.75
CA Intermed. Tax-Exempt (5100) VCADX $50K Buy $11.78 1.1% 6.8% 9.7% 5.3% 5.5% 3.2% 1.67% 1.37
CA Long-T. Tax-Exempt (575) VCLAX $50K Sell $12.02 1.5% 9.6% 13.5% 6.6% 6.3% 3.8% 2.38% 1.85
NJ Tax-Exempt (514) VNJUX $50K Sell $12.24 1.5% 8.3% 11.6% 5.4% 5.3% 3.6% 2.57% 1.68
NY Tax-Exempt (576) VNYUX $50K Sell $11.76 1.5% 9.0% 12.2% 5.3% 5.3% 3.5% 2.30% 1.68
PA Tax-Exempt (577) VPALX $50K Sell $11.64 1.4% 8.6% 12.0% 5.3% 5.4% 3.8% 2.54% 1.64
** Fund sold with a 0.75% front-end load
PERFORMANCE REVI EW
Vanguard exchange-traded fund shares can be bought and sold like stocks, anytime markets are open. They are expected to track the performance of
Vanguards like-named index funds closely, though not precisely. Price and performance are based on actual closing prices, not net asset value. Individual
investor performance can vary depending on price variability during the trading day. Buy, Sell and Hold ratings may differ from open-end versions of the
same index funds listed in the Investor share section of the Performance Review if an alternative ETF is better or worse.
Admiral shares are identical to regular, investor shares (and my recommendations are the same as those for investor shares) except that
their operating expenses are several basis points lower. (One basis point equals one one-hundredth of a percent.) For instance, a fund with an
operating expense ratio of, say, 0.25%, might have Admiral shares available with an operating expense ratio of 0.21%.
VANGUARD EXCHANGE-TRADED FUNDS
Fund Ticker Advice
8/29
Price
August
Return
YTD
Return
12-Mo.
Return
3-Year
Return
5-Year
Return
12-Mo.
Yield
SEC
Yield Risk
BROAD EQUITY ETFS
SmallCap Growth VBK Buy $126.44 4.7% 3.4% 18.0% 19.7% 19.4% 0.6% 1.39
S&P SmallCap 600 Growth VIOG Buy $101.34 3.9% -0.5% 16.1% 19.2% 0.5% 1.46
Russell 2000 Growth VTWG Hold $99.76 5.6% 1.3% 17.2% 19.2% 0.6% 1.60
SmallCap VB Hold $116.84 5.0% 6.3% 22.2% 21.0% 19.1% 1.2% 1.32
S&P SmallCap 600 VIOO Hold $99.74 4.2% 1.4% 18.4% 20.5% 0.8% 1.39
Russell 2000 VTWO Hold $93.71 4.9% 1.8% 17.7% 19.3% 1.0% 1.45
SmallCap Value VBR Hold $105.60 5.1% 8.5% 25.5% 22.0% 18.3% 1.7% 1.30
S&P SmallCap 600 Value VIOV Hold $98.80 4.3% 3.3% 20.1% 22.1% 0.9% 1.34
Russell 2000 Value VTWV Hold $87.33 3.8% 1.6% 17.3% 18.6% 1.4% 1.39
Extended Market VXF Sell $88.03 4.9% 6.5% 22.6% 20.8% 19.1% 1.1% 1.31
Growth VUG Hold $101.84 4.6% 10.1% 27.4% 20.6% 18.1% 1.2% 1.12
S&P 500 Growth VOOG Buy $97.04 4.3% 10.5% 27.4% 20.1% 1.3% 1.03
Russell 1000 Growth VONG Hold $95.78 4.4% 9.5% 26.2% 20.0% 1.3% 1.05
MegaCap Growth MGK Buy $79.17 4.5% 9.9% 28.1% 20.9% 17.8% 1.3% 1.12
MidCap Growth VOT Buy $99.21 5.6% 9.9% 23.2% 18.3% 19.1% 0.6% 1.22
S&P MidCap 400 Growth IVOG Buy $97.18 4.7% 5.5% 20.9% 17.1% 0.6% 1.37
MidCap VO Hold $121.17 4.7% 10.2% 25.2% 20.4% 19.2% 1.1% 1.11
S&P MidCap 400 IVOO Buy $97.21 5.1% 7.9% 23.1% 19.8% 0.9% 1.30
MidCap Value VOE Hold $87.95 3.9% 10.3% 26.8% 22.3% 19.1% 1.4% 1.09
S&P MidCap 400 Value IVOV Buy $96.77 5.2% 10.7% 25.3% 21.8% 0.8% 1.26
S&P 500 VOO Buy $183.99 4.0% 9.8% 25.3% 20.6% 1.6% 1.02
Russell 1000 VONE Buy $92.74 4.1% 9.8% 25.3% 20.7% 1.6% 1.00
Dividend Appreciation VIG Buy $78.12 3.6% 4.8% 18.5% 16.8% 15.0% 1.9% 1.13
High Dividend Yield VYM Hold $67.66 3.8% 10.0% 23.2% 20.4% 16.9% 2.7% 1.01
LargeCap VV Buy $92.29 4.0% 9.8% 25.1% 20.5% 17.0% 1.7% 1.00
MegaCap MGC Buy $68.67 3.8% 9.7% 25.2% 20.6% 16.5% 1.8% 1.02
Total Stock Market VTI Hold $103.88 4.2% 9.2% 24.8% 20.7% 17.3% 1.7% 1.05
Russell 3000 VTHR Hold $92.75 4.0% 9.0% 24.4% 20.7% 1.6% 1.02
Value VTV Hold $82.73 3.4% 9.5% 25.5% 21.4% 16.3% 3.7% 1.05
S&P 500 Value VOOV Hold $88.59 3.6% 9.1% 22.9% 20.8% 1.9% 1.04
Russell 1000 Value VONV Hold $89.85 3.6% 10.2% 24.3% 21.4% 1.9% 1.06
MegaCap Value MGV Hold $59.60 3.4% 9.5% 22.9% 20.4% 15.3% 2.2% 1.03
INTERNATIONAL ETFS
Emerging Markets Stock VWO Hold $45.40 3.8% 11.7% 23.5% 4.1% 7.8% 2.4% 1.60
Developed Markets VEA Sell $41.69 0.3% 2.3% 16.8% 11.3% 8.3% 3.2% 1.28
European VGK Hold $57.79 0.7% 1.4% 17.7% 12.8% 8.9% 4.0% 1.45
Pacific VPL Hold $62.53 -0.4% 3.0% 14.5% 9.1% 7.6% 2.5% 1.42
Total International Stock VXUS Hold $53.97 1.2% 4.9% 18.3% 9.3% 3.1% 1.22
Total World Stock VT Hold $62.76 2.6% 7.0% 21.6% 14.4% 12.1% 2.3% 1.07
World ex-U.S. VEU Sell $52.03 1.0% 4.6% 18.3% 9.3% 8.2% 3.1% 1.27
World ex-U.S. SmallCap VSS Hold $109.37 1.5% 7.0% 20.8% 9.3% 11.0% 2.5% 1.27
SECTOR ETFS
Consumer Discretionary VCR NA $111.78 4.4% 3.4% 20.6% 24.4% 23.4% 0.8% 1.29
Consumer Staples VDC NA $117.12 4.7% 6.4% 17.4% 16.9% 16.4% 2.1% 1.26
Energy VDE NA $142.29 2.7% 12.5% 24.2% 14.3% 15.6% 1.5% 1.38
Financials VFH NA $47.34 3.9% 7.4% 21.3% 21.3% 12.1% 1.8% 1.12
Health Care VHT NA $117.17 5.2% 15.9% 31.9% 27.2% 20.5% 1.0% 1.23
Industrials VIS NA $103.96 4.5% 3.9% 24.8% 22.1% 19.3% 1.0% 1.27
Information Tech. VGT NA $101.40 4.2% 13.2% 31.9% 20.9% 17.2% 0.9% 1.17
Materials VAW NA $113.53 4.2% 10.0% 27.1% 15.8% 15.6% 1.7% 1.23
REIT VNQ Hold $77.18 3.0% 21.4% 24.6% 14.5% 18.9% 3.6% 1.43
Global ex-U.S. Real Estate VNQI Hold $58.84 0.3% 8.7% 15.8% 11.4% 3.4% 1.50
Telecom Services VOX NA $88.42 -0.6% 5.7% 17.1% 14.7% 15.5% 3.7% 1.44
Utilities VPU NA $94.61 5.1% 15.4% 20.6% 13.4% 13.3% 3.3% 1.60
INCOME ETFS
Short-Term Government VGSH Sell $61.01 0.2% 0.4% 0.8% 0.4% 0.3% 0.37% 0.14
Short-Term Inflation Bond VTIP Hold $49.92 -0.1% 1.2% 1.6% 0.0% -0.84% 0.59
Short-Term Corporate VCSH Buy $80.24 0.3% 1.6% 3.6% 2.9% 1.6% 1.40% 0.62
Short-Term Bond BSV Hold $80.28 0.4% 1.1% 1.7% 1.1% 2.2% 1.1% 0.90% 0.39
Int.-Term Government Bond VGIT Sell $64.20 1.1% 3.4% 3.7% 1.5% 1.3% 1.59% 1.13
Int.-Term Corporate VCIT Buy $87.15 1.5% 7.4% 9.9% 5.7% 2.8% 3.00% 1.73
Int.-Term Bond BIV Hold $85.26 1.5% 6.2% 7.2% 3.6% 6.0% 2.9% 2.46% 1.58
Total Bond Market BND Hold $82.60 1.2% 4.8% 5.9% 2.8% 4.3% 2.5% 2.05% 1.06
Mortgage-Backed Securities VMBS Sell $52.68 0.7% 4.3% 5.5% 2.0% 1.6% 1.40% 0.91
Long-Term Government VGLT Sell $73.95 4.2% 17.6% 14.7% 5.8% 2.6% 2.90% 3.39
Long-Term Corporate VCLT Hold $92.59 3.3% 14.5% 17.8% 9.0% 3.9% 4.32% 3.01
Long-Term Bond BLV Sell $92.79 4.0% 16.5% 17.1% 7.5% 9.0% 4.1% 3.85% 3.03
Ext. Duration Treasury EDV Sell $113.82 7.1% 30.3% 23.9% 10.4% 10.3% 2.8% 3.11% 5.41
Emerging Mkts. Govt Bond VWOB Buy $80.82 1.1% 8.3% 13.2% 4.2% 4.42% 2.48
Total International Bond BNDX Hold $52.24 1.3% 6.2% 7.5% 1.4% 1.21% 0.85
DISTRIBUTIONS
Fund Dist.
AUGUST REGULAR
Short-Term Treasury $0.00
Short-Term Federal $0.01
Short-Term Investment-Grade $0.02
Short-Term Bond Index $0.01
Intermediate-Term Treasury $0.02
Intermediate-Term Investment-Grade $0.03
Intermediate-Term Bond Index $0.03
Total Bond Market Index $0.02
GNMA $0.02
Long-Term Treasury $0.03
Long-Term Investment-Grade $0.04
Long-Term Bond Index $0.05
High-Yield Corporate $0.03
Emerging Markets Gov't Bond $0.04
Total International Bond $0.01
Admiral Treasury MM $0.00001
Federal MM $0.00001
Prime MM $0.00001
Tax-Exempt MM $0.00001
CA Tax-Exempt MM $0.00001
NJ Tax-Exempt MM $0.00001
NY Tax-Exempt MM $0.00001
OH Tax-Exempt MM $0.00001
PA Tax-Exempt MM $0.00001
Short-Term Tax-Exempt $0.01
Limited-Term Tax-Exempt $0.01
Intermediate-Term Tax-Exempt $0.04
Long-Term Tax-Exempt $0.04
High-Yield Tax-Exempt $0.04
CA Int.-Term Tax-Exempt $0.03
CA Long-Term Tax-Exempt $0.04
MA Tax-Exempt $0.03
NJ Long-Term Tax-Exempt $0.04
NY Long-Term Tax-Exempt $0.03
OH Long-Term Tax-Exempt $0.04
PA Long-Term Tax-Exempt $0.04
ETF DISTRIBUTIONS
Short-Term Government Bond $0.02
Short-Term Corporate Bond $0.12
Short-Term Bond $0.08
Intermed.-Term Government Bond $0.09
Intermed.-Term Corporate Bond $0.23
Intermediate-Term Bond $0.20
Total Bond Market $0.17
Mortgage-Backed Securities Bond $0.07
Long-Term Government Bond $0.18
Long-Term Corporate Bond $0.34
Long-Term Bond $0.31
Emerging Markets Gov't Bond $0.30
Total International Bond $0.06
Distributions are per share. All distributions are
reinvested at month-end Net Asset Value unless
otherwise noted.
Compound interest is the eighth won-
der of the world. He who understands
it, earns ithe who doesntpays it.
Albert Einstein (maybe)
NO ONE DOUBTS that Albert Einstein
was a genius, though claims that the
quote above about the wonders of com-
pound interest and the myriad varia-
tions Ive seen over the years were his
are actually unverified.
Quotably admired by Einstein or
not, compound interest is indeed a
powerful wealth builderand it under-
pins my philosophy of spending time
in the markets, rather than trying to
time them. Since you and I want to be
the ones earning compound interest,
and not paying it, I thought it would
be worth rolling up our sleeves to get
a better understanding of what com-
pounding is and how it works.
So lets start at the beginning:
Compounding is the phenomenon of
earning increasing returns on prior
gains, over time. You dont have to
make a conscious decision to put the
power of compounding to work, though
you can make moves that rob you of its
benefits.
It takes discipline and patience to
reap the long-term benefits of com-
pounding. For one, you need the dis-
cipline to stick with a solid investment
plan and to leave your money invested
in the market to build on itself over
time. Patience is necessary, because
early on, the amount you invest far
outweighs the amount earned on those
initial contributions. But as Ill show
you shortly, those first investments, if
held over long time periods, can add up
to very significant sums as they build
upon themselves.
How Compounding Works
For a simple example of how com-
pounding works, take a look at the
chart at the top of this page, which
shows the growth of a single $10,000
investment assuming an annual return
of 10% over 30 years. Ive broken
this investment into its three compo-
nents: Principal, interest and com-
pound interest.
In this example, you can see that
in the early years, most of the over-all
value of the portfolio lies in the original
$10,000 investment, or principal (the
dark blue area along the bottom). This
amount never changes, since no money
is being added over time. Gradually,
the 10% return earned on the principal
(the light blue region in the middle)
accumulates at a steady $1,000 per
year to match (after 10 years10 times
$1,000 = $10,000) and then exceed the
principal.
But its what happens in the com-
pound interest area of the chart that
is most intriguing (the grey shading on
top). Initially, its the barest shadow of
a line because there is little additional
value to compound. Remember, only
$1,000 is added each year to the
portfolio from the 10% return on the
$10,000 principal. In year two, we earn
our first compound interest: 10% of the
$1,000 gained in year one, or $100. The
next year compound interests accounts
for a total of $310. Each year thereaf-
ter, the gains generated by compound-
ing keep growing, and this portion of
the overall return becomes a visible,
though still relatively small piece of the
portfolios value. Starting in year 15,
the cumulative amount of compound
interest earned exceeds the aggregate
amount of interest received. From that
point onward, those earnings on earn-
ings really take off, driving the majority
of the subsequent growth.
Regular Contributions Kick
Compounding Up a Notch
While the growth of that single
$10,000 investment compounded at
10% is impressive, its worth noting
that the real power of compounding
kicks into overdrive when combined
with regular additional contributions
to your account. This is what makes
investing in retirement accounts like
IRAs and 401(k)s so attractive.
Meet an imaginary 65-year-old
investor, Joe, who retired a millionaire
at the end of June 2014. Forty years
ago, on Wednesday, July 1, 1974, as
a 25-year-old with a $12,000 salary
(equivalent to about $57,700 in todays
dollars), Joe started investing 10% of
his (pretax) paycheck every month
into Wellingtona practice he would
continue for the rest of his career. Joe
stuck with the same employer for his
entire career, and was rewarded for
his loyalty with consistent, annual 3%
raises.
The table to the left provides a
snapshot of where Joe ended up, and
as you can see, Joe did pretty well for
himself. His contributions increased
each year in concert with his sal-
ary, but in the end the biggest slice
of his portfolios ending value, by a
wide margin, came from earnings on
those contributions and, importantly,
earnings on those earnings. All told,
COMPOUND INTEREST
The Investment Tipping Point
In Time, Compounding
Creates Wealth
Principal: Your initial investment.
Interest: Earnings gained on the
principal.
Compound Interest: Earnings
made off of previous gains.
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
A
c
c
o
u
n
t

V
a
l
u
e
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Years
Creation of a Millionaire
Starting Age 25
Retirement Age 65
% of Salary Invested 10%
Annual Raises 3%
Total Investment $90,798
End Balance $1,000,290
% from Contributions 9%
% from Investment Returns 91%
he retired with a sum that was more
than 26 times his final annual salary
of $38,004, which, by the way, didnt
come close to keeping up with infla-
tion over the period. Thank goodness
he was a consistent investor. Note
that Joe achieved these results while
investing in a balanced portfolioit
was the power of compounding that
drove the results, not excessive risk
taking.
The first chart to the right shows the
percentage breakdown between contri-
butions and investment returns in Joes
portfolio at various milestones. In the
earlier part of his investing career,
Joes monthly contributions accounted
for the majority of the assetsthis
was the case even after 10 years. By
around the age of 40, after 15 years
of monthly investments, Joes port-
folio had reached its tipping point,
and from then on out, compounding
Contribution vs. Returns
%

o
f

P
o
r
t
f
o
l
i
o
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Age
Contributions Investment Returns
30 35 40 45 50 55 65 60
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
Discipline and Patience
Lead to Growth
6
/
7
4
6
/
7
9
6
/
8
4
6
/
8
9
6
/
9
4
6
/
9
9
6
/
0
4
6
/
0
9
6
/
1
4
Contributions
Return on Contributions
Return from Compounding
Account Value
returns increasingly pushed the value
upward as his contributions became
proportionately smaller parts of the
whole.
Keep in mind that Joes account
weathered all types of markets. Joe was
in his 30s when stocks dropped over
20% in single day on October 19, 1987.
Joe invested through the steep market
declines of the tech bubble in the early
2000s while in his early 50s and the
financial crisis of 20082009 when
he was in his late 50s. During those
periods, his account experienced draw-
downs of 23.4%, 14.8% and 32.0%,
respectivelythis is where Joes selec-
tion of Wellington, which holds both
stocks and bonds, helped reduce the
full drawdown experienced by stocks.
The second chart above shows that by
the time the tech bubble burst and the
financial crisis hit, Joes account had
already hit the turning point where
compounding had taken over. As a
result he quickly regained and sur-
passed what was lost, helped by the
strong stock market returns off of those
bottoms.
The lessons for a young investor are
clear: Start early, pick a plan and stick
to it, and let compounding and time
work in your favor. If you are a more
seasoned investor, when it may feel like
every market surge and correction is
going to make or break your portfolio,
think of these compounding tipping
points, what it takes to get there and
how impressive the results can be. Over
time, the impact of compounding will
more than make up for the inevitable
potholes on the road to wealth. n
Let Taxes Encourage Better Behavior
ONE KEY COST THAT I AVOIDED in our discussion on compounding was taxes. But for many inves-
tors, taxes are a real cost: In a taxable account, when you sell a stock or bond or ETF or mutual
fund, you owe taxes on any profits. Those taxes on trades are a headwind against compounding.
Lets walk through an example. Say you made a $1,000 investment, buying 100 shares in a fund
with a $10.00 NAV. The funds NAV subsequently rises to $15.00, and your investment has grown
to $1,500, giving you an unrealized gain of $500, or 50%. You decide to sellrealizing that $500
gain. At a 30% tax rate, you owe $150 in taxes. This leaves you with $1,350 in cash. You now
have less money10% less, to be specificto compound upon.
So if you sold to avoid a potential decline in the markets, your decision wont have been a prof-
itable one unless the markets fall 10% (at a minimum). Otherwise, you would have been better
off staying in your original holding. Of course, a 10% decline is not a magic numberthe decline
you need to break even after paying taxes varies depending on your tax rate and the level of gains
being realized. In the table below, Ive done the math for you to determine how steep a decline in
the markets (or your investments) you would need to see to justify selling your shares in order to
side-step a market decline.
Market timing is difficult. You have to get the timing of the decline right, you have to sell
before it happens, and then you have to figure out when to get back in. A market timer subject to
taxes also has to be confident the magnitude of the losses is enough to offset the taxes incurred
in selling to avoid those losses. Most investorsno, probably all investorsare going to be bet-
ter off avoiding the taxes and letting compounding work for them over time.
In short, taxes are yet another reason why it doesnt pay to try to time the market.
Market Drop Required to Justify Selling Now
Taxable Unrealized Gains
Tax Rate 5% 10% 15% 20% 25% 50% 75% 100%
10% -0.5% -0.9% -1.3% -1.7% -2.0% -3.3% -4.3% -5.0%
15% -0.7% -1.4% -2.0% -2.5% -3.0% -5.0% -6.4% -7.5%
20% -1.0% -1.8% -2.6% -3.3% -4.0% -6.7% -8.6% -10.0%
25% -1.2% -2.3% -3.3% -4.2% -5.0% -8.3% -10.7% -12.5%
30% -1.4% -2.7% -3.9% -5.0% -6.0% -10.0% -12.9% -15.0%
35% -1.7% -3.2% -4.6% -5.8% -7.0% -11.7% -15.0% -17.5%
40% -1.9% -3.6% -5.2% -6.7% -8.0% -13.3% -17.1% -20.0%
ITS BEEN A BIT MORE than a decade
since Vanguard shut the doors on
Capital Opportunity for what would
turn out to be a nine-year closure before
reopening it briefly, then closing the
doors once again.
And, while I have nothing but praise
for the PRIMECAP Management team
and their stewardship of our money, I
think its important to recognize that,
as Ive said for years now, the Capital
Opportunity of today is a far cry from
the fund it was in its early years. In fact,
despite some differences in portfolios,
the performance of Capital Opportunity
and PRIMECAP has been almost iden-
tical. Identically good, I should add.
From the end of March 2004, when
Vanguard closed the then-$7.4 billion
fund, through August 2014 Capital
Opportunity (now with $12.5 billion
in assets) has gained 185.6% versus a
180.6% gain for PRIMECAP, with its
$42.9 billion in assets.
In the meantime, PRIMECAP
Managements private-label Odyssey
Aggressive Growth has continued on
the path of smaller-cap outperformance.
Since inception in November 2004 (just
eight months after Capital Opportunitys
closure), the private-label fund is up
266.5% versus Capital Opportunitys
177.3% gain over the same period.
Now, dont get me wrong: No mat-
ter which PRIMECAP-run fund you
bought, you far outpaced the stock mar-
ket. (Dont tell all those folks who believe
you cant find great active managers,
please. Lets keep this to ourselves.)
In fact, Capital Opportunity also per-
formed light years ahead of the small-
cap and mid-cap indexes, as well as
S&P MidCap 400 Growth ETF since I
added it to our Growth Model Portfolio
at the end of April 2012 in my desire
to add back greater mid-cap exposure.
As it turns out, no matter which portion
of the market you indexed, you just
couldnt keep up with the great stock-
picking at Capital Opportunity (or the
other PRIMECAP-managed funds, for
that matter).
If you take a look at the chart on
page 15, youll see not only that the
relative performance between Capital
Opportunity and PRIMECAP flattens out
considerably after the 2004 closure (and
even more so after assets hit a peak in
2007), but also that Odyssey Aggressive
Growth has consistently outperformed
since its inception. (Note that the lon-
ger line rises when Capital Opportunity
is outperforming PRIMECAP and the
PRIMECAP
When One Fund Acts Like Another
The PRIMECAP Record
3/31/04
8/31/14
10/31/04
8/31/14
PRIMECAP 180.6% 168.3%
Capital Opportunity 185.6% 177.3%
Total Stock Market 129.7% 127.2%
Odyssey Agg. Growth 266.5%
VANGUARD.COM
Ghost in the Machine
SEND IN THE POLICE.
When is 1.2% the mid-point between
0.0% and 3.0%? For that matter, when
is 6.0% the mid-point between 0.0%
and 20.0%? How about never? The
mid-points are 1.5% and 10.0%, unless
youre Vanguard.coms interactive
Principles for Investing Success cost
calculator, that is.
My sharp-eyed Senior Managing
Editor, Billy Currano, found this bug
in Vanguards system this past month,
and Jeff DeMaso and I both confirmed
that Vanguards programmers need to
do a bit of tweaking if youre to believe
the numbers the calculator shows.
In a nutshell, as you read through
Vanguards principles online, youre
given a calculator that shows that
an investor with $10,000 who pays
1.2% in expenses and earns a 6.0%
return over 10 years will end up with
$12,349.43 while losing $3,588.00 to
expenses. The problem is, those num-
bers are wrong. Actually, the investor
would keep just $5,894.74 and lose
$2,013.73 to expenses. (At least thats
what Vanguards calculator says once
you jigger with the dials to recalibrate
it.) And no, you wont end up with
$547,612 after 50 years of investing
at 6% with a 1.2% expense ratio. The
numbers are a bit more, um, tame.
Youll have $91,454.
Im guessing Vanguards going to put
the fix in shortly, so hopefully, this partic-
ular error wont pop up again. However,
the lesson learned is permanent: You can
trust, but you also have to verify. Even if
you paid nothing in expenses and earned
a 6.0% percent return, youd only have
$184,201 at the end of 50 years, which is
a far cry from half a million. n
Low Costs Are Good, But Not This Good
WHAT VANGUARD SAYS THE REAL NUMBERS
Kept Lost Kept Lost
1 year $837.44 $162.56 $474.31 $125.69
5 years $4,949.73 $1,155.37 $2,607.44 $774.82
10 years $12,349.43 $3,588.00 $5,894.74 $2,013.73
25 years $64,673.43 $33,673.63 $21,851.79 $11,066.92
50 years $547,612.04 $616,296.49 $91,453.64 $82,747.90
Note: Assumes 6.0% annualized return and 1.2% expense ratio.
HUMAN ERROR CREEPS into all kinds of
transactions, and when youre Vanguard,
with lots of humans and lots of transac-
tions, well, you know whats bound to
happen. But theres human error and then
theres what one FFSA member Ill call
John (he asked I not use his real name)
refers to as a monumental screw-up.
And, though hes been waiting since
February for Vanguard to make more
than a cursory apology and explana-
tion, John, a Vanguard shareholder for
decades, says Vanguard has simply
refused to take ownership other than
to say the problem was human error.
Heres the story in a nutshell. Im
repeating it here because theres a les-
son for all Vanguard investors in partic-
ular, and investors at large, as we deal
with ever-larger financial fiduciaries.
On the advice of his dad, Johns son,
also named John, opened an account at
Vanguard by printing out a deposit slip
from vanguard.com and mailed it in with
his check for $29,000. But when the
slip was received, someone at Vanguard
opened a new account in the fund in
the fathers name but didnt deposit the
money into it (the money went into the
sons account). However, now that the
fathers new account was established and
was supposed to have $29,000 in it but
hadnt been funded, Vanguard decided
the account was in debit. So, they liter-
ally sucked $29,000 out of the local bank
account tied to John seniors Vanguard
account, without his authorization.
The issues here are myriad. First, as
far as I can tell, Vanguard has no right to
suck money out of a linked bank account
unless you authorize them to do so.
John says he doesnt recall ever taking
money from his local bank and send-
ing it to Vanguard. He only moves
STEWARDSHIP
Vanguard Speak
DISTRIBUTIONS TO COME
Quarterly Payouts
HOW QUICKLY the year flies by. September
brings the third quarterly installment of
distributions for a host of Vanguard funds
and is the last payment before the year-end
income and capital gains season.
As always, my recommendation is that
taxable investors not reinvest their distribu-
tions automatically, but rather have them
paid into a money market, and from there,
use the cash to make slight rebalancing
tweaks to their portfolios.
In the list below, remember that all share
classes of a fund will pay out during the
month. Ive listed ETFs where open-end
Investor or Admiral share classes are not
available.
500 Index
Balanced Index
Convertible Securities
Developed Markets Index
Dividend Appreciation Index
Emerging Markets Stock Index
Equity Income
European Stock Index
Extended Duration Treasury ETF
Financials Index
Global ex-U.S. Real Estate Index
Growth Index
High Dividend Yield Index
Inflation-Protected Securities
Large-Cap Index
LifeStrategy Conservative Growth
LifeStrategy Income
MegaCap ETF
MegaCap Growth ETF
MegaCap Value ETF
Pacific Stock Index
REIT Index
Russell 1000 ETF
Russell 1000 Growth ETF
Russell 1000 Value ETF
Russell 3000 ETF
S&P 500 Growth ETF
S&P 500 Value ETF
Short-Term Inflation-Protected Securities
Target Retirement Income
Tax-Managed Balanced
Total International Stock Index
Total Stock Market Index
Total World Stock Index
Utilities Index
Value Index
Wellesley Income
Wellington
World ex-U.S. Index
World ex-U.S. Small-Cap Index
shorter line rises when the Odyssey fund
outperforms Capital Opportunity.) Ive
also marked the points where Capital
Opportunity was closed and reopened in
2000, 2001, 2004 and 2013.
It turns out though, that while the
PRIMECAP and Capital Opportunity
portfolios are similar, with about 75% to
80% of each funds holdings also found
in the others, the Odyssey funds port-
folio isnt as different as its performance
might suggest. Many of the stocks found
in Capital Opportunity can also be found
in the Odyssey fund (about two-thirds
according to data from the end of June).
But how those stocks are weighted in
the portfolio as well as the distinctly dif-
ferent companies found in one-third of
Odyssey Aggressive Growth account for
the differences in performance.
Odyssey Aggressive Growth was
closed to new investors in January,
with assets of about $5.5 billion.
Im guessing that the PRIMECAP
Management team didnt want to let it
grow anywhere near the size of Capital
Opportunity before its 2004 closure.
At $5.5 billion, the fund is about half
the size Capital Opportunity was in
todays dollars.
I dont have to tell you that you should
hold onto any and all shares of any of
the PRIMECAP funds you own. With
Odyssey Aggressive Growth closed, you
can still get exposure to the PRIMECAP
teams excellent stock-picking in its other
two Odyssey funds, but of course, the
smaller-cap and distinct exposures avail-
able in the aggressive fund are now solely
the province of existing shareholders, of
which Im happy to say I am one. n
>
A Jump in Growth Led to
More Similar Performance
$0
$1,750
$3,500
$5,250
$7,000
$8,750
$10,500
$12,250
$14,000
7
/
9
8
7
/
0
0
7
/
0
2
7
/
0
4
7
/
0
6
7
/
0
8
7
/
1
0
7
/
1
2
7
/
1
4
M
i
l
l
i
o
n
s
Capital Opportunity Assets
Capital Opportunity vs. PRIMECAP
Odyssey Agg. Gro. vs. Capital Opportunity
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
Cap. Opp reopened
Cap. Opp closed
Never Use a
PIN Again
AdviserOnline.com is more streamlined
and easier to use than ever. But theres one
thing that can make it even better: Setting up
your unique username and password. Instead
of looking for a new PIN on page 1 of the
newsletter each month, you can simply use
your own personalized login.
If you dont have your own unique login, you
should set it up now, as weve discontin-
ued the PIN as of September 1. Here are
a few tips to help you set up or modify a
unique login:
Create a username and password at
www.adviseronline.com/password/new.php.
Youll need your account number, or if you
just joined, your order number. Both can be
found on correspondence you receive such as
the Hotline emails.
Modify your username and password at
www.adviseronline.com/password/modify.
php. All you need is your current personal
login information.
Forgot your username or password? No
problem. Reset it at www.adviseronline.com/
password/forgot.php. Again, you should have
your account number or order number handy.
Set up or modify your login at AdviserOnline.
com today. If you have any questions or prob-
lems, call us at 800-211-7641 or email us at
service@adviseronline.com.
Daniel P. Wiener is Americas leading expert on
the Vanguard family of funds. He is founder of
the Fund Family Shareholder Association and
chairman and chief executive officer of Adviser
Investments, LLC, a Newton, Massachusetts,
investment advisory firm (800-492-6868). As
editor of The Independent Adviser for Vanguard Investors, he is
a five-time recipient of the Newsletter Publishers Foundations
Editorial Excellence Award. He also edits the annual
Independent Guide to the Vanguard Funds. Mr. Wiener is often
quoted in the nations leading financial publications.
Jeffrey D. DeMaso, Editor/Director of
Research, works directly with Dan Wiener
researching and writing the multiple-award
winning Independent Adviser for Vanguard
Investors newsletter. He also leads the analyst
team for Adviser Investments, LLC, helping to
oversee $2.7 billion in assets. Jeff graduated magna cum laude
from Tufts University with a B.A. in economics, holds the
Chartered Financial Analyst designation and is a member of
the CFA Institute and the Boston Security Analysts Society.

money from Vanguard to his bank
when he needs to replenish the account.
So theres not even any precedent for a
transaction in that direction.
Second, Johns local bank account
was immediately overdrawn because
he didnt have $29,000 in the account,
so the bank began to charge him fees.
And third, its not clear why
Vanguard didnt try to take money
from Johns other Vanguard accounts
since, as he says, he has substantial
sums with Vanguard and is a Flagship
client, which, by definition, means he
has more than $1 million invested there.
John says this wouldnt have made him
any happier, but at least he wouldnt
have been dunned by his local bank.
Johns a lawyer. Johns firm has a
profit-sharing account at Vanguard with,
he says, more than $60 million invested
in it. Johns obviously a larger-than-
average shareholder in Vanguard. Hes
livid at Vanguards response, which was
to fix it with his bank to reverse the fees
and to basically tell him it was human
error and theyre sorry. Not once, he
says, did anyone with any authority
call or write him to both apologize and
explain how sucking money out of
his personal bank account could have
happened. I was in disbelief and apo-
plectic. Vanguard actually stole money
from our personal bank account, he
says, further compounding its numer-
ous errors. As he told me, I wanted
them to take ownership. But all I got
was what I call Vanguard speak.
John didnt authorize me to ask
Vanguard about this, but then again,
Vanguard never discusses individual
client issues.
In the end, John decided not to pur-
sue legal action but has lost a good deal
of faith in the company he says he used
to recommend to his family, friends and
partners. I asked him what lessons he
would share with other Vanguard inves-
tors after this experience.
Be vigilant, he says. Dont assume
Vanguard will do what you expect them
to do. You control your destiny.
Also, be ready to be surprised. The
wildest things beyond your imagination
can and will occur, he says.
What bothers John most, he says,
was the sense that this was an ordinary
day for Vanguard. So, Bill McNabb, if
youre listening, maybe its time to give
John a phone call and perhaps send him
a nice bottle of wine for his troubles.
Ill report back if theres a coda to
this tale, but as I constantly remind you,
its your money and youre the only one
who really cares about it, so stay alert,
stay vigilant, and trustbut verify. n
>
DAN S DO- I T- NOW ACTI ON RECOMMENDATI ONS
4 Compounding has been called the eighth wonder of the world. All investors should understand
its power. (See page 12)
4 Yields are at zero and inflation isnt, yet money market funds like Tax-Exempt Money
Market still have a place in your portfolio. Boost your yield? (See page 1)
4 Capital Opportunity remains one of my all-time favorite Vanguard funds, but its character
has changed over time. Whats right and whats changed? (See page 14)

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION VOL. 24, NO.

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