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1/16

A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION VOL. 24, NO. 9

Turbulent TimesTHE 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; theEbola virus is becoming a larger health issue in Africa than was originally thought; andEurope seems on the verge of deflation if not outright recession.

We are not immune. From aerial tiffs with the Chinese to cyber attacks emanatingfrom 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 investorshere remain nervous (money keeps pouring into bond funds) and overseas investorssee us as both a safe haven and, yes, even an island of relative value. In Germany, forinstance, the yield on the 10-year bund has fallen below 0.90%, making our 10-years2.34% yield look positively wunderbar.

Let the naysayers and bears keep growling. Last month, I told you that I thought allthe chatter about the stock markets imminent demise, having fallen a few percentagepoints 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 confirmsthat the U.S. economy is growing nicely, with corporate profits also moving higher. TotalStock Market gained 4.2% for the month, while Total International Stock and TotalBond Market both added 1.1%.

The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.

F U N D S F O C U S > MONEY MARKET FUNDS

Zero Yield, But Still ValuableINVESTORS HAVE TWO COMMON, YET OPPOSING SAYINGS about cash: Cash istrash, and Cash is king. Well, which one is it? Neither, actually. In my view, cash is acornerstone of any investment portfolio and a vital money management tool, but it is nota long-term investment itself.

For most fund investors, the equivalent to cash is a money market fund. If all goesaccording to plan, a money market funds price will sit at $1.00 as we earn a little bitof 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, andmoney market funds have been making headlines.

Lets start with the headlines. As I mentioned last month, the SEC recently changedsome 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

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4800

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NASDAQ COMPOSITE


0.00%

0.02%

0.04%

0.06%

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3-MO. TREASURY BILL YIELD

August Close: 0.02%

2.0%

2.3%

2.6%

2.9%

3.2%

AJJMAMFJDNOS

10-YR. TREASURY NOTE YIELD

August Close: 2.34%

14600

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AVERAGE VANGUARD INVESTOR*

August: 2.6% YTD:7.4%

-2.0%

-1.0%

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AJJMAMFJDNOS

*See the footnotes on page 2.

Model Portfolios ...............................................................2Performance Review ................................................... 8-11The Investment Tipping Point ......................................... 12Ghost in the Machine ..................................................... 14When One Fund Acts Like Another ................................ 14Vanguard Speak .............................................................. 15

Quarterly Payouts ........................................................... 15Dans Do-It-Now Action Recommendations ................... 16

PIN: SEE PAGE 1

S E P T E M B E R 2 0 1 4

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


2/162 Fund Family Shareholder Association www.adviseronline.com

THIS MONTHS CHANGES None.About our Model Portfolios TheGrowth portfolio is aimed at investors with longtime horizons who can withstand a certainamount of monthly volatility in exchange forabove-average returns. Most appropriate foryounger investors who continue to add moneyas markets gyrate. Since inception the modelhas been slightly less volatile than the stockmarket. TheConservative Growth portfolio

is appropriate for investors seeking to matchthe markets risk-adjusted returns over time.Since inception it has been just 80% as volatilas the stock market. TheIncome portfolio isdesigned for investors who desire a higherlevel of income plus the opportunity for capitgrowth with low risk, such as retirees or near-retirees. Since inception the model has beenonly two-thirds as volatile as the stock marketReturns have been substantially higher thanthe bond market. TheGrowth Index model isdesigned for young investors who wish to indexclusively. AllModel relative volatility figuresare measured against the stock market.When trades are recommended we willannounce them on ourHotline and they willalso appear on this page.Our Average Vanguard Investor index (seepage 1) measures the monthly performance ofthe typical Vanguard fund investor. The aver-age Vanguard Investor index (VII) is a dollar-weighted performance measure for the entireVanguard fund group, including stock, bond,balanced and money market funds. It providesa yardstick against which to measure an indi-vidual portfolios performance.

NOTE: All returns are total returns withdistributions reinvested. Flagship investorsmay open new accounts in all closed funds inthe model portfolios, though some may onlyallow a maximum of $25,000 per year. If youdont qualify, here are some alternatives. WithCapital Opportunity (andPRIMECAP OdysseAggressive Growth ) closed I recommend

investors considerPRIMECAP Odyssey Growt (POGRX) as a replacement. PRIMECAP OdysseStock (POSKX) is the preferred replacementfor PRIMECAP Core. Both can be purchaseddirectly at www.OdysseyFunds.com or for a fthrough Vanguard Brokerage.

M O D E L P O R T F O L I O S

The Alternative Funds in the table to the leftare both current and past recommendationsIve made for Vanguard funds that either closedor were saddled with high minimums. Someof these funds have subsequently closed, butmany of you own them, so Ive provided thisperformance data for your interest. Note thatHGHAX is typically sold with a front-end load,though clients of private money managers cansometimes buy the fund no-load.Please refer to the note above for my current alternativerecommendations .

PAST ALTERNATIVES TO CLOSED/HIGH MINIMUM FUNDS

Fund Ticker8/29

PriceAugustReturn

YTDReturn

12-Mo.Return

3-YearReturn

5-YearReturn 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 ValuePolaris Global Value PGVFX $21.72 2.0% 5.2% 20.5% 18.9% 14.7% Global EquityFidelity 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 CareICON Healthcare ICHCX $22.31 3.4% 16.5% 36.0% 27.8% 20.1% Health CarePRIMECAP Odyssey Growth POGRX $26.07 5.9% 10.4% 22.2% 22.3% 17.7% PRIMECAPPRIMECAP 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 CoreFidelity High Income SPHIX $9.43 1.6% 4.2% 8.4% 9.3% 10.8% High-Yield Corporate

GROWTH MODELTicker 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

PASTPERFORMANCE

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%

CURRENTPERFORMANCE 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 0.97Beg. Value: $50,000 (1/1/91)

CONSERVATIVE GROWTH MODELTicker Shares NAV Value % Mo. Return

Dividend Growth VDIGX 5,237 $22.50 $117,837 22% 3.8%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%Health Care VGHCX 178 $213.46 $38,091 7% 4.1%International Growth VWIGX 1,468 $23.79 $34,921 6% 1.1%Short-Term Inv.-Grade VFSTX 2,884 $10.75 $31,003 6% 0.3%TOTAL $535,034

PASTPERFORMANCE

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%

CURRENTPERFORMANCEAug. 3.7% YTD 8.4% 1-yr 21.7% 3-yr 18.0% 5-yr 14.7%Risk last 24 months 0.92 Risk since inception 0.83

Beg. Value: $50,000 (1/1/91)

INCOME MODELTicker Shares NAV Value % Mo. Return

Dividend Growth VDIGX 4,172 $22.50 $93,878 25% 3.8%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%Short-Term Inv.-Grade VFSTX 2,694 $10.75 $28,964 8% 0.3%Health Care VGHCX 118 $213.46 $25,090 6% 4.1%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

PASTPERFORMANCE

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%

CURRENTPERFORMANCE

Aug. 2.9% YTD 8.1% 1-yr 17.7% 3-yr 13.7% 5-yr 12.3%Risk last 24 months 0.65 Risk since inception 0.61

Beg. Value: $50,000 (1/1/91)

GROWTH INDEX MODELTicker Shares NAV Value % Mo. Return

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

CURRENTPERFORMANCE

Aug. 4.3% YTD 7.8% 1-yr 22.7% 3-yr 17.6% 5-yr 16.3%Risk last 24 months 1.10 Risk since inception 1.04

Beg. Value: $50,000 (3/1/95)

PASTPERFORMANCE

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%
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3/16 The Independent Adviser for Vanguard Investors September 2014 3FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641

Whats particularly interesting to meis the broad rotation weve experiencedin the first eight months of this year.During the first quarter, U.S. smallstocks were by far the best performers,and now they are the laggards. Foreigndeveloped stock markets took the leadfor a while. And after an almost 10%decline, emerging markets have comeroaring back and are now outperform-ing by a wide margin, as the chart to theright shows.

Dont forget what the naysayerswere shouting about junk bonds, either.High-Yield Corporate , which dropped1.2% in July (its first losing month in11), came back with a 1.6% gain inAugust as sentiment suddenly shiftedand Wall Street started buying again.You and I didnt panic, and wevemade good money in the sector. Andfor all the claims that health care stockswould begin to falter after their robustperformance early this year, HealthCare remains up 19.0% after generat-ing a further 4.1% gain this past month.I expect diversified portfolios such asours, with year-to-date gains of 7.8% to8.4% and allocations to great managersin the large-cap, mid-cap and healthsectors, among others, to continue to

provide a good ride through the globalturmoil, whether its geopolitical ormarket-induced.

Going for BrokerageVanguard has taken a page from

my playbook and has a push on to getinvestors to merge their individual fundaccounts under a brokerage accountumbrella (with separate accounts forIRAs, joint accounts, and so on). Youll

Daniel P. Wiener - Senior EditorJeffrey D. DeMaso - Editor/Research DirectorSeth H. Kennedy - Assistant EditorAmy Long - Vice President and PublisherBilly Currano - Senior Managing EditorDavid Clarfield - Assistant Managing EditorLouisa Dorado - Marketing DirectorMary Taylor - Marketing DirectorJohn Hall Design Group - Design and Production

Fund Family Shareholder AssociationMember, Newsletter Publishers Association Daniel P. Wiener - ChairmanJames 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 Associationby 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 mutualfunds and services. If you have questions regarding your membership, call 800/211-7641 ([email protected]). While the information providedis obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can the publication be considered liable forthe future investment performance of any securities or strategies discussed. The newsletter, hotline and associated publications provide informationof general interest and are not intended to provide individualized investment advice for any subscriber or specific portfolio. Subscribers are urged toreview the full disclaimer and securities holdings disclosure policy associated with this publication at www.adviseronline.com/disclosure-disclaimer.html or call800-219-8592 to receive a copy via mail. Vanguard and The Vanguard Group are service marks of The Vanguard Group, Inc. FFSA andInvestorPlace Media, LLC are not affiliated in any way with The Vanguard Group and receive no compensation from The Vanguard Group, Inc.

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 fundassets up to $500,000 (which you didnthave with the regular fund account),and it will make transacting businessspeedier (they say). Plus, the year afteryou make the switch, youll receive aconsolidated tax document for invest-ments held at Vanguard.

But there are several devils in thedetails. They arent deal-killers, but thisisnt seamless either. For instance, ifyou have given someone like a trusteeor investment adviser access to youraccount, youll have to redo thosepermissions on your new brokerageaccounts. The permissions dont carryover. Also, if youve been taking dis-tributions from one fund and having

them deposited into another fund, thatservice is going away. You will have tomake all of those trades manually.

With the new brokerage account,youll receive a new money marketfundeither Prime Money Market or Tax-Exempt Money Market that will become your settlementaccount even though you may alreadybe investing in a state tax-free moneyfund, Admiral Treasury Money

Market or Federal Money Market .Sell a fund or ETF, or receive intereston a bond, and that money will go intothe new settlement account. Want towrite a check on it? Youll need newchecks. Vanguard says that you canstill hold onto your old money fundand designate it as an alternativeredemption fund, which means itllbe your backup if you write a checkand overdraw your new settlementaccount. Thanks, but aside from theconfusion, that doesnt really help theinvestor who wants all her cash in theTreasury fund, for instance, and notsomething else.

Ultimately, having all your Vanguard-held assets under a brokerage umbrellamakes sense to me. The problem isthe path from here to there is riddledwith potholes. Vanguards new broker-age account pamphlet, which you canfind online, isnt completely clear. Youwont be required to make this switchnow, but eventually it sounds like allVanguard shareholders will be movingto this brokerage model.

Finally, I wanted to let you knowthat yes, my team and I do read allof the emails and letters you writeto us at AdviserOnline , and yes, I dowant 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, thankyou) is quite large. One thing I amlearning from your questions is thatits important to keep returning to thebasicswith a Vanguard flavor. Jeffand I will continue to do that in theweeks and months ahead. Our storyon compounding, which begins onpage 12, is an effort in that direction.Enjoy. n

Leadership Has Rotated in 2014(Year-to-Date Returns Through August)

SmallCap IndexTotal Stock MarketEmerging Markets IndexTotal Intl. Stock Index

1 2 / 1 3

1 / 1 4

2 / 1 4

3 / 1 4

4 / 1 4

5 / 1 4

6 / 1 4

7 / 1 4

8 / 1 4-10%

-5%

0%

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10%

15%



are minimal. Why the need for newregulations 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 paperand in your statement shows a stable$1.00, there is actually some movementbelow the surface. Money funds recordshadow NAVs daily, which estimatethe current market value of their secu-rities. Those daily NAVs often dancearound $1.00 by a few thousandths ofa dollar as the prices of the short-termsecurities held by the funds fluctuateday-to-day. But we rarely see thesefluctuations, as the price for buying andselling shares is rounded to two decimalplaces. In a few rare instances, a moneymarkets reported NAV (or price) hasdropped below $1.00. This is calledbreaking the buck. When that hap-pens, Wall Street shakes. Luckily, its arare occurrence. The last fund to breakthe buck was the Reserve Fund during2008s credit-market lockup. Its fallprompted the SEC to review the rulesapplied to money market fundsinparticular, whether money funds shouldbegin 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 pricingfor us individual investors. Institutionalprime money funds, however, will shiftto floating NAVs (showing prices outto four decimal places) by the end ofa two-year transition period. The SECalso gave money funds (investor andinstitutional) the ability to charge a feefor redemptions or to suspend redemp-tions entirely for up to 10 days if theresa run on assets during a crisis and

liquidity dries up.None of the regulationsfloat-ing NAVs or the emergency fees andgatesapply to government moneymarket funds. So if you wanted to com-pletely avoid the issue, you could con-sider something like Admiral TreasuryMoney Market though as that fund isclosed to new investors, youll have tolook outside of Vanguard. But Im notlosing any sleep over the changes. For

Vanguard investors like us, I think thisis a non-event. We keep the $1.00 NAVprice, and Vanguards money fundscontinue to be safe and well-run.

Thats the good news. Unfortunately,the yield or income were getting fromour money funds these days is a seriousproblem.

The Federal Reserve, which, as wediscussed in last months issue, essen-tially sets short-term interest rates,last cut its fed funds rate to a rangeof 0.00% to 0.25% on Dec. 16, 2008,over five years ago. Money marketsyields are generated by very short-term bonds that peg their own rates towhat the Fed does. If the fed funds rateis low, so are money market yields.

And money market yields are cur-rently so low you almost have to lookup to see bottom.

Ill bet you never thought muchof a money market fund yielding1.00%. Big deal, right? Well, you and Ihavent seen a yield of 1.00% on any ofVanguards money market funds since

March 2009and Vanguards the low-cost leader, right? It has been nearlyfive years since their money marketfunds sported yields above 0.25%, andover two years since I could find a0.10% yield. Its been almost a yearsince there was a yield above 0.01%, orone basis point.

The fact that Vanguard is going togreat lengthssubsidizing some of thecosts on a temporary basis to keepyields above zeroshows the toll thatthe Feds zero-interest-rate policy hastaken on yields. The ultra-short-termbond market is fairly high quality, sotheres not much more a great fund man-ager can do than a mediocre manager toselect great securities for a money mar-ket fund. In the end, it mainly comesdown to costs. The lower your operat-ing expenses, presumably, the higheryour money funds yield. Yet Vanguard,which has some of the lowest costs inthe industry, still cant get the yields onits money funds up over 0.01%.

Annuity investors face a specialcase. See the box on page 6 for moreon Money Market Annuity , but as thetable above shows, Vanguard cant keepinvestors yields in the black. Its beenlosing value since Dec. 1, 2009.

With core inflation running between1.5% and 1.9%, money market assets

arent coming anywhere close tokeeping up with inflationmeaningthe value of cash is slowly eroding.Consider the graph to the left, whichplots the return of 500 Index , TotalBond Market and Prime MoneyMarket as well as inflation over thepast 25 years. Cash does give youa smooth ride, and at times like themarket crash in 2008 and early 2009,simply holding cash at a then-bountifulyield above 1% looked like a smart

movebut over an investment lifetime,returns from cash have fallen well shortof those from stocks or bonds, and areonly narrowly ahead of inflation. Overthe last five years, inflation has spedwell ahead of cash, up more than 10%cumulatively to Prime Money Markets0.2% gain. Given where we are today,with yields at zero, its almost certainthat returns from money market fundswill continue to fall short of inflation.

ZERO FROM PAGE 1>

Cash Doesnt PayOver a Lifetime

500 IndexTotal Bond Market IndexPrime Money MarketCore CPI

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400$1,600

8 / 8 8

8 / 9 0

8 / 9 2

8 / 9 4

8 / 9 6

8 / 9 8

8 / 0 0

8 / 0 2

8 / 0 4

8 / 0 6

8 / 0 8

8 / 1 0

8 / 1 2

8 / 1 4

Rock Bottom YieldsCurrent

Yield

First DateYield

Hit 0.01%Admiral Treas. Money Mkt. 0.01% 12/7/2009Federal Money Mkt. 0.01% 1/6/2010Prime Money Mkt. 0.01% 2/18/2010Tax-Exempt Money Mkt. 0.01% 6/20/2011CA Tax-Exempt Money Mkt. 0.01% 6/14/2011NJ Tax-Exempt Money Mkt. 0.01% 6/14/2011NY Tax-Exempt Money Mkt. 0.01% 6/14/2011OH Tax-Exempt Money Mkt. 0.01% 7/5/2011PA Tax-Exempt Money Mkt. 0.01% 6/8/2011Money 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 moneymarket fund at all.

As Ive said many times in the past,I keep a substantial amount of my owncash in New York Tax-Exempt Money

Market . Heres why: Even if Im barelyearning any interest and I know Im notgoing to keep up with inflation, I alwayswant to have a Vanguard money fund asa repository for rainy day money, aswell as a conduit for my other investingactivities. Notice I do not view this as an

investment, but as a practical and usefulasset-management tool.

First, every investor should have anemergency fund. Life happens! Someeventslike an unexpected medicalexpense, or a downsizing at work,or a suddenly leaking roofdont

AS I HINT ON PAGE 6, there are times when short-term bond funds makesense as a substitute for money markets. Remember, a money marketfund is a money management tool for your immediate (within the next 12months) cash needs. A short-term bond fund can work as a vehicle forcash 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 moneymarket yields hit bottom. But anytime we are in a position to get morereturn, its important to keep in mind that there is a greater potential forloss.

Lets start with the risk, because if you cant live with the risks, youshouldnt reach for extra potential returns. While Im not aiming totake on lots of risk in recommending a short-term bond fund, the creditmarket freeze in 2008 put all types of funds, short-term bond and moneymarkets included, to the test. With the crisis several years behind us, weknow that Vanguards funds have been battle-tested and all survived tofight another day. And as long as you didntneed that money and stuckwith your short-term bond positionremember, this is for cash you dontneed immediatelyany losses were short-lived.

For tax-sensitive investors, I recommend extending out beyond amoney market withShort-Term Tax-Exempt, which I liken to a moneyfund on steroids. I have used this one myself. Going back nearly 20years, 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 recommendedShort-Term

Investment-Grade . That advice proved to be terrific until the credit cri-sis of 2008, when Short-Term Investment-Grade suffered huge short-termlosses as credit markets locked up. The depth of the drawdownShort-Term Investment-Grade lost 6.8% in three monthswas greater than Ihad expected. Before the credit crisis, the worst three-month loss in thefund was about 2.2%. Even though the loss was recovered quickly, I cantell you that those few months were nerve-racking.

This is why I emphasize using a short-term bond fund for cash youdont 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 tothe right, Ive applied my rolling returns analysis to Vanguards moneyfunds and short-term bond funds, listing the worst three-month, six-monthand 12-month returns over the past nearly 20 years, as well as the bestand average returns over those periods. Short-Term Investment-Gradesworst 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 betin 2008, and all are solid options.

Another option as a cash substitute isShort-Term Inflation ProtectedIndex. The fund is not yet two years old, so I did not include it in the tabwith the other cash substitutes, but with a short maturity profile it is aviable option for this roleparticularly if you are concerned about infla-tion. This is how Vanguard appears to be using the fund within theTargetRetirement series of funds. Note that the fund last paid out a dividend inDecember 2013, so you arent earning any current income right now.

There is a final alternative for what Ill call longer-term cash thatyou may find of interest. Paul Kaplan, former manager ofGNMA and Wellesley Income s bond portfolio and the now-retired chief ofWellington Managements bond shop, told me many years ago that heconsidered GNMA a cash substitute. The data both backs Kaplan upand highlights why this is for your longer-term cash. Had I stoppedthe analysis in the table below at the end of 2012, the worst six-monthdecline for GNMA would have been a drop of 1.8%. However, GNMAmore sensitive to interest rates than most of the other funds in the tableand when interest rates rose in 2013, this fund felt more of the painexperiencing its largest decline over a six-month period, 3.2%.

Have no doubts: Interest rates will rise, and money markets will produce some income again, just as short-term bond funds will show somshort-term losses. In the end, it is really up to you how much (potentialshort-term pain youre willing to suffer for the prospect of longer-termgains. Just keep in mind that there is no free lunch, and reaching for thextra return does court some extra risk.

>

Risk and Reward for Money Fundsand Short SubstitutesRolling Returns Since 12/31/94

3-Month S h o r t -

T e r m

T r e a s u r y

S h o r t -

T e r m

F e d e r a

l

S h o r t -

T e r m

I n v e s t

. - G r .

S h o r t -

T e r m

B o n

d I n d e x

G N M A

A d m i r a

l T r e a s u r y

M M

P r i m e

M o n e y

M a r k e t

T a x -

E x .

M o n e y

M a r k e t

S h o r t -

T e r m

T a x

E x e m

p t

L i m

i t e

d - T e r m

T a x -

E x .

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-MonthWorst -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


6/16



annually or are executing a gradualshift in your portfolios allocation.

A fourth and final reason to holda money market fund is that cash is ashock-absorber, taking the edge off ofthe volatility in your portfolio. I haveoften allocated a percentage of myprivate clients accounts to a moneymarket or slightly higher-yielding alter-native like Short-Term Investment-Grade . Your money market fund orshort-term bond fund isnt going tomake you rich on its own, but it shouldhelp keep your portfolio above waterwhen the storm hits while putting youin a position to buy when everyone elseis rushing for the exits.

What Is an Investor to Do?Yes, yields are at rock bottom right

now, and as much as anyone else, Iwould like to earn more on my cash, ifonly to help offset the impact of infla-tion. But as I said, my primary concernwith my cash holdings is the return of my capital, not the return on my capital.

Usually, this is where I provide someadvice to taxable investors about theadvantages of a tax-exempt moneyfund. But right now, with the yieldson all of Vanguards funds essentiallypinned at zero, there isnt much incometo worry about. At some point that will

change, and tax-conscious investorswill need to pay attention to the differ-ence between taxable and tax-exemptmoney fund yields. Today, the differ-ences are almost rounding errors.

Of course, for some investors, theadded value of the U.S. Treasurysfull faith and credit may allow them tosleep better at night, even if the yieldis next to nothing, hence the appeal ofVanguards Treasury or Federal funds.For me, though, the high credit qual-

ity of all of Vanguards money marketfunds and the research skills employedby Vanguards money market team giveme enough confidence to predict thatnone of Vanguards money funds aregoing to break the buck. And, as Isaid, Vanguard is currently waivingsome expenses in order to keep itsyields in the black and prices at $1.00.

Ill say it one more time: Cash is amoney management tool, not an invest-

ment. Vanguard is probably the besthardware store in town. Though it isfrustrating to be earning next to noth-ing on our money funds, as long as the

objective is to have some safe, liquidmoney available to us, then Vanguardsfunds are the ultimate cash-holdingvehicle. n

A Non-Fund Option?THOSE ADS PROMISING HIGH YIELDS on your cash are everywhere. I get it. Earning e

zero on our money funds isnt fun. And some non-mutual-fund companies are trying to comethe rescue. If you are looking for a place to stash cash that offerssome yield and is still safe, youmay want to consider a high-yield savings account.

As I write this, a quick internet search readily reveals a number of saving accounts offeringyields well above those found on Vanguards money market funds. The table below lists a hanful of options. (Please donot consider this a recommendation or endorsement of these banks oraccounts. I am merely showing them for illustrative purposes.)

Lets put some numbers on how muchmore you can earn with a high-yield savingsaccount versus a Vanguard money market fundtoday. A yield of 0.95% on $10,000 generates$95 dollars in income. That wont make yourich, but its far better than the $1 of incomeyoull get from a 0.01% yield on $10,000.

Many of these accounts are FDIC-insuredso there is a high level of safety to go withthe yield. Whats not to like?

First, note that many high-yield savingaccounts are offered by online banks. Havinglower costs and few brick-and-mortar locations is one way these banks are able to offereven lower expenses than Vanguards, with higher yields to boot. There is nothing inherentwrong with an online bank (Jeff DeMaso uses one), but recognize that all of the customeservice is provided over the internet, phone or your mobile device. The bank may not offerthe same services, or they may just take longer to execute a transaction compared to a physcal 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 t

six withdrawals a month in a savings account. If you want to spend the money in this type ofaccount, you may have to transfer the assets to your checking account or another bank. In shoutilizing 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 rateyou see isnt exactly the same thing as the yield reported for money market funds. Moneymarket funds typically report an SEC yield, which looks at the interest paid less any expenseover 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) comonly reported on savings accounts does factor in compounding. To compare apples to appleyou need to look for a money market funds compound (or effective) yield. Vanguard repor

both the SEC and compound yields for its money market funds in the individual fund profileits website. The difference between a funds SEC yield and its compound yield typically isntgreatand at todays rock bottom yields there is no appreciable differencebut it is somethinto 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 yielstash your emergency fund, a high-yield savings account may be worth considering. The saviaccount wont work as well for handling distributions from your stock and bond funds or offesame flexibility for near-term purchases, but those are separate issues from maintaining a rainday fund. Keep in mind that there is no guarantee your account will always be high yieldinand Vanguards money markets wont yield one basis point forever, either.

A Sample of HigherYields Out There

Bank Account Name8/29APY

GE Capital Bank Online Savings 0.95%Synchrony Bank Optimizer Plus HighYield 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%



E R F O R M A N C E R E V I E W

VANGUARD EQUITY FUNDS

Fund (fund #) Ticker Minimum Loads Advice8/29

PriceAugustReturn

YTDReturn

12-Mo.Return

3-YearReturn

5-YearReturn

12-Mo.Yield Risk

SECTOR

Energy (51) VGENX $3K Hold $74.32 1.8% 10.7% 20.7% 9.8% 11.4% 1.5%Precious Metals & Mining (53) VGPMX $3K Sell $11.67 0.0% 12.9% 5.9% -20.4% -4.1% 0.0% 2Health Care (52) VGHCX $3K Buy $213.46 4.1% 19.0% 37.1% 26.1% 20.4% 1.1%REIT Index (123) VGSIX $3K Hold $25.62 3.0% 21.1% 24.2% 14.3% 18.7% 3.5% 1Global 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% AGGRESSIVE GROWTH

Capital Opportunity (111)(CLOSED) VHCOX $3K Buy $52.31 5.1% 13.3% 28.6% 24.8% 17.7% 0.1%Explorer (24) VEXPX $3K Hold $105.26 5.1% 1.8% 18.1% 20.0% 18.6% 0.0%Explorer Value (1690) VEVFX $3K Hold $32.97 3.2% 4.7% 20.3% 20.7% 0.5% 1MidCap Growth (301) VMGRX $3K Sell $26.26 4.5% 6.2% 20.2% 18.8% 18.2% 0.0% 1SmallCap Growth Index (861) VISGX $3K Buy $35.55 4.8% 3.4% 18.0% 19.5% 19.3% 0.5% 1SmallCap Index (48) NAESX $3K Hold $55.93 5.0% 6.2% 22.1% 20.9% 18.8% 1.1% 1SmallCap Value Index (860) VISVX $3K Hold $25.31 5.2% 8.5% 25.5% 21.8% 18.1% 1.6% 1Strategic Equity (114) VSEQX $3K Hold $33.33 4.8% 11.1% 30.4% 23.8% 20.8% 1.1%Strategic SmallCap Equity (615) VSTCX $3K Hold $32.70 5.2% 7.9% 26.4% 22.6% 20.7% 0.7% 1Admiral Tax-Managed SmallCap (116) VTMSX $10K Sell $44.34 4.3% 1.9% 18.7% 20.5% 18.6% 0.9% 1 GROWTH

Capital Value (328) VCVLX $3K Buy $16.00 4.1% 11.1% 28.3% 23.8% 18.6% 0.6%Extended Market Index (98) VEXMX $3K Sell $66.76 4.9% 6.4% 22.4% 20.7% 18.9% 0.9% 1Growth Index (9) VIGRX $3K Buy $52.45 4.7% 10.1% 27.2% 20.4% 17.9% 1.0%MidCap Growth Index (832) VMGIX $3K Buy $38.98 5.6% 9.9% 23.0% 18.2% 19.0% 0.4% 1MidCap Index (859) VIMSX $3K Hold $33.04 4.7% 10.1% 24.9% 20.2% 19.0% 0.9% 1MidCap Value Index (835) VMVIX $3K Hold $34.60 3.9% 10.3% 26.7% 22.2% 19.0% 1.3%Morgan Growth (26) VMRGX $3K Hold $27.58 4.8% 7.7% 24.6% 18.8% 16.9% 0.6%PRIMECAP (59)(CLOSED) VPMCX Buy $104.52 3.9% 13.2% 31.4% 22.9% 17.9% 0.8% 1PRIMECAP Core (1220)(CLOSED) VPCCX Buy $22.05 4.4% 13.4% 28.9% 21.6% 17.6% 0.8% 0Selected Value (934) VASVX $3K Buy $30.41 3.8% 7.8% 24.5% 22.4% 18.7% 1.0%Social Index (213) VFTSX $3K Buy $12.74 4.1% 9.8% 25.6% 22.0% 16.9% 1.2% 1

STAR Growth (122) VASGX $3K Sell $29.37 2.8% 7.4% 19.2% 14.2% 12.6% 2.0% 0Admiral Tax-Mgd. Capital App. (5102) VTCLX $10K Sell $102.74 4.1% 9.7% 25.6% 20.8% 17.2% 1.4%U.S. Growth (23) VWUSX $3K Sell $31.03 4.1% 8.2% 26.3% 20.2% 16.5% 0.4% 1.2 GROWTH & INCOME

500 Index (40) VFINX $3K Buy $185.43 4.0% 9.8% 25.0% 20.4% 16.7% 1.7%Convertible Securities (82) VCVSX $3K Buy $14.37 1.4% 6.2% 13.5% 12.6% 12.1% 2.8% 0Diversified Equity (608) VDEQX $3K Sell $33.13 4.2% 8.4% 24.2% 20.8% 17.1% 0.8% 1Dividend Appreciation Index (602) VDAIX $3K Buy $31.24 3.6% 4.7% 18.2% 16.7% 14.9% 1.8%Dividend Growth (57) VDIGX $3K Buy $22.50 3.8% 6.5% 19.9% 18.3% 15.9% 1.9% 0Equity Income (65) VEIPX $3K Buy $31.91 3.6% 8.7% 21.7% 20.2% 17.2% 2.4% 0Growth & Income (93) VQNPX $3K Sell $43.33 4.2% 10.4% 25.8% 21.0% 17.1% 1.5% 1High Dividend Yield Index (623) VHDYX $3K Hold $26.80 3.8% 10.0% 23.1% 20.3% 16.8% 2.7%LargeCap Index (307) VLACX $3K Buy $37.28 4.0% 9.8% 25.0% 20.4% 16.9% 1.6%Market Neutral (634) VMNFX $250K Sell $11.44 0.0% 3.7% 9.0% 3.2% 3.3% 0.0% 0STAR Moderate Growth (914) VSMGX $3K Sell $24.45 2.4% 6.9% 15.8% 11.4% 10.7% 2.0% 0Total Stock Market Index (85) VTSMX $3K Hold $50.56 4.2% 9.2% 24.6% 20.5% 17.2% 1.6% 1U.S. Value (124) VUVLX $3K Hold $17.34 4.3% 11.2% 25.7% 22.8% 17.6% 1.7%Value Index (6) VIVAX $3K Hold $32.27 3.5% 9.5% 23.1% 20.5% 15.8% 2.0%Windsor (22) VWNDX $3K Hold $22.28 3.9% 10.3% 25.0% 23.1% 17.2% 1.2%Windsor II (73) VWNFX $3K Buy $39.68 3.6% 9.2% 22.5% 20.5% 15.8% 2.1% 0 BALANCEDBalanced Index (2) VBINX $3K Hold $29.31 3.0% 7.4% 16.6% 13.2% 12.1% 1.7% 0Managed Payout (1498) VPGDX $25K Sell $19.38 2.1% 7.0% 16.3% 10.9% 11.3% 5.0% 0STAR (56) VGSTX $1K Hold $25.38 2.4% 7.0% 17.3% 13.2% 11.6% 1.8% 0STAR Conservative Growth (724) VSCGX $3K Sell $18.99 1.9% 6.3% 12.5% 8.5% 8.5% 2.0% 0STAR Income (723) VASIX $3K Sell $15.00 1.6% 5.8% 9.2% 5.7% 6.4% 2.0% 0Admiral Tax-Managed Balanced (103) VTMFX $10K Sell $26.58 2.5% 7.8% 16.5% 12.0% 10.8% 2.0% 0Wellesley Income (27) VWINX $3K Hold $26.16 2.0% 6.9% 12.7% 10.3% 10.4% 2.9% 0Wellington (21) VWELX $3K Buy $40.46 2.5% 7.9% 17.4% 14.7% 12.4% 2.3% TARGET RETIREMENT

Target Retirement 2060 (1691) VTTSX $1K $28.82 3.0% 7.7% 20.9% 1.3% 0.9Target Retirement 2055 (1487) VFFVX $1K $32.70 3.0% 7.7% 20.9% 15.7% 1.5% 0Target Retirement 2050 (699) VFIFX $1K $30.37 3.0% 7.7% 20.9% 15.7% 13.7% 1.7% 0Target Retirement 2045 (306) VTIVX $1K $19.14 3.1% 7.8% 21.0% 15.7% 13.7% 1.7% 0Target Retirement 2040 (696) VFORX $1K $30.51 3.0% 7.7% 20.9% 15.7% 13.7% 1.6% 0Target Retirement 2035 (305) VTTHX $1K $18.27 2.9% 7.6% 20.1% 15.0% 13.3% 1.8% 0Target Retirement 2030 (695) VTHRX $1K $29.67 2.7% 7.3% 18.7% 14.0% 12.6% 1.7% 0Target Retirement 2025 (304) VTTVX $1K $16.88 2.6% 7.2% 17.5% 13.0% 11.9% 1.7% 0Target Retirement 2020 (682) VTWNX $1K $28.99 2.4% 6.9% 16.2% 11.9% 11.2% 1.7% 0Target Retirement 2015 (303) VTXVX $1K $15.73 2.1% 6.5% 14.4% 10.6% 10.3% 1.7% 0Target Retirement 2010 (681) VTENX $1K $27.09 1.8% 5.8% 11.9% 8.8% 9.2% 1.5% 0Target Retirement Income (308) VTINX $1K $13.06 1.5% 5.3% 10.0% 7.0% 7.7% 1.6% 0

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. Howewho 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 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 annuunless you have $10,000 in the fund, $100,000 with Vanguard or accept all paperwork through online means.



P E R F O R M A N C E R E V I E W

VANGUARD EQUITY FUNDS (CONT.)

Fund (fund #) Ticker Minimum Loads Advice8/29

PriceAugustReturn

YTDReturn

12-Mo.Return

3-YearReturn

5-YearReturn

12-Mo.Yield Risk

INTERNATIONAL/GLOBAL

Developed Markets Index (1397) VDVIX $3K Sell $10.37 0.3% 2.6% 2.9%Emerging Markets Stock Index (533) VEIEX $3K Hold $28.73 3.6% 12.4% 22.3% 3.9% 7.6% 2.2%Emerging Markets Select Stock (752) VMMSX $3K Hold $22.04 2.9% 10.9% 23.9% 6.6% 1.2%European Index (79) VEURX $3K Hold $31.06 0.6% 1.9% 17.6% 12.9% 8.9% 3.8%Global Equity (129) VHGEX $3K Buy $25.17 2.7% 7.2% 23.1% 16.1% 13.5% 1.4%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%International Growth (81) VWIGX $3K Buy $23.79 1.1% 1.9% 18.3% 11.2% 10.5% 1.4%

International Value (46) VTRIX $3K Hold $38.40 0.0% 2.7% 18.1% 12.1% 8.2% 1.8%Pacific Index (72) VPACX $3K Hold $11.92 -0.2% 3.6% 14.4% 8.9% 7.4% 2.4%Total International Stock Index (113) VGTSX $3K Hold $17.31 1.1% 5.2% 18.3% 9.3% 8.1% 3.0%Total World Stock Index (628) VTWSX $3K Hold $25.54 2.6% 7.3% 21.3% 14.3% 11.9% 2.2%World ex-U.S. Index (770) VFWIX $3K Sell $20.52 1.0% 5.0% 17.9% 9.2% 8.1% 3.0%World ex-U.S. SmallCap Index (1684) VFSVX $3K Hold $41.59 1.3% 6.9% 20.9% 8.9% 10.8% 2.3%

Minimum refers to the dollar amount (e.g., $3K means$3,000) needed to open a new taxable account.Loads aredenoted with an f for front-end and r for back-end.Holding periods are noted for loads imposed on sales ofshares held less than two months (



E R F O R M A N C E R E V I E W

VANGUARD ADMIRAL FUNDS

Admiral Fund (fund #) Ticker Min. Loads Advice8/29

PriceAugustReturn

YTDReturn

12-Mo.Return

3-YearReturn

5-YearReturn

12-Mo.Yield

SECYield Risk

ADMIRAL SECTOR SHARESConsumer Discret. Index (5483) VCDAX $100K NA $57.87 4.4% 3.4% 20.8% 24.4% 23.4% 0.8% Consumer Staples Index (5484) VCSAX $100K NA $57.74 4.7% 6.4% 17.4% 16.9% 16.4% 2.1% 1Energy (551) VGELX $50K NA $139.52 1.8% 10.8% 20.7% 9.8% 11.4% 1.6% Energy Index (5480) VENAX $100K NA $71.06 2.7% 12.5% 24.3% 14.3% 15.6% 1.5% Financials Index (5486) VFAIX $100K NA $23.72 4.0% 7.3% 21.2% 21.3% 12.1% 1.8% Health Care (552) VGHAX $50K NA $90.06 4.1% 19.0% 37.2% 26.1% 20.4% 1.1% Health Care Index (5485) VHCIX $100K NA $58.61 5.3% 15.9% 31.8% 27.2% 20.5% 1.0% Industrials Index (5482) VINAX $100K NA $53.40 4.4% 4.0% 24.8% 22.1% 19.3% 1.0% 1Info.Technology Index (5487) VITAX $100K NA $51.93 4.3% 13.3% 32.1% 20.9% 17.3% 0.9% Materials Index (5481) VMIAX $100K NA $57.84 4.2% 10.0% 27.2% 15.8% 15.7% 1.7% REIT Index (5123) VGSLX $10K Hold $109.31 2.9% 21.3% 24.3% 14.5% 18.9% 3.6% 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% Telecom Svcs. Index (5488) VTCAX $100K NA $45.07 -0.6% 5.7% 17.1% 14.7% 15.5% 3.7% Utilities Index (5489) VUIAX $100K NA $47.47 5.1% 15.4% 20.6% 13.4% 13.3% 3.3% ADMIRAL EQUITY SHARES

Capital Opportunity (5111) (CLOSED) VHCAX Buy $120.82 5.1% 13.3% 28.7% 24.8% 17.8% 0.2% 1Explorer (5024) VEXRX $50K Hold $97.99 5.1% 1.9% 18.3% 20.2% 18.8% 0.2% SmallCap Growth Index (5861) VSGAX $10K Buy $44.49 4.8% 3.5% 18.2% 0.6% 1.SmallCap Index (548) VSMAX $10K Hold $56.02 5.0% 6.3% 22.3% 21.0% 19.0% 1.2% 1SmallCap Value Index (5860) VSIAX $10K Hold $45.40 5.1% 8.6% 25.7% 1.7% 1.Extended Mkt. Index (598) VEXAX $10K Sell $66.81 5.0% 6.5% 22.5% 20.8% 19.1% 1.1% 1Growth Index (509) VIGAX $10K Buy $52.45 4.7% 10.2% 27.4% 20.5% 18.1% 1.2% MidCap Growth Index (5832) VMGMX $10K Buy $42.71 5.6% 10.0% 23.2% 0.6% 1MidCap Index (5859) VIMAX $10K Hold $150.06 4.7% 10.2% 25.1% 20.4% 19.2% 1.1% MidCap Value Index VMVAX $10K Hold $45.56 3.9% 10.3% 26.9% 1.4% 1Morgan Growth (526) VMRAX $50K Hold $85.53 4.8% 7.8% 24.8% 18.9% 17.1% 0.7% PRIMECAP (559)(CLOSED) VPMAX Buy $108.44 3.9% 13.3% 31.5% 23.0% 18.1% 0.9% 1U.S. Growth (523) VWUAX $50K Sell $80.37 4.1% 8.2% 26.4% 20.4% 16.7% 0.5% 1

500 Index (540) VFIAX $10K Buy $185.46 4.0% 9.9% 25.2% 20.6% 16.8% 1.8% Dividend Appreciation Index (5702) VDADX $10K Buy $21.19 3.6% 4.7% 1.1Equity Income (565) VEIRX $50K Buy $66.90 3.6% 8.8% 21.8% 20.3% 17.3% 2.5% 0Growth & Income (593) VGIAX $50K Sell $70.75 4.2% 10.5% 25.9% 21.1% 17.3% 1.6% 1LargeCap Index (5307) VLCAX $10K Buy $46.62 4.0% 9.9% 25.1% 20.5% 17.0% 1.7% Total Stock Market Index (585) VTSAX $10K Hold $50.58 4.2% 9.3% 24.7% 20.7% 17.3% 1.7% 1Value Index (506) VVIAX $10K Hold $32.27 3.5% 9.6% 23.3% 20.6% 16.0% 2.2% Windsor (5022) VWNEX $50K Hold $75.18 4.0% 10.3% 25.2% 23.2% 17.4% 1.3% 1Windsor II (573) VWNAX $50K Buy $70.41 3.6% 9.2% 22.5% 20.6% 15.9% 2.2% 0Balanced Index (502) VBIAX $10K Hold $29.31 3.0% 7.5% 16.7% 13.4% 12.3% 1.8% 0Wellesley Income (527) VWIAX $50K Hold $63.38 2.0% 7.0% 12.8% 10.4% 10.4% 3.0% 0Wellington (521) VWENX $50K Buy $69.89 2.5% 8.0% 17.5% 14.8% 12.5% 2.4% 0Developed Markets Index (127) VTMGX $10K Sell $13.40 0.3% 2.7% 16.6% 11.5% 8.3% 3.2% 1Emerging Markets Stock Index (5533) VEMAX $10K Hold $37.74 3.6% 12.5% 22.5% 4.1% 7.8% 2.4% 1European Index (579) VEUSX $10K Hold $72.34 0.6% 1.9% 17.7% 13.0% 9.0% 4.0% 1Global 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% Pacific Index (572) VPADX $10K Hold $77.39 -0.1% 3.7% 14.6% 9.1% 7.6% 2.5% 1Total International Stock Index (569) VTIAX $10K Hold $28.96 1.0% 5.3% 18.4% 9.4% 3.1% 1World ex-U.S. Index (570) VFWAX $10K Sell $32.33 1.0% 5.1% 18.1% 3.1% 1. ADMIRAL INCOME SHARESShort-Term Treasury (532) VFIRX $50K Sell $10.70 0.1% 0.6% 1.0% 0.5% 1.4% 0.5% 0.53% 0Short-Term Federal (549) VSGDX $50K Sell $10.75 0.1% 0.9% 1.4% 0.8% 1.8% 0.7% 0.63% 0Short-Term Govt Index (1942) VSBSX $10K Sell $20.32 0.1% 0.4% 0.7% 0.4% 0.3% 0.37% 0Short-Term Inflation Index (567) VTAPX $10K Hold $25.01 -0.2% 1.3% 1.5% 0.1% -0.84% 0Short-Term Inv.-Grade (539) VFSUX $50K Buy $10.75 0.3% 1.9% 3.2% 2.6% 3.4% 2.0% 1.54%Short-Term Corp. Index (1945) VSCSX $10K Buy $21.81 0.4% 2.0% 3.5% 3.1% 1.8% 1.40% 0Short-Term Bond Idx. (5132) VBIRX $10K Hold $10.52 0.3% 1.1% 1.8% 1.2% 2.3% 1.2% 0.90%Inflation-Protected Securities (5119) VAIPX $50K Hold $26.86 0.5% 6.4% 5.8% 2.1% 5.3% 2.4% -0.15%Interm.-Term Treasury (535) VFIUX $50K Sell $11.34 1.0% 3.4% 3.8% 1.6% 4.0% 1.7% 1.64% 1Interm-Term Govt Index (1943) VSIGX $10K Sell $21.64 1.0% 3.2% 3.6% 1.5% 1.4% 1.59% 1Interm.-Term Inv.-Grade (571) VFIDX $50K Buy $9.98 1.1% 5.6% 7.5% 4.9% 6.9% 3.2% 2.59%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%Intermed.-Term Bond Idx. (5314) VBILX $10K Hold $11.54 1.4% 6.1% 7.2% 3.8% 6.2% 2.9% 2.46%Total Bond Market (584) VBTLX $10K Hold $10.88 1.1% 4.9% 5.7% 2.9% 4.4% 2.6% 2.05%GNMA (536) VFIJX $50K Sell $10.74 1.0% 5.0% 6.2% 2.2% 4.2% 2.7% 2.55% 1Mortgage-Backed Sec. Idx (1948) VMBSX $10K Sell $21.04 0.8% 4.2% 5.2% 2.1% 1.7% 1.40% 0Long-Term Treasury (583) VUSUX $50K Sell $12.57 4.2% 17.9% 14.7% 5.9% 7.7% 3.1% 2.90% 3Long-Term Govt Index (1944) VLGSX $10K Sell $24.81 4.2% 17.7% 14.6% 5.8% 2.9% 2.90% 3Long-Term Inv.-Grade (568) VWETX $50K Hold $10.76 3.2% 15.2% 17.2% 9.2% 9.7% 4.5% 4.01%

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%High-Yield Corporate (529) VWEAX $50K Buy $6.13 1.6% 5.5% 9.9% 9.6% 10.8% 5.6% 4.50%Emerging Markets Govt Bond Index (520)** VGAVX $10K 0.75%f Buy $20.15 0.9% 9.1% 12.9% 4.3% 4.42%Total International Bond Index (511) VTABX $10K Hold $20.83 1.3% 6.2% 7.5% 1.5% 1.21%Short-Term Tax-Exempt (541) VWSUX $50K Buy $15.87 0.1% 0.7% 1.1% 0.8% 1.2% 0.8% 0.35% 0Limited-Term Tax-Exempt (531) VMLUX $50K Buy $11.09 0.3% 1.8% 2.9% 1.6% 2.3% 1.7% 0.81%Interm.-Term Tax-Exempt (542) VWIUX $50K Buy $14.25 1.1% 6.1% 8.7% 4.4% 4.8% 3.2% 1.74%Long-Term Tax-Exempt (543) VWLUX $50K Hold $11.69 1.5% 9.0% 12.3% 5.8% 5.8% 4.0% 2.54%High-Yield Tax-Exempt (5044) VWALX $50K Hold $11.19 1.5% 9.4% 12.6% 6.4% 6.6% 4.0% 2.87%CA Intermed. Tax-Exempt (5100) VCADX $50K Buy $11.78 1.1% 6.8% 9.7% 5.3% 5.5% 3.2% 1.67%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%NJ Tax-Exempt (514) VNJUX $50K Sell $12.24 1.5% 8.3% 11.6% 5.4% 5.3% 3.6% 2.57% 1NY Tax-Exempt (576) VNYUX $50K Sell $11.76 1.5% 9.0% 12.2% 5.3% 5.3% 3.5% 2.30%PA Tax-Exempt (577) VPALX $50K Sell $11.64 1.4% 8.6% 12.0% 5.3% 5.4% 3.8% 2.54%

** Fund sold with a 0.75% front-end load



P E R F O R M A N C E R E V I E W

Vanguard exchange-traded fund shares can be bought and sold like stocks, anytime markets are open. They are expected to track the performance ofVanguards like-named index funds closely, though not precisely. Price and performance are based on actual closing prices, not net asset value. Individualinvestor performance can vary depending on price variability during the trading day. Buy, Sell and Hold ratings may differ from open-end versions of thesame 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 thattheir operating expenses are several basis points lower. (One basis point equals one one-hundredth of a percent.) For instance, a fund with anoperating 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 Advice8/29

PriceAugustReturn

YTDReturn

12-Mo.Return

3-YearReturn

5-YearReturn

12-Mo.Yield

SECYield Risk

BROAD EQUITY ETFSSmallCap Growth VBK Buy $126.44 4.7% 3.4% 18.0% 19.7% 19.4% 0.6% 1.39S&P SmallCap 600 Growth VIOG Buy $101.34 3.9% -0.5% 16.1% 19.2% 0.5% 1.46Russell 2000 Growth VTWG Hold $99.76 5.6% 1.3% 17.2% 19.2% 0.6% 1.60SmallCap VB Hold $116.84 5.0% 6.3% 22.2% 21.0% 19.1% 1.2% 1.32S&P SmallCap 600 VIOO Hold $99.74 4.2% 1.4% 18.4% 20.5% 0.8% 1.39Russell 2000 VTWO Hold $93.71 4.9% 1.8% 17.7% 19.3% 1.0% 1.45SmallCap Value VBR Hold $105.60 5.1% 8.5% 25.5% 22.0% 18.3% 1.7% 1.30S&P SmallCap 600 Value VIOV Hold $98.80 4.3% 3.3% 20.1% 22.1% 0.9% 1.34Russell 2000 Value VTWV Hold $87.33 3.8% 1.6% 17.3% 18.6% 1.4% 1.39Extended Market VXF Sell $88.03 4.9% 6.5% 22.6% 20.8% 19.1% 1.1% 1.31Growth VUG Hold $101.84 4.6% 10.1% 27.4% 20.6% 18.1% 1.2% 1.12S&P 500 Growth VOOG Buy $97.04 4.3% 10.5% 27.4% 20.1% 1.3% 1.03Russell 1000 Growth VONG Hold $95.78 4.4% 9.5% 26.2% 20.0% 1.3% 1.05MegaCap Growth MGK Buy $79.17 4.5% 9.9% 28.1% 20.9% 17.8% 1.3% 1.12MidCap Growth VOT Buy $99.21 5.6% 9.9% 23.2% 18.3% 19.1% 0.6% 1.22S&P MidCap 400 Growth IVOG Buy $97.18 4.7% 5.5% 20.9% 17.1% 0.6% 1.37MidCap VO Hold $121.17 4.7% 10.2% 25.2% 20.4% 19.2% 1.1% 1.11S&P MidCap 400 IVOO Buy $97.21 5.1% 7.9% 23.1% 19.8% 0.9% 1.30MidCap Value VOE Hold $87.95 3.9% 10.3% 26.8% 22.3% 19.1% 1.4% 1.09S&P MidCap 400 Value IVOV Buy $96.77 5.2% 10.7% 25.3% 21.8% 0.8% 1.26S&P 500 VOO Buy $183.99 4.0% 9.8% 25.3% 20.6% 1.6% 1.02Russell 1000 VONE Buy $92.74 4.1% 9.8% 25.3% 20.7% 1.6% 1.00Dividend Appreciation VIG Buy $78.12 3.6% 4.8% 18.5% 16.8% 15.0% 1.9% 1.13High Dividend Yield VYM Hold $67.66 3.8% 10.0% 23.2% 20.4% 16.9% 2.7% 1.01LargeCap VV Buy $92.29 4.0% 9.8% 25.1% 20.5% 17.0% 1.7% 1.00MegaCap MGC Buy $68.67 3.8% 9.7% 25.2% 20.6% 16.5% 1.8% 1.02Total Stock Market VTI Hold $103.88 4.2% 9.2% 24.8% 20.7% 17.3% 1.7% 1.05Russell 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% 1.05S&P 500 Value VOOV Hold $88.59 3.6% 9.1% 22.9% 20.8% 1.9% 1.04Russell 1000 Value VONV Hold $89.85 3.6% 10.2% 24.3% 21.4% 1.9% 1.06MegaCap Value MGV Hold $59.60 3.4% 9.5% 22.9% 20.4% 15.3% 2.2% 1.03 INTERNATIONAL ETFSEmerging Markets Stock VWO Hold $45.40 3.8% 11.7% 23.5% 4.1% 7.8% 2.4% 1.60Developed Markets VEA Sell $41.69 0.3% 2.3% 16.8% 11.3% 8.3% 3.2% 1.28European VGK Hold $57.79 0.7% 1.4% 17.7% 12.8% 8.9% 4.0% 1.45Pacific VPL Hold $62.53 -0.4% 3.0% 14.5% 9.1% 7.6% 2.5% 1.42Total International Stock VXUS Hold $53.97 1.2% 4.9% 18.3% 9.3% 3.1% 1.22Total World Stock VT Hold $62.76 2.6% 7.0% 21.6% 14.4% 12.1% 2.3% 1.07World ex-U.S. VEU Sell $52.03 1.0% 4.6% 18.3% 9.3% 8.2% 3.1% 1.27World ex-U.S. SmallCap VSS Hold $109.37 1.5% 7.0% 20.8% 9.3% 11.0% 2.5% 1.27 SECTOR ETFSConsumer Discretionary VCR NA $111.78 4.4% 3.4% 20.6% 24.4% 23.4% 0.8% 1.29Consumer Staples VDC NA $117.12 4.7% 6.4% 17.4% 16.9% 16.4% 2.1% 1.26Energy VDE NA $142.29 2.7% 12.5% 24.2% 14.3% 15.6% 1.5% 1.38Financials VFH NA $47.34 3.9% 7.4% 21.3% 21.3% 12.1% 1.8% 1.12Health Care VHT NA $117.17 5.2% 15.9% 31.9% 27.2% 20.5% 1.0% 1.23Industrials 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% 1.17Materials VAW NA $113.53 4.2% 10.0% 27.1% 15.8% 15.6% 1.7% 1.23REIT VNQ Hold $77.18 3.0% 21.4% 24.6% 14.5% 18.9% 3.6% 1.43Global ex-U.S. Real Estate VNQI Hold $58.84 0.3% 8.7% 15.8% 11.4% 3.4% 1.50Telecom Services VOX NA $88.42 -0.6% 5.7% 17.1% 14.7% 15.5% 3.7% 1.44Utilities VPU NA $94.61 5.1% 15.4% 20.6% 13.4% 13.3% 3.3% 1.60 INCOME ETFSShort-Term Government VGSH Sell $61.01 0.2% 0.4% 0.8% 0.4% 0.3% 0.37% 0.14Short-Term Inflation Bond VTIP Hold $49.92 -0.1% 1.2% 1.6% 0.0% -0.84% 0.59Short-Term Corporate VCSH Buy $80.24 0.3% 1.6% 3.6% 2.9% 1.6% 1.40% 0.62Short-Term Bond BSV Hold $80.28 0.4% 1.1% 1.7% 1.1% 2.2% 1.1% 0.90% 0.39Int.-Term Government Bond VGIT Sell $64.20 1.1% 3.4% 3.7% 1.5% 1.3% 1.59% 1.13Int.-Term Corporate VCIT Buy $87.15 1.5% 7.4% 9.9% 5.7% 2.8% 3.00% 1.73Int.-Term Bond BIV Hold $85.26 1.5% 6.2% 7.2% 3.6% 6.0% 2.9% 2.46% 1.58Total Bond Market BND Hold $82.60 1.2% 4.8% 5.9% 2.8% 4.3% 2.5% 2.05% 1.06Mortgage-Backed Securities VMBS Sell $52.68 0.7% 4.3% 5.5% 2.0% 1.6% 1.40% 0.91Long-Term Government VGLT Sell $73.95 4.2% 17.6% 14.7% 5.8% 2.6% 2.90% 3.39Long-Term Corporate VCLT Hold $92.59 3.3% 14.5% 17.8% 9.0% 3.9% 4.32% 3.01Long-Term Bond BLV Sell $92.79 4.0% 16.5% 17.1% 7.5% 9.0% 4.1% 3.85% 3.03Ext. Duration Treasury EDV Sell $113.82 7.1% 30.3% 23.9% 10.4% 10.3% 2.8% 3.11% 5.41Emerging Mkts. Govt Bond VWOB Buy $80.82 1.1% 8.3% 13.2% 4.2% 4.42% 2.48Total International Bond BNDX Hold $52.24 1.3% 6.2% 7.5% 1.4% 1.21% 0.85

DISTRIBUTIONSFund Dist.AUGUST REGULAR

Short-Term Treasury $0.00Short-Term Federal $0.01Short-Term Investment-Grade $0.02Short-Term Bond Index $0.01Intermediate-Term Treasury $0.02Intermediate-Term Investment-Grade $0.03Intermediate-Term Bond Index $0.03Total Bond Market Index $0.02GNMA $0.02

Long-Term Treasury $0.03Long-Term Investment-Grade $0.04Long-Term Bond Index $0.05High-Yield Corporate $0.03Emerging Markets Gov't Bond $0.04Total International Bond $0.01Admiral Treasury MM $0.00001Federal MM $0.00001Prime MM $0.00001Tax-Exempt MM $0.00001CA Tax-Exempt MM $0.00001NJ Tax-Exempt MM $0.00001NY Tax-Exempt MM $0.00001OH Tax-Exempt MM $0.00001PA Tax-Exempt MM $0.00001Short-Term Tax-Exempt $0.01Limited-Term Tax-Exempt $0.01Intermediate-Term Tax-Exempt $0.04Long-Term Tax-Exempt $0.04High-Yield Tax-Exempt $0.04

CA Int.-Term Tax-Exempt $0.03CA Long-Term Tax-Exempt $0.04MA Tax-Exempt $0.03NJ Long-Term Tax-Exempt $0.04NY Long-Term Tax-Exempt $0.03OH Long-Term Tax-Exempt $0.04PA Long-Term Tax-Exempt $0.04ETF DISTRIBUTIONS

Short-Term Government Bond $0.02Short-Term Corporate Bond $0.12Short-Term Bond $0.08Intermed.-Term Government Bond $0.09Intermed.-Term Corporate Bond $0.23Intermediate-Term Bond $0.20Total Bond Market $0.17Mortgage-Backed Securities Bond $0.07Long-Term Government Bond $0.18Long-Term Corporate Bond $0.34Long-Term Bond $0.31Emerging Markets Gov't Bond $0.30Total International Bond $0.06

Distributions are per share. All distributions arereinvested at month-end Net Asset Value unlessotherwise noted.



Compound interest is the eighth won-der of the world. He who understandsit, earns ithe who doesntpays it.

Albert Einstein (maybe)

NO ONE DOUBTS that Albert Einsteinwas a genius, though claims that thequote above about the wonders of com-pound interest and the myriad varia-tions Ive seen over the years were hisare actually unverified.

Quotably admired by Einstein ornot, compound interest is indeed apowerful wealth builderand it under-pins my philosophy of spending timein the markets, rather than trying totime them. Since you and I want to bethe ones earning compound interest,and not paying it, I thought it wouldbe worth rolling up our sleeves to geta better understanding of what com-pounding is and how it works.

So lets start at the beginning:Compounding is the phenomenon ofearning increasing returns on priorgains, over time. You dont have tomake a conscious decision to put thepower of compounding to work, though

you can make moves that rob you of itsbenefits.

It takes discipline and patience toreap the long-term benefits of com-pounding. For one, you need the dis-cipline to stick with a solid investmentplan and to leave your money investedin the market to build on itself overtime. Patience is necessary, becauseearly on, the amount you invest faroutweighs the amount earned on thoseinitial contributions. But as Ill show

you shortly, those first investments, ifheld over long time periods, can add upto very significant sums as they buildupon themselves.

How Compounding WorksFor a simple example of how com-

pounding works, take a look at thechart at the top of this page, whichshows the growth of a single $10,000investment assuming an annual return

of 10% over 30 years. Ive brokenthis investment into its three compo-nents: Principal, interest and com-pound interest.

In this example, you can see thatin the early years, most of the over-allvalue of the portfolio lies in the original$10,000 investment, or principal (thedark blue area along the bottom). Thisamount never changes, since no moneyis 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 peryear to match (after 10 years10 times$1,000 = $10,000) and then exceed theprincipal.

But its what happens in the com-pound interest area of the chart thatis most intriguing (the grey shading ontop). Initially, its the barest shadow ofa line because there is little additionalvalue to compound. Remember, only$1,000 is added each year to theportfolio 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. Thenext year compound interests accountsfor a total of $310. Each year thereaf-ter, the gains generated by compound-ing keep growing, and this portion ofthe overall return becomes a visible,though still relatively small piece of theportfolios value. Starting in year 15,the cumulative amount of compoundinterest earned exceeds the aggregateamount of interest received. From thatpoint onward, those earnings on earn-ings really take off, driving the majorityof the subsequent growth.

Regular Contributions KickCompounding Up a Notch

While the growth of that single$10,000 investment compounded at10% is impressive, its worth notingthat the real power of compoundingkicks into overdrive when combinedwith regular additional contributionsto your account. This is what makesinvesting in retirement accounts likeIRAs and 401(k)s so attractive.

Meet an imaginary 65-year-old

investor, Joe, who retired a millionaireat the end of June 2014. Forty yearsago, on Wednesday, July 1, 1974, asa 25-year-old with a $12,000 salary(equivalent to about $57,700 in todaysdollars), Joe started investing 10% ofhis (pretax) paycheck every monthinto Wellington a practice he wouldcontinue for the rest of his career. Joestuck with the same employer for hisentire career, and was rewarded forhis loyalty with consistent, annual 3%

raises.The table to the left provides asnapshot of where Joe ended up, andas you can see, Joe did pretty well forhimself. His contributions increasedeach year in concert with his sal-ary, but in the end the biggest sliceof his portfolios ending value, by awide margin, came from earnings onthose contributions and, importantly,earnings on those earnings. All told,

COMPOUND INTEREST

The Investment Tipping Point

In Time, CompoundingCreates Wealth

Principal: Your initial investment.Interest: Earnings gained on theprincipal.Compound Interest: Earningsmade 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 30Years

Creation of a MillionaireStarting Age 25Retirement Age 65% of Salary Invested 10%Annual Raises 3%Total Investment $90,798End Balance $1,000,290% from Contributions 9%% from Investment Returns 91%



he retired with a sum that was morethan 26 times his final annual salaryof $38,004, which, by the way, didntcome close to keeping up with infla-tion over the period. Thank goodnesshe was a consistent investor. Notethat Joe achieved these results whileinvesting in a balanced portfolioitwas the power of compounding thatdrove the results, not excessive risktaking.

The first chart to the right shows thepercentage breakdown between contri-butions and investment returns in Joesportfolio at various milestones. In theearlier part of his investing career,Joes monthly contributions accountedfor the majority of the assetsthiswas the case even after 10 years. By

around the age of 40, after 15 yearsof 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 6560 $0

$200,000

$400,000

$600,000

$800,000

$1,000,000

Discipline and PatienceLead 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

ContributionsReturn on ContributionsReturn from CompoundingAccount Value

returns increasingly pushed the valueupward as his contributions becameproportionately smaller parts of thewhole.

Keep in mind that Joes accountweathered all types of markets. Joe wasin his 30s when stocks dropped over20% in single day on October 19, 1987.Joe invested through the steep marketdeclines of the tech bubble in the early2000s while in his early 50s and thefinancial crisis of 20082009 whenhe was in his late 50s. During thoseperiods, his account experienced draw-downs of 23.4%, 14.8% and 32.0%,respectivelythis is where Joes selec-tion of Wellington, which holds bothstocks and bonds, helped reduce the

full drawdown experienced by stocks.The second chart above shows that bythe time the tech bubble burst and thefinancial crisis hit, Joes account hadalready hit the turning point wherecompounding had taken over. As aresult he quickly regained and sur-passed what was lost, helped by thestrong stock market returns off of thosebottoms.

The lessons for a young investor areclear: Start early, pick a plan and stick

to it, and let compounding and timework in your favor. If you are a moreseasoned investor, when it may feel likeevery market surge and correction isgoing to make or break your portfolio,think of these compounding tippingpoints, what it takes to get there andhow impressive the results can be. Overtime, the impact of compounding willmore than make up for the inevitablepotholes on the road to wealth. n

Let Taxes Encourage Better BehaviorONE 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 mutualfund, 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 fundwith a $10.00 NAV. The funds NAV subsequently rises to $15.00, and your investment has grownto $1,500, giving you an unrealized gain of $500, or 50%. You decide to sellrealizing that $500gain. At a 30% tax rate, you owe $150 in taxes. This leaves you with $1,350 in cash. You nowhave 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 declineyou need to break even after paying taxes varies depending on your tax rate and the level of gainsbeing realized. In the table below, Ive done the math for you to determine how steep a decline inthe markets (or your investments) you would need to see to justify selling your shares in order toside-step a market decline.

Market timing is difficult. You have to get the timing of the decline right, you have to sellbefore it happens, and then you have to figure out when to get back in. A market timer subject totaxes also has to be confident the magnitude of the losses is enough to offset the taxes incurredin 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 onCapital Opportunity for what wouldturn out to be a nine-year closure beforereopening it briefly, then closing thedoors once again.

And, while I have nothing but praisefor the PRIMECAP Management teamand their stewardship of our money, Ithink its important to recognize that,as Ive said for years now, the CapitalOpportunity of today is a far cry fromthe fund it was in its early years. In fact,

despite some differences in portfolios,the performance of Capital Opportunityand PRIMECAP has been almost iden-tical. Identically good, I should add.

From the end of March 2004, whenVanguard closed the then-$7.4 billionfund, through August 2014 CapitalOpportunity (now with $12.5 billionin assets) has gained 185.6% versus a180.6% gain for PRIMECAP, with its$42.9 billion in assets.

In the meantime, PRIMECAP

Managements private-label Odyssey Aggressive Growth has continued onthe path of smaller-cap outperformance.Since inception in November 2004 (justeight months after Capital Opportunitysclosure), the private-label fund is up266.5% versus Capital Opportunitys177.3% gain over the same period.

Now, dont get me wrong: No mat-ter which PRIMECAP-run fund youbought, 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 asS&P MidCap 400 Growth ETF since Iadded it to our Growth Model Portfolio at the end of April 2012 in my desireto add back greater mid-cap exposure.As it turns out, no matter which portionof the market you indexed, you just

couldnt keep up with the great stock-picking at Capital Opportunity (or theother PRIMECAP-managed funds, forthat matter).

If you take a look at the chart onpage 15, youll see not only that therelative performance between CapitalOpportunity and PRIMECAP flattens outconsiderably after the 2004 closure (andeven more so after assets hit a peak in2007), but also that Odyssey AggressiveGrowth has consistently outperformedsince its inception. (Note that the lon-ger line rises when Capital Opportunityis outperforming PRIMECAP and the

PRIMECAP

When One Fund Acts Like Another

The PRIMECAP Record3/31/04

8/31/1410/31/04

8/31/14PRIMECAP 180.6% 168.3%Capital Opportunity 185.6% 177.3%Total Stock Market 129.7% 127.2%Odyssey Agg. Growth 266.5%

VA N GUAR D. COM

Ghost in the MachineSEND IN THE POLICE.

When is 1.2% the mid-point between0.0% and 3.0%? For that matter, whenis 6.0% the mid-point between 0.0%and 20.0%? How about never? Themid-points are 1.5% and 10.0%, unlessyoure Vanguard.coms interactivePrinciples for Investing Success costcalculator, that is.

My sharp-eyed Senior ManagingEditor, Billy Currano, found this bugin Vanguards system this past month,and Jeff DeMaso and I both confirmedthat Vanguards programmers need todo a bit of tweaking if youre to believethe numbers the calculator shows.

In a nutshell, as you read throughVanguards principles online, youregiven a calculator that shows thatan investor with $10,000 who pays1.2% in expenses and earns a 6.0%

return over 10 years will end up with$12,349.43 while losing $3,588.00 toexpenses. The problem is, those num-bers are wrong. Actually, the investorwould keep just $5,894.74 and lose$2,013.73 to expenses. (At least thatswhat Vanguards calculator says onceyou jigger with the dials to recalibrateit.) And no, you wont end up with$547,612 after 50 years of investingat 6% with a 1.2% expense ratio. The

numbers are a bit more, um, tame.Youll have $91,454.

Im guessing Vanguards going to putthe fix in shortly, so hopefully, this partic-ular error wont pop up again. However,the lesson learned is permanent: You cantrust, but you also have to verify. Even ifyou paid nothing in expenses and earneda 6.0% percent return, youd only have$184,201 at the end of 50 years, which isa far cry from half a million. n

Low Costs Are Good, But Not This Good WHAT VANGUARD SAYS THE REAL NUMBERS

Kept Lost Kept Lost1 year $837.44 $162.56 $474.31 $125.695 years $4,949.73 $1,155.37 $2,607.44 $774.810 years $12,349.43 $3,588.00 $5,894.74 $2,013.725 years $64,673.43 $33,673.63 $21,851.79 $11,066.950 years $547,612.04 $616,296.49 $91,453.64 $82,747.9Note: Assumes 6.0% annualized return and 1.2% expense ratio.



HUMAN ERROR CREEPS into all kinds oftransactions, and when youre Vanguard,with lots of humans and lots of transac-tions, well, you know whats bound tohappen. But theres human error and thentheres what one FFSA member Ill callJohn (he asked I not use his real name)refers to as a monumental screw-up.

And, though hes been waiting sinceFebruary for Vanguard to make morethan a cursory apology and explana-

tion, John, a Vanguard shareholder fordecades, says Vanguard has simplyrefused to take ownership other thanto say the problem was human error.

Heres the story in a nutshell. Imrepeating it here because theres a les-son for all Vanguard investors in partic-ular, and investors at large, as we dealwith 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 slipfrom vanguard.com and mailed it in withhis check for $29,000. But when theslip was received, someone at Vanguardopened a new account in the fund inthe fathers name but didnt deposit themoney into it (the money went into thesons account). However, now that thefathers new account was established andwas supposed to have $29,000 in it buthadnt been funded, Vanguard decided

the account was in debit. So, they liter-ally sucked $29,000 out of the local bankaccount tied to John seniors Vanguardaccount, without his authorization.

The issues here are myriad. First, asfar as I can tell, Vanguard has no right tosuck money out of a linked bank accountunless you authorize them to do so.John says he doesnt recall ever takingmoney from his local bank and send-ing it to Vanguard. He only moves

STEWARDSHIP

Vanguard Speak

DISTRIBUTIONS TO COME

Quarterly PayoutsHOW QUICKLY the year flies by. Septembbrings the third quarterly installment ofdistributions for a host of Vanguard fundsand is the last payment before the year-endincome and capital gains season.

As always, my recommendation is thattaxable investors not reinvest their distribu-tions automatically, but rather have thempaid into a money market, and from there,use the cash to make slight rebalancingtweaks to their portfolios.

In the list below, remember that all shareclasses of a fund will pay out during themonth. Ive listed ETFs where open-endInvestor orAdmiral share classes are notavailable.500 IndexBalanced IndexConvertible SecuritiesDeveloped Markets IndexDividend Appreciation IndexEmerging Markets Stock IndexEquity IncomeEuropean Stock IndexExtended Duration Treasury ETFFinancials IndexGlobal ex-U.S. Real Estate IndexGrowth IndexHigh Dividend Yield IndexInflation-Protected SecuritiesLarge-Cap IndexLifeStrategy Conservative GrowthLifeStrategy IncomeMegaCap ETFMegaCap Growth ETFMegaCap Value ETFPacific Stock IndexREIT IndexRussell 1000 ETFRussell 1000 Growth ETFRussell 1000 Value ETFRussell 3000 ETFS&P 500 Growth ETFS&P 500 Value ETFShort-Term Inflation-Protected SecuritiesTarget Retirement IncomeTax-Managed BalancedTotal International Stock IndexTotal Stock Market IndexTotal World Stock IndexUtilities IndexValue IndexWellesley IncomeWellingtonWorld ex-U.S. IndexWorld ex-U.S. Small-Cap Index

shorter line rises when the Odyssey fundoutperforms Capital Opportunity.) Ivealso marked the points where CapitalOpportunity was closed and reopened in2000, 2001, 2004 and 2013.

It turns out though, that while thePRIMECAP and Capital Opportunityportfolios are similar, with about 75% to80% of each funds holdings also foundin the others, the Odyssey funds port-folio isnt as different as its performancemight suggest. Many of the stocks foundin Capital Opportunity can also be foundin the Odyssey fund (about two-thirdsaccording to data from the end of June).But how those stocks are weighted inthe portfolio as well as the distinctly dif-ferent companies found in one-third ofOdyssey Aggressive Growth account forthe differences in performance.

Odyssey Aggressive Growth wasclosed to new investors in January,with assets of about $5.5 billion.Im guessing that the PRIMECAPManagement team didnt want to let itgrow anywhere near the size of CapitalOpportunity before its 2004 closure.At $5.5 billion, the fund is about half

the size Capital Opportunity was intodays dollars.

I dont have to tell you that you shouldhold onto any and all shares of any ofthe PRIMECAP funds you own. WithOdyssey Aggressive Growth closed, youcan still get exposure to the PRIMECAPteams excellent stock-picking in its othertwo Odyssey funds, but of course, thesmaller-cap and distinct exposures avail-able in the aggressive fund are now solelythe province of existing shareholders, ofwhich Im happy to say I am one. n

>

A Jump in Growth Led toMore 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 AssetsCapital Opportunity vs. PRIMECAPOdyssey Agg. Gro. vs. Capital Opportunity

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

Cap. Opp reopenedCap. Opp closed


16/16

Never Use aPIN Again

AdviserOnline.com is more streamlinedand easier to use than ever. But theres onething that can make it even better: Setting upyour unique username and password. Insteadof looking for a new PIN on page 1 of thenewsletter each month, you can simply useyour own personalized login.

If you dont have your own unique login, you

should set it up now, asweve discontin-ued the PIN as of September 1 . Here area few tips to help you set up or modify aunique login:

Create a username and password atwww.adviseronline.com/password/new.php.Youll need your account number, or if youjust joined, your order number. Both can befound on correspondence you receive such asthe Hotline emails.

Modify your username and password atwww.adviseronline.com/password/modify.php. All you need is your current personal

login information.Forgot your username or password? Noproblem. Reset it at www.adviseronline.com/password/forgot.php. Again, you should haveyour 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 [email protected].

Daniel P. Wiener is Americas leading expert onthe Vanguard family of funds. He is founder ofthe Fund Family Shareholder Association andchairman 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 isa five-time recipient of the Newsletter Publishers Foundations

Editorial Excellence Award. He also edits the annualIndependent Guide to the Vanguard Funds. Mr. Wiener is oftenquoted in the nations leading financial publications.

Jeffrey D. DeMaso, Editor/Director of Research, works directly with Dan Wienerresearching and writing the multiple-awardwinning Independent Adviser for VanguardInvestors newsletter. He also leads the analystteam 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 theChartered Financial Analyst designation and is a member ofthe CFA Institute and the Boston Security Analysts Society.

money from Vanguard to his bankwhen he needs to replenish the account.So theres not even any precedent for atransaction in that direction.

Second, Johns local bank accountwas immediately overdrawn becausehe didnt have $29,000 in the account,so the bank began to charge him fees.

And third, its not clear whyVanguard didnt try to take moneyfrom Johns other Vanguard accountssince, as he says, he has substantialsums with Vanguard and is a Flagshipclient, which, by definition, means hehas more than $1 million invested there.John says this wouldnt have made himany happier, but at least he wouldnthave been dunned by his local bank.

Johns a lawyer. Johns firm has aprofit-sharing account at Vanguard with,he says, more than $60 million investedin it. Johns obviously a larger-than-average shareholder in Vanguard. Heslivid at Vanguards response, which wasto fix it with his bank to reverse the feesand to basically tell him it was humanerror and theyre sorry. Not once, hesays, did anyone with any authoritycall or write him to both apologize andexplain how sucking money out ofhis personal bank account could havehappened. I was in disbelief and apo-plectic. Vanguard actually stole money

from our personal bank account, hesays, further compounding its numer-ous errors. As he told me, I wantedthem to take ownership. But all I gotwas what I call Vanguard speak.

John didnt authorize me to askVanguard about this, but then again,Vanguard never discusses individualclient issues.

In the end, John decided not to pur-sue legal action but has lost a good dealof faith in the company he says he usedto recommend to his family, friends andpartners. I asked him what lessons hewould share with other Vanguard inves-tors after this experience.

Be vigilant, he says. Dont assumeVanguard will do what you expect themto do. You control your destiny.

Also, be ready to be surprised. Thewildest things beyond your imaginationcan and will occur, he says.

What bothers John most, he says,was the sense that this was an ordinaryday for Vanguard. So, Bill McNabb, ifyoure listening, maybe its time to giveJohn a phone call and perhaps send hima nice bottle of wine for his troubles.

Ill report back if theres a coda tothis tale, but as I constantly remind you,its your money and youre the only onewho really cares about it, so stay alert,stay vigilant, and trustbut verify. n

>

DANS DO-IT-NOW ACTION RECOMMENDATIONS

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