(PUB) Vanguard Advisor

S P E C I A L E X PA N D E D 1 6 - PA G E I S S U E

APRIL 2014

Model Portfolios................................................................2 March Special Distributions..............................................3 TheGap in Investor Returns.............................................4 Buy High!..........................................................................6 ExplorerValue Stays Small................................................7 Performance Review.................................................... 8-11 Interview: Donald Kilbride...............................................12 Dan’s Do-It-NowAction Recommendations....................16

PIN 3461

Rational Expectations HASTHESTOCKMARKET suddenly becomemore rational?

AVERAGEVANGUARD INVESTOR* March: 0.4% YTD: 2.0%

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

High-flyingbiotechnology stocks gaveup10.6%of their gains inMarch asmomen- tum and traders took a chill pill. Thehigh-flyingmarket for initial publicofferings (IPOs) reversed course.KingDigital Entertainment (maker of the extraordinarilypopularCandy CrushSagagame) offered its shares at $22.50 andpromptly tumbled19.2%.And, in a broader sense, themarket that fell in January and rose inFebruary simplymuddled through inMarch, leaving investors little to show for the first quarter’s rollercoaster ride. Marchmay have come in like a lion, but it went out like a lamb. TheDow Jones IndustrialAverage gained 0.8% for themonth, but is off 0.7% for the year. The NASDAQComposite dropped 2.5% for themonth, and is up just 0.5% for the year. I’m calling this a rationalmarket in part because neither earnings, nor economic fun- damentals, nor news of a blockbuster treatment for cancer orAlzheimer’s have given investors any reason to bid prices higher thanwhere they stood at their recent records. TheDow remains 0.7% off itsDec. 31 record close, while the S&P 500 index did post a new high onMar. 7 before backing off 0.3%.And by theway, though HealthCare lost some ground, it’s still up a very healthy 8.8% for the year. That isn’t to say that therewasn’t news tomove themarkets. The only thing crazier thanVladimir Putinmay be the fact that theDow’s two biggest up days duringMarch came on theTuesday after the SundaywhenRussia invadedCrimea, and on theMonday after the SundaywhenCrimeans voted to secede. TheCrimeanmess is a geopolitical quagmire, but it’s a longway from having a discernible impact on valuations, beyond a few companies thatmay be relying onRussian contracts.

MF JDNOSAJ JMA

*See the footnotes onpage 2.

DOWJONES INDUSTRIALS MarchClose: 16457.66

14000 14900 15800 16700 17600

M F JD NOS AJ JMA

STANDARD&POOR’S500 MarchClose: 1872.34

1500 1600 1700 1800 1900 2000

M F JD NOS AJ JMA

NASDAQCOMPOSITE MarchClose: 4198.99

3000 3300 3600 3900 4200 4500

SEE RATIONAL PAGE3 >

RETIREMENT OpenYour Teen an IRA

M F JD NOS AJ JMA

3-MO.TREASURYBILLYIELD MarchClose: 0.03%

0.00% 0.02% 0.04% 0.06% 0.08% 0.10%

EVERYYEAR, when Iwrite about opening an IRA for your teen or grand-teen, I hear fromFFSAmembers, friends, and even familywho say, in a nutshell, “Great idea.”And it is. Helping a young person get on board the retirement trainmay not get you lots of appreciation today, but trustme, the beneficiary of your forward thinkingwill thank you for years to come as theymove into adulthood. Whether you call themMillennials, GenYs, or EchoBoomers, the Internet generation is amassive group of teens and 20-somethingswho could use a kick in the pantswhen it comes to planning for retirement. I know it sounds a bit crazy to talk to teenagers about retirement and IRAs. I can hear the howls of laughter. “Retirement?” you ask. “Who are you kidding?The kid couldn’t

M F JD NOS AJ JMA

10-YR.TREASURYNOTEYIELD MarchClose: 2.72%

1.6% 2.0% 2.4% 2.8% 3.2%

M F JDNOS AJ JMA

SEE RETIREMENT PAGE12

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A PUBLICATION OF FUND FAMILY SHAREHOLDERASSOCIATION • VOL. 24, NO. 4 The Independent Adviser for Vanguard Investors and FFSA are completely independent of TheVanguardGroup, Inc.

MODEL PORTFOLIOS

THISMONTH’SCHANGES None.

GROWTHMODEL Ticker Shares NAV

PAST PERFORMANCE

Value % Mo. Return

About ourModel Portfolios The Growth portfolio is aimed at investorswith long time horizonswho canwithstand a certain amount of monthly volatility in exchange for above-average returns.Most appropriate for younger investorswho continue to addmoney asmarkets gyrate. Since inception themodel has been slightly less volatile than the stock market. The ConservativeGrowth portfolio is appropriate for investors seeking tomatch themarket’s risk-adjusted returns over time. Since inception it has been just 80% as volatile as the stockmarket. The Income portfolio is designed for investorswho desire a higher level of income plus the opportunity for capital growthwith low risk, such as retirees or near- retirees. Since inception themodel has been only two-thirds as volatile as the stockmarket. Returns have been substantially higher than the bondmarket. The Growth Index model is designed for young investorswhowish to index exclusively. AllModel relative volatility figures aremeasured against the stockmarket. When trades are recommendedwewill announce them on our Hotline and theywill also appear on this page. Our AverageVanguard Investor index (see page 1) measures themonthly performance of the typical Vanguard fund investor. The aver- age Vanguard Investor index (VII) is a dollar- weighted performancemeasure for the entire Vanguard fund group, including stock, bond, balanced andmoneymarket funds. It provides a yardstick against which tomeasure an indi- vidual portfolio’s performance. NOTE: All returns are total returnswith distri- butions reinvested. Flagship investorsmay open new accounts in all closed funds in themodel portfolios to amaximum of $25,000 per year. If you don’t qualify, here are some alternatives. With Capital Opportunity (and PRIMECAP Odyssey AggressiveGrowth) closed I recom- mend investors consider PRIMECAPOdyssey Growth (POGRX) as a replacement. PRIMECAP Odyssey Stock (POSKX) is the preferred replacement for PRIMECAPCore . Both can be purchased directly at www.OdysseyFunds.com or for a fee through Vanguard Brokerage.

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% 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% 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% 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% PAST PERFORMANCE PAST PERFORMANCE PAST PERFORMANCE

Selected Value

VASVX

6,064 1,773 6,918 2,914 1,146 2,281 250

$28.80 $94.10 $21.71 $48.62 $195.23 $23.16 $10.73

$174,646 $166,866 $150,186 $141,696 $48,741 $26,549 $24,476

24% 1.2% 23% -0.5% 20% 1.6% 19% -1.9% 7% -2.0% 4% -0.2% 3% -0.1%

S&PMidCap 400Growth ETF

IVOG

DividendGrowth Capital Opportunity

VDIGX VHCOX VGHCX VWIGX VFSTX

Health Care

International Growth Short-Term Inv.-Grade

TOTAL

$733,159

Mar. 0.0%

YTD 2.9%

1-yr 23.8%

3-yr 14.0%

5-yr 20.6%

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

Risk last 24months 0.97

Risk since inception 0.97

CONSERVATIVE GROWTHMODEL Ticker Shares NAV

Value % Mo. Return

DividendGrowth Capital Opportunity S&PMidCap 400 ETF

VDIGX VHCOX

5,191 2,210

$21.71 $48.62 $92.65 $28.80 $195.23 $23.16 $10.73 $6.11

$112,688 $107,442 $77,336 $70,126 $41,311 $34,838 $33,997 $30,698

22% 1.6% 21% -1.9% 15% 0.3% 14% 1.2% 8% 0.1% 7% -2.0% 7% -0.2% 6% -0.1%

IVOO

835

Selected Value

VASVX

2,435

High-Yield Corporate

VWEHX 6,761

Health Care

VGHCX VWIGX VFSTX

178

International Growth Short-Term Inv.-Grade

1,468 2,861

TOTAL

$508,436

Mar. 0.0%

YTD 3.0%

1-yr 21.3%

3-yr 13.7%

5-yr 18.7%

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

Risk last 24months 0.86

Risk since inception 0.83

INCOMEMODEL Ticker Shares NAV

Value % Mo. Return

DividendGrowth PRIMECAP Core

VDIGX VPCCX VFICX VFSTX VGHCX VIMSX VWIGX

4,135 3,873 7,162

$21.71 $20.45

$89,777 $79,208 $70,259 $38,593 $28,679 $22,947 $20,806 $13,919

25% 1.6% 22% 0.7% 19% -0.0% 10% 0.1% 8% -0.1% 6% -2.0% 6% -0.3% 4% -0.2%

Int-Term Investment-Grade

$9.81 $6.11

High-Yield Corporate Short-Term Inv.-Grade

VWEHX 6,316

2,673

$10.73 $195.23 $30.98 $23.16

Health Care MidCap Index

118 672 601

International Growth

TOTAL

$364,188

Mar. 0.4%

YTD 3.1%

1-yr 14.6%

3-yr 11.5%

5-yr 15.1%

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

Risk last 24months 0.60

Risk since inception 0.61

GROWTH INDEXMODEL Ticker Shares NAV

Value % Mo. Return

S&PMidCap400GrowthETF S&PMidCap 400Value ETF DividendAppreciation ETF

IVOG IVOV

910 790 798 490 191 135 205

$94.10 $90.94 $75.23 $89.36 $106.92 $79.98 $52.20

$85,587 $71,841 $60,020 $43,803 $20,425 $10,778 $10,706

28% -0.5% 24% 1.2% 20% 0.8% 14% -0.7% 7% -2.0% 4% -0.3% 3% 0.5%

VIG

S&P 500Growth ETF

VOOG

HealthCare ETF

VHT

Short-TermCorporate ETF Total International Stock ETF

VCSH VXUS

TOTAL

$303,160

Mar. 0.1%

YTD 2.2%

1-yr 20.6%

3-yr 12.8%

5-yr 21.2%

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

Risk last 24months 0.98

Risk since inception 1.04

TheAlternative Funds in the table to the left are both current and past recommendations I’vemade for Vanguard funds that either closed or were saddledwith highminimums. Some of these funds have subsequently closed, but many of you own them, so I’ve provided this performance data for your interest. Note that HGHAX is typically soldwith a front-end load, though clients of privatemoneymanagers can sometimes buy the fund no-load. Please refer to thenoteabove formy current alternative recommendations .

PASTALTERNATIVESTOCLOSED/HIGHMINIMUM FUNDS

3/31 Price

March Return

YTD Return

12-Mo. Return

3-Year Return

5-Year Return

Fund

Ticker

Alternative For

ArtisanMidCap ArtisanMidCap Value Polaris Global Value

ARTMX $48.80 ARTQX $27.48

-4.1% 2.5% 29.5% 15.4% 26.2%

Capital Opp.

1.9% 1.8% 18.8% 14.1% 23.1% Selected Value 0.0% 4.4% 27.9% 14.1% 25.2% Global Equity -1.8% 0.0% 22.7% 9.8% 22.5% International Expl. 0.7% 4.7% 23.0% 12.2% 23.7% International Expl. -0.7% 2.6% 20.3% 10.7% 23.0% International Expl.

PGVFX FISMX

$21.55 $26.79

Fidelity International SmallCap Fidelity International SmallCapOpp. T. Rowe International Discovery

FSCOX $14.62

PRIDX

$57.17

HartfordHealthcare ICONHealthcare

HGHAX $32.44

-3.2% 7.2% 38.3% 24.0% 24.1% -1.4% 4.4% 32.2% 22.5% 22.1% -2.0% 4.3% 25.6% 16.0% 23.0% -3.5% 4.7% 39.8% 21.8% 30.1%

Health Care Health Care PRIMECAP Capital Opp.

ICHCX

$19.99

PRIMECAPOdyssey Growth

POGRX $24.62

PRIMECAPOdysseyAggressiveGrowth POAGX $31.03

PRIMECAPOdyssey Stock Fidelity High Income

POSKX $21.97

1.2% 3.8% 24.4% 15.5% 21.1% PRIMECAP Core 0.1% 2.4% 5.7% 7.5% 16.1% High-Yield Corporate

SPHIX

$9.47

2 • Fund Family Shareholder Association

www.adviseronline.com

stake, aswell as “a portion of new cash flow over time.” SelectedValue is one of the few active funds atVanguard that has had consistent cash inflows over the last year, with about $1.9 billion of net new cash coming in over the past 12months. For those of you interested in keep- ing score, I first added Selected Value to my Model Portfolios in May 1999, when I sold Windsor II to fund the stake. You and I added to that posi-

once again muddying the waters of a good stock fund by adding yet a third management team to Selected Value , the $8.5 billion mid-cap fund that per- formedworseunder twomanagers than under one, and presumably will not see any improvement under three. Of course, with only one Vanguard direc- tor owning shares in the fund, thismay not cut as close to the board’s interests as shareholdersmight have hoped. Pzena Investment Management is going to be building a portfolio from some of the fund’s current 5.8% cash

RATIONAL FROMPAGE1 >

Even the bondmarketmaybe acting rationally. After soaring over 3%, the yieldon the10-yearTreasuryhasmoved back intoa trading rangebetweenabout 2.6% and 2.8%. Inflation is nowhere to be found; the Fed continues on a slow taper; and short rates won’t rise for at least another 13 or 14months, accord- ing to a parsing of Fed Chief Janet Yellen’s latest statements. RationalVanguard Vanguard filed a request with the SEC for “exemptive relief” that would allow it tooffer activelymanagedETFs (essentially,ETF sharesof active funds) if and when it wishes to do so. This pretty much moves Vanguard off the benchandonto the sidelines, but I don’t think they’ll actually get into the game of actively managed ETFs. Of course, stranger things have happened, and one thing I’ve learned is you never say never in this business. On a somewhat broader note, it appears theSEC isgoing toacquiesce to thedemands ofmany investors and fund companies and essentially continue to allowmoney funds aimedat retail inves- tors tomaintain a$1 shareprice, regard- less of whether the underlying portfolio has deviated slightly from that value—a debate that has raged since the financial crisis. I’ve said all along that the $1 sharepricewas an important andneeded characteristic of retailmoney funds, and I guess themessage finally got through. This is awin for you andme. IrrationalVanguard In a typical Vanguard move, the firm announced on Mar. 31 that it is

SEE RATIONAL PAGE16

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MARCHSPECIALDISTRIBUTIONS

Pacific Index

$0.018 @ $10.90 $0.453 @ $69.96 $0.142 @ $23.04 $0.331 @ $85.90 $0.300 @ $88.03 $0.388 @ $83.51 $0.322 @ $86.19 $0.779 @ $170.13 $0.249 @ $88.71 $0.407 @ $82.77 $0.009 @ $112.80 $0.017 @ $124.71 $0.003 @ $35.09 $0.001 @ $53.98 $0.024 @ $100.17 $0.004 @ $23.97 $0.093 @ $18.23 $0.069 @ $14.50 $0.048 @ $12.61 $0.106 @ $9.97 $0.128 @ $25.27 $0.009 @ $95.49 $0.386 @ $83.28 $0.367 @ $51.18 $0.115 @ $16.26 $0.423 @ $97.10 $0.192 @ $47.08 $0.334 @ $58.88 $0.131 @ $23.85 $0.731 @ $89.33 $0.366 @ $44.41 $0.430 @ $77.43 $0.157 @ $30.03 $0.222 @ $25.20 $0.243 @ $38.38 $0.394 @ $49.23 $0.148 @ $19.22

500 Index

$0.734 @ $172.04 $0.128 @ $27.77 $0.068 @ $14.05 $0.429 @ $40.51 $0.329 @ $74.65 $0.122 @ $29.81 $0.051 @ $21.40 $0.105 @ $39.49 $0.055 @ $24.59 $0.217 @ $67.18 $0.225 @ $29.98 $0.878 @ $58.15 $0.460 @ $30.83 $0.769 @ $99.91 $0.018 @ $84.79 $0.013 @ $64.32 $0.113 @ $45.55 $0.057 @ $22.82 $0.275 @ $93.61 $0.125 @ $48.07 $8.448 @ $194.61 $0.401 @ $62.69 $0.154 @ $24.63 $0.008 @ $13.23 $0.375 @ $85.69 $0.138 @ $34.46 $0.056 @ $18.70 $0.276 @ $63.49 $0.198 @ $71.87 $0.302 @ $55.74 $0.024 @ $112.91 $0.011 @ $92.46 $0.002 @ $36.36 $0.005 @ $30.76 $0.019 @ $81.93 $0.004 @ $32.15 $0.115 @ $57.53

REIT ETF

Balanced Index

REIT Index

Convertible Securities DevelopedMarkets ETF DividendAppreciation ETF DividendAppreciation Index

Russell 1000 ETF

Russell 1000Growth ETF Russell 1000 Value ETF

Russell 3000 ETF

DividendGrowth

S&P 500 ETF

EmergingMarkets Stock ETF EmergingMarkets Stock Index

S&P 500Growth ETF S&P 500 Value ETF

Energy

SmallCap ETF

Equity Income

SmallCapGrowth ETF SmallCapGrowth Index

Europe ETF

European Index

SmallCap Index

Extended-Duration Treasury ETF

SmallCap Value ETF SmallCapValue Index

ExtendedMarket ETF ExtendedMarket Index

STARCons. Gro.

Financials ETF Financials Index Growth ETF Growth Index Health Care

STAR Income

Target Retirement Income Tax-Managed International

T-MBalanced

T-MCapital Appreciation T-MGrowth& Income Total International StockETF Total International Stock Index

HighDividend Yield ETF HighDividend Yield Index Inflation-Protected Securities

LargeCap ETF LargeCap Index Managed Payout

Total StockMarket ETF Total StockMarket Index TotalWorldStockETF TotalWorldStock Index

MegaCap ETF

MegaCapGrowth ETF MegaCap Value ETF

UtilitiesETF Utilities Index ValueETF Value Index

MidCap ETF

MidCapGrowth ETF MidCapGrowth Index

Wellesley Income

MidCap Index

Wellington

MidCap Value ETF MidCap Value Index

Worldex-U.S. ETF Worldex-U.S. Index

Pacific ETF

Daniel P.Wiener - Senior Editor JeffreyD. DeMaso - Editor/ResearchDirector SethH. Kennedy - Assistant Editor Amy Long - Vice President and Publisher Billy Currano - SeniorManaging Editor DavidClarfield - AssistantManaging Editor Carla Lake - AssistantManaging Editor LouisaDorado -MarketingDirector Mary Taylor -MarketingDirector JohnHall DesignGroup - Design and Production Fund FamilyShareholderAssociation Member, Newsletter PublishersAssociation Daniel P.Wiener - Chairman JamesH. Lowell - President (www.FidelityInvestor.com)

The Independent Adviser for Vanguard Investors (ISSN 1093-4200) is publishedmonthly for members of the Fund Family Shareholder Association by InvestorPlaceMedia, LLC, 9201 Corporate Blvd., RockvilleMD 20850. A one-year membership is $229 (foreign, add $18). POSTMASTER: Send address changes to The Independent Adviser for Vanguard Investors/Fund Family Shareholder Association, c/o InvestorPlace Media, LLC, 700 IndianSpringsDrive, Lancaster, PA 17601. The FFSA is an independent organization dedicated to providing investorswith intelligent and objective advice about theVanguard family ofmutual funds and services. If you have questions regarding yourmembership, call 800/211-7641 (service@adviseronline.com).While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can the publication be considered liable for the future investment performance of any securities or strategies discussed. The newsletter, hotline and associated publications provide information of general interest and are not intended to provide individualized investment advice for any subscriber or specific portfolio. Subscribers are urged to review the full disclaimer and securities holdings disclosure policy associatedwith this publication atwww.adviseronline.com/disclosure-disclaimer. html or call 800-219-8592 to receive a copy viamail. Vanguard and TheVanguardGroup are servicemarks of TheVanguardGroup, Inc. FFSA and InvestorPlaceMedia, LLC are not affiliated in anywaywith TheVanguardGroup and receive no compensation from TheVanguardGroup, Inc. Copyright 2014 by Fund Family Shareholder Association. Reproduction inwhole or in part is prohibited except bywritten permission of FFSA.

The Independent Adviser for Vanguard Investors • April 2014 • 3

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PERFORMANCE TheGap in Investor Returns

This difference between the inves- tor’s realized return and the fund’s stated return (-1.5%versus 7.3%, inour example) is often called the “behavior gap.”As investors, our behavior has an impact on the returns we realize. Are we buying at tops and selling at bot- toms, or arewe staying the course? While the example above illustrates a situation where the investor’s return was less than the fund’s return, it is pos- sible for an investor’s return tobehigher than the fund’s return. Had our investor started with a $50,000 investment and

During the first six months, the investor made $1,000 (a 10.0% gain on the initial $10,000 investment). At the start of the second half of the year, the investor had $61,000 invested in the fund—the $10,000 initial invest- ment, the $1,000 gain and the $50,000 addition. Over the next sixmonths, the fund lost 2.5%, or $1,525, leaving him with $59,475. Though the traditional sources would report the fund gained 7.3% on the year, our investor actually lost money ($525) due to the timing of his trades. Invest. Return Diff. EmergingMarkets Index 16.3% 6.2% -10.1% REIT Index 29.4% 22.2% -7.2% Capital Value 33.0% 27.4% -5.7% World ex-U.S. Index 17.6% 12.1% -5.5% Total International Stock 17.3% 12.0% -5.3% HighDividendYield Idx. 23.4% 19.0% -4.4% TotalWorldStock Index 19.9% 15.6% -4.4% International Explorer 22.2% 18.7% -3.6% Target Retirement 2050 20.2% 16.7% -3.5% MidCapGrowth Index 26.1% 22.6% -3.5% DividendApprec. Idx. 20.2% 16.8% -3.5% Target Retirement 2040 20.2% 16.8% -3.4% Target Retirement 2030 18.9% 15.4% -3.4% SmallCapGrowth Index 29.9% 26.9% -2.9% Target Retirement 2020 16.4% 13.6% -2.8% Target Retirement 2045 20.2% 17.8% -2.5% Target Retirement 2035 19.9% 17.6% -2.3% Target Retirement Income 10.3% 8.1% -2.2% MidCapValue Index 27.9% 25.7% -2.1% Target Retirement 2025 17.6% 15.6% -2.0% DevelopedMarkets Idx. 17.9% 15.9% -2.0% SmallCap Index 29.0% 27.1% -1.9% DividendGrowth 20.4% 18.7% -1.7% Target Retirement 2010 13.4% 11.7% -1.7% Strategic SmallCap Equ. 28.6% 27.0% -1.6% Target Retirement 2015 15.1% 13.6% -1.5% MidCapGrowth 25.3% 24.0% -1.3% SmallCapValue Index 28.0% 26.7% -1.3% Wellesley Income 13.7% 12.4% -1.3% Managed Payout 16.1% 15.0% -1.2% MidCap Index 27.1% 25.9% -1.1% ExtendedMarket Index 28.2% 27.2% -1.0% Equity Income 23.3% 22.3% -0.9% PRIMECAPCore 23.9% 22.9% -0.9% Total StockMarket 23.8% 23.0% -0.9% Balanced Index 16.3% 15.7% -0.6% SelectedValue 26.2% 25.6% -0.6% Five-YearTurnaround Mkt. Return

IT’S NO SURPRISE that stocks and stock funds have generated strong returns over the past five years. Just take a look at the Performance Review inside this letter. The question is: Howmuch of that return did Vanguard investors actually capture? Returns reported by mutual fund companies and other services like Morningstar are point-in-time returns. They assume that you made a single investment at the start of a given time period and simply reinvested distribu- tions. This is a fair way to measure a manager and fund’s performance—this ishow I report performance toyou in the PerformanceReview onpages 8 through 11—but we know that, for better or worse, investors are buying and selling funds all the time. You may be adding money on a monthly basis, and your neighbor may be taking out chunks to pay for her retirement. Then, of course, there are those who either try to time the market, or feel compelled to move money around to try and capture some mythical extra gain. As a result, point- in-time returns don’t necessarily reflect what investors actually earn. Let’s walk through an example. Say an investor puts $10,000 in a fund at the start of the year. The fund returns 10.0% over the first six months of the year. The investor, pleased with the performance, decides to add$50,000 to the fund. Unfortunately, over the next six months the fund loses 2.5%. Up 10.0% and then down 2.5%works out to a total return for the year of 7.3%. However, once we account for our investor’s cash flows, we discover that hispersonal rateof return (calculatedas an internal rateof return)was actually a loss of 1.5%. How is that possible? In simple terms, our luckless inves- tor had a lot more money invested in the fundwhen itwas on a losing streak, so those negative returns countedmore heavily inhis personal, dollar-weighted rate of return.

Mkt. Return

Invest. Return Diff.

Value Index STAR Income

22.5% 21.9% -0.5% 8.6% 8.1% -0.5% 20.3% 19.8% -0.5% 23.0% 22.7% -0.4% 23.7% 23.4% -0.4% 12.1% 11.7% -0.3% 17.6% 17.3% -0.3% 16.2% 15.9% -0.3% 16.8% 16.6% -0.2% 25.5% 25.3% -0.2% 22.9% 22.7% -0.1%

International Growth

LargeCap Index Growth Index STARCons. Gro.

ConvertibleSecurities

Energy

Wellington Social Index 500 Index

International Value 17.4% 17.4% -0.0% Admiral T-MBalanced 13.8% 13.8% -0.0% Capital Opportunity 25.6% 25.6% -0.0% STAR 16.8% 16.8% 0.1% PreciousMetals&Mining 6.4% 6.5% 0.2% HealthCare 25.1% 25.3% 0.2% PRIMECAP 24.1% 24.5% 0.4% MorganGrowth 23.3% 23.7% 0.4% Admiral T-MSmallCap 27.9% 28.3% 0.4% Admiral T-MCap. App. 23.6% 24.1% 0.5% STARGrowth 18.8% 19.3% 0.6% STARMod. Growth 15.5% 16.2% 0.7% Diversified Equity 24.4% 25.2% 0.8% Admiral T-MGro. & Inc. 22.9% 23.8% 0.9% Windsor II 22.6% 23.6% 1.0% Explorer 27.5% 28.7% 1.2% Market Neutral 1.2% 2.4% 1.2% U.S. Growth 23.0% 24.3% 1.3% U.S. Value 23.1% 24.4% 1.4% Windsor 25.1% 26.8% 1.7% Growth& Income 22.5% 24.6% 2.1% Global Equity 22.3% 24.8% 2.5% Strategic Equity 28.5% 32.5% 4.0% Pacific Index 14.8% 22.5% 7.7% European Index 19.7% 28.5% 8.8%

Note:All returnsare five-year annualized returns from theendof February2009 throughFebruary2014.Market returnsare returnsof the investor shareclass. Investor returnswerecalculatedusingall shareclassesandmonthly fund flows. Entries in theDiff. columnmayappear off by0.1%due to rounding.

4 • Fund Family Shareholder Association

www.adviseronline.com

2009, there was $10.6 billion invested in Vanguard’s Emerging Market Index fund across all its share classes. In February 2011, assets rose to $57.5 billion and kept climbing until January 2013, when investors had $77.7 billion invested. Strong returns at the start of the recovery and a late flood of money is a recipe for poor investor returns and a large behavior gap. In fact, the investor return story for EmergingMarketsIndexmighthavebeen worse for investors than the table shows. InOctober 2010,Vanguard consolidated itspositions in European Index , Pacific Index and Emerging Markets Index within the TargetRetirement funds into Total International Stock . As a result, these funds had a significant outflow that was driven by Vanguard—not the underlying investors.Thisoutflowskews the investor return upwards as returns after the outflowwere lower thanbefore the change. If we look at only the ETF share classes of these funds, which were not impacted by Vanguard’s decision and actually experienced net inflows in October 2010, we get a clearer picture. The investor return for Emerging

two funds showed the biggest turn- around in five-year returns from the end of February2009 to the endof February 2014, offering the potential for strong returns with some pretty big scares along theway. That type of volatility is difficult for most investors to stickwith and often leads them to buy high and sell low, a recipe for lousy returns. EmergingMarkets Index standsout for being one fundwhere investorsmay havebeenabit tooactivewith their buys and sells, as their average returns were a full 10 percentage points less than the fund’s return. Howdid that happen? Well, like the imaginary hapless investor mentioned earlier, real inves- tors in the fund hadmuchmoremoney invested during lean times than they did in good times. EmergingMarkets Index put up very strong returns in the first two years of the recovery, up 133.8% from the end of February 2009 through the end of February 2011. In the lat- ter three years (ending February 2014) however, Emerging Markets Index lost 9.1%. Unfortunately, investors’ timing was not so good, with far more money being invested during the last three years than the first two. In February

sold$10,000atmid-year, hewouldhave a personal rate of return of 8.6%, more thanone full percentage point above the fund’s 7.3% annual gain. We can apply this analysis to gener- atesomethingcalledan“investor return” for a mutual fund. Some investors may have timed their buys and sells better (or worse) than others, but by consider- ing all of the monthly flows in and out of a fund, we can calculate the return realized collectively by all the investors in the fund. Obviously, your individual return is almost certainly going to vary from the “investor return” if you were addingmoney toorwithdrawingmoney from a fund. But by looking at the overall picture, we can get a sense of just how well or how poorly investors in a particular fund are doingwith their money, rather than focusing exclusively on the fund’s total return. Jeff DeMaso has done that calcula- tion for all of Vanguard’s equity funds (taking into account all of the differ- ent share classes). The table on page 4 shows each fund’s market returns over the five years endingFebruary 2014, as well as the investor returns and the dif- ference between the two. Which brings us back to the origi- nal question: How much of the past five years’ strong stock returns did Vanguard investors capture? On the whole, Vanguard investors did reasonably well, particularly given that it has been a difficult five years to stay the course. The average slippage in performance between the funds and the return realized by investors was only 0.9%. Also, consider that investors in 500 Index realized returns of 22.7% a year while the fund’s returnwas 22.9% per year. That is not much of a gap at all, and speaks to the long-term think- ing thatmanyof the fund’s shareholders obviously adhere to. Clearly though, not all investors cap- tured all of the potential return available to them. Investors in REIT Index and Capital Value failed to capture all of the available returns over the past five years by a wide margin. Investors in REIT Index gave up 7.2% a year, while investors inCapitalValuemissedout on 5.7% of returns per year. Notably, these

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TIMING StudyingProcrastination

I LOVE IT! In a recent study, Vanguard basically confirmedwhat I’ve been recommending to you for years concerning how andwhen to invest for retirement, and they gave it a name. They call it the “procrastination penalty.” In short, the procrastination penalty is the amount ofmoney left on the tablewhen, instead of investing as soon as it is legally allowed, investorswait until the lastminute tomake their IRA contributions, losing out onmore than a year’sworth of returns on thatmoney (actually, 15.5months, which is the time between January 1 andApril 15 of the following year—the period inwhich you canmake a given year’s IRA contribution). Vanguard found thatmore than twice asmuchmoney is contributed to IRAs at the last possibleminute, during the first two weeks of the followingApril, as is invested in the firstmonth that contributions can bemade (January of the prior year). That’s a lot of procrastinating. WhileVanguard’sexample isbasedona relatively lowassumed total returnand runs for 30 years, thedifference in valuesbetween theprompt investor and theprocrastinator addsup to $15,500procrastinationpenalty, or almost 10%of theamount that’sbeen investedover that period. For years I’ve told you to invest your IRAmoney, and your 401(k) money if you can, as early as you can, and not towait. I putmy ownmoneywheremymouth is and usually havemademy IRA contributionwithin the firstweek of the new year. Once it’s invested, I don’t have to think about it, and I certainly can’t spend it, whichmeansmy retirement looks brighter all the time. Followmy lead: Don’t fall subject to the “procrastination penalty,” and you can thankme from the rocker on your porch 30 years down the road.

The Independent Adviser for Vanguard Investors • April 2014 • 5

FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641

>

Markets ETF over the five years through February 2014was 3.7% vs. a market returnof15.6%,which suggests investors fared worse than my initial calculation. Unfortunately, investors in European IndexandPacific Indexprob- ably didn’t capture returns in excess of the funds’ market returns as the table suggests. The investor returns for European ETF and Pacific ETF over the five years through February 2014 were nearly spot-on with the market returns of the ETF shares—19.6% vs. 19.8% and 14.9% vs. 15.2%, respec- tively. For our purposes, the fund’s return is the relevant number to examinemost of the time. It is the fund’s return that tells the tale of a manager’s skill—not the investor return.A fundmanager has WITHU.S. STOCKS at or near all-time highs, some investors are asking if they should wait for a pullback before put- ting money in the markets. Nobody wants to invest at amarket peakonly to start losingmoney from the get-go. But should the fear of a potential loss keep us on the sidelines? No. In fact, even if youwere “lucky” enough to have invested at themarket’s highs in each of the last 30 years, your end result was still satisfactory as long as you held the course. Let’s compare two investors: DisciplinedDave andHaplessHarry. Both Dave and Harry invest $1,000 in 500 Index at the end of 1983. Each and every year for the next 30 years, they both invest an additional $1,000 in the fund. Disciplined Dave simply adds his money on the last trading day of every year. Hapless Harry tries to pick his spots, but he easily lays claim to having the worst timing in modern Wall Street history, and ends up adding his $1,000 at the fund’s highest price each calendar year. It’s pretty obvious that Disciplined Dave should have a lot more money at TIMING BuyHigh!

sions impact the returns we realize, and unfortunately, inmost cases, inves- tors’ trading activity is harmful rather than helpful, though I would argue that Vanguard investors are better thanmost atminimizing this cost. The lesson is that it not onlymatters what investment you own, but when and how you own it. You might have identified the greatest manager or the top-performing index in the world, but if you are trading in and out, you may not be capturing all of the possible returns. Ask yourself, “Am I a trader, or an investor?” I think you’ll make more money if you act like an investor and stickwith your investments for the long term. In fact, maybe the “inves- tor return” should really be called the “trader return.” n For all his bad luck—his timing could not have been any worse— Hapless Harry ended up with only $8,023 less thanDisciplinedDave. What can we learn from Hapless Harry?Despitehispoor timing,Hapless Harry did have a few things going for him. Harry stuck to a regular invest- ment plan. Even though every trade he made immediately lost money, Harry, likeDave, was disciplined and invested $1,000 every year. Harry also never panicked—hedidnot sell a single share. Finally, Harry had a long time-horizon. The lesson is that timing isn’t every- thing. Spending time in the market, which means being disciplined, con- sistent and staying focused on the long run, goesa longway towardsmakingup for unlucky timing.And in reality, your luck can’t be as bad asHaplessHarry’s. Yes, wemay be at amarket top. But wewon’t know that until after the fact, and what might be a market top could just as easily be a pause before a rally to higher highs. If you are on the side- lines, take a lesson fromHaplessHarry, andmake a plan toget in the game—as a long-term investor. n

limited ability to control when inves- tors buy or sell their fund and in what quantities, sowe shouldn’t penalize (or reward) them for that. Sowhy spend all this time on inves- tor returns? First, it can help set expectations when investing in a fund. Say you are considering an investment in Capital Value. The gap between the fund’s return and the investor return signals that most investors have had a difficult timewith the fund—either buying after runs of strong performance or selling after a cold streak. If you know from past experience that you find it hard to stick with a fund like that, you may want to look elsewhere. Second, looking at investor returns is a reminder that our buy and sell deci-

DisciplineandTimeCan OvercomeUnluckyTiming

$200,000

HaplessHarry DisciplinedDave

$160,000

$120,000

$80,000

$40,000

Growthof Investment in 500 Index

$0

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the endof 30years thanHaplessHarry, right? Well, Dave compounded his money at a 9.9% annual rate, turning his $31,000 into $177,176 at the end of 2013 (including his final contribution at the end of that year). Harry, despite his unfortunate timing, compounded his money at a 9.5% rate, and ended up with $169,153 (also including his final contribution, coincidentally, made at the market’s high on the last day of the year). As a frame of reference, 500 Indexcompounded at a10.9% rateover this 30-year period.

6 • Fund Family Shareholder Association

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SMALL CAPS ExplorerValue Stays Small

as yet. Remember, Vanguard and the managers determine the benchmark against which they’ll be measured. But investors don’t necessarily use that same benchmark as part of their own criteria when selecting a fund. The fact that Explorer Value has beaten its benchmark todate is fine, but not a suf- ficient reason to buy it. I’mmaintain- ingmy “Hold” rating, with a hope that the active managers will pick up their pace a bit. But I’m not recommending the fund. n

that performance has been mixed. On theonehand, the fundhasoutperformed its Russell 2500 Value Index bogey as well as the age-old SmallCap Value Index . On the other, it hasn’t been able to match the performance of either its growth-oriented big sib, Explorer , or the value-oriented Strategic SmallCap Equity , run byVanguard’s quant team. So, the basic question is, “What’s the value added (pun intended) in buy- ingExplorerValue?” I’mnot sure there is any—or at least it hasn’t shown any

OPEN UP THE TAP, and you expect a rushing flow—not a steady dribble. But a dribble is exactly what Vanguard’s gotten since twisting the handle at ExplorerValue . On April 3, 2013, Vanguard announced it would make Explorer Value available to institutional clients investing directly with Vanguard. As ChairmanBillMcNabb put it, “We are confident that the fund can accommo- date additional assets.” Just one thing: There hasn’t been much to accommodate. Since the fund openedwider, inflowshaveheld steady, and small, with less than$10million in newmoney coming into the fund each month. At the end of February, assets stood at $281 million. Given perfor- mance inMarch, assets probably stood around $284million at quarter’s end. And performance may be the rub here. As you know, I’m no fan of overmanaged mutual funds with port- folios divvied up amongmultipleman- agement companies who often further divide assets among multiple portfolio managers. In Explorer Value’s case, we’re talking about three firms with about equal portions of the portfolio overseen by seven different “named” portfolio managers. That’s a lot of cooks stirring the pot. WhileExplorerValue is still relative- lynew, havingbeenaround for just four years, you can see in the chart below

QUOTABLE Vanguard.comDownloadsof Trouble

I ASKED, ANDYOUSPOKE—loudly. Yes, there are problemswithVanguard’s TurboTax down- loads aswell as continuing problemswith vanguard.com. And yes, those of youwho spoke out are aggravated, to say the least. Not onlyare someof youhaving to resubmit tax returns you’vealready sent in to the IRS, but thereareapparentlyother vanguard.com limitations that are causingheadaches. Onenewone I’ve heardabout is that Vanguard’s computer systemswon’t allow you toassignapower-of-attorney over both taxableand tax-deferredaccounts. According tomy correspondent, “My Flagship rep indi- cates that he’s let the ITdepartment knowabout this, but so far it is still incorrect.” As I have said again and again, the computers at Vanguard are far from perfect. I’ve hadmy own issues of late. So, in all matters electronic, “Trust, but verify.”

QUOTABLE EmergingMarketsExpensive

RICHARD PZENA, head of the eponymous value firm that runs a piece of Windsor , Emerging MarketsSelect Stock and the non-U.S. fund, U.S. Fundamental Value , andwas recently named to SelectedValue , says emergingmarkets are still expensive. According to a report on an investment conferencewhere Pzena spoke, he said that even the stocks that he likes in the emergingmarkets—companies benefiting from the growth of the middle class—haven’t gotten cheap enough, and that he prefers European stocks over those in the emergingmarkets. I’m always impressedwhen amanager can actually say something negative about the sector inwhich he is investing, because somanymanagers simply lay out the bullish case for their funds or strategies nomatterwhichway the valuationwinds are blowing. I should note, by the way, that Pzena himself is not listed as a portfoliomanager on EmergingMarkets Select Stock, but I’m sure his opinions inform some of the discussions at his firm. Since its inception in June 2011, EmergingMarkets Select Stock has outperformed EmergingMarkets Index , gaining 1.4% versus the index fund’s 8.5% loss. Pzena InvestmentManagement runs about one-quarter of the activelymanaged fund’s $250mil- lion in assets.

ExplorerValueVersus...

0.90 0.92 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 rising line =E.V.Outperforms

E.V. vs. SmallCapValue Index E.V. vs. Russell 2500Value Index E.V. vs. Explorer E.V. vs. StrategicSmallCap Equity

3/10

9/10

3/11

9/11

3/12

9/12

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3/14

The Independent Adviser for Vanguard Investors • April 2014 • 7

FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641

PERFORMANCE REVIEW

VANGUARD EQUITY FUNDS

3/31 Price

March Return

YTD Return

12-Mo. Return

3-Year Return

5-Year Return

12-Mo.

Fund (fund #) SECTOR Energy (51) Health Care (52) REIT Index (123)

Ticker Minimum

Loads Advice

Yield Risk

VGENX VGPMX VGHCX VGSIX VGXRX VHCOX VEXPX VEVFX VMGRX VISGX NAESX VISVX VSEQX VSTCX VTMSX VCVLX VEXMX VIGRX VMGIX VIMSX VMVIX VMRGX VPMCX VPCCX VASVX VFTSX VASGX VTCLX VWUSX VFINX VCVSX VDEQX VDAIX VDIGX VEIPX VQNPX VHDYX VLACX VMNFX VSMGX VTSMX VUVLX VIVAX VWNDX VWNFX VBINX VPGDX VGSTX VSCGX VASIX VTMFX VWINX VWELX VTTSX VFFVX VFIFX VTIVX VFORX VTTHX VTHRX VTTVX VTWNX VTXVX VTENX VTINX

$3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K — — $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K — $3K $3K $3K $3K $3K

— Hold $68.78

1.8% 2.5% 14.6% 2.0% 15.1% 1.6% 1.42 -3.1% 7.2% -17.8% -22.1% 2.4% 0.0% 2.31 -2.0% 8.8% 36.2% 23.3% 22.8% 1.2% 1.05 0.5% 9.9% 4.1% 10.4% 28.5% 3.7% 1.30 0.6% -0.6% -2.1% 6.6% — 3.2% 1.51 -1.9% 5.3% 29.3% 16.6% 22.4% 0.1% 1.15 -1.2% 0.8% 29.3% 14.5% 25.2% 0.0% 1.21 1.0% 1.9% 23.0% 14.6% — 0.5% 1.14 -1.5% 1.5% 22.3% 13.5% 23.0% 0.0% 1.16 -2.2% 1.6% 24.7% 13.6% 27.0% 0.5% 1.19 -0.3% 2.6% 25.1% 14.2% 26.6% 1.1% 1.15 1.3% 3.4% 24.5% 14.5% 26.1% 1.7% 1.14 0.7% 4.6% 30.2% 17.2% 26.9% 1.1% 1.18 0.6% 3.5% 29.2% 16.1% 27.0% 0.7% 1.25 0.7% 1.1% 27.7% 15.8% 26.1% 0.9% 1.16 0.2% 5.2% 34.0% 13.5% 29.5% 0.7% 1.38 -0.7% 2.7% 25.7% 14.2% 25.8% 0.9% 1.15 -1.6% 0.8% 21.9% 14.7% 21.4% 1.1% 1.05 -1.7% 2.6% 20.7% 11.5% 23.6% 0.5% 1.13 -0.3% 3.2% 23.4% 13.4% 24.9% 1.0% 1.08 1.0% 3.8% 24.9% 15.2% 26.0% 1.3% 1.07 -2.5% 0.9% 24.8% 12.9% 20.8% 0.6% 1.12 -0.0% 5.0% 28.5% 16.4% 21.7% 0.8% 1.01 0.7% 5.2% 26.5% 15.7% 21.5% 0.8% 0.95 1.2% 2.1% 28.9% 16.4% 24.7% 1.1% 0.98 0.7% 2.8% 25.6% 16.3% 23.1% 1.3% 1.07 0.4% 1.7% 15.5% 9.7% 17.0% 1.9% 0.86 0.6% 2.1% 23.2% 14.8% 21.8% 1.5% 1.02 -3.0% 0.7% 24.4% 14.8% 20.3% 0.4% 1.20 0.8% 1.8% 21.7% 14.5% 21.0% 1.8% 1.00 -0.2% 3.9% 16.3% 7.9% 16.6% 2.9% 0.68 -0.4% 2.0% 24.7% 14.6% 22.1% 0.9% 1.07 0.9% 0.4% 16.7% 13.0% 18.8% 1.8% 0.99 1.6% 1.9% 20.7% 15.6% 19.1% 1.9% 0.93 2.4% 2.3% 19.6% 16.2% 21.7% 2.6% 0.96 0.8% 1.7% 22.0% 15.0% 20.8% 1.5% 1.02 2.5% 1.9% 18.6% 15.9% 21.6% 2.8% 0.97 0.7% 1.9% 21.9% 14.4% 21.2% 1.7% 1.00 1.9% 2.8% 8.4% 4.4% 2.2% 0.0% 0.40 0.3% 1.8% 11.4% 8.2% 14.1% 1.9% 0.65 0.8% 1.8% 21.7% 14.5% 21.1% 1.8% 1.00 0.5% 2.0% 22.5% 14.5% 21.9% 1.7% 1.01 2.7% 4.6% 23.2% 16.6% 22.0% 1.8% 1.08 2.6% 2.8% 21.7% 14.0% 21.0% 2.1% 1.03 1.3% 3.5% 26.0% 15.4% 22.7% 0.9% 1.11 2.0% 2.9% 21.9% 14.8% 21.1% 1.9% 0.99 0.2% 2.0% 12.9% 10.3% 15.0% 1.8% 0.60 0.6% 2.2% 12.0% 8.2% 14.9% 5.6% 0.75 0.0% 2.2% 14.4% 10.1% 15.4% 1.8% 0.70 0.2% 1.9% 7.5% 6.4% 11.0% 2.0% 0.45 0.1% 2.0% 3.7% 4.7% 7.9% 2.0% 0.30 0.2% 2.4% 11.3% 9.9% 13.0% 2.1% 0.52 0.9% 2.6% 7.8% 9.6% 13.2% 3.1% 0.43 0.9% 2.4% 14.4% 11.2% 15.9% 2.4% 0.66 0.4% 1.7% 17.5% — — 1.3% 0.96 0.5% 1.7% 17.5% 10.8% — 1.5% 0.97 0.4% 1.7% 17.5% 10.7% 18.5% 1.8% 0.97 0.4% 1.7% 17.5% 10.8% 18.5% 1.8% 0.97 0.4% 1.7% 17.5% 10.7% 18.4% 1.7% 0.97 0.4% 1.7% 16.4% 10.3% 18.1% 1.9% 0.92 0.4% 1.7% 15.0% 9.8% 17.2% 1.7% 0.84 0.3% 1.8% 13.4% 9.3% 16.1% 1.8% 0.76 0.3% 1.8% 12.0% 8.7% 14.9% 1.8% 0.68 0.2% 1.8% 9.9% 8.0% 13.7% 1.7% 0.59 0.2% 1.7% 7.2% 7.1% 12.1% 1.6% 0.47

— Sell

$11.08

PreciousMetals&Mining (53)

— Buy $195.23 — Hold $23.45

$3K 0.25%f/0.25%r

Hold $21.61

Global ex-U.S. Real Estate Index (738) AGGRESSIVEGROWTH Capital Opportunity (111) (CLOSED)

— Buy

$48.62

— Hold $104.23 — Hold $32.10

Explorer (24)

Explorer Value (1690) MidCapGrowth (301)

— Sell — Buy

$25.11 $34.91

SmallCapGrowth Index (861) SmallCap Index (48) SmallCap Value Index (860) Strategic Equity (114) Strategic SmallCap Equity (615) Admiral Tax-Managed SmallCap (116)

— Hold $54.04 — Hold $24.12 — Hold $31.38 — Hold $31.35

$10K

— Sell

$44.03

GROWTH Capital Value (328)

— Buy — Sell — Buy — Buy

$15.15 $64.44 $48.11 $36.39

ExtendedMarket Index (98)

Growth Index (9)

MidCapGrowth Index (832) MidCap Index (859) MidCap Value Index (835) MorganGrowth (26) PRIMECAP (59) (CLOSED)

— Hold $30.98 — Hold $32.58 — Hold $25.84

— Buy — Buy — Buy — Buy — Sell — Sell — Sell — Buy — Sell — Buy — Buy — Buy — Sell — Buy — Sell — Sell — Sell

$96.97 $20.45 $28.80 $11.92 $28.10 $95.69 $28.88 $14.14 $31.15 $30.11 $21.71 $30.23 $40.21 $34.74 $11.34 $23.53 $83.94

PRIMECAPCore (1220) (CLOSED)

Selected Value (934) Social Index (213) STARGrowth (122)

$10K $3K

Admiral Tax-Mgd. Capital App. (5102)

U.S. Growth (23)

GROWTH& INCOME 500 Index (40) Convertible Securities (82) Diversified Equity (608) DividendAppreciation Index (602) DividendGrowth (57) Equity Income (65) Growth& Income (93) LargeCap Index (307) Market Neutral (634) HighDividend Yield Index (623) STARModerateGrowth (914)

— Buy $172.63

— Hold $25.01

$250K

Admiral Tax-Mgd. Gro. & Inc. (5101) (CLOSED) VTGLX

— Hold $47.41 — Hold $16.30 — Hold $30.45 — Hold $21.05

Total StockMarket Index (85)

U.S. Value (124) Value Index (6) Windsor (22) Windsor II (73) BALANCED Balanced Index (2)

— Buy

$37.83

$3K $25K $1K $3K $3K $10K $3K $3K

— Hold $27.93 — — $18.78 — Hold $24.41

Managed Payout (1498)

STAR (56)

— Sell — Sell — Sell

$18.30 $14.54 $25.38

STARConservativeGrowth (724)

STAR Income (723)

Admiral Tax-Managed Balanced (103)

— Hold $25.28

Wellesley Income (27)

— Buy

$38.59

Wellington (21)

TARGETRETIREMENT Target Retirement 2060 (1691) Target Retirement 2055 (1487) Target Retirement 2050 (699) Target Retirement 2045 (306) Target Retirement 2040 (696) Target Retirement 2035 (305) Target Retirement 2030 (695) Target Retirement 2025 (304) Target Retirement 2020 (682) Target Retirement 2015 (303) Target Retirement 2010 (681) Target Retirement Income (308)

$1K $1K $1K $1K $1K $1K $1K $1K $1K $1K $1K $1K

— — $27.20 — — $30.87 — — $28.66 — — $18.06 — — $28.79 — — $17.27 — — $28.12 — — $16.03 — — $27.60 — — $15.03 — — $26.03 — — $12.65

0.1% 1.6% 4.9% 6.3% 9.3% 1.7% 0.36 Our ratings: BUY: Best choice. Generally funds held in ourModel Portfolios or fundswith similar objectives. HOLD: Current prospects for the fund are not as good as thosewith aBuy rating. However, investors who own shares in the fundmaywish to assess tax costs of trading into aBuy-rated fund. SELL: The fund’s long-term prospects are not as compelling as other funds’, or other factorsmaymake the fund unattract- ive compared to alternatives. “+” is a rating upgrade over the previousmonth; “-” is a downgrade. Investors shouldweigh all tax implications of fund switches beforemaking 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, $100,000withVanguard or accept all paperwork through onlinemeans.

8 • Fund Family Shareholder Association

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PERFORMANCE REVIEW

VANGUARD EQUITY FUNDS (CONT.)

3/31 Price

March Return

YTD Return

12-Mo. Return

3-Year Return

5-Year Return

12-Mo.

Fund (fund #)

Ticker Minimum

Loads Advice

Yield Risk

INTERNATIONAL/GLOBAL DevelopedMarkets Index (227) (CLOSED) EmergingMarkets Stock Index (533) EmergingMarkets Select Stock (752)

VDMIX VEIEX VMMSX VEURX VHGEX VMVFX VINEX VWIGX VTRIX VPACX VDVIX VGTSX VTWSX VFWIX VFSVX

— $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K $3K

— Sell

$11.62

-0.4% 0.4% 17.2% 7.3% 16.0% 2.6% 1.46 3.9% -0.4% -3.0% -3.7% 13.7% 2.7% 1.52 3.6% -0.7% 0.5% — — 1.3% 1.52 -0.7% 2.2% 24.9% 8.7% 17.7% 3.7% 1.58 0.6% 2.0% 20.3% 10.6% 20.3% 1.5% 1.16 0.7% 2.5% — — — — — 0.7% 4.3% 27.6% 7.9% 20.6% 2.2% 1.32 -0.2% -0.8% 18.4% 7.0% 18.2% 1.5% 1.47 0.1% -0.1% 19.5% 7.1% 15.6% 1.9% 1.46 -0.1% -2.6% 5.1% 5.1% 13.1% 2.4% 1.45 -0.5% 0.4% — — — — 1.50 0.4% 0.8% 12.7% 4.3% 15.4% 3.1% 1.40 0.4% 1.4% 17.1% 8.8% 18.0% 2.2% 1.16 0.4% 0.4% 12.3% 4.1% 15.5% 3.1% 1.41 0.1% 4.4% 17.3% 4.9% — 2.4% 1.37

— Hold $25.70 — Hold $19.74 — Hold $31.65 — Buy $23.95 — Hold $10.56 — Hold $19.22 — Buy $23.16 — Hold $37.35 — Hold $11.29 — Hold $16.76 — Hold $24.31 — Sell $10.27

European Index (79) Global Equity (129)

GlobalMinimumVolatility (1194) International Explorer (126) International Growth (81)

International Value (46) Pacific Index (72)

Tax-Managed International (1397) Total International Stock Index (113) TotalWorld Stock Index (628)

World ex-U.S. Index (770)

— Sell

$19.83

World ex-U.S. SmallCap Index (1684)

0.25%f&r

Hold $40.86

VANGUARD INCOME FUNDS

——TaxEquivalent Yield—— 25% 28% 36.8% * 38.8% * 43.4% *

Avg. Mat.

3/31 Price

March Return

YTD Return

12-Mo. Return

3-Year Return

5-Year Return

12-Mo. Yield

SEC Yield

Fund (fund #)

Ticker Advice

Risk

TAXABLE INCOME Short-Term Treasury (32) Short-Term Federal (49) Short-Term Inflation Index (1967) Short-Term Investment-Grade (39) Short-TermBond Index (132) Inflation-Protected Sec. (119) Intermed. Investment-Grade (71) Intermed.-TermBond Index (314) Long-Term Treasury (83) Long-Term Investment-Grade (28) Long-TermBond Index (522) High-Yield Corporate (29) Tax-ExemptMoneyMarket (45) CA Tax-ExemptMM (62) NJ Tax-ExemptMM (95) NY Tax-ExemptMM (163) OH Tax-ExemptMM (96) PA Tax-ExemptMM (63) TAX-FREE INCOME Short-Term Tax-Exempt (41) Limited-Term Tax-Exempt (31) Intermed.-Term Tax-Exempt (42) Long-Term Tax-Exempt (43) High-Yield Tax-Exempt (44) STATETAX-FREE CA Intermed. Tax-Exempt (100) CA Long-T. Tax-Exempt (75) MA Tax-Exempt (168) NJ Long-T. Tax-Exempt (14) NY Long-T. Tax-Exempt (76) OH Long-T. Tax-Exempt (97) PA Long-T. Tax-Exempt (77) Intermed. Treasury (35) Total BondMarket (84) GNMA (36) FederalMM (33) (CLOSED) PrimeMM (30)

VFISX Sell 2.2 $10.68 -0.2% 0.1% -0.0% 1.0% 1.2% 0.4% 0.33% — — — — — 0.24 2.5 $10.72 -0.2% 0.3% -0.1% 1.4% 1.8% 0.6% 0.54% — — — — — 0.34 VTIPX Hold 2.5 $24.72 -0.4% 0.2% -1.9% — — 0.0% -1.49% — — — — — 0.53 Buy 3.3 $10.73 -0.1% 0.8% 1.3% 2.5% 5.0% 1.8% 1.53% — — — — — 0.44 VBISX Hold 2.8 $10.50 -0.3% 0.4% 0.3% 1.7% 2.6% 1.0% 0.72% — — — — — 0.36 VIPSX Hold 8.5 $13.23 -0.5% 2.0% -6.8% 3.3% 4.7% 1.6% -0.26% — — — — — 1.97 Sell 5.5 $11.19 -0.6% 1.3% -2.1% 3.5% 3.1% 1.5% 1.55% — — — — — 1.16 Buy 6.5 $9.81 -0.0% 2.4% 0.6% 5.5% 9.1% 3.2% 2.73% — — — — — 1.27 VBIIX Hold 7.2 $11.28 -0.3% 2.5% -1.5% 5.3% 6.6% 2.9% 2.58% — — — — — 1.53 VBMFX Hold 7.6 $10.69 -0.1% 1.9% -0.3% 3.6% 4.6% 2.4% 2.06% — — — — — 1.00 Sell 8.3 $10.56 -0.3% 2.0% -0.3% 3.0% 4.0% 2.4% 2.61% — — — — — 1.06 0.5% 7.5% -4.6% 8.1% 4.7% 3.2% 3.25% — — — — — 3.85 0.4% 6.3% 0.7% 9.4% 11.4% 4.7% 4.38% — — — — — 2.86 0.7% 6.9% -1.3% 8.9% 9.0% 4.2% 4.20% — — — — — 3.13 0.1% 2.7% 5.5% 8.3% 14.5% 5.6% 3.97% — — — — — 1.45 0.9% 3.3% — — — 3.3% 4.68% — — — — — 2.67 0.3% 2.3% — — — 1.4% 1.44% — — — — — 0.89 VSGBX Sell VFSTX VFITX VFICX VFIIX VUSTX Sell 24.3 $11.62 VWESX Hold 23.9 $10.13 VBLTX Sell 24.0 $13.13 VWEHX Buy 6.5 $6.11 VTIBX Hold 8.3 $10.09

EmergingMkts. Gov’t Bond Idx. (1120)** VGOVX Buy 10.3 $9.72

Total International Bond Index (1231) MONEYMARKET Admiral TreasuryMM (11) (CLOSED) VUSXX

— 55 $1.00 — 55 $1.00 — 34 $1.00 — 29 $1.00 — 46 $1.00 — 33 $1.00 — 32 $1.00 — 17 $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% 0.0% 0.01% — — — — — — 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% — — — — — — 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% — 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% — 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% — 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% — 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% — 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.01% 0.0% 0.0% 0.0% 0.0% 0.0% —

VMFXX

VMMXX — 54 $1.00

VMSXX VCTXX VNJXX VYFXX VOHXX VPTXX

VWSTX Buy 1.3 $15.86 -0.1% 0.2% 0.4% 1.0% 1.2% 0.8% 0.28% 0.4% 0.4% 0.4% 0.5% 0.5% 0.16 VMLTX Buy 2.8 $11.04 -0.5% 0.6% 0.7% 2.0% 2.4% 1.6% 0.71% 0.9% 1.0% 1.1% 1.2% 1.3% 0.44 VWITX Buy 5.2 $13.97 -0.1% 2.6% 0.7% 5.2% 5.0% 3.2% 2.02% 2.7% 2.8% 3.2% 3.3% 3.6% 1.26 0.3% 4.0% 0.6% 6.4% 6.1% 4.0% 3.02% 4.0% 4.2% 4.8% 4.9% 5.3% 1.65 0.3% 4.4% 0.4% 7.0% 7.5% 4.0% 3.32% 4.4% 4.6% 5.3% 5.4% 5.9% 1.69 VWLTX Hold 6.7 $11.34 VWAHX Hold 7.9 $10.85

VCAIX VCITX

Buy 5.2 $11.52

0.0% 3.0% 1.5% 6.0% 5.7% 3.2% 1.92% 2.9% 3.0% 3.4% 3.5% 3.8% 1.34 0.4% 4.5% 1.1% 7.3% 6.6% 3.8% 2.83% 4.2% 4.4% 5.0% 5.2% 5.6% 1.79 0.2% 3.8% 0.4% 5.4% 5.0% 3.3% 2.73% 3.8% 4.0% 4.6% 4.7% 5.1% 1.67 0.3% 3.9% 1.0% 6.2% 5.4% 3.6% 2.88% 4.2% 4.4% 5.0% 5.2% 5.6% 1.62 0.4% 3.8% 0.5% 5.7% 5.5% 3.5% 2.79% 4.1% 4.2% 4.8% 5.0% 5.4% 1.61 0.3% 4.2% 0.7% 6.1% 5.6% 3.7% 3.07% 4.4% 4.6% 5.2% 5.4% 5.8% 1.74 0.4% 4.0% 0.8% 5.9% 5.4% 3.7% 2.95% 4.1% 4.2% 4.8% 5.0% 5.4% 1.58

Sell

6.3 $11.64 7.2 $10.52 6.8 $11.92 6.3 $11.37 6.5 $12.19 6.1 $11.32

VMATX Sell VNJTX Sell VNYTX Sell

VOHIX VPAIX

Sell Sell

Minimum refers to the dollar amount (e.g., $3Kmeans $3,000) needed to open a new taxable account. Loads are denotedwith an “f” for front-end and “r” for back-end. Holding periods are noted for loads imposed on sales of shares held less than twomonths (<2mo.) or one year (<1). 3-year and 5-year returns are compound, annualized returns. Averagematurity is in years for bond funds and days for moneymarket funds. 12-month yields are based on trailing 12-month dividend/income distributions. SEC yields are reported 30-day yields. Taxableequivalent yields are based on SEC yields. For state funds, taxable equivalent yields incorporate state taxes. Risk is fund vola- tilitymeasured over the previous 24months. Equity fund risk ismeasured 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 aremore limited. * Tax equivalent yields incorporate the 3.8% health care sur-

VANGUARDVARIABLEANNUITIES

3/31 Price $18.21 $35.54 $29.01 $24.64 $26.61 $77.12 $34.58 $27.10 $64.81 $71.54 $35.02 $42.86 $45.26 $62.59 $26.54 $39.24

March Return

YTD Return

12-Mo. Return

3-Year Return

5-Year Return Risk

Fund (fund #)

Advice

MoneyMarket Annuity (64) Short-Term Inv.-GradeAnnuity (144) Total BondMarket Annuity (67) High-Yield BondAnnuity (146) ConservativeAllocationAnnuity (801) Hold ModerateAllocationAnnuity (803) Hold Buy Hold Buy

— $1.90

-0.0% -0.0% -0.2% -0.2% -0.1% — -0.2% 0.6% 1.0% 2.2% 4.6% 0.47 -0.2% 1.9% -0.6% 3.3% 4.3% 1.02 0.3% 2.7% 5.2% 7.9% 14.0% 1.45 0.1% 1.8% 7.3% — — 0.45 0.3% 1.7% 11.1% — — 0.65 0.9% 2.3% 14.3% 10.9% 15.7% 0.66 -0.0% 5.0% 27.3% 16.2% 21.3% 1.00 2.2% 2.9% 20.5% 14.5% 20.6% 0.94 2.3% 2.3% 19.3% 15.7% 21.1% 0.97 0.8% 1.7% 21.3% 14.2% 20.6% 1.00 -2.9% 0.6% 24.0% 14.5% 19.9% 1.20 -0.3% 3.2% 23.1% 13.1% 24.5% 1.08 0.5% 9.8% 3.8% 10.0% 28.1% 1.30 -2.3% -0.8% 29.2% 15.2% 26.6% 1.23 0.5% 1.9% 22.1% 14.1% 21.5% 1.01 -0.3% -0.9% 18.3% 6.9% 18.1% 1.47

BalancedAnnuity (69) Capital GrowthAnnuity (603) Diversified ValueAnnuity (145) Equity IncomeAnnuity (8) Equity Index Annuity (68) GrowthAnnuity (10) MidCap Index Annuity (143) REIT Index Annuity (147)

Buy Buy Buy Buy Buy Sell Buy Hold

tax into the 33%, 35% and 39.6% tax rates. ** Fund soldwith a 0.75% front-end load

Small Company GrowthAnnuity (160) Hold Total StockMarket Annuity (604) Hold

International Annuity (86)

Buy

The Independent Adviser for Vanguard Investors • April 2014 • 9

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