(PUB) Vanguard Advisor

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

Does a Fed Rate Hike Guarantee Losses?....................... 1 Model Portfolios................................................................ 2 Counting the Costs........................................................... 6 Performance Review.................................................... 8-11 Is the Henhouse Unguarded?......................................... 12 Active Management Wins, So Far.................................. 14 Vanguard Costs Under Siege in Lawsuit........................ 15 Dan’s Do-It-Now Action Recommendations.................... 16 PIN 4258* *SEE PAGE 16 AUGUST 2014

Long, Slow Grind I TALKED ABOUT THIS A BIT LAST MONTH, but it bears repeating: The economy is in a long, slow grind towards recovery/expansion, and so in my mind, the stock market may be in a long, slow grind higher as well. Despite a 2.0% loss this month, Total Stock Market is up 4.8% for the year. Total Bond Market has returned 3.6%, and Total International Stock is up 4.1%. In other words, everything’s up in 2014, for the moment. Lately, though, I’ve heard plenty of arguments that the stock market bull is fading, the economy is late in “the cycle,” and returns are destined to suffer—soon. Well, much of that is simply opinion, but the comments about the economic and market cycle warranted a further look, so Jeff and I did a little digging. First off, when strategists talk about economic and market cycles, they are typically referring to the common wisdom that the stocks of companies in particular industries or segments of the market perform best when the economy is coming out of a recession; others do well when we are in mid-recovery; still others are the leaders when the econ- omy is slowing; and a different group does well when we are in recession. For example, you’ve probably heard of “defensive” industries or stocks as the ones you want to own when the market or the economy is heading into the abyss. That’s all fine and well, except for a few inconvenient truths. First, how do you know when you are mid-cycle as opposed to late in the cycle? Usually, you won’t until after the fact—way after the fact. Second, while it may sound like it’s a given that a sector considered to be defensive, like health care, does best in the early portions of a bear RISING RATES Does a Fed Rate Hike Guarantee Losses? AS QE III, or the Fed’s third round of quantitative easing, comes to an end, investors are increasingly concerned about the Federal Reserve’s next move: A hike, or several, in the benchmark federal funds rate. When the Fed starts to raise interest rates—so the story goes—well, then the game is up not only for bonds, but stocks, too! Hold on, though. Investors shouldn’t be so quick to jump to that conclusion. Unless economic conditions change dramatically in the next few weeks, the Fed’s bond buying program is on course to end in October. Then, assuming the economy con- tinues to expand, at some point the Fed will raise interest rates. We’ve all known that the fed funds rate wouldn’t, and couldn’t, stay at zero forever. It’s always been a ques- tion of when—not if —the Fed would raise rates. Once it begins, the next question will be, how far will they go? SEE GRIND PAGE 3 >

AVERAGEVANGUARD INVESTOR* July: -1.3% YTD: 4.6%

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

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*See the footnotes on page 2.

DOW JONES INDUSTRIALS July Close: 16563.30

14000 14900 15800 16700 17600

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STANDARD & POOR’S 500 July Close: 1930.67

1600 1700 1800 1900 2000

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NASDAQ COMPOSITE July Close: 4369.77

3500 3750 4000 4250 4500

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3-MO.TREASURY BILLYIELD July Close: 0.02%

0.00% 0.02% 0.04% 0.06% 0.08%

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10-YR.TREASURY NOTE YIELD July Close: 2.56%

2.0% 2.3% 2.6% 2.9% 3.2%

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SEE RATES PAGE 4

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 24, NO. 8 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.