(PUB) Vanguard Advisor

some bond or stock fund shares (which could impact your tax bill) and have the money transferred into your money market. Money market funds are practical for systematic investment plans, like dollar-cost averaging or value-averag- ing. Your money continues to earn a smidge of interest, remains completely safe, and can be moved with ease into another fund when the time comes. In taxable accounts, I have long recommended (and practiced) having distributions, whether they are monthly income from your bond fund or year- end capital gains, deposited automati- cally into your money market fund. This money becomes instantly avail- able should you need to write a check on it. It allows you to reallocate or rebalance without having to sell fund shares. This is helpful if you rebalance

convenient and simple to use. As a conduit, money funds are a power- ful money-management tool. You can write checks on them. You can wire money into and out of them. You can use them to move money into and out of your Vanguard funds. You can direct distributions from other funds into your money market fund. If you’re like me, you occasionally need to extract some money from your Vanguard investments to help pay the bills. You don’t need to transfer money to a checking account. Writing a check from your money market account is easy. I do it all the time. Unlike writing a check on a bond fund, a check written on a money market fund doesn’t create a taxable event that must be reported to the IRS. Just confirm you have enough assets in your money market fund first, otherwise you’ll need to sell

happen according to plan or a regu- lar schedule. Just this past month, I had to have a tree taken out of my backyard in an emergency. That cost me a pretty penny. Having money set aside for the unexpected isn’t pessimistic; it’s pru- dent. Not only will having ready cash make a stressful situation less stressful, it also means you’ll be less likely to disrupt your carefully made long-range investment plans. In my mind, an emergency fund equivalent to six to 12 or even 24 months of living expenses is the foun- dation of any savings and investment plan. The safety and liquidity of money market funds, particularly Vanguard’s, make them ideal vehicles for this role. You may have to “top up” your emer- gency fund from time to time, as infla- tion or a change in lifestyle may have caused your expenses to rise, but that is far better than finding your safety net has been cut out from under you by a tumbling stock market. Hopefully you’ll never have to tap your rainy day fund, kind of like insur- ance. But a money market fund is also useful for near-term expenses you are already expecting. I am often asked questions like, “Where should I invest the $200,000 I have for buying a house this year?” If your time horizon is short and you can’t make up the difference if you lose any of the money you’ve saved, then the answer really is to keep it in cash—a money market fund or FDIC-insured bank account. It’s the only place where you can put a dollar in and get a dollar out on a daily basis. (A certificate of deposit, or CD, could work as well, but your money will be locked up for whatever period you’ve chosen for that CD.) I can’t recommend anything else in good conscience. If your time horizon is longer—say, two or three years—you may have more options, like a short-duration bond fund. (See the box on page 5 for more on short-term funds.) But again, it’s a matter of knowing how much money you’re willing to risk losing, even if it’s a small amount. Every dollar counts when you’re house-hunting in a hot market, for instance. Plus, money funds are incredibly >

Expense Headwind Pushes Money Market Annuity in Reverse MONEY MARKET ANNUITY IS A BIT OF A DIFFERENT ANIMAL. The portfolio is run, like Vanguard’s other money funds, with the goal of a stable $1.00 NAV, safety and liquidity first. However, unlike its other money funds, Vanguard Money Market Annuity has additional insur- ance-related expenses to contend with. And for several years now, its portfolio’s meager yields have been overwhelmed by those expenses, resulting in negative returns for investors. By Vanguard’s account, in the most recent annual report for its annuity products, the Money Market Portfolio delivered positive performance of 0.11% in 2013. This beat peers and an expense-free benchmark, all while maintaining a $1.00 NAV. However, that return was not enough to cover the cost of the annuity contract investors must pay for. As a result, after accounting for fees, Money Market Annuity lost -0.19% in 2013. This year isn’t shaping up to

be much better, with the annuity off 0.13% so far. (This is also reflected in the negative yield shown in the table on page 4.) It’s been a tough five-year stretch for Money Market Annuity. The annuity product is priced at AUV, or accumulated unit value, which adds all income and subtracts all expenses from its share price on a daily basis. As you can see in the chart to the right, Money Market Annuity’s AUV has been gradually slipping since Dec. 2009. In fact, Money Market Annuity’s three- year return turned negative on January 24, 2012, and its five-year return fell into the red on November 29, 2013. The underlying portfolio may have met

MM Annuity’s Tumble

$1.900 $1.902 $1.904 $1.906 $1.908 $1.910 $1.912 $1.914 $1.916

Value starts falling 12/1/09

Value falling again 9/15/10

Value tops out 8/14/09

Stops falling 7/19/10

5-year return goes

negative 11/29/13

3-year return goes negative 1/24/12

2/09

8/09

2/10

8/10

2/11

8/11

2/12

8/12

2/13

8/13

2/14

8/14

Vanguard’s expectations, but the actual client experience has been disappointing—to say the least. Performance-eroding expenses combined with near-zero yields make this an unattractive option. I do not recommend using Money Market Annuity. Period.

6 • Fund Family Shareholder Association

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