(PUB) Vanguard Advisor

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out working, saving and investing on his or her own. In the three scenarios, I’ve assumed the actual returns from Total Stock Market , Total Bond Market and Wellington from 2000 through 2013. Despite two stock bear markets dur- ing thisperiod,Wellington,whichkeeps about 60% of assets in stocks and the remainder inbonds,matchedor slightly beat the returns fromTotalBondMarket aswell asTotal StockMarket. These charts might be just the thing to show the teen or young adult you’re interested in leading down the road to retirement. I hope I’ve both made the benefits of funding an IRA clear, and simplified it enough that ayoung inves- tor can understand it. But the question remains: How canwe get a teenager to save for retirement? You probably can’t. So, my advice is to help them. That’s what I did with both ofmy kids. Let’s assume you can afford to match their summer earnings. Do it. Let themhave their hard-earnedmoney, but open a Roth IRA in your child or grandchild’s name and add the money

gression a young person might fol- low as they age and gain employment: Starting with their first summer job at age 15, they invest $1,000 a year until they graduate from college and get settled into a career, bumping their contribution up to $2,000 a year at 23. By age 30, they will (hopefully) be well-established and able to again bump their contribution up to $4,000, and at 40 bump it up again to $5,500, an amount they continue to contribute up until retirement. You can see that the greater the con- tribution and the greater the time that’s passed, the larger and faster the account grows. That is the power of compound- ing—by constantly adding to your investment, you increase the potential return, going from what seems like a paltry$1,000 initial investment at age15 to$225,000byage60, simplybyadding $1,000ayear to theaccount, achievinga 6%annual returnandpayingno taxeson your income and gains.With larger ini- tial (and subsequent) investments, you get evenmore bang for your bucks. But I also put together another sce- nario that may be more realistic, par-

RealCompounding: TotalStockMarket

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000

$1,000 per year $1,500 per year $2,000 per year $2,500 per year

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ticularly when we’re talking about real markets and real teenagers. First off, few teenagers are going to be able to earn $5,500 in a summer, though they might beable tohit that numberorhigh- er if theywork during the school year. Also, as you know, markets don’t compound in a straight line. They go up and down. So, in the charts on this page and the next, I’ve assumed that our teen (or guardian angel) is not only socking away more modest sums, but does so from the age of 12 to the age of 25,when, presumably, Juniorwill be

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mentalswouldsuggest. I think this isall beingheldupbymassiveamounts of central bank liquidity. I amnot overlyencouragedby theglobal economy right now, and I’mnotwildlydiscouraged, either.What discouragesme is the level of theequitymarketscompared to that fundamental data. What happensas the Fed tapers? How dowe unravel from all of this? That is part of the reasonwhy I amworried.We’ve never really experienced this before. We don’t have a playbook that says, “This iswhat happenswhen you keep rates at a very, very low level globally for a long period of time and you inject enormous amounts of liquidity by growing your balance sheet and buying assets that no onewants.” The hopewas thatwe create wealth, thatwealth leads to confidence, that confidence leads to hiring, and that solves all the fundamental problems. My issue is you are going to have to reintroduce those assets into the privatemarkets.What happenswhen you do it, andwhat happenswhen you do itwrong, andwhat is the rightway, and all that? That’swheremy caution really lies. It’s not somuch thatwe did it, but that I’m not so sure thatwe know how to get out of it. Howdoyouexpress that cautiousview in theportfolio?Or if you were lesscautious, howwould theportfolio lookdifferent? You’ll probably chucklewhen I say this: I’mnot so sure theportfolio would lookmeaningfully different. Theremight bea coupleof names fewer or a coupleof namesmoreor different positioning in the top10.

But by and large, the characteristics of the companies in theportfolio wouldnot beany different. Imight just have slightlymore confidence in individual names. Oneof the things I’ve tried todo toaddress this concern is toadda couplemorenames to theportfolio. I usually run this portfolio very, very concentrated—45or sonames, andat thepresentwe’vegot 50. That sort of helps, at least inmymind, todiversify the risk a littlebit. Theother thing that you’ll see is I’ll runwitha littlebitmore cash. Typically, I runwithanywherearound, say, 2% cash,which, you know, I think is a reasonable level toallow yourself tohave some flexibility. But inaperiodwhere you’remore cautious, I tend tohavea littlebitmore. Sowe’vehadanywhere from3% to sometimes 4% cash. But by and large, theportfoliowouldn’t bedramatically different—andoh, by the way, Iwouldhopeandexpect that that is exactlywhat youwouldwant. Healthcareaddeda lot to returnsover thepast year. Do those ideascome fromJeanHynesandher teamor are thesedevel- opedby you? Both. If I think about the names in the portfolio in the health care sector, it is a very substantial weight, to your point. A number of those names are names that I thinkwe sort of came upwith, but I’d be lying— and you know Jean and the team aswell as, probably better than I do— but I’d be lying to tell you thatwe don’t lean on them quite heavily for helping us think through health care. I try to build this brick by brick, but on occasion you do have to have a bit of a sector view, and I’ve always thought that over the next 20 to 30 years the health care sector broadly

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