(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

JUNE 2014

Funds Focus: Sector......................................................... 1 Model Portfolios................................................................ 2 A Year of Changes............................................................. 4 Interview: Charles Plowden.............................................. 5 Beware the Bear............................................................... 6 Performance Review.................................................... 8-11 An Active Option and a Word of Caution........................ 15 Dan’s Do-It-Now Action Recommendations.................... 16

PIN 7638

Shadows and Light ONE OF JONI MITCHELL’S BALLADS, “Shadows and Light,” begins, “Every picture has its shadows and it has some source of light.” A chorus responds, “Blindness and sight.” As with so many of the economic signposts we’ve seen over the past several weeks, there’s a little bit of darkness and a little bit of light in each. Take Friday’s consumer spend- ing and income report, for instance. The pessimists sawApril’s spending decline of 0.1% as a signal that the economic expansion is in trouble. The optimists noted that despite that decline, spending actually rose on a year-over-year basis to the fastest rate in two years. On the income side of the ledger, while April income growth was the slowest we’ve seen this year, the year-over-year number was a pickup from the prior two months. The same goes for inflation. Inflation hawks, who tend to see signs of an overheating economy and loose monetary policy around every corner, probably took Friday’s report on PCE inflation, which is the Fed’s favored metric, as proof we are about to suffer the winds of rapidly rising prices. At 1.6% year over year, it was the highest since Nov. 2012, and core PCE inflation, at 1.4%, was the highest since March 2013. Inflation doves aren’t so worried about these numbers. I’m in the camp that says higher inflation is a good thing, so long as it’s not runaway inflation, which these numbers absolutely do not suggest. What does all this mean for the markets? Again, you can take either side of this argu- ment. As May came to a close, Merrill Lynch’s strategists were writing that the summer would bring further gains followed by a “nasty correction.” Despite trying to cut my sodium intake, I take all of these prognostications and crys- tal-ball predictions with a massive amount of salt. As I’ve often said, you can find fairly

AVERAGEVANGUARD INVESTOR* May: 1.7% YTD: 4.2%

-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 May Close: 16717.17

14000 14900 15800 16700 17600

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STANDARD & POOR’S 500 May Close: 1923.57

1500 1600 1700 1800 1900 2000

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NASDAQ COMPOSITE May Close: 4242.62

3000 3300 3600 3900 4200 4500

SEE SHADOWS PAGE 3 >

FUNDS FOCUS > SECTOR Riding Through the Storms

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3-MO.TREASURY BILLYIELD May Close: 0.03%

PICK THE RIGHT SECTOR AT THE RIGHT TIME, and there are some outsized returns to be had. But focus too much of your money on the wrong sector, and all you’ll have are regrets. Despite its philosophy of diversification, diversification, diversification, Vanguard gives investors plenty of ways to play the sector game. The question is, should we? I wouldn’t categorically say you can’t make money in sector funds—you can, but let’s get a couple of things out of the way. First, I can’t tell you which market sector will lead the way (or fall behind) in any given year, much less any month or quarter. Nor do I know anyone that can do this with any consistency. Check out the crazy quilt on page 12, where I’ve plotted the returns for

0.00% 0.02% 0.04% 0.06% 0.08%

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10-YR.TREASURY NOTE YIELD May Close: 2.46%

2.0% 2.3% 2.6% 2.9% 3.2%

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SEE FOCUS PAGE 12

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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 24, NO. 6 The Independent Adviser for Vanguard Investors and FFSA are completely independent of The Vanguard Group, Inc.