(PUB) Vanguard Advisor

for Marketwatch.com , recently cited an investor survey that showed too many people have unrealistic expectations for the returns they’ll earn over time and the risks they’ll take. I’ve seen this before. Almost 20 years ago, not long after my partners and I started our investment management firm, Adviser Investments, I received a call from a potential new client who said his objectives were fairly simple: He wanted to match the stock market’s return with about half the risk. Granted, it was 1994 or 1995, and a bull market was gathering a head of steam that wouldn’t end for at least another five years, but sheesh! I told the man on the phone that if he could find someone guaranteeing those kinds of returns, I’d close up shop and give him my money to manage. As you might imagine, he never called back. (Note: Adviser Investments is a separate company neither owned nor operated by InvestorPlace Media, the publisher of this newsletter.) Just a quick update on the October Hot Hands fund, Capital Opportunity : Since making the selection at the end of October, Capital Opportunity has gained 11.8% versus Total Stock Market’s 10.2% rise, which puts the Hot Hands fund on the right track. We’ll have to wait to see how the next five months play out. And finally, the closing to Joni Mitchell’s “Shadows and Light” is a long and drawn-out chorus of, “Wrong and right.” It’s worth remembering as we round out the first half of 2014 and the midyear predictions of what is to come begin to flow from Wall Street to Main Street. Some may be right, but most will be wildly wrong. I hope you’re enjoying the beginning of summer. n

pretty reasonable. A 2.46% yield on a 10-year Treasury, the benchmark for safe and secure investing, means that barring a nuclear holocaust, you’ll only earn 2.46% per year over the next 10 years. Period. Yes, you’ll get your principal back, but its real value will be eroded by inflation. In 10 years, $10,000 just isn’t going to buy you what it buys today. Last year, the stock market returned better than 32%. Depending on the risk you were willing to accept, our Model Portfolios generated returns ranging from 18.6% to 34.2% (though I’ll note that the Growth Model Portfolio remained less risky, overall, than the stock market with a since-inception risk of 0.97, or 97% of the market’s risk). The bond market lost 2.0%. Compared to 2013, it may feel like we’re treading water this year, but so far, returns are on pace for a decent out- come. Total Stock Market’s 4.3% gain has it on pace for a 9% or 10% annual return—about average. While the markets may appear calm on the surface, there are definitely some nasty currents moving below. Investors’ continued risk-aversion is illustrated in Treasury bonds having jumped to sit among the top-performing assets this year. Long-TermTreasury ’s 12.6%gain outpaces even Long-Term Investment- Grade ’s 10.9%. And although the Dow and S&P have been hitting new highs, small stocks have been flirting with a 10% correction. It’s only a matter of time before large ones do, too. Unfortunately, too many investors are sabotaging their success through attempts at market timing and poorly conceived investment plans (if you can call them that). Chuck Jaffe, who writes

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well-reasoned but wrong arguments on both sides of just about any issue when the stakes are as high as in the stock and bond markets. Returning For all the talk of corrections and bear markets (see the story on page 6 to find out how common they truly are), stocks have put in positive returns every month since January. Total Stock Market gained 2.2% in May, and 500 Index was up 2.3%. Total International Stock has gained 4.0% this year, benefiting from rebounds in Europe, where the German DAX hit multiple all-time highs in May, and strength in some emerging markets. Emerging Markets Stock Index is up 3.8%. Japan’s market is the weak kit- ten in this year’s litter, down 10.2% as Prime Minister Abe’s reforms have yet to transform his economy or markets. May also saw 500 Index absorb all the assets in Tax-Managed Growth & Income , which was finally closed, following the lead of Tax-Managed International , which was shuttered in April. Are stocks expensive? Well, yes and no. On a historical basis, the U.S. equity market is fairly valued, with a price-earnings multiple of 19.1 on the S&P 500 compared to an average of 18.9 over the past 50 years. Using another metric, the Shiller Cyclically Adjusted PE Ratio (CAPE), the market is definitely richly valued, with a CAPE of 25.5 compared to an average of 19.6 over the same period. On the other hand, one look at alter- natives like bonds makes stocks look

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The Independent Adviser for Vanguard Investors • June 2014 • 3

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