(PUB) Investing 2015

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The Independent Adviser for Vanguard Investors • January 2015 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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2014 Scoreboard
End 2014 Change 2014
Dow Jones Ind. Avg. 17823.07 7.5%
S&P 500 2058.90 11.4%
NASDAQ 4736.05 13.4%
Russell 2000 1204.7 3.5%
Tokyo 17450.77 7.1%
London 6566.09 -2.7%
Frankfurt 9805.55 2.7%
Hong Kong 23605.04 1.3%
Sao Paulo 50007.41 -2.9%
Gold (oz.) $1,184.10 -1.5%
Oil (bbl) $53.27 -45.9%
Nat. Gas (MMBtu) $2.93 -30.8%
3-mo. T-bill 0.04% down 3 bp
10-yr. T-bond 2.17% down 86 bp
30-yr. T-bond 2.75% down 121 bp
Fed funds 0%–0.25% no change
Euro $1.2104 -12.0%
Well, I don’t know if Vanguard
rethought it after we posted the Hotline,
but they changed the article to a much
more docile, and less “money-market
alternative” description, simply say-
ing the new fund would help investors
diversify the duration of their port-
folios. I can’t imagine a whole lot of
Vanguard’s investors think in terms
of diversifying their duration, but I do
think they probably would understand
earning a higher yield than a money
market.
On another note, Vanguard lowered
the minimum on Market Neutral to
$0. Yes, that’s right, $0. But there’s a
catch: You have to be an institution or
work with a financial adviser to qualify
because, as Vanguard puts it, “given the
distinctive characteristics of the fund …
[it’s] not appropriate for retail investors
broadly.” So, assuming Market Neutral
is appropriate for someone, how is it
that it’s only amassed a piddling $282
million in total assets? Remember, this
was a fund available to sophisticated
investors willing to pony up at least a
quarter of a million dollars. They must
be savvy, right?
Vanguard adopted Market Neutral in
November 2007 when it had almost no
assets. Building it up to $282 million
would be a big success for some com-
panies. But over the seven years through
November 2014, the fund gained a total
0.7% return. No, not an annualized
0.7%, but a cumulative return of 0.7%.
Vanguard’s lowest-return retail money
fund, Admiral Treasury Money
Market, gained 2.8% over the same
period. Even the struggling Money
Market Annuity is up 2.5% over the
last seven years. Only a handful of
foreign equity funds, including Total
International Stock, down 4.2%, and
Energy, up 0.4%, have done worse.
Why the “zero down” sale on
Market Neutral? Vanguard says it wants
to “make the fund more accessible to a
wider range of sophisticated investors.”
Good luck with that.
Now that the new year is here, the
“January Barometer” will soon be in
heavy rotation. It has many adherents,
which is really too bad because it scored
a three-peat of failure last year. Why
three? Well, the January Barometer has
three definitions depending on who
you ask. The first is that January’s
stock market performance predicts the
market’s performance for the year. The
second is that January’s performance
predicts the performance of the stock
market over the following 11 months of
the year. And the third is that the first
five trading days in January tell you
how the year is going to turn out. You
may or may not remember that during
the first five days of January 2014, the
Dow fell 0.7% and the S&P 500 fell
0.6%. For the entire month of January,
the Dow dropped 5.3% and the S&P
500 index fell 3.6%. Pretty ominous, if
you ask me.
What’s happened since? Well, the
Dow gained 7.5% for the year, and
was up 13.5% from Feb. through Dec.
The S&P 500 was up 11.4% and 15.5%
over the same periods. So much for
great market indicators. By the way, if
anyone tells you that 2015 is going to
be a great year because years ending in
5 are bullish, ask them how large their
sample is—10 years ending in 5 over
the last century doesn’t mean much.
I think there are plenty of reasons to
believe we can continue to mint gains
in 2015, but it isn’t because the year
ends in 5, or because January is an up
month (if it is). As you’ll read through-
out this issue, my best advice for the
coming year is to stick with a well-
thought out plan, as you and I have
now for 24 years running.
By the way, I’ll have a full run-
down on the annual Hot Hands trad-
ing strategy and its record in the next
issue. However, for those following
the strategy, the 2015 Hot Hands fund
is PRIMECAP Core. It’s closed to
new investors, but you can still buy
PRIMECAP Odyssey Stock (POSKX)
to mimic the Vanguard option. After
a terrific run in 2013, last year’s Hot
Hands choice, Explorer, definitely
didn’t cut it for 2014, as small-caps—
and small-cap growth stocks in par-
ticular—lagged. The fund gained just
3.9%, compared to returns of 13.5% for
500 Index and 12.4% for Total Stock
Market. I’ll have more to say on that
next month. n
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