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The Independent Adviser for Vanguard Investors
•
January 2015
•
7
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
I continue to hold
International
Growth
in my
Model Portfolios
as a
diversified approach to foreign markets,
with top-notch managers helping to
separate the winners from the losers. If
you are an aggressive investor, you may
even want to consider allocating from
what has done well (U.S. stocks) to
what hasn’t done well (foreign stocks).
It is only a question of when, not if,
foreign stocks will take the performance
baton from U.S. stocks. We could see
the turn in 2015, though we won’t know
it’s happened until months or years later.
BondsThat Attract
Recency bias was in evidence
when I and countless others sug-
gested that rising yields at the end
of 2013 presaged even higher yields
in 2014. Wrong. Interest rates did
just the opposite, with the yield on
the 10-year Treasury falling from
3.03% to 2.17% by year-end. Last
year proved that despite low starting
yields, bonds can still deliver strong
returns, especially if those bonds have
long maturities. Consider that
Long-
Term Treasury
entered the year with
return for the period versus a 1.9% loss for
Emerging Markets Stock
Index
…TOP FUND:
Precious Metals & Mining
, 7.6%, WORST:
Market Neutral
, -1.6%.
JULY:
U.S. stocks end the month at a loss for the first time since
January, and the bears come out of hibernation once again.
Total Stock
Market
declines 2.0%…The SEC decides that consumer money market
funds will be allowed to maintain a $1.00 NAV despite the actual daily
fractional changes to values, but institutional funds will have to let their
NAVs float, a win for you and me…Vanguard removes the front-end and
back-end loads on
World ex-U.S. SmallCap Index
…Updated reports
show Vanguard’s costs for running
500 Index
and
Total Stock Market
,
including all share classes plus the Institutional versions, at $400 million,
up from $16.8 million in 1993…A lawsuit filed in 2013 alleging Vanguard
has manipulated its earnings and underpaid taxes is unsealed in New
York…TOP FUND:
Extended Duration Treasury ETF
, 1.5%, WORST:
Utilities Index
, -6.9%.
AUGUST:
While bonds are strong, so are stocks, and the S&P 500
index hits multiple record highs….Yields drop, with the 10-year Treasury’s
falling from 2.56% to 2.34% at month’s end…The U.S. begins an aerial
bombing campaign against ISIS in Syria…Africa’s Ebola crisis becomes
more pronounced…Vanguard begins a push to consolidate all fund inves-
tors’ accounts into a single brokerage account…TOP FUND:
Extended
Duration Treasury ETF
, 7.1%, WORST:
Telecom Services Index
, -0.6%.
SEPTEMBER:
On the last day of the month, Vanguard surprises
with a special capital gain for
Health Care
. The reason: A “corporate
action…initially classified as a non-taxable event” was deemed taxable.
No further explanation is given…
Total Bond Market
and its many share
classes take the title of largest bond fund in the world as assets continue
to gush from PIMCO’s Total Return Fund when its manager, Bill Gross,
abandons ship…In the largest initial public offering in history, Alibaba
debuts on the NYSE and sees its first trade at $92.70, 36.3% above the $68
offering price…An insider reports that Windsor II’s Jim Barrow will make
his retirement official during the summer of 2015…Vanguard causes confu-
sion when it changes something that causes Quicken financial software to
stop working with the company’s data…TOP FUND:
Consumer Staples
Index
, 0.3%, WORST:
Precious Metals & Mining
, -13.5%.
OCTOBER:
Ebola and ISIS fears ratchet up, and small stocks cor-
rect early in the month, with the Russell 2000 closing 13.2% below its
March 2014 high on the 13th. But large stocks narrowly miss a 10%
correction and rebound…Oil prices continue falling on worries about
global demand.
Energy
, down 7.4% in September, falls another 5.1%
in October…Gold prices also tumble, closing the month under $1,200
per ounce.
Precious Metals & Mining
loses more than one-quarter
of its value in September and October…Vanguard experiences website
“failures,” possibly as it begins a transition to a newer design slated
for launch before year-end…TOP FUND:
REIT Index
, 9.9%, WORST:
Precious Metals & Mining
, -13.7%.
NOVEMBER:
The GOP takes control of Congress by winning
the Senate from the Democrats…Vanguard unveils an online “swag
shop” selling logoed T-shirts, golf-club covers and the like…Plans
for
Ultra-Short-Term Bond
are revealed, and Vanguard waffles on
whether it is or isn’t a substitute for a money market fund…Q3 GDP is
revised up to give the U.S. economy the best six-month gain in over a
decade…Oil prices plummet, and Vanguard’s two energy sector funds
dive…TOP FUND:
Consumer Discretionary ETF
, 5.6%, WORST:
Energy Index
, -9.3%.
DECEMBER:
Oil prices continue to drop, putting additional pres-
sure on Russia, where the ruble sinks despite a hike in the policy interest
rate to 17.0%…Pressure is also on any emerging economies dependent
on oil revenues, and
Emerging Markets Stock Index
and
Emerging
Markets Select Stock
drop 5.0% and 6.1%, respectively…An alleged
North Korean hack of Sony Pictures’ computers reveals damning emails
and financial data, but more importantly causes the studio to halt, then
restart the release of
The Interview
. The Obama administration promises
retaliation while opening doors to another communist country, Cuba…A
steep but short market decline turns around as the Fed says rate hikes
are still in the future, and the Dow crosses 18000 for the first time…
Vanguard lowers the minimum on
Market Neutral
to $0 (for financial
advisers) to gin up interest in a laggard offering…Vanguard also says
it will launch a strategy to encourage boards of companies it invests
in to better engage with shareholders. They should look in the mirror
first…TOP FUND:
Extended Duration Treasury ETF
, 5.3%, WORST:
Emerging Markets Select Stock
, -6.1%.
a yield of only 3.57% but returned a
total 25.3% as its yield declined to
2.51% at year-end.
It would be a mistake to look at
the bond market’s recent strength and
extend it forward into 2015. While a
bond fund’s return can and will vary
in the short term, the fund’s starting
yield is a good predictor of returns
over longer periods of, say, five years
or more. You can get a vivid example
of this in the second chart on page 13,
>
SEE
OUTLOOK
PAGE 12