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The Independent Adviser for Vanguard Investors
•
January 2015
•
13
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tors expect from a core bond fund. I
continue to prefer
Intermediate-Term
Investment-Grade
, which focuses on
corporate bonds, where a higher yield
can offer a little more protection when
interest rates rise.
A lot of ink was spilled over the
Fed’s final statement in 2014 as market
pundits and participants tried to interpret
the importance of three words: “patient”
and “considerable time.” Rather than
get bogged down in the nuances, to me
this is a small step toward the Fed rais-
ing the fed funds rate while still giving
itself plenty of wiggle room to adjust.
With the U.S. economy expanding, as
discussed above, it is only natural that
the Fed continues to reverse the emer-
gency policies it put in place during
the financial crisis and tries to return to
what it calls a “normalized” interest rate
environment.
A higher fed funds rate doesn’t auto-
matically translate into higher yields
for all bonds, though it does mean
that money market fund investors may
finally earn a few pennies in 2015.
Wrap-up
It’s only natural to review your port-
folio and re-evaluate your investment
plan as the new year kicks off. Again,
let me warn you to keep your recency
bias in check. If you’ve got a diversi-
fied or balanced portfolio, you may be
wondering why you shouldn’t just sell
everything and buy 500 Index. And you
may be kicking yourself for not piling
into long-maturity bond funds. But the
recent past may not repeat in the year
ahead—so if you’ve got a long-term
plan, stick with it.
A quick rundown on a few of our
top holdings: A couple of FFSA mem-
bers have complained that they are
ready to throw in the towel on Don
Kilbride’s
Dividend Growth
after lag-
ging 500 Index by 0.7% a year over
the past five years. This would be a
huge mistake. Just because investors
haven’t rewarded his strategy of late—
Dividend Appreciation Index lagged
500 Index by even more (1.4% a year)
over that stretch—Kilbride’s approach,
which he consistently plies, shows its
stripes through a full market cycle. And
if U.S. stocks have a bumpier ride in
2015, you’ll be glad to have Dividend
Growth as ballast.
Health Care
and the PRIMECAP-
run funds have powered the returns
of my
Model Portfolios
over the past
three years. Health Care has more
than doubled, returning 111.8%!
Capital Opportunity
doubled too,
Yield Predicts
Longer-TermReturns
11/94
11/96
11/98
11/00
11/02
11/04
11/06
11/08
11/10
11/12
11/14
SEC Yield
Return Over Next 5 Years
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Changing Leadership
11/96
11/98
11/00
11/02
11/04
11/06
11/08
11/10
11/12
11/14
rising line
= U.S. stocks outperforming international stocks
0.90
1.10
1.30
1.50
1.70
1.90
2.10
gaining 100.8% over the same peri-
od (
PRIMECAP Odyssey Aggressive
Growth
did even better, return-
ing 118.8%). The management team
behind these funds is among the best
in the business, and if you don’t own
them already, well, I don’t know what
you are waiting for. However, keep
your expectations in check—returns
approaching 30% annually, which is
what these funds have delivered over
the past three years, aren’t sustainable.
Focus on the long term, something
which has done all FFSA members
well over the 24 years that I’ve been
writing this newsletter and recommend-
ing which Vanguard funds to buy and
which to avoid. With annualized returns
since inception ranging from 12.2% for
the
Growth Model Portfolio
to 9.0% for
the
Income Model Portfolio
, compared
to returns of 10.1% for 500 Index and
6.2% for Total Bond Market over the
same period, I’d say taking the long
view has paid off.
n
2015 MAY BE UNDERWAY,
but don’t
close the door on 2014 just yet, espe-
cially if you haven’t reached the contri-
bution limits on your retirement savings
accounts.
I bring this up each new year because
it bears repeating that tax-deferred
accounts such as 401(k)s, 403(b)s and
IRAs are unmatched when it comes
to saving for retirement, especially
for those who regularly add to their
accounts through the markets’ ups and
downs. While there will always be a
lot of debate around different retire-
ment spending strategies, I don’t think
there’s much to argue about when it
comes to saving. One of the best ways
to ensure you can live the lifestyle you
desire in retirement is to save long and
hard, well before you get there.
How much is enough? Well, that’s
going to depend on your individual
situation. Fidelity offers a guideline
for retirement savings that suggests
you need to have put away eight times
your annual income by the time you
hit age 67 to have a shot at 85% of
RETIREMENT
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