(PUB) Investing 2015

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The Independent Adviser for Vanguard Investors • April 2015 • 13 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
Bond fund. This isn’t a money market
fund, so the NAV will fluctuate, but
those changes should be minimal, and
you’ll pick up more yield than in a
money market fund.
Gold, not Treasurys, is considered
by some to be the ultimate safe-haven
asset. While I have my doubts about
the metal itself being of much use in
an end-of-days-type scenario, the only
way to “play” the metal at Vanguard is
through Precious Metals &Mining, so
let’s focus our attention there. This fund
has been anything but a bastion of safe-
ty. In fact, six years into a bull market
for stocks, this fund is fast approaching
a new record maximum drawdown.
The fund’s previous max drawdown of
-68.9% was reached in November 2008
in the midst of the credit crisis. It never
recovered that loss, climbing to within
8.5% of its previous high at the end of
April 2011 before tumbling again. As
of the end of March, it was at -67.1%.
The chart on this page of the fund’s
maximum drawdowns over the past
nearly 25 years isn’t exactly a picture
of safety and smooth sailing.
Defensive Stocks
Another way to tackle this question
of how to stick with stocks through all
the noise is to seek out stock funds and
managers with a history of doing rela-
tively well in bear markets. If, when the
markets sell off, your portfolio sells off
less, it may be easier for you to stay the
course. Dividend Growth, managed
by Don Kilbride, and Health Care, run
by Jean Hynes and the health care team
at Wellington, are two of my longtime
favorites and have weathered past mar-
ket storms quite well. In the financial
crisis, as 500 Index fell -51.0% from its
prior peak, Dividend Growth’s maxi-
mum decline was -41.5%, and Health
Care’s steepest loss was -33.2%.
Global Minimum Volatility is
another stock fund that offers the pros-
pect of a relatively shallow decline dur-
ing bear markets. Take a look at page 6
2/932/952/972/992/012/032/052/072/092/112/132/15
PreciousMetals &Mining
Losing Big Again
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
for a deeper dive into this newish fund.
Keep in mind that these funds, while
showing defensive characteristics, are
still baskets of stocks—it is reasonable
to expect them to be down less, but if
stock prices are falling, they will still
decline, too.
Engage Less Often
Adding a “flight-to-safety” fund
like Short-Term Investment-Grade to
a stock-heavy portfolio can reduce the
intensity of your flight response, as
you’ll have already prepared for some
trouble ahead of time. But another
strategy to consider is that you do have
some control over how often you have
to wrestle with that response.
When you watch (or read) the finan-
cial media, you are constantly bom-
barded by forecasts and warnings of
danger ahead. If you simply cut back the
frequency with which you engage the
financial media outlets (or better yet, cut
them off entirely), your flight-or-flight
instinct will be triggered far less often.
And, as we saw earlier, most headlines
don’t actually warrant a response in your
diversified portfolio. Rather than having
to resist the strong impulse to flee every
time you turn on CNBC, you can avoid
facing the response altogether by not
tuning in at all. n
A RECENT STUDY by Standard &
Poor’s that has been getting a lot of
play in the press over the past couple
of weeks purports to show that active
management can’t succeed.
But this study and others like it
choose expediency over experience.
Investors who blindly follow their con-
clusions will be the poorer for it. I
probably don’t have to remind you of
that, since you know how the Model
Portfolios in this newsletter, based on
active management, have creamed the
stock market indexes over time.
Actively managed mutual funds have
come increasingly and repeatedly under
fire, as researchers trot out studies show-
ing that, en masse, mutual funds run by
human portfolio managers don’t per-
form as well as the stock market. Those
that do outperform, they say, cannot be
chosen in advance, because the winners
in the performance race are random.
The takeaway from these studies is
that investors should simply buy index
funds to satisfy their portfolio needs,
sit back, and let the markets hand them
whatever returns they produce.
The studies may be correct on their
face, but they are wrong in their conclu-
sions. First, almost all studies of mutual
fund performance base their findings on
static time periods, such as the five-year
period ending in the most recent quarter,
or the six-year period since the start of
the current bull market. The presump-
tion is that the investor has invested his
or her money at the start of this period
and simply stayed the course.
Nothing could be further from real-
ity. Consider the typical investor in a
company-sponsored 401(k) retirement
account. Contributions taken from bi-
weekly paychecks are added to the
workers’ accounts regularly for months
at a time. Hence, some of that money
may be invested for five years from
January through January, but more dol-
lars will be invested over other time
periods from, say, February through
February, or April through April. To
ACTIVE MANAGEMENT
Buy the Manager, Not the Fund
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