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A PUBLICATION OF FUND FAMILY SHAREHOLDER ASSOCIATION • VOL. 25, NO. 9
China Syndrome II
IN JULY 2010,
I led this newsletter with a story titled
China Syndrome
. At the time, investors
were giddy over the prospects for fairer trade and higher stock prices as a result of China’s
announcement that it would let its currency, the yuan, begin to float higher against the dol-
lar. Morgan Stanley said they expected China stocks to rally 65% over the coming year.
Not quite. The Shanghai market gained 1.4%, and optimism about China, its growth
prospects and its stock market cratered. Sound familiar? By the end of August this year,
Shanghai’s market, up just shy of 60% for the year in June, melted down 37.9%.
Sparking the fireworks was a surprise move to devalue the yuan. The magnitude of the
change was small—only 4% or so—but it caught investors off guard, raising uncertainty
about China’s economic growth prospects—something investors abhor. A quick aside on
China’s currency move: You may remember a video making the rounds on the web warn-
ing of a looming dollar collapse as the yuan became a reserve currency. Well, the IMF
has tabled that idea for at least a year. So much for trading on irrational currency fears.
U.S. investors reacted to this China syndrome by selling stocks, which fell into their
first official correction since 2011. The Dow was down 14.4% from its May 19 high
before it rebounded to end the month only 9.7% below it, while the S&P 500 index hit
a low 12.4% below its own May 21 high, then rebounded to just 7.4% below the high.
Volatility, both down and up, saw the Dow and the S&P moving in wide ranges intraday.
This recent focus on China, supplanting our focus earlier this year on Greece, has again
raised the bears from their slumber. But as Jeff and I have been saying over the past
The Independent Adviser for Vanguard Investors
and FFSA are completely independent of The Vanguard Group, Inc.
FUNDS FOCUS
> TAXABLE BONDS
Still a Role to Play
WHEN IT COMES TO BONDS,
Jeff and I have covered a lot of ground over the past two
months. The primary aim was to educate, giving you the knowledge you need before
the Chicken-Little headlines and articles about the coming bond bust start to make an
appearance, so you can stick with your long-term investing plan. As I’ve said many
times, rising yields are good for long-term investors’ portfolios. Still, there is one topic
we both want to emphasize and explore more thoroughly before applying all we’ve
talked about to Vanguard’s stable of bond funds.
Despite the low yields investors face today and the expectation for rising rates in the
future,
bonds maintain a critical role as a volatility buffer
.
The past three decades have been kind to income investors whether they bought
individual bonds or bond funds.
Total Bond Market
compounded at a 7.5% rate in the
DOW JONES INDUSTRIALS
August Close:
16528.03
STANDARD & POOR’S 500
August Close:
1972.18
4200
4500
4800
5100
5400
A J JMAM F JD NOS
NASDAQ COMPOSITE
August Close:
4776.51
0.00%
0.02%
0.04%
0.06%
0.08%
A J JMAM F JD NOS
3-MO.TREASURY BILLYIELD
August Close:
0.00%
1.6%
2.0%
2.4%
2.8%
3.2%
A J JMAM F JD NOS
10-YR.TREASURY NOTE YIELD
August Close:
2.20%
16000
16600
17200
17800
18400
A J JMAM F JD NOS
1800
1900
2000
2100
2200
A J JMAM F JD NOS
AVERAGEVANGUARD INVESTOR*
August:
-4.5%
YTD:
-2.1%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
AJ JMAMF JDNOS
*See the footnotes on page 2.
Funds Focus: Taxable Bonds............................................. 1
Model Portfolios................................................................ 2
Performance Review.................................................... 8-11
How Do You Spell “Security”?........................................ 13
A Muni Index Fund at Long Last?................................... 14
Horizon Job..................................................................... 15
More Funds Go Quarterly............................................... 15
Dan’s Do-It-Now Action Recommendations.................... 16
S EPT EMBER 2015
SEE
CHINA
PAGE 3
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S P E C I A L E X P A N D E D 1 6 - P A G E I S S U E
>
SEE
FOCUS
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