(PUB) Investing 2015

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The Independent Adviser for Vanguard Investors • September 2015 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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month in our Hotlines, and in our com-
ments to the press, the focus on China
is over-done. Our exports to China
account for less than 1% of U.S. GDP,
so the trade impact of a weaker yuan
isn’t a big one for us. Yes, it has an
effect on some of our exporters who
may lose market share in other parts
of the globe, but here at home, where
we trade in dollars, the economy is
strong: GDP was marked up to a 3.7%
growth rate in Q2 from the preliminary
estimate of 2.3%; the housing market is
picking up again; consumers are spend-
ing; incomes are on a slow-growth
trajectory; job growth is strong; and
interest rates remain low and accom-
modative.
Ah, yes, interest rates. That’s the
other topic that has the pundits in a
lather. Whether the Federal Reserve
decides to hike the fed funds rate from
0.25% to 0.50% or so in September
or December, or even holds off until
2016, doesn’t really matter despite the
dire predictions of an interest-rate con-
flagration. Rates remain low and will
continue to remain low whether they
go up 25 basis points or even 100. The
takeaway from a Fed rate hike should
be that policymakers feel there is suffi-
cient evidence of sustainable growth in
the U.S. economy to support it. Period.
And, by the way, higher rates will also
begin to re-arm the Fed to fight any
future bouts of economic weakness.
The worriers made quite a lot over
the fact that the stock market fell
almost 15% (something that I have
warned could happen at any time), but
no one seemed to register that between
the last correction in 2011 and the
CHINA FROM PAGE 1 > beginning of the current one, the Dow
had risen about 53% and the S&P 500
had risen 75%. Giving back less than
10% as of month’s end seems like a
pretty good trade for four years’ worth
of investing.
Some of our favorite funds, like
Health Care, PRIMECAP Core and
Selected Value, were all down less
than Total Stock Market’s 6.0% loss
for the month, while International
Growth lagged Total International
Stock by just 1.0%. Though the abso-
lute returns for the year are nothing to
write home about, with Model Portfolio
losses ranging from 1.0% to 1.8% for
the year to date, they remain well ahead
of the benchmark market index funds.
Market declines, whether they are
slow and drawn out or as fast and furi-
ous as August’s, can be trying times for
investors. But those temporary market
setbacks only become permanent losses
if you deviate from your long-term plan
and sell to cash. Here are a few ideas
that help me stay the course, if not buy
more, when markets are stumbling.
First, I accept that market correc-
tions and bear markets are going to
happen, so I prepare for them ahead of
time. In part, this means having enough
spending money set aside that I’m not
reliant on the market for my day-to-day
needs. But I also try to prepare emo-
tionally. Remember when I asked back
in May if you were ready to see the
Dow at 16460? Well, the Dow closed
at 16459.75 on August 21 and slightly
above that at August’s end.
Second, I know market corrections
create opportunity for the top-notch
managers picking stocks for you and
me. How do the portfolio managers
take advantage of these opportunities?
If a manager is sitting on cash, then
it’s pretty easy to use that money to
do some buying. But more likely, if
a manager sees a great opportunity in
the market, he or she may “upgrade”
the portfolio, selling an existing hold-
ing that is less attractive than the one
spied during a volatile market, when
the stock babies are being thrown out
with the market water.
Finally, I try to remember that sharp
market declines have been a prelude to
gains. Since the second half of 1983,
which is as far back as my daily pric-
ing data on 500 Index goes, there have
been 54 days when the fund fell 3.5% or
more in a single trading session (it fell
3.9% on August 24). The average return
over the ensuing 12 months: 21.7%.
Take a Bow
You may have missed it, but trad-
ing finally began in August for both
Alternative Strategies and Tax-
Exempt Bond Index. The former isn’t
something you can invest in directly,
unless you are a client of Vanguard’s
Institutional Advisory Services, but it
will be found in Managed Payout. The
latter is the long-awaited muni-bond
index fund that Vanguard began seed-
ing with assets before releasing it to the
public. You can find out more about the
muni fund on page 14.
While PrimeMoneyMarket’s yield
first moved off 0.01% in June, it contin-
ues to climb, hitting 5 basis points, or
0.05%, in late August. Federal Money
Market has also come off the mat and
has reported a 0.02% yield since last
Tuesday. A Fed rate hike would likely
breathe some more life into money
market yields—something I think all of
us would cheer. n