(PUB) Investing 2016

The Independent Adviser for Vanguard Investors

•

September 2016

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FOR CUSTOMER SERVICE, PLEASE CALL

800-211-7641

leveraged strategies such as these, but

that’s another story.)

However, that added liquidity and

trading flexibility comes with some

costs. When you trade ETFs, you aren’t

buying or selling at net asset value, as

you do with typical mutual funds. The

price of an ETF can become unhinged

from the value of its holdings—called

trading at a premium or a discount. Bid-

ask spreads (the difference between the

price at which the broker is willing to sell

and the price the broker is willing to buy

at) mean that you, the investor, could end

up paying slightly more or less than net

asset value, but more likely you’ll pay

slightly more or sell at slightly less.

And some investors may pay a com-

mission to trade ETFs. Vanguard does

not charge a commission if you trade

Vanguard ETFs through its brokerage

platform, but you may face commission

charges when trading ETFs elsewhere.

Also, mutual funds allow you to

buy fractional shares, making it easy to

invest a full $10,000 and to set up auto-

matic investment plans. With ETFs, you

have to buy whole shares, so you may

not be able invest that entire $10,000.

If the ETF you want to buy is selling

at $53.41 per share, you’ll only be able

to buy 187 shares for $9,987.67. The

remaining $12.33 doesn’t get invested.

So yes, ETFs are more liquid, but

you have to ask yourself if the benefit of

trading throughout the day is (a) worth

the added complexity and (b) actually

something that you need. If you are a

trader, maybe that extra liquidity is nec-

essary. But if you’re a long-term inves-

tor, measuring success in years, not days

or hours, it is hard to see how being able

to trade during the day helps—though I

can see how it might hurt.

If you’re a trader, ETFs have been a

nice addition to your toolkit. But inves-

tors shouldn’t believe the rumors that

mutual funds are a dying breed. In fact,

for many investors, an index mutual

fund may actually be the smarter option

over an ETF.

OCTOBER’S JUST AROUND

the corner,

and I want you to be prepared for all the

dire warnings that will herald its arrival.

You remember October, don’t you?

In 1987, we had the great crash that took

the Dow down 508 points (or 22.6%)

on what came to be known as Black

Monday.

500 Index

fell 21.7% for the

month. And ever since then, it’s been

“common wisdom” that Octobers were

bad for your health and your wealth.

Of course, the minute everyone

agreed that Octobers were to be avoid-

ed, well, they turned out not to be so

bad, with positive returns in 19 (68%)

of the past 28 Octobers.

October 2008 may have set the tone

for further worries about this particular

month. Following on Lehman Bros.’

September 2008 bankruptcy, the credit

markets seized up, the Fed slashed

interest rates, TARP was unveiled

and the stock market dove 17.6% in

October 2008, the single worst month

of the entire 2008 to 2009 bear market.

500 Index dropped 16.8% that month.

It sounds pretty dismal. But I’ve got

some good news and some bad news. The

good news is that October isn’t the worst

month of the year for investors. The bad

news is that the worst month is the one

that’ll get here sooner—September.

Since 1987, 500 Index has aver-

aged a 1.8% gain during October.

Septembers are another story. Over the

same period, 500 Index has averaged a

0.3% loss during September.

Over just the past 10 years, for

all Vanguard equity and balanced

funds that have been around that long,

the average September return was a

fractional gain of 0.1%. The average

October return: 1.0%.

I’m sure you’re wondering if this

means that, given the recent market

highs, we should sell everything today

and buy it back after September is over?

Absolutely not. I’m not a market timer,

and you shouldn’t be, either. Market tim-

500 Index September Returns

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

-20%

-15%

-10%

-5%

10%

15%

ing costs you money (taxes), wasted ener-

gy, anxiety and pain—and the occasional

redemption fee. And you never know

when you’ll have a September like the

one in 2010, when the average Vanguard

fund gained 9.2%, or an October like the

ones in 2011 or 2015, when the average

fund was up 10.8% and 6.2%, respective-

ly. Monthly returns are random, despite

what the media tells you.

So remember, in the next few weeks

you’re going to be hearing plenty about

how terrible October will be for inves-

tors. Armed with the numbers I’ve just

laid out, and prepared for September

rather than October, you may sleep a bit

better at night. I know I will.

500 Index October Returns