In The Vanguard Winter 2016 › pdf › itvwinter2016.pdf · 4 In The Vanguard > Winter 2016 Can “superforecasters” see into the future? Philip Tetlock believes they can. His

Winter 2016

In The Vanguard®

In this issue

page 6

What you should

know about RMDs

The time to start planning

a strategy for taking your

IRS-required withdrawals

is well before you retire.

page 4

A professor and indexing fan

says investors can learn

from the best practices

used by “superforecasters.”

page 10

Vanguard Ultra-Short-Term

Bond Fund can be another

option for meeting your

short-term spending needs.

page 11

A new budget law affects

two Social Security filing

strategies that married

couples have often used.

Connect with Vanguard® > vanguard.com

As you study the markets, what two or three things will Vanguard especially focus on in the year ahead?

Mr. Buckley: In the United States, we’ll be watching the effects of “dovish” or slow tightening as the Federal Reserve finally moved off its near-zero interest rates. With such low rates, we’ve seen some distorted behavior in which companies seem more interested in buying back their own shares than investing in their businesses. We have also seen clients take far more risk than they have historically in reach of return.

Globally, all eyes will be on China. As its economy continues to slow down, can it brake that deceleration and achieve a high-6% growth rate? China is a tale of

two worlds. It’s dealing with overcapacity in its industrial sector and a high level of debt in the economy. Yet it also has a fast-growing consumer sector and a vibrant service economy. So the question is, will it be able to hand the baton from the old industries to the service sector?

Mr. McNabb: I would just add that when it comes to the Fed raising short-term rates, I think getting back to a more normal rate structure and environment in the long run will be a good thing. Obviously, over the short term, we’ll be watching for any potential disruptions. [For more about the Fed’s interest rate moves, see the article on page 5.]

On China, the only thing I would add is that as the world’s second-largest economy, it represents about 15% of world GDP. But that figure actually understates the country’s impact, because so many other economies have become, in part, dependent on what China buys. So, obviously, we’re paying close attention there.

What to expect in 2016? Vanguard’s CEO and investment chief share their views

A new year brings new questions—and fresh hope. What can investors look ahead to? And what’s on Vanguard’s radar? In The Vanguard sat down with Chairman and CEO Bill McNabb and Chief Investment Officer Tim Buckley to find out.

See Q&A WITH BILL MCNABB AND TIM BUCKLEY

on page 8

Bill McNabb Tim Buckley

2 In The Vanguard > Winter 2016

Market microscope

page 3

Broad global diversification goes beyond

holding just large-company U.S. stocks.

Managing your wealth

page 4

The best practices of “superforecasters”

could aid investors, a Wharton author says.

page 5

Maintaining perspective is important in

light of the Fed’s interest rate increase.

pages 6–7

Properly planning a strategy for your

required retirement-fund withdrawals can

help your portfolio and your tax situation.

Investing your money

pages 10-11

Funding near-term spending needs? Vanguard

Ultra-Short-Term Bond Fund is one option.


page 11

A new law has pared back the availability

of two Social Security filing strategies.

The Vanguard viewpoint

page 12

The time is ripe to review your investment

goals and whether you’re on track with them.

Contents

Vanguard reports lower expense ratios for many mutual funds and ETFs

For the 12 months ended August 31, 2015, Vanguard clients saved a total of $12.4 million as a result of lower expense ratios for multiple share classes of 23 mutual funds, including exchange-traded fund (ETF) shares of 21 of those funds.*

Vanguard reported expense ratio reductions for a range of share classes (Investor, Admiral™, ETF, Institutional, and Institutional Plus) in five fund categories: bond index, equity sector index, size/style index, social index, and actively managed equity.

“Vanguard continues to set the standard as the industry’s low-cost leader, reducing costs not just on a subset of products, but across our funds and ETFs,” said Vanguard Chairman and CEO Bill McNabb. “We have a track record of nearly 40 years of lowering the cost of investing for our clients, and we have every intention of continuing to lower the cost of investing.”

During the 2015 calendar year, Vanguard reported expense ratio reductions for 102 individual mutual fund shares, 28 of them ETF shares, including the latest round of reductions. In calendar year 2014, Vanguard reported lower expense ratios for 90 individual mutual fund shares, including 31 ETF shares. ■

* Vanguard calculation based on average fund assets over a 12-month period and the change in expense ratios through

fiscal year August 2015.

Fund news

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars.

Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage

account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying

and receive less than net asset value when selling.

All investments are subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future results. Diversification does not ensure a profit or protect against a loss.

Have questions about taxes? We can help

Feeling unprepared for tax season? Vanguard’s website offers various resources to help make your tax preparation easier. Visit vanguard.com/taxes for answers to frequently asked tax questions and to view the 2015 tax form schedule. Log on to your account to review your personal tax information in the secure Tax Center area.

Connect with Vanguard > vanguard.com 3

Market microscope

For true global diversification, look beyond the S&P 500 Index

Diversification is a powerful risk-management strategy that resonates with many investors. The old saying about not putting all your eggs in one basket has a simple, compelling logic.

Some investors believe that their portfolios are sufficiently exposed to international stocks through their holdings in large-capitalization U.S. companies such as the ones represented in the Standard & Poor’s 500 Index. After all, those companies generated almost half their sales outside the United States in 2014.*

But is that exposure a good substitute for a truly diversified global portfolio?

International exposure would be patchy

The near-even split of sales at home and abroad for S&P 500 Index companies is an average. When sales are broken down by sector, the picture looks much different.

Information technology has the most international exposure: IT companies based in the United States earned almost 60% of their 2014 sales in other countries. That shouldn’t come as a surprise; global demand is strong for the products and services of big technology names such as Apple, Microsoft, Google, and Facebook. Even in this sector, though, investors holding only U.S. companies would miss out on the potential diversification benefit of owning foreign stocks— both those with a global reach, such as South Korea’s Samsung, and more domestically focused businesses, such as Chinese e-commerce giant Alibaba.

In contrast, utilities and telecommunication services, which tend to operate regionally or nationally, were among the sectors that generated the least sales overseas. Investors holding only large-cap U.S. companies would have little international exposure to these industries, which together accounted for nearly 9% of stock market capitalization outside the United States as of the end of October 2015.

Domestic allocations would be uneven

Not only would a portfolio that exclusively holds large-cap U.S. stocks lack international diversifi-cation, but its domestic sector allocations would be out of step as well.

The figure on this page shows how the sector weightings in the S&P 500 Index don’t track with those of the global stock market (which includes U.S. companies). Some of the differences aren’t very large. But compared with a broadly diversified international portfolio, one based on the S&P 500 Index would have significantly more exposure to IT and health care stocks and considerably less to materials and financials.

The past doesn’t show what lies ahead

U.S. stocks have outperformed international stocks in recent years with help from the IT and health care sectors. But performance leadership can be quick to change, and that’s one reason why diversification is important. Large-cap U.S. stocks can give you a degree of exposure to international economic and market forces, but not to the same extent as a portfolio of both U.S. and non-U.S. stocks. ■

For a more detailed discussion of the merits of international stock diversification, see Global Equities: Balancing Home Bias and Diversification, available at vanguard.com/

research.

* All S&P 500 Index and sector revenue data are from S&P Dow Jones Indices LLC for 2014.

There are additional risks when investing outside the United States, including the possibility that returns will be hurt by a decline in the value of foreign currencies or by unfavorable developments in a particular country or region.

S&P 500 Index sector weightings vary from those of global stocks(Differences in percentage points)

Notes: Data are as of October 31, 2015. Global stocks are represented by the FTSE All-World Index.

Sources: Vanguard calculations, based on data from S&P Dow Jones Indices LLC and FTSE International Limited.

8 6 4 2 0 2 4 6 8

FinancialsMaterials

Telecommunication servicesIndustrials

Consumer staplesUtilities

Consumer discretionaryEnergy

Health careInformation technology 6.6

2.60.4

0.10.30.3

0.51.3

2.05.3

Underweighted sectors versus global stocks

Overweighted sectors versus global stocks


Can “superforecasters” see into the future?

Philip Tetlock believes they can. His new book, Superforecasting: The Art and Science of Prediction, co-written with journalist Dan Gardner, identifies a small percentage of elite amateurs who were more accurate in their forecasts than experts with classified information.

A professor of management and psychology at the University of Pennsylvania’s Wharton School, Professor Tetlock compiled his research over 20 years. Since 2011, he has led a federally funded forecasting tournament, the Good Judgment Project. Professor Tetlock and Mr. Gardner noted that superior forecasters benefited from collecting evidence from multiple sources, considering probabilities, working in teams, and being willing to admit errors and change course.

How all that translates to investing is a different question. In one of his book’s endnotes, the professor embraced index investing. “You could call it the Vanguard endnote,” he said in an interview.

Implicit in an indexing—or passive investing—approach is the acknowledgment that investors aren’t well-served by trying to pick which stocks or bonds will be future winners. The goal of an index fund, of course, is to track the market’s performance, not to outperform it.

Professor Tetlock detailed the math and methods that support passive investing. “The current weight of evidence does . . . favor the humbler and lazier strategy,” he wrote in the book.

He pointed to the efficient market hypothesis, which holds that asset prices reflect all available information. This means that consistently outper-forming the market is enormously challenging because the market already “knows” as much as any individual stock- or bond-picker could.

“A number of influential economists have made this argument in one form or another,” he said. Former Vanguard director Burton Malkiel’s A Random Walk Down Wall Street “is a powerful book. The efficient market hypothesis comes in varying degrees of strength, and I don’t believe in the super-strong version,” in which all information, both public and private, is priced into the market. “But I think it’s not a bad first-order approximation of reality.”

Although Professor Tetlock is a proponent of indexing, he said investors could also benefit from some of the best practices of the super-forecasters, such as making use of probability thinking and research. Forecasting the markets has proven virtually impossible in the short term, but making more accurate predictions than others hasn’t.

“It’s like the old joke, right?” Professor Tetlock said. “Three hunters come across a bear. One of them says, ‘We’d better run!’ Another one says, ‘Well, we can’t possibly outrun a bear!’ And the other guy looks back at him and says, ‘I don’t have to outrun the bear. I just have to outrun you!’

“I don’t think there’s much mystery about that. If there are behavioral biases that many traders are susceptible to, then traders who are less susceptible to those biases will, by definition, have some advantage.” ■

Note: Opinions expressed by Professor Tetlock are not necessarily those of Vanguard.


Author weighs what investors can learn from ‘superforecasters’

Philip Tetlock


In mid-December, the Federal Reserve raised the target federal funds rate by a quarter percentage point, to 0.25%–0.5%. The move marked the first change to the near-zero interest rate policy put in place during the Global Financial Crisis that preceded extraordinary levels of stimulative action by the Fed.

Although economic conditions remain frustratingly fragile around the globe, the central bank’s decision to start normalizing interest rates was a vote of confidence in the U.S. economy’s resiliency. Since the “great recession,” the economy and the job market have steadily recovered from negative growth and a double-digit unemployment rate.

The 5.0% unemployment level cited in the most recent job reports puts the labor market comfortably within the Fed’s target range for full employment. Wage increases are gradually returning to more normal levels, and the labor market has shown signs of further strengthening.

Still, not all economic measures have achieved the Fed’s goal. Core inflation, which excludes volatile prices from such sources as energy and food, is in its third year of running below the Fed’s long-term target of 2%. As discussed in Vanguard’s Economic and Investment Outlook for 2016 (available at vanguard.com/research), policymakers are likely to keep struggling to achieve 2% core inflation over the medium term.

However, some deflationary forces are beginning to moderate, including commodity prices and the “slack” labor market (more workers than available jobs). Inflation trends in the developed markets should firm up, and even begin to turn, this year.

Rate hikes may be gradual

Despite the attention paid to the timing of interest rate increases, we believe it’s more important to focus on their pace and where the rates stop. Vanguard’s economists expect the Fed to make more measured, staggered rate increases than in its previous tightening cycles,

especially given the mixed global economic environment.

“The shallower trajectory for the federal funds rate is likely to include an extended pause, perhaps at 1%, so the Fed can reassess how vigorously the economy can withstand higher interest rates,” Vanguard Global Chief Economist Joseph Davis said.

If this view proves correct, real interest rates—the rate investors can expect to receive after adjusting for inflation—would remain negative through 2017 and only gradually normalize in a global environment not yet ready for a positive real federal funds rate. This would result in what could be called a “dovish tightening.”

“Unless a stronger-than-expected acceleration in global growth and/or inflationary pressures emerges, we believe that long-term interest rates, such as the 10-year Treasury yield, may be hard-pressed to exceed 3% over the foreseeable future,” Mr. Davis said.

How should you respond?

It’s important to realize that the initial rate increase was ultimately a sign that the Fed considered the U.S. economy healthy enough that it could start removing the historic accommodative measures put in place after the 2008–2009 financial crisis. Policy changes can lead to some short-term market volatility as investors digest any potential effects on the economy.

That’s why, according to Mr. Davis, it’s more important than ever to keep sight of one of Vanguard’s key investment principles: Maintain perspective and long-term discipline.

If you feel the need to take action, start by reviewing your asset allocation—the mix of bonds, stocks, and cash in your portfolio—or talk with your financial advisor.

Said Mr. Davis, “As long as your asset allocation matches your financial goals, risk tolerance, and time horizon, we believe the best thing you can do is to stay the course.” ■

What you need to know about the Fed’s recent interest rate move


Joseph Davis

Maria Bruno


Let’s say you’ve saved diligently over your working life. Now you’re near retirement—and near the time you’ll have to tap your retirement funds. You might have heard about required minimum distributions (RMDs) or the “4% spending rule” for withdrawing money.

What do these terms mean, and how do you best put them to work? Maria Bruno, a Vanguard senior investment strategist, says the time to think about these questions is before you retire. Properly planning your withdrawal strategy can help your portfolio, your tax situation, and your confidence.

“Planning for RMDs shouldn’t begin at age 70; it should be well in advance of that,” Ms. Bruno said. “Once you’re at 70½, you have no choice—you just have to take the money.”

Defining the terms

The IRS sets RMDs, which are the minimum annual amounts that must be taken out of a tax-deferred retirement account such as a 401(k) plan or traditional IRA. You must start withdrawing from these accounts once you turn 70½, and you must pay income tax on the distributions. The IRS imposes penalties for withdrawing less than the minimum. Withdrawal rates are based on a life expectancy table administered by the IRS.

“It’s actually a ‘percent-of-portfolio distribution,’ but the IRS is mandating what that distribution percentage is,” Ms. Bruno said. (The percentage roughly tracks 4% for several years into retire-ment.) As such, the distributions also depend on market performance, so they’ll fluctuate. In up markets, your RMD might be higher, which “can be good and bad.” If the RMD is needed as an income source, a larger RMD could meet that need, “but it also would result in greater income taxes because the distribution is greater,” she said.

The traditional 4% spending rule, on the other hand, is a dollar inflation-adjusted strategy. It suggests that retirees can safely take 4% from a balanced portfolio in the first year, then adjust the amount for inflation each year after that to offer a strong likelihood of not running out of money over a 30-year period.

“It’s meant to provide a predictable income stream, but it completely ignores market performance,” Ms. Bruno said. “And we know, realistically, that retirees don’t spend like that. They do some type of hybrid method.”

For example, in up markets, retirees can cap what they spend and reinvest the rest, she said. That method provides a buffer in down markets so retirees don’t have to decrease their spending as much. “It’s a percent-of-portfolio strategy with some guardrails around it, and it’s the strategy Vanguard recommends,” Ms. Bruno said.

It’s not required minimum spending

She noted that even though the IRS mandates the RMDs, retirees are not required to spend them. More affluent retirees sometimes ask how to invest distributions that they don’t immediately need. Vanguard research has found that up to 20% of retirees reinvest the money in a nonretirement account, Ms. Bruno said. To determine what strategies could be used, those close to retirement might work with an advisor or an accountant to learn “what the RMD picture and tax picture would look like for you.”

Many retirees—accustomed to having an employer withhold taxes from their paycheck—have to think about taxes in a new way. In retirement, taxes “become a line item in the budget,” Ms. Bruno said. Sizable tax-deferred portfolios and Social Security could potentially push some retirees into a higher marginal tax bracket once RMDs start.

Thinking about retiring? Plan early for required withdrawals


We recommend that you consult a tax or financial advisor about your individual situation.


On the other hand, income could be relatively lower in the early years of retirement, putting some retirees in a lower bracket. It might make sense for these retirees “to accelerate some IRA distributions because they would be taxed, presumably, at the lower marginal rate.” Another option is to do a series of partial conversions from traditional to Roth IRAs as a way to build tax diversification, she said.

Taking your RMD can kill two birds with one stone: In addition to satisfying the IRS require-ment, you could use the withdrawal to rebalance your portfolio. For instance, if robust stock market gains have left your portfolio with a higher proportion of equities than is appropriate for your circumstances, you might take your RMD from the stock portion of your tax-deferred portfolio. That way, you can rebalance and not have to worry about adjusting your taxable portfolio and incurring additional taxes.

The sequence of your withdrawals

RMDs, if you’ve begun taking them, “should be the first source of where you spend from your portfolio,” Ms. Bruno said, because the distributions are required. The money can be placed in a money market or similar account. If an RMD is more than you need for expenses, you can reinvest the money in a tax-efficient investment within your taxable portfolio.

If the RMD, on top of Social Security and other guaranteed income sources, is not enough to cover your expenses, you could turn to your non-retirement accounts, starting with investments that generate dividends or capital gains, which are subject to income tax. Instead of reinvesting those dividends, you could put them in the money market account as well.

When it comes to spending, flexibility is key, Ms. Bruno said: “If you use a percent-of-portfolio approach, then technically you can never run out

of money, because it’s a percentage of the prior-year balance. But if the portfolio is declining because of market conditions, the amount you can spend is less.”

However, if you use an inflation-adjusted strategy (the 4% spending rule), you could run out. Retiring in a sustained bear market puts you at risk of depleting your portfolio prematurely, because the method doesn’t readjust based on market performance.

Ms. Bruno noted that deciding on a spending strategy in retirement involves a series of trade-offs, such as how much income variability you can accept and how much you should take market performance into account. This is why Vanguard recommends a percentage-of-portfolio approach with “ceiling and floor” guardrails.

“The key is to go back and revisit this, because the markets will affect what your portfolio balances look like,” she said.

How we can help

Vanguard offers clients a free Required Minimum Distribution Service. Vanguard can automatically calculate your distribution amount each year. We also can deposit the distribution in a Vanguard nonretirement account or a bank account and withhold federal taxes from the distribution. For more information or to sign up, go to vanguard.com/helpwithrmds. ■


Vanguard just published its economic and investment outlook for 2016. How can investors best use this analysis?

Mr. McNabb: This will be the third year in a row where our outlook is a bit guarded for the next decade. We think returns over that time are likely to be lower than long-term historical norms. For several reasons, stock and bond returns will probably be muted. That means investors would be wise to expect returns from a balanced portfolio of stocks and bonds to be two to three percentage points below what they may have experienced in the past. So for investors to reach their goals, savings rates will become even more important—especially for people getting ready for retirement.

Mr. Buckley: Because we expect lower global growth and lower returns, we hope people won’t be tempted by new investment fads to try to get extra return. I think it’s important to remember that investing is not alchemy. You can’t create extra return without increasing risk. If an investment sounds as if it’s going to provide higher returns, there are probably risks involved that you may not fully appreciate. As Bill said, if you save more, you’ll be better off.

Vanguard made news in 2015 when it publicly urged companies to strengthen engagement with their shareholders. What do we hope to accomplish for clients with our corporate governance activities?

Mr. McNabb: Company directors are always told they should act in the best interest of their shareholders. If I’m a board member, I should be asking, “Which shareholder?” Is it the investor who’s renting the stock for three months? Or the investor who’s in it for the long haul? You can make a case for both. They’re both owners, and they have equal votes. But because Vanguard represents the long-term investor, we want the companies we’re invested in to recognize it’s important to focus on the interests of long-term investors. Vanguard’s actively managed funds

tend to be long-term holders of securities, and of course our index funds are essentially permanent stockholders. So we want companies to run themselves with a long-term perspective. The activities of short-term investors make the headlines, but what we’re really concerned about is long-term wealth creation.

Do more companies recognize the importance of the long-term investor than five or ten years ago?

Mr. McNabb: At a high level, I would say yes, we’re making progress. The engagement between companies and longer-term investors is greater than it was, and I think we are having good dialogue. We have a team that does much more than just vote proxies. We analyze and discuss many substantive issues with companies, and we’ve had terrific results from personal meetings with directors and senior management. We held more than 700 meetings last year with companies on governance issues.

Vanguard introduced new funds and services in 2015. Which stand out as having potentially the greatest impact on investors?

Mr. McNabb: We introduced a number of new funds and made a few changes to existing funds, but I think one thing in particular is worth pointing out. We’re very gratified by our clients’ acceptance of our Personal Advisor Services. It’s grown more quickly than we expected. We have more than 32,000 clients, with about $30 billion in assets, now enrolled. For clients with multiple goals and somewhat complicated situations, the service provides great advice through a dedicated financial advisor at a very low cost.

Mr. Buckley: The one fund change I would highlight is the inclusion of China A-shares in Vanguard Emerging Markets Stock Index Fund. China’s stock market can be expected to be volatile, like other emerging markets. But the fund now gives investors direct exposure to the most influential emerging market in the world.


Q&A WITH BILL MCNABB AND TIM BUCKLEY, from page 1 >


Do either of you have any particular investment resolution for the year ahead?

Mr. Buckley: In our job, it’s easy to start thinking you know more than the market, and it’s always tempting to try to time the market because you live it each and every day. So my resolution is the same every year: Stick to my long-term plan.

Mr. McNabb: I agree, and my goal is similar. I’m going to remain global in my asset allocation. Even though non-U.S. markets have generally underperformed the last several years, I believe in global diversification.

For people who want to be invested beyond the United States, what is a good amount to invest?

Mr. Buckley: Every investor’s situation is unique, but if you’re looking for a general guideline, we think it’s reasonable to consider investing about 40% of stock assets in markets outside the United States, and for bonds, around 30%.

As more investors around the world become Vanguard clients, what challenges do you face in managing growth?

Mr. McNabb: It’s helpful to remember that growth for its own sake is never our objective. We actually don’t have growth objectives within the company. We spend much less time talking about market share and so forth than most people would imagine, given the success we’ve had. Our basic mission is to make sure that existing clients have high-performing funds at the lowest possible cost. Then we can couple that with great service. We think if we do that, growth will take care of itself.

And when we do experience significant growth, we always ask ourselves, “Does it benefit the existing client in terms of creating more scale, which allows us to create more capabilities at lower price?” If the answer is no, then we won’t allow the growth to go too far.

Mr. Buckley: Our duty is always to our existing clients, so any growth has to benefit them. By design we have pushed our expense ratios lower, and we have expanded services through the years. Of course, we have also made sure we have the best possible professionals managing our clients’ money and have delivered excellent long-term performance. Achieving success on these three fronts isn’t easy at any size, but it is our sole focus.

As Vanguard grows, is it harder to maintain the client-centric culture we’re so well known for?

Mr. McNabb: I’ll be celebrating my 30th anniversary at Vanguard this year. And it’s really gratifying to see that even as we’ve expanded over the decades, our core values haven’t changed. Since I arrived, we’ve grown from under 1,000 crew members [employees] to nearly 15,000 worldwide. Obviously, I’m biased, but it still feels like a small company with the same values we had 30 years ago. We still have that incredible missionary zeal to take our way of investing to more and more investors because we think it really is the right way.

So as much time as we spend studying the markets and developing our economic outlook, we spend just as much if not more time on our human capital. And that’s been true as we expand our international presence.

Bottom line, whether we’re talking about our U.S. sites or our offices abroad, we want to be sure we’ve got great team members and are doing all we can to make Vanguard a great place to work, as well as a great place to invest. ■

Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

Advisory services are provided by Vanguard Advisers, Inc. (VAI), a registered investment advisor.

To read Vanguard’s Economic and Investment Outlook for 2016, please visit vanguard.com/research.


Have you been tempted to stash your cash under a mattress while savings account and money market fund yields have been near zero? Or have you sought the higher yields—and risks—offered by short-term fixed income funds?

Then you may want to consider Vanguard Ultra-Short-Term Bond Fund. But first, it’s important to know what this fund is—and what it’s not.

Why we offer an ultrashort fund

We launched this fund early last year to give investors another option for meeting their near-term spending needs. “It has more risk than a money market fund but offers the opportunity for a modest pickup in yield, without as much additional risk as short- and longer-term bond funds,” said Matthew Piro, a senior investment analyst in Vanguard’s Portfolio Review Department.

Many investors hold short-maturity investments to cover two types of near-term needs. The first is day-to-day and immediate spending—

for example, paying rent or making emergency home repairs. A money market fund with a stable $1-per-share net asset value is appropriate here.

Then there are anticipated expenses over, say, the next one to two years. For this time frame, we’ve seen two investing behaviors that have possible unintended consequences. Some investors have used money market funds to cover these needs, but that means giving up some yield potential in exchange for a stable return. Others have gone in the opposite direction, choosing short- or longer-term bond funds to try to earn a better yield—and taking on more risk in the process.

“An ultrashort bond fund can better align with an expected spending horizon of one to two years,” Mr. Piro explained. Some investors, of course, may prefer a tax-exempt option, such as our national or state-specific tax-exempt money market funds or Vanguard Short-Term Tax-Exempt Fund.

Here’s one way you can fund your near-term spending needs

Matthew Piro


How some alternatives for funding near-term spending compare

Vanguard Prime Money

Market Fund

Vanguard Ultra-Short-

Term Bond Fund

Vanguard Short-Term

Bond Index Fund

Investment objective Seeks to provide current income while maintaining liquidity and a stable share price of $1.

Seeks to provide current income while maintaining limited price volatility.

Seeks to track an index that provides broad exposure to U.S. investment-grade bonds with maturities from 1 to 5 years.

Yield 0.26% 0.96% 1.37%

Average maturity 54 days 1.1 years 2.8 years

Notes: Data are as of December 31, 2015. Yields shown are the 7-day SEC yield for the money market fund and the 30-day SEC yield for Investor Shares

of the bond funds. Average maturity for the bond funds is an average effective maturity that takes into consideration the possibility that the issuer may

call the bond before its maturity date.

Source: Vanguard.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.


This isn’t a money market fund

Many shareholders have asked about our money market funds in light of new Securities and Exchange Commission rules that fund sponsors must adopt by October 2016. Vanguard has taken steps to ensure that all individual and institutional investors will still have access to money market funds that seek to maintain a $1-per-share price.

In contrast, the Ultra-Short-Term Bond Fund’s share price fluctuates, because it holds securities with an expected maturity of up to about 3 years. (Typically, the longer a bond’s maturity, the greater its price sensitivity to changes in interest rates, though there are

exceptions.) As you can see in the table on page 10, the fund’s average maturity is slightly longer than 1 year. In contrast, the average maturity of Vanguard Prime Money Market Fund is less than 2 months and that of Vanguard Short-Term Bond Index Fund is almost 3 years.

How our ultrashort fund can help

This low-cost fund can help you diversify your fixed income holdings in an already balanced portfolio, and it can complement your other cash management funds. Given the maturity profile of its holdings, we believe it offers investors a reasonable trade-off between additional yield and higher interest rate risk compared with our money market and short-term bond funds. ■

New law may limit your use of two Social Security strategies

The Autumn issue of In The Vanguard included an article titled “Deciding when to take Social Security is a crucial question.” The article discussed strategies that could help readers maximize their Social Security benefits.

Shortly after the article was published, the Bipartisan Budget Act of 2015 was passed by Congress and signed into law. The law affects the availability of two Social Security strategies, described in the article, that many married couples have used: filing for and suspending benefits and filing a restricted application.

What’s changing

After a six-month grace period following the law’s November 2, 2015, enactment, if you suspend your benefit, your spouse and any dependent children won’t be able to collect a benefit based on your earning record during the time you’re not receiving one.

You’ll still be able to file for your own Social Security benefit starting at age 62, then suspend receiving it until you reach 70. The delay (called the “start-stop-start” strategy) allows you to receive 8%-per-year delayed retirement credits.

In addition, if you’re married and turn 62 on or after January 2, 2016, and have an earned income record of your own, you won’t be able to file a restricted application, which allows you to choose to receive a spousal benefit in place of yours. Instead, you’ll receive whichever benefit is greater at the time you file, whether it’s the spousal benefit or the one based on your own earnings record.

If you’re already using the strategies, the changes in the law won’t affect you. For everyone else, your age will determine the potential effects. You can read more at vanguard.com/socialsecurityupdate. ■


We recommend that you consult a tax or financial advisor about your individual situation.

P.O. Box 2600Valley Forge, PA 19482-2600

For more information about Vanguard funds and ETFs, visit vanguard.com or call 800-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

© 2016 The Vanguard Group, Inc.

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ITV 012016

First things first: What’s your investment goal?

Should I buy stocks—or bonds? An index fund or an actively managed one? Fund X, Fund Y, or Fund Z?

These are the questions that Vanguard Chairman and CEO Bill McNabb often hears from clients. Perhaps those investors assume that the key to investing success is getting the inside scoop on what’s likely to outperform the rest. And whom better to ask than the head of the company?

In fact, as Mr. McNabb often tells these clients, the first step in achieving investment success is to ask yourself a question that only you can answer: What am I trying to accomplish? You have to know your goal (or goals) before you can begin to weigh decisions about stocks versus bonds, index funds versus active funds, and which specific funds to choose.

With the start of the new year, this is a perfect time to reexamine your investment goals and evaluate whether your portfolio is on the right track.

Investing for multiple goals

Most investors have more than one goal. The biggest and longest-term goal usually is saving for retirement—or managing retirement income if you’re already retired. Other goals may include investing savings for college expenses, building and maintaining an emergency fund, or putting away money toward a wedding, a dream vacation, or a new house.

You’ll want to make sure you’ve set priorities wisely. For most people, saving for retirement would probably come first. The second priority would be to pay off any high-interest debt such as credit card debt, and the third would be to establish an emergency fund to cover unforeseen expenses. Beyond that, you would address additional financial goals.

As you evaluate your portfolio, revisit each goal to ensure that you are saving enough money and investing appropriately. The time frame is a critical consideration. For example, if your goal is a year away, the savings should be invested conservatively—in a money market fund, say, rather than a riskier stock fund.

Getting advice and guidance

Vanguard can help you with goal-setting and planning, whether you are a do-it-yourselfer who just wants some online guidance or a person who’d like to partner with our expert financial advisors. To explore the options, click on the “Advice & Guidance” tab at the top of the page on investor.vanguard.com. ■

The Vanguard viewpoint

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For information about Vanguard funds, Vanguard Brokerage Services®, or your account, call us Monday through Friday from 8 a.m. to 10 p.m. and on Saturday from 9 a.m. to 4 p.m., Eastern time. For general information and account services: 800-662-7447 (Flagship clients, 800-345-1344; Voyager Select clients, 800-284-7245; Asset Management Services clients, 800-567-5163).

Documents

In The Vanguard Winter 2016 › pdf › itvwinter2016.pdf · 4 In The Vanguard > Winter 2016 Can “superforecasters” see into the future? Philip Tetlock believes they can. His