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Rebecca Katz
Rebecca Katz
Rebecca Katz: Well, good evening and welcome to this live Vanguard webcast. I’m Rebecca Katz. And Happy New Year to you. Although I must say this first week of 2016 hasn’t felt very good for us investors. The financial markets have been in turmoil and we’ve seen a lot of news from the global economy, but luckily tonight we have with us two people who are going to put it all in perspective for us. Joining me here in the studio are Vanguard’s chief investment officer, Tim Buckley, and Vanguard’s chairman and CEO, Bill McNabb. Thanks for being here, guys.

Tim Buckley: Our pleasure.

Bill McNabb: Thanks, Rebecca.

Rebecca Katz: So we have a lot to talk about tonight. As many of you know, if you’ve watched these webcasts before, we have a Q&A format. We are going to take your questions. And, honestly, people have submitted so many questions, a lot of them around volatility that’s in the headlines. We’ll talk about that. You can continue to submit more questions our way or tweet them to us using #VGLive. And a couple of just housekeeping notes. You may not have used this viewer that we’re using for the video tonight. And you’ll see some icons there, and there are a couple icons you should be aware of. One is a little blue icon. If you have any technical difficulties, push the blue icon and you can get help right there. And there’s also a green icon, a green widget, where you can download our research and thought leadership around some of the issues we’ll be talking about tonight, including our economic overview. So take a look there; there’s some great resources we would encourage you to download. Now before I start asking you questions about the headlines, I thought we might just take the pulse of our viewing audience if you don’t mind.

Bill McNabb: Sure.

Tim Buckley: Great.

Rebecca Katz: So on your screen, you should see our first polling question. And what we’d like to know is, “Which of the following concerns you the most for 2016?” Not to start on a negative note, but, “Is it a hard landing in China, is it a market correction in the U.S., is it the strong U.S. dollar, or is it geopolitical risk?” So please respond now. We’re going to talk a little bit, but then I’ll share those responses with you. So, obviously, lots of market volatility news out of China. It’s been in the headlines. Lot of questions on this. Our first question is from Linda. She’s in Boston, Massachusetts. And she said, “Do you foresee volatility in the financial markets continuing in 2016?” So, Tim, I’ll toss that one to you.
Tim Buckley
Tim Buckley


Tim Buckley:
Well, for Linda, really, she should expect volatility to continue. We’re coming out of a period where, well, we had lower than usual volatility. If you look at the past three years, it’s been below average. And in the past few days, we have come up to average volatility if you go back to 1990, and now we’ve gone past that. So we’re in a more volatile period, but it’s probably more typical than what we had in the past three years in that volatility. Now in that question I’m sure is, so what’s causing all this volatility? Why now? Well, in the past, we had extreme monetary actions by the Federal Reserve, other central banks which help mute volatility. So that is easing off now. Certainly, in the U.S. it’s gone and elsewhere it still exists. But another thing that happens you have to have the context of the global environment. And that is what is driving growth? What has been driving growth? And that has been called the story of the tortoise and the hare. You had the U.S. plugging along, the tortoise, at a 2% growth rate. And we have complained about that 2% growth rate, but it has been consistent year after year. And you’ve had China coming out of the global financial crisis growing at a breakneck pace, double-digit growth, and now it’s started to slow. China is going through a transformation. It’s going from this industrial complex, manufacturers, to one that’s more of a consumption, service-based economy. It is a huge economy. It’s 13% of the world’s GDP. The U.S. is 22. So these are the two big titans, right, driving the economy. And as China slows, everyone wants to know how much is it slowing? Well, China is not like the U.S. It’s opaque. So you can’t see that industrial complex that’s slowing down. That’s slowing down at the same time you have the service industry that’s building. And the consumption is growing 8 to 10% a year, but how much is that production slowing down? You don’t get great numbers out of that. And so recently we had a number that printed that said, “Well, the manufacturing is slowing down more than people expected, or that many people expected, and maybe service isn’t growing as fast.” So suddenly everybody started thinking, “Global growth isn’t what it’s going to be.” You got the tortoise chugging along and the hare’s getting tired now, getting winded. And, thus, a selloff in China and people worried about global growth you start to see that selloff here. That is the volatility you’re feeling here. It might be a bit of an overreaction because you really don’t know what the right numbers are, but, unfortunately, it’s probably to be expected in the coming year.

Rebecca Katz: Well, what should investors do about it?
Bill McNabb
Bill McNabb


Bill McNabb:
Well, you know, this is the hard thing is volatility always makes investors nervous because you see fluctuations in your portfolio that are pretty dramatic sometimes on a daily basis. Just in the first four or five days of the year equity markets have lost more than 5%. But what we believe investors should be doing is, frankly, tuning out the noise and they should be thinking about what are my goals, what are my long-term goals, and do I have the right asset allocation to achieve those goals? And then they should really be trying to maintain their discipline in terms of that asset allocation. If they’re investing on a regular basis through a 401(k) plan and so forth, they should continue to invest on that regular basis as well.

Rebecca Katz: Okay, great. Well, we’ll have some questions about international stock allocations and things like that coming up.

Tim Buckley: Sure, great.

Rebecca Katz: But let’s see what’s on the minds of our viewers. I would assume it’s China, but let’s take a look. Actually, we asked which of the following concerns you the most? We asked about a hard landing in China and that was about 15% of our viewers concerned about that. But by far and away, a market correction in the U.S., more than half of our viewers are concerned about that. Less so the strong U.S. dollar. I just traveled. It was wonderful. And geopolitical risk is about 30% of people, and there’s been a lot of news about that over the last few days as well.

Bill McNabb: You know, just a comment on that, Rebecca, the U.S. market correction, this is the third-longest bull market in history. And because of the depths of the great financial crisis in 2008 and ’09, people sometimes forget from the bottom of 2009 to the end of last year, this is one of the longest uninterrupted bull markets and, literally, the third largest. And if you think about that, typically markets do have cycles so it’s not unexpected that you would see some pullback at some point.

Tim Buckley: And, I think, Bill, you would echo this too, we don’t see a bubble out there. What we see are richer valuations. So when you think about bonds, well, their yields are still historically low, which means that they’re expensive. And with stocks, you look at their historical valuations and they’re above their long-term averages. In some cases, depending on your measure, considerably above their long-term averages. They’re not in a spot where you’d say, “It’s a bubble and we’re in for a crash.” That’s not, as we look at it, we just think differently. We think, “We’ll just have different expectations for long-term returns. It doesn’t mean you have to plummet before you go up.”

Rebecca Katz: Right, but lower returns generally.

Bill McNabb: Yes. And we’ll get to that, but I think one of the really important things every investor has to remember that when you look at long-term averages of stock returns, and over 80 years it’s been 9 to 10%, it’s not a straight line. There’s years where you’re up double digits, there’s years you’re down, there’s years you’re up, you know, you barely break even. It’s never a straight line and, again, the last five or six years it has been pretty much a straight line.

Rebecca Katz: Okay. Well let’s turn to something a little bit more positive and ask about 2016 financial resolutions. So we’re going to talk a lot about the markets, but also people have just general questions about personal finance. So on your screen, you should see our second polling question, and we would like to know what is your financial resolution for 2016? Is it to save more for retirement, develop a financial plan, to invest for children/grandchildren or other college education, or contribute more to charity? So respond now and we’ll come back with that in just a few moments. But we’re going to go back to the markets anyway. So I mentioned the economic overview, the economic outlook, which is out under the green icon. And we had a question from Jim in Massachusetts who said, “Your December 2015 Economic and Investment Outlook states that we view the global low-rate environment as secular, not cyclical. Explain that distinction and what does it mean to investors?” So, Tim, your group produces that.

Tim Buckley: Right. So what I would say is if you think secular, just think, “Well, for the foreseeable future” is the best way I could explain it. We expect low rates globally for the foreseeable future. And you only have to look at it, Rebecca, and say, “Well, come up with a reason why rates are going to go dramatically higher.” For them to go dramatically higher, you’d have to change your expectations around inflation and global growth. And we just don’t see those signs. We just talked about China slowing down its growth. We talked about the U.S. just plugging along. I didn’t mention Europe, though, right, and Europe’s eking along. It’s got growth, but it’s nothing to write home about. So you don’t see the upper pressures of global growth that would push rates up and push inflation expectations. Commodities, commodities, well, we all know the price of oil is tanked. And then if you look at other commodities, inputs to many industries, they continue to head down so you don’t have inflationary pressures there. And then we look a lot. We look a lot, Bill, right. We look at the wages in the U.S., wage growth. We’re at full employment, but you’re not seeing a lot of wage pressure. So you’re just not seeing the measures that would tell you to expect rates to jump up. If you saw pressures in those areas, you’d see it. But there’s another thing capping where rates are, and that is there’s really a glut of global savings. There is a lot of money searching for yield out there, whether it’s insurance companies or sovereign wealth, corporations, or individuals. Whenever any market you start to see a rate pop up where someone can get yield, everyone starts rushing towards it and goes in and buys and pushes it back down. So there is a lot of money sloshing around looking for yield and that helps keep global rates lower too. So we see it as an environment that where you can expect global we can expect low rates.

Rebecca Katz: Well, we saw the Fed raised rates a little bit here in the U.S. and that was welcome news, people looking for a little bit of yield especially in money market accounts. What have been the effects of that rate increase? We had a question from Darlene in Hawaii about that.

Bill McNabb: You know, there really haven’t been any discernible effects. This was very well anticipated. I think as you stated in the question, we’ve seen money market yields come up just a little bit. We welcome the rate increase in the sense that the sooner we get back to normal, if you will, from a monetary policy standpoint, we think that’s a good thing.

Rebecca Katz: So normal meaning they’ve backed off the quantitative easing* and now we’re—

Bill McNabb: Yes.

Tim Buckley: Yes, from an investor standpoint, so you take the economy out of it, we’ve seen some distortions and people take a lot more risk in their portfolios as they look for yield, as they look for return. They haven’t found it in money markets or short-term bond funds and they’ve taken more risk. We think if they can start to get that yield in those traditional safer areas, that would be a good thing from the investor standpoint.

Rebecca Katz: Well, do we expect the Fed to continue to raise rates, albeit gradually, since we’ve already talked about not a huge shift up in rates? And then how does that impact our expectations for stock and bond fund performance? Bill, do you want to take that?

Bill McNabb: Yes. So, you know, our current expectation is that the Fed will be very cautious but will raise rates over a period of time but the moves will likely be very incremental. And as Tim already said, we don’t really expect a big rise in long-term rates. Just a little bit more of a move toward normalization. When we think about the impact of this on markets, we don’t tend to look at short-term market predictions. We don’t think we’re any good at that. Actually, we don’t think anybody is, so I would tell you if you are reading headlines about what to expect in 2016, I would take them with a little bit of a grain of salt. But what we do do is we try to project out over the next decade, so over the next ten years what we think the probabilities of various returns are. And when we run our models today, sort of the central tendency for a balanced portfolio—60% stocks, 40% fixed income—the real return on that, so return after inflation, would be about 4.3%, 4.5%, something like that. That’s about a 1% or a little more lower than the 80-year historical average. So we are expecting more muted returns, if you will, over the next decade but not at sort of a disastrous level, if you will. And there are consequences of that. One of the consequences is for those who can save a little bit more in their 401(k) plans, their IRAs, and so forth, it’s a really good strategy to help offset that.

Rebecca Katz: Right. Well, so that’s the perfect segue back to our poll. So we did ask what are peoples’ financial resolutions for 2016? And looking at the results, almost a tie between saving more for retirement, so, obviously, a good strategy, or creating a financial plan. Those were the two most popular responses. So reaction to that.

Tim Buckley: He loves hearing saving for retirement.

Bill McNabb: You know, so it’s interesting. I think those are the two best answers—

Tim Buckley: That’s his big lever.

Bill McNabb: —to that because to me saving for retirement, the more you do early with the power of compounding the bigger the effect. And I think having a financial plan is something that gets lost sometimes. Everybody is talking about the markets and what opportunities there are and so forth. And the first thing you have to always do as an investor is establish a long-term set of goals and then a plan to meet those goals.

Tim Buckley: Rebecca, I’d love just to add on to that.

Rebecca Katz: Sure.

Tim Buckley: The saving for retirement you think about two things you control when you’re investing: how much you save, and how much you’re paying. The rest is up to the market. You want to have a plan and all that, but the rest is up to the market. And in controlling your return how much will benefit from that return and how much will you pay for that return? So it’s great to hear clients are zeroed in right on that.

Rebecca Katz: Right. You never hear anyone say they saved too much, honestly.

Tim Buckley: Right.

Rebecca Katz: Okay, our next question is from a long-term investor, Todd in Villanova, Pennsylvania. He says, “I’m currently significantly underweighted in stocks, but I feel a need to increase my exposure as I’m a long-term investor. However, I’m concerned in this environment about a short market decline. What’s the best strategy for me at this point?” Now we talked a little bit about not expecting a short market decline, but, obviously, this week probably has a lot of people deciding whether or not to invest.

Bill McNabb: So, you know, the most important thing is to know what you want your asset allocation to be in order to meet your goals. So that’s the first thing you’ve got to be zeroed in on. And then if you’re not where you want to be, I think a great strategy—and in Todd’s case, it sounds like he’s underweighted stocks from where he thinks he should be for his long-term allocation. A good way to sort of take the market volatility out of the equation a bit is to dollar-cost average in and so put a little bit more into equities every month for a 12- to 18-month period and sort of ease your way in. And, actually, that way the volatility can actually, mathematically it actually helps you a little bit.

Rebecca Katz: Well, we have a question from Benjamin as a follow-up who says, “Since volatility means ups and downs, it wouldn’t be good to buy in the dips.” I mean today we talked about that a little bit. So dollar-cost averaging but if you see a day like today is—

Bill McNabb: You know, again, I think it’s really hard to predict these short-term fluctuations. I think when you dollar-cost average, the best way to do it is pick a date, you know, a set date of the month and just that’s when you move your money.

Rebecca Katz: Any difference in opinion?

Tim Buckley: It can be tough to resist. You’d rather buy on a down day. I would say, one thing I’d say is don’t let a down day stop you from buying because most people will head to the sidelines on a down day.

Bill McNabb: That’s true.

Tim Buckley: So to Bill’s point, hey, if this is the time for you to rebalance or to dollar-cost average in and it’s a big down day, feel like, oh wow, this is great. I’m buying on a down day. Don’t say, “I’m going to wait until the market stabilizes” because that’s crazy. Why would you wait until prices go up for you to actually get in? So consider a down day it’s not a sign that you shouldn’t rebalance or that you shouldn’t invest. It’s an opportunity.

Rebecca Katz: Okay, great. Our next question is really looking at retirees. So Cynthia in Goodyear, Arizona, says, “Is the stock market too risky right now for retirees?” We also had a lot of questions about people who are in retirement and whether in light of the lower market performance, you know, this rule of thumb of taking out 4% a year still makes sense. So maybe you can both tag-team that question.

Bill McNabb: Sure. You want to start?

Tim Buckley: Yes. One of the things we talk about retirees is the stock market too risky? Well, a retiree, someone retiring today, retiring at 65, they can expect to live 20 years, 30 years. The bigger risk is not to have any growth in your portfolio, that you’ll run out of money. No one wants to run out of money. And so equities are there for growth in your portfolio. If you think about that nice diversification, so we’re a nautical place, right. Bill’s got his nautical tie on. So we’ll go with bonds are there for the ballast. To keep the ship upright, equities they’re your sails. They’re the wind in your sails. They will give you that growth over the long run now to be volatile but so you want a diversified portfolio. That doesn’t end when you retire. You need growth over the next 20, 30 years. So we say have a diversified portfolio. Equities can play a big role in that. Know kind of your risk tolerance and how much you want in equities but they play an important role in that. And as far as the drawdown, a typical 4% rule, that’s a rule that we’ve used in the past.

Rebecca Katz: And can you explain that quickly for those who might not know.

Tim Buckley: Yes, sure, it’s a drawdown of if you look at your assets, you can spend 4% of kind of your ending balance from the year before if you spend 4% drawdown on it. So each year spend 4% of what you have. Now you don’t have to be dogmatic. You probably don’t want to be dogmatic. In a good year, splurge, spend 4.2%, but that means in a down year, you should spend less than 4%. Control your expenses because Bill, I think, would say that the worst thing you can do to your portfolio is overspend in a down year.

Bill McNabb: Yes.

Tim Buckley: Many universities did that and in the global financial crisis found themselves in a jam. So have a ceiling and a floor. Maybe you can spend 4.2 in a good year and you’re 3.8, you’re going to draw down in a bad year. But it’s a good general rule of thumb for a drawdown.

Rebecca Katz: Okay, great. There is a special bonus prize to any viewers who can figure out what Bill’s tie says in nautical flags by the way. Our next question is from John in Rockland, Maryland, who says, “A well-known financial advisor recommends avoiding bond mutual funds. What say you in the face of the rate increases in 2016?” So, again, we think it’s gradual, but should you get out of bonds?”

Tim Buckley: First of all, he’s asking the guy that runs the largest mutual fund company in the U.S., right, so.

Bill McNabb: Look, you know, there’s a tendency when people fear rising rates to you’ll see recommendations arise that you should own individual bonds because the maturity is set and you know you’re going to get your money back. And here’s the problem with that. When you buy individual bonds, you pay a very high price for doing that. When you’re an individual buying bonds from a broker, the price you pay is high. Second thing is you can’t possibly build a diversified portfolio because you can’t buy enough issuance. Third thing is if you do need to sell, it’s really hard to sell and you’re also going to get hurt very badly on the price, the commission, if you will, to sell.

Rebecca Katz: The commission.

Bill McNabb: So not a lot of liquidity, very expensive, not diversified. Those don’t sound like good things to me. The beauty of a bond fund is it’s run by Tim’s team, highly professional, highly diversified, focused on really good risk control.

Tim Buckley: Extensive credit research.

Bill McNabb: Extensive research and so forth and, again, great liquidity all at an incredibly low price when you look at what we charge for our fixed income funds. So the rising rate thing everybody knows if rates go up, bond prices go down and, therefore, the price of a bond fund goes down. Here’s the thing though, mathematically again, and you actually have to sit down and do this one out because it’s not intuitive. If your time horizon is longer than the duration of the bond fund and we provide duration information—

Rebecca Katz: On the website.

Bill McNabb: —for every fund, if your time frame is longer than the duration, then actually rising rates are not going to hurt you. They’ll actually help you, and you’ll actually earn more in that fund over that period of time because what you’re doing is you’re reinvesting constantly at that increasing rate. So this is one of the things. Now if you, on the other hand, are in a very long-duration bond fund but your time frame is very short, well then you do fear a rate rise and then that’s a very fair concern.

Rebecca Katz: That’s a good comprehensive answer. What about muni funds? We have a question from Willy in Willow Grove, Pennsylvania, who says, “Will the rate increases affect muni bonds in the same way?”

Tim Buckley: Rebecca, essentially the mechanics are the same, as Bill described. So rates go up, yields go up, prices will go down in a muni fund. It just won’t happen in the same absolute terms because of the tax-free nature of munis. So for every point you might go up in a taxable fund, a muni fund may go up two-thirds of that. And that’s just reflecting the fact that the income from a muni is tax-free and so that’s kind of more the clearing rate for it.

Rebecca Katz: You know, we’ve touched on interest rates, we touched on oil. We have a lot of questions on oil. And Paula in New Jersey said, “The market seems to think that declining oil prices are negative. Why is that?” Are you concerned?

Bill McNabb: Tim, why don’t you talk a little bit about it from the effect on the economy and I can talk a little bit as a consumer.

Tim Buckley: Sure. And Bill’s always warned me it’s one of the most difficult things in the market to predict is where’s oil going because there’s so many geopolitical aspects, supply, demand. But I think what people see right now is people can confuse cause and effect. They see oil going down. They’ll see oil going down and the markets going down as well. And it’s not oil plummeting that’s causing the markets to go down, but rather maybe there’s the same cause behind them. So, remember, we talked about a global slowdown that people have concerns about global growth. Well, global growth if you’re concerned about global growth, that means there’s less demand for oil out there so the price of oil is going to drop. It also means there’s less demand for all the other goods and services that companies offer, which means their stock prices will drop. So the two happen to be correlated. And this is different than the decline in oil that we saw last year where it was much more supply-oriented. This is more of a demand decline whereas last year you had, well, the advent of fracking had brought a lot of supply to the market. You had Saudi Arabia just opening up the valve for more and more oil. We had more OPEC countries coming online producing more and more oil. You had more of a supply effect that dropped the price. So it’s very different. We’re dealing with a different element here and so they’ll have different effects on the market as well.

Rebecca Katz: And consumers.

Bill McNabb: Well, you know, just one comment on Tim’s point. I mean it’s such an important point that this is a cumulative thing that’s been going on. And I think what people do miss is the distinction you made the first part of the decline in oil over the last several years was much more supply-driven and now we are seeing this demand-driven effect as well so it’s just sort of piling on at this point. So, obviously, the energy sector itself has been hurt very badly because most of those companies their fortunes, if you will, are tied to the price of oil and so that sector of the economy has suffered and labor in those markets has suffered and so forth. But for everybody else in a sense, all consumers, it’s actually been good news.

Rebecca Katz: Yes.

Bill McNabb: And for many companies that are energy-dependent on the input side, it’s been great news because one of their huge costs has actually come down. And so consumers, Tim, I think your team did an estimate on this, but we think this is putting several hundred dollars a year more in the pocket of the average consumer, which cumulatively gives consumers literally tens of billions of dollars of purchasing power for other things.

Rebecca Katz: That’s great.

Tim Buckley: And the downside that you see right now is that with demand dropping off, so oil is giving the tailwind that Bill described to consumption. But if you truly think global growth is slowing down, now that’s going to be a headwind—

Rebecca Katz: Eventually.

Tim Buckley: —counteracting it so it’s not as pure as the supply-driven. And let’s hope that people are wrong about global growth and it’s not dropping off. We just have cheap oil, which would be great.

Rebecca Katz: Right. Okay, great. Well. we have a question just in from Christopher. And he says, first of all, “Excellent discussion. Given the volatility in the non-U.S. market, I’m concerned about investing in international equity investments, particularly in the emerging markets. So do you believe investors should be essentially avoiding or rationing back exposure there?”

Bill McNabb: You know, I’ll start, Tim will jump in, the temptation certainly is great because of all the geopolitical issues that hit the headlines. But we believe very strongly that diversification in the long run is an investor’s best defense against volatility and it’s also the best path, if you will, to sustainable returns. And, therefore, one should be invested in international equities. And even though it feels like it’s tough out there in the emerging markets and other sectors of the global economy, having a fairly significant portion of your equity invested in non-U.S. equities to have this broad diversification we think is really beneficial for the long run.

Rebecca Katz: But generally speaking, emerging markets tends to be a much smaller piece of that overall international exposure.

Bill McNabb: You know, for a typical U.S. investor, if you were looking at your equity portfolio, Tim, what do we recommend, 40%?

Tim Buckley: A total of 40% say in equities.

Bill McNabb: 40% of your total equity should be in non-U.S., and of that 40 maybe it’s 10 now in emerging or so. So, again, you’re not talking about taking a big bet here, but you are talking about broad diversification. And, again, for what it matters and there may be good reasons for these valuations, but if you were to look at valuations today, certainly the emerging markets are the most attractively valued equities if you project out over the next decade versus the developed world.

Rebecca Katz: You just have to be able to stomach more weeks like this week with emerging markets.

Bill McNabb: And maybe long periods because, again, if you look at the history of emerging market returns, you will go many years with very volatile and negative returns and then you get rewarded by that patience, if you will, with what can be a very volatile up market.

Rebecca Katz: Tim, you want to add?

Tim Buckley: Yes, I would say that with emerging markets, people should be careful not to— You want to hold a nice, diversified portfolio but you hear news on one and don’t paint with a broad brush because they’re all different countries and they’re in a different financial situation. All much better off than say they were in 2002, but there are some that, well, yes, they have big current account deficits where they’re actually they’re running a current account deficit. They’re having to finance that with debt and they’re running that debt. Maybe it’s in U.S. dollars and they’re in tough shape, some of those. And then there are other ones with huge current account surpluses, the big exporters that aren’t commodity-based that haven’t been hurt by that. By the way, China happens to be one of them and they could have a very different prospect. It’s really tough to parse through, okay, exactly what’s what and I would encourage our investors stay diversified among them because even when you get to these, some are in tougher shape but they’re cheaper as a result. And then within the markets, some sectors, the banks may be the cheapest, and there are other areas where they have e-commerce and may be doing very well. And so it’s going to be really tough for anyone to go, “Oh, I know what country is going to be— Oh, I know Malaysia is going to come out first.” I hear this all the time. And good luck picking them. I’d rather own the whole basket. I’d rather own all of them and I don’t want to pick which sector within them either. I’d rather own all of the whole market and, as Bill said, have exposure to this return stream. That could be very important over the next 20 years in your portfolio.

Rebecca Katz: Alright, keeping that long-term view. Well, we have another question just in from Phillip, and, again, we’re hearing a lot of talk from pundits about all sorts of scenarios. And he’s concerned; he’s hearing that this could be a repeat of 2008. Now so far in our discussion it hasn’t sounded like you’re signaling that, but do we agree that there’s a possibility that what we’re seeing in the markets today could be signaling 2008?

Tim Buckley: Well, you know, 2008, you have to look at, that was excess in the economy, right? You think if it’s housing-led, it’s excess in the financial system. And when we look at the—, and we led into a recession, and it brought the markets down as well. If we look at right now, we have had a nice long expansive period of growth, longer than you would typically have between recessions. So you’ve had this long period of growth. That doesn’t mean that you’re in for a downturn because we’ve been growing slower than you typically do. We’ve been growing at about 2.2% a year, and you’d be in the high 3s typically coming out of a recession and expansionary period. And decumulatively, you know, we’re about 14% that the economy’s expanded versus say 27, which would be the average expansion. So, you know, we’re not sitting there where the economy has just rocketed and now it’s got to cool off. We’re not in that, and we haven’t had the excess. There hasn’t been the debt that you’ve had before. So at least within the U.S., you just haven’t seen that. So when people say, when they say “’08—”

Rebecca Katz: Yes.

Tim Buckley: I think, well, I think it’s the global financial crisis, not, and the markets followed. It was led by that. If you want to see valuation, I know, Bill, you talk a little bit about valuations. We’ve talked about them, and it’s—

Bill McNabb: Yeah, you know, I think, look, there’s never zero possibility of anything, right?

Rebecca Katz: Right.

Bill McNabb: I mean we live in a world of unknowns. However, when you look at what led to the great financial crisis, extraordinary leverage in the financial system and inadequate capital. And then some tremendous excesses in the housing market, and that combination was deadly. If you look at the financial system today, it’s so much healthier than it was going into the financial crisis. You know, all the new rules and regulations, banks have much stronger balance sheets. As Tim said, there’s much less leverage, both within the financial system but also in corporate America and also in consumer America. You know, you look at the level of debt; it is just down very dramatically. So, you know, I think actually the bigger worry, if you will, is that the slow growth tips into more a deflationary kind of thing. You know, that’s probably what we worry about the most, and we think—

Rebecca Katz: Well, explain deflation and why it’s so bad, because I’m not sure everyone understands that.

Bill McNabb: Well, you know, deflation means that the price of something tomorrow is lower than it is today.

Rebecca Katz: Which sounds good on the surface, like oil.

Bill McNabb: Right, but then what happens is everybody stops purchasing because tomorrow it’s going to be cheaper. And then you get to tomorrow, and the next day it’s going to be cheaper. So and growth just stops.

Bill McNabb: Now the Fed—

Tim Buckley: It’ll look like Japan.

Bill McNabb: Right, and this has happened in Japan, and it’s happened for brief periods in Europe over the last several years. You know, the central banks and the Fed, in particular, have been very, very attuned to this. And whatever anybody may think about their policies, the one thing I think they deserve a ton of credit for is that this has been a big focus, is to prevent that kind of scenario. So while we see growth being slow, as Tim described earlier, we don’t actually see it becoming deflationary. But, you know, to me that’s actually a bigger risk than the potential of another 2008 kind of situation today.

Rebecca Katz: Well, there’s this sense, we had a couple questions asking aren’t we overdue for a recession, and you were saying to me before we went on air that that’s because they tend to happen every 5 or 6 years.

Tim Buckley: Right at the end of every say 6 and, call it every 5-1/2 years. And as I was saying earlier, it’s not like one of those things you put a clock on. Like, “Hey, we’re out of the recession, and now we’ve got, you’ve got 5-1/2 years to make good, and then we’re going to dip back in.” You’ve had periods of time in the ’90s when I first came into this business, 1991 was an expansionary period that lasted for a decade. And, you know, so you have decade-long periods of expansion, so I’d be wary about putting a clock on an economy.

Bill McNabb: Right, one of the worst concepts that came about during the ’90s, and then it got repeated a little bit in the early 2000s, was there was a sense that we collectively were all smart enough to quote/unquote “defeat the business cycle.”

Rebecca Katz: Right.

Bill McNabb: Business cycles occur. Economies go through periods of more rapid growth than they do go through periods of recession. There is a natural refreshing, if you will, and you know, stronger companies rise up, weaker companies fail, and the whole system refreshes, if you will. This has been going on as long as there have been markets, and our view is that we will continue to see cycles. We don’t think anybody is smart enough to quote/unquote “control business cycles.”

Rebecca Katz: Right. Sounds somewhat healthy too. Well, speaking of prices getting lower, we’re going to shift gears here for a second because Charlotte in Jacksonville, Florida, had a Vanguard-specific question, which was “Should we expect to see expense ratio changes in 2016?” So the expenses that our mutual funds charge? Any changes coming in 2016?

Bill McNabb: Yes, so, Charlotte, you should expect that. You should always expect that of us. We believe one of our great missions is to continue to provide more and better service and really highly diversified, high-quality investment portfolios at an ever-decreasing price. And we’ve been fortunate over the 40 years that we’ve been in existence to almost every year be able to do that. Earlier, well, at the very end of last year, we announced as we’re going into this year a number of expense ratio reductions I think on 50 different funds. So we are continuing the mantra of trying to create more value for our investors.

Rebecca Katz: That’s great. Anything to add to that, Tim?

Tim Buckley: I mean it’s the sign that we’re doing our jobs well. I mean Bill said it. If we’re not reducing expense ratios, then we’ve got to look at how we’re doing business and how we’re investing in the business because we should improve service, give you outstanding returns, and drop that expense ratio. And, look, as the guy responsible for the investments, it makes our job easier when we have a lower expense ratio.

Rebecca Katz: That’s right, that’s right, because that’s a hurdle you have to beat in performance.

Tim Buckley: Yes, and everyone has to get over their costs.

Bill McNabb: I remind them of that every day.

Rebecca Katz: So we’re all working for you, Tim. We know that. Well, speaking of your dollar going a little farther, we had some questions about currency, and Ed in Cedar Park, Texas, asks, “How does the dollar’s rise affect the U.S. economy and stock market?” Again, I just traveled abroad. It was a wonderful thing. My dollar went further, but does it have some negative implications, or is it all positive?

Tim Buckley: It’s a little mixed bag. So for Ed, I mean if Ed’s going to travel like you were traveling, then it’s great. The strong dollar means you can buy more overseas. But a strong dollar, if you look at the economy, you know, the most obvious thing is exports. Our exports become more expensive to the globe. So once you leave the U.S., it costs more money to buy something from the U.S. if the dollar has appreciated. And that hurts the production part of the U.S. So in the economy, that’s about 16% of the jobs out there would be say manufacturing-type jobs and things where you’re producing goods and selling them overseas. So it’s a headwind there. There’s another one, for most people, it just means that, whether you’re traveling, there’s a stronger dollar. You can buy more. But, more importantly, when you’re here, all those imports are cheaper. Whether you’re buying cars or curtains or whatever you’re buying, we import a lot here in the U.S. And as a consumption economy, it’s cheaper for people to buy things. And that’s, to Bill’s earlier point, that’s deflationary. So that’s a deflationary effect on the economy. For our clients, probably the most important thing to talk about is what does it mean to my returns. So Bill just told me, like, I should be investing overseas.

Rebecca Katz: Right.

Tim Buckley: International. And if he said that last year too, and he said that last year, everyone’s probably sitting there going, “Yes, you told me rates weren’t going to go up dramatically and I listened to you there, but I did invest overseas and I got hurt. And I got hurt because the dollar appreciated.” And so when the dollar appreciates, your international investments, the return gets undermined by an appreciating dollar. I would caution people though to try to ignore the movements in the dollar. Yes, it’s going to take, now when you try to repatriate your profits from whatever investment you have abroad, you’re going to use more of that local currency to buy dollars so you can spend them here. But ignore that a bit because currency tends to wave up and down over time. There’s zero expected return from currency, which also means that if you go over time, you don’t know if it’s going to give or take, give or take. And it does both over time. So for a long-term investor, probably not worth worrying about. Where we do worry about is more where return’s a little bit meager, more meager, and there’s less volatility, and that’s in the bond market.

Rebecca Katz: Right.

Tim Buckley: And so with our Total International Bond Fund, we actually hedge that for our shareholders, taking currency out of it. There’s an expense to it, but we do hedge it, and it takes currency out of it so people don’t have to worry about that. And as one of the largest international bond fund hedged out there, certainly all of our clients benefited from it.

Rebecca Katz: Well, isn’t that because in large part people think about bond funds as being this ballast that you mentioned, the stabilizer, and currency would just make the returns too volatile.

Tim Buckley: You just make it a currency fund.

Bill McNabb: That’s exactly right.

Tim Buckley: That’s exactly it.

Rebecca Katz: Speaking of volatility, Jeff asks, well, he says, “Some experts say just peek at your portfolio balance once a year, or once a quarter,” actually, he says, “so you won’t freak out by the market volatility.” Is that your advice? Maybe it is once a year. How often do you peek?

Bill McNabb: So I’m actually kind of in the once a quarter. You know, it’s when my statements come, and I try not to look a whole lot more often than that, to be honest. So I think it’s very tempting. Obviously, we have all the data out there, and people are watching it. You have to have really great discipline here and not react to fluctuations up or down.

Tim Buckley: Rebecca, I’ll change this a little bit. If people could come and spend a day in the life with me, walk on the trading floor, and see— You know, all the movies show this panic, panicked traders. Look at the markets. They’re down 2%, sell, sell, sell. I mean it isn’t. It’s calm.

Rebecca Katz: It’s really boring.

Tim Buckley: The market opened— Yes, thank you, we’re boring.

Rebecca Katz: We’re sitting around looking at computers.

Tim Buckley: But if you came over—

Rebecca Katz: It’s very calm.

Tim Buckley: —the market opens up today, there’s no stress. Things are working fine. And these guys, volatility is second nature in investing. And, you know, they have a lot of responsibility, but they take it in stride. And so I take a piece of that and go, “Okay, well why would I go look at my portfolio right now and worry about it?” I take that strategy. I look only at those times where, “Hey, it’s time to rebalance. It’s time to reallocate.” That’s when I look. Other than that, I check out the website for checking out the mutual funds, information, make sure the right information’s up there, but I don’t go into my accounts.

Rebecca Katz: That’s great. We, well I think have already covered our next question on currency investing. Let’s take another from the questions that came in with registration. So we have a question from Dominick in Royersford who just says, “What’s your response to all of the doom and gloom prognosticators?” So we just tried to lay out some balanced perspective, but there are all these headlines every single day. It’s a lot like checking the markets. You don’t want to check through your television set. You know, what’s our response to that?

Bill McNabb: You know, again, we think things go in cycles, and we’re in a cycle now where the combination of geopolitical issues that are out there that are certainly significant; we’re just several years removed from a really very serious financial crisis. You know, we’ve seen this unbelievable change in the world economy due to China. Twenty-five years ago the Chinese economy wasn’t even measurable, and today it’s the second-largest economy in the world. So when you look at all that’s going on, you can understand why people step back when they look at all these headlines. But our view is you have to take a much longer view, and we look at the long-term prospects of growth in the U.S., and we think they’re actually quite good over a very long period of time. One really interesting stat our chief economist loves to remind people of, that if you look at the S&P 500 and the 500 companies that are there, 80% of their value, 80% of the companies roughly were created during recessionary times or just coming out of a recession. And so what you see is often great shoots of growth being created during these difficult times. So my, I have a very optimistic view of the longer term, but Tim said it right up front. With all the issues that are out there right now in the headlines, and valuations being pretty full, we expect, you know, the next 12 to 18 months to actually be pretty volatile. And we do expect, therefore, and the headlines will reflect that.

Rebecca Katz: Right.

Bill McNabb: But we don’t think it’s any reason for people to take a longer-term pessimistic view.

Tim Buckley: And I throw in there doom and gloom, I’ll build on what Bill said, because a lot of it is, right now, about China.

Rebecca Katz: Right, or Middle East crisis, too.

Tim Buckley: Or Middle East crisis, we can go to that. But China, people treat it like it is not an emerging market.

Rebecca Katz: But it’s large. It’s so large.

Tim Buckley: It’s large, but it’s an emerging market, and it is in the same fund with Russia, with Turkey. But everyone treats it like it’s this market that would operate in the same exact way as the U.S. Having talked to many officials over there, many businesses over there, it is a vibrant economy. You will find places that feel like Palo Alto or you’ll find innovation, great innovation. You’ll find areas of, well, bureaucracy. You’ll find all those things in a large economy, but it is one that you look at and say, “They’re learning as they go,” and do you want to be sitting on the sidelines? Uninvested? Do you want to be unexposed to the emerging markets, to China where you’re worried about it. If you’re a 20-year investor, if you’re a 10-year investor, or do you want to say, “Okay, well, I don’t know. Are they the equivalent of the U.S. in the ’50s, in the ’80s?” Whatever it is, are you willing to sit on the sidelines and wait until you’ve got the stability that you have in the U.S., and it’s growing at 2.2% a year?

Rebecca Katz: Well, I will say a lot of our viewers, based on the questions that were submitted, are those who are either nearing retirement or who are in retirement. We did get a lot of questions on, “Well what should I do?” And we’ve talked about that a little bit, but I mean might they think differently since they don’t necessarily, may have a 20-year time horizon or may not.

Tim Buckley: Well, it depends where you are in your retirement. If you’re towards the end of it, you’d be naturally ratcheting down your equity exposure. And remember also that there’s evaluation to everything. Just when there’s doom and gloom, it’s in the price. It’s in the price, so it’s already built into the price. So I discount the doom and gloom sometimes, and say, “Well, if it’s out there, then it’s already in the price by and large. Some of it is just that it gets more attention.”

Bill McNabb: You know, Rebecca, you’re right. An awful lot of the questions that were coming in were from retirees or near-retirees. You know, as you’re at that stage, well, we’ve talked about the need for equity exposure. You also should have significant fixed income exposure, even at these lower yields, as you get further into retirement. First of all, that’s what generates income. Second of all, it is what really tamps down volatility, and that’s really important when you’re at that phase. And so, again, there’s, but to do that, you still have to have confidence that the fixed income markets are going to work and the equity markets are going to work over the long run, which we do believe.

Rebecca Katz: Well, let’s go back to the fixed income markets. We just got a question about the rate increase. And it says, “Why is there so much concern around this? It was 25 basis points. It’s a tiny little rate increase. Wouldn’t the Fed raising rates indicate stability and strengthen the economy, and shouldn’t that help equities?

Bill McNabb: We agree.

Tim Buckley: Yes, we agree.

Bill McNabb: That’s all I can say is we agree.

Rebecca Katz: Thanks, Donald.

Bill McNabb: Donald, you have it right. It should have been viewed as good news.

Rebecca Katz: But the markets didn’t react that way.

Tim Buckley: Initially. I think there’s just overconcern about a slowdown in China, and now people will say we shouldn’t have raised rates because that will— Like 25 basis points shouldn’t change the behavior of companies in terms of are they going to be able to issue debt at a reasonable rate and grow the business? In fact, we saw the opposite. Kind of at zero rate, at that zero bound, we saw some behavior that may not be what you want, where companies were buying, issuing debt, and buying back more of their own stock. They weren’t investing in factories and expanding. It was distorted behavior.

Bill McNabb: Right.

Tim Buckley: So we actually think having a cost to capital is actually a good thing. Twenty-five basis points is not a killer cost to capital, alright? It’s not been cranked up. And nor has the Fed said they’re going to really crank it up, and that would slow down the economy. This is going to be a low, slow gradual rise, and it’s one that investors shouldn’t try to time and try to— We said this, I think the past three years, Bill?

Bill McNabb: Right.

Tim Buckley: We’ve said people have been worried about a rate rise. We said, “Well don’t do anything about it. Stay diversified. Don’t try to shorten your portfolio because this rise is not, stay with your diversified bond portfolio, and the worst thing you could have done over the past few years is to really shorten up your portfolio. You would have given up a lot of income and not really protected yourself from a dramatic rise.

Rebecca Katz: Okay, great. Well, speaking of Donalds and speaking of other things that’ll be in the news in 2016, it’s an election year, and I’m not asking about picks, but George in Mesa, Arizona, said, “What impact can elections have on financial markets?” Do we expect that—? I mean we’ve obviously had a lot of elections to look back on, regardless of who wins.

Bill McNabb: He’s had more than I have.

Rebecca Katz: Is there volatility because of that?

Bill McNabb: You know, so the short answer is it depends. I think the more uncertainty that gets created by any factor, and elections being included in that, the more potential there is for volatility. And I think, you know, what you’re seeing certainly play out, I think it is a contributing factor to the volatility right now. There’s just so much uncertainty as to what the political landscape’s going to look like a year from now in the U.S. and what policy decisions will be made there because of that. We’ve seen this play out historically numerous times. When you’re not clear on what fiscal policy might look like, tax policy, what the regulatory environment, how it’s going to be shaped, that can add volatility to the markets.

Rebecca Katz: We’ll just continue to take the long-term view and ride it out. We have a question from Steve in Southampton who wants to ask some questions again about Vanguard and asks, “What can we expect from Vanguard in 2016 and beyond?” So we’re aware of all this volatility, but what things are on the horizon for us as a firm?

Bill McNabb: Well, what we continue to try to do is, we continue to try to invest very heavily in the business so that we can provide even better and more comprehensive service to our investors. So that means enhancing the website and education materials and all the tools that we provide in making that more accessible on any device and so forth. So there’s a lot of work around the education aspect. You know, secondly, we have broadened our ability to provide financial advice for investors who need that, and we have a new service that we launched last May, as you know. And that has been embraced by thousands of investors over the course of the past year. We’re continuing to invest very heavily in that. You know, the third area that we’re spending a lot of money is on the technology front, and it’s trying to make ourselves more efficient and so forth. But it’s also trying to make ourselves even better on the whole risk spectrum, whether that’s cyber, whether that’s the infrastructure in terms of running the organization and so forth. So that’s another area investors don’t actually get to see in a sense that directly, but hopefully they feel it in terms of the quality of what we’re doing.

Rebecca Katz: That’s great. We have just enough time probably for two or three more questions. It’s hard to pick because there are a lot of good questions that have come in. Tim, maybe a question for you to go back to the economy. You mentioned that we are the tortoise, the U.S. economy tends to be, it’s right now a little bit more robust than other countries. But what makes us more stable? What are the kind of contributing factors that make us that tortoise as opposed to the hare?

Tim Buckley: Rebecca, as a contributing factor, it’s not going to be any one factor. If you look at the U.S. economy, you’ve got great industry. Industry that’s been, you know, right now their balance sheets are in great shape. They’re global companies. But they’re supported by this great infrastructure. They’re supported by infrastructure of higher education, of great rule of law, of IP, of a venture capital industry that doesn’t exist anywhere else. So we kind of have new ideas are born and new companies form, and they become multibillion-dollar companies. And you look at all of that, where you have more transparency in accounting than most other countries, all of that combined, oh, and by the way, we tend to be the best credit in the world, despite what some agencies may say. When there’s a crisis, the flight to quality is the U.S., which means we have a very low cost to capital relative to other countries. So we have a large, stable, very well-run economy, relative to the rest of the world, and you can’t point to just one factor. And I would also credit the Fed and the measures they took. We took the right measures when times were tough, and I think that’s mattered significantly as well.

Rebecca Katz: Anything to add?

Bill McNabb: Yes, it’s hard to add anything to that. Yes, the way I like to describe it is, you know, we have by far the most diverse and resilient economy in the world, and that resilience has really been on stage if you will. Tim mentioned venture in sort of passing. We also have the most entrepreneurially oriented economy in the world, and we’ve traveled, we get to travel the world. We get to meet with lots of different companies all around the globe. There is not a broad environment like that which exists in the U.S. for new ideas and new businesses to be created, and that is something that we should never take for granted.

Rebecca Katz: This gets to the heart of what America seems to be all about. That’s great.

Bill McNabb: Well, it’s also, you know, back to your doom and gloom prognostication question.

Rebecca Katz: Mine?

Bill McNabb: Well, no, I mean it was a very fair question from one of our investors. This is why I remain very optimistic about the long run.

Rebecca Katz: That’s great. Well, speaking of the long run, we have a group of investors who have a very long run ahead of them, millennials, Gen Yers. So, Bill, you might have a few of those in your own family. So what’s the best advice to give them?

Bill McNabb: Rebecca, I have four millennials in my family. So, look, I think there’s a couple things that every young investor should be doing. One, at a macro level, save as much as you can, as early as you can. And it’s really hard sometimes to get that started, but the earlier you start saving at the higher rate, the power of compounding, which Einstein described as the most powerful force in the universe, it really works on your behalf. And so what’s that mean practically? If you’re working for a company that offers a 401(k) plan, contribute to it so that you get the full match. You know, second after you do that, try to figure out how to accelerate paying down any student loans and debt that you may have. Third, make sure you’ve got a really good emergency fund established for yourself. These early habits and the saving early really makes a huge difference in the end. And then, you know, in terms of what you do with it, you know, I think, again, we both believe in balance and diversification. And so young investors, just like all investors, should be thinking about how to enter a diversified portfolio. You know, things like balanced funds or target date funds may be appropriate for millennial investors.

Rebecca Katz: That’s great. I think with that long point of view though, millennials have to be used to this long-term volatility too. Do we see differences in how our investors invest behavior wise? Are millennials more risk-averse or anything to show things like that?

Bill McNabb: So, you know, there were some early data that came out a couple years ago that, and the headline was millennials are more risk-averse because of many of them having gone through the great financial crisis and before that the tech wreck, just when many of them were emerging out of school. However, when you actually look at what they do from an investment perspective, at least based on our 401(k) data, we see most millennial investors using target date funds, which have a very, when you’re young, have a very high equity exposure. So they actually don’t, from a portfolio allocation standpoint, they don’t look any different than prior generations do in terms of the risk profile. And what they’ve done by using the automated 401(k)s and these target date funds is they’ve actually set themselves up in a way that they’re constantly rebalancing and keeping a portfolio allocation that makes sense for where they are in their career.

Rebecca Katz: That’s great. Well, unfortunately, we have a lot more questions on the economy, but we are pretty much out of time. So, I mean, Tim, I’ll give you the opportunity if you have a kind of closing thought about what we can expect over the coming years, since we don’t make one-year predictions.

Tim Buckley: And, Rebecca, I think Bill said it, which is hold tight, lower your expectations for returns, but, you know, don’t expect, it’s not going to be a smooth ride. It’ll be a bumpy ride, but if you can get 5% from a balanced portfolio, 6% from a balanced portfolio, that’s a great return over the long run. And just avoid the noise. There’s a lot of noise out there. It’s easy to get to panic when you hear about what’s going on in China or such. You know, please avoid that noise. The best thing you can do is save early, save often, and stay the course.

Rebecca Katz: And, Bill, any final parting words for our viewers?

Bill McNabb: Well, I think Tim captured sort of the advice, but I want to say to all of our investors just thank you. It’s a great privilege for us here at Vanguard to serve you. We greatly appreciate you being our clients, and you have our pledge that we’re going to continue to do everything in our power to deliver the highest-quality investments at the lowest cost possible, coupled with great service. Thanks for being with us tonight, and we look forward to doing more of these in the future.

Rebecca Katz: Well, and thanks to both of you for spending this great hour with us and would love to have you back more than once a year, so we’ll be talking again.

Tim Buckley: Maybe we’ll work that out.

Rebecca Katz: I think we can work that out. So, and thanks to all of you for spending your evening with us. Now a couple of asks. We would love it if you would fill out our survey. You can see that by clicking on the red widget and tell us what you liked, what you didn’t like, what you would like to see more of, would you like these fellows back, and I can make that happen. Also, we’ll be sending out a replay of tonight’s broadcast with a transcript for your convenience in a few weeks, so look for that email. And from all of us here at Vanguard, once again, thank you for your time, for your attention, and have a wonderful 2016.


*Quantitative easing is a monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.

Important information

An investment in the 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.

All investing is subject to risk, including possible loss of principal. Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.

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Vanguard Total International Bond Index Fund is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund’s foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in relevant currency exchange rates. The Fund will incur expenses to hedge its currency exposures.

Diversification does not ensure a profit or protect against a loss. Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling. You should consider whether you would be willing to continue investing during a long downturn in the market, because dollar-cost averaging involves making continuous investments regardless of fluctuating price levels.

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