The basics of investing

Succeed as an investor

Investment knowledge is important for families with

significant wealth—the more money you have, the more

complex investing gets. Without a solid foundation

of investment knowledge, it’s difficult to make educated

decisions regarding your finances.

Use this brochure to help position yourself for success.

Learn the investment basics and see how sticking with a plan

for the long term can help you build and maintain your wealth.

Saving versus investing 2

The three asset classes 3

The basics of mutual funds 6

Creating a portfolio 8

Why costs matter 11

Understanding performance 13

Four rules for successful investing 15

What’s next? 16

There’s a big difference between saving and investing.

When you save, you store your money away by putting

it in a safe place for a later time (a savings account at

a bank, for example). When you invest, you have a goal in

mind, like retirement, so you try to create more money

out of what you already have. Investing involves additional

risks, but you have the opportunity to earn a higher reward.

Saving versus investing

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Dividends

When a company distributes a portion of its earnings in cash or stock to its shareholders.

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Stocks

When you buy a stock, you invest in a company. In fact, you have ownership of that company, which allows you to share in the company’s financial performance, whether it’s good or bad. When a company does well, it may pay out some of its profits in the form of dividends to you, a shareholder. Or it may reinvest those profits in the company with the hopes of increasing sales, which could make your stock more valuable later.

Why invest in stocks? Of the three major asset classes, stocks have delivered the highest average returns over the long term (10.2% annually since 1926, compared with 5.5% for bonds and less for cash investments). And historically, they’ve outpaced inflation, a goal of many investors. However, it’s important to remember that they can be very volatile in the short term, and they’re subject to several types of risk:

Stock market risk: The risk that the stock market performs poorly.

Sector risk: The risk that the sector that the company is in, like health care, performs poorly.

The three asset classes

There are three primary asset classes you can invest your money in:

stocks, bonds, and cash investments. Eventually, you’ll need to decide

how you split your investment dollars among these three, a process

called asset allocation. But that’s something we’ll get into a little later.

Business risk: The risk that the company itself does poorly.

You can invest in domestic or international stocks. With domestic stocks, you’ll choose among large-, medium-, and small-capitalization companies.

Note: Market-cap values can shift over time. In addition, the companies within them can change too—going from large- to mid-cap, for example.

Market capitalization

A company’s net worth

Large-cap $10 billion plus (examples include Walmart, Exxon Mobil, and Apple).

Medium-cap $2 billion to $10 billion (examples include GNC, Five Below, and J. C. Penney).

Small-cap $2 billion and less (examples include Abercrombie & Fitch and Weight Watchers).

Interest

The amount charged for borrowing money, usually expressed as an annual percentage rate.

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You’ll also choose among domestic companies that are considered either “growth” or “value.” Growth stocks are companies believed to have strong expectations for future profits and growth. They usually pay lower dividends because these companies prefer to reinvest earnings into research and development. Value stocks are companies considered undervalued in the market. Generally, they offer higher dividend yields because these companies tend to distribute their earnings to shareholders.

Finally, with international stock investing, you’ll choose among developed markets (e.g., Europe and Japan) and emerging markets (e.g., India and China).

Bonds

A bond is like a loan. With a bond, you lend your money to an entity—such as a specific company or the government. In return, that entity gives you regular interest payments. Then, after a set number of years, when the bond reaches its maturity, it pays you back the whole amount borrowed—called the principal.

A bond’s maturity can be short-term (1 to 5 years), intermediate-term (5 to 10 years), or long-term (10 years or longer). In general, the longer the maturity, the more risk you take with your bond investment.

Why invest in bonds? The interest you receive provides you with regular income. This can be important, especially as you get older and reach retirement. A lot of investors also add bonds to a portfolio to offset the volatility of stocks. Cushioning your portfolio with bonds is called diversification, and it’s something we’ll get into shortly.

Like stocks, bonds have risks associated with them:

Credit risk: Also known as default risk, this is the possibility that the issuer of the bond won’t repay the interest or principal in a timely manner.

Interest rate risk: This is the possibility that a bond will decrease in value because of movements in interest rates.

Inflation risk: This is the possibility that the rising cost of living will reduce the returns on your bond investment.

With bonds, you can invest domestically or internationally, and you’ll choose among bonds issued by the government and by corporations:

U.S. government: These are bonds issued by the Treasury. They offer the lowest risk of default. That’s because they’re backed by the full faith and credit of the U.S. government.

State and local governments: These are issued by state, county, and municipal governments. Often called municipal bonds, these can be especially beneficial to high-net-worth investors as the interest paid is generally free from federal tax (and in some cases, from state and local income taxes as well).

Corporations: These are bonds issued by companies to finance a variety of operations as an alternative to issuing stock. Corporate bonds can be very safe when issued by strong, reputable companies; they can be risky when issued by weak ones.

International: You’ll choose among developed markets (e.g., Europe and Japan) and emerging markets (e.g., China and India). And like domestic bonds, you can choose among a country’s government or corporate bonds.

Bonds get more complex when we start discussing how interest rates affect them (that is—when interest rates rise, then bond prices fall, and vice versa), but we’ll cover that in our A closer look at bonds brochure.

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Cash investments

Cash investments are very short-term debt securities that mature in 90 days or less. They offer regular interest rate payments, but they usually have lower returns than bonds.

Why invest in them? Because cash investments are so short-term, they tend to remain stable. As a result, they can help you preserve your principal but also provide modest returns in the form of dividends and interest. In addition, your investment is considered liquid, so it’s quick to access and easy to get. Examples include money market funds, bank savings accounts, short-term certificates of deposit (CDs), and Treasury bills. Cash investments are useful when you’re saving for the immediate future— like buying a car, making a down payment on a home, or creating an emergency fund.

A general rule of thumb is that you should hold anywhere from three to six months’ worth of living expenses in cash investments for emergencies or unexpected life events.

Cash investments have many of the same characteristics of bonds, and as a result, have similar risks associated with them including credit risk, interest rate risk, and inflation risk.

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The basics of mutual funds

When you invest in a mutual fund, you pool your money

together with many other people in a fund, which then invests

in various securities. A professional manager oversees the

money, investing it based on the fund’s objective—like long-term

growth, current income, or stability of principal. Depending

on the fund’s objective, a fund may invest in stocks, bonds,

cash investments, or a combination of all three.

More about mutual funds

With a mutual fund, you purchase shares along with many other investors. The price of a fund share is called the net asset value (NAV). As an example, if you invest $1,000 in a fund with a NAV of $50, you’ll own 20 shares.

Why invest in a mutual fund? First of all, mutual funds can be low-cost investment options. In addition, they have some advantages over individual stocks or bonds, including:

Diversification: For a minimum investment, you gain exposure across broad market segments (see “Market indexes” on the next page) at a fraction of the cost of owning individual securities.

Professional management: You don’t have to keep track of the individual securities that make up the fund. A professional fund manager takes care of that by buying and selling as needed to help the fund meet its objectives.

Convenience/Liquidity: You can buy and sell mutual funds daily by phone or online, so you can always access your money.

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Active versus index

There are two types of mutual funds: index and active.

An index fund tries to track the return of a benchmark, such as the S&P 500 Index (see “Market indexes” below), by owning all (or a representative sample) of its securities. These funds won’t beat their market indexes, but they shouldn’t substantially underperform them either. They usually have lower costs than actively managed funds, and broad-market index funds can generally be more tax-efficient.

With an active fund, a manager attempts to “beat the market” by trying to exceed the average returns of the fund’s designated benchmark (or index). There’s the risk that the fund manager’s selection may underperform, but there’s also a chance it could do better. Because of the active approach to managing assets, these funds usually have higher costs and trade more often (which can make them less tax-efficient).

In a well-diversified portfolio that includes retirement and nonretirement accounts, active and index funds can complement each other.

What are exchange-traded funds (ETFs)?

ETFs are bundles of securities much like traditional mutual funds, and they offer many of the same benefits—low costs, diversification, and potential tax efficiency. However, instead of being priced at the end of each day, like traditional mutual funds, they’re priced and traded throughout the day, like individual stocks and bonds. With ETFs, you get the diversification of mutual funds and the trading flexibility of stocks and bonds. Keep in mind that you may pay brokerage commissions when buying or selling ETFs.

Market indexes

Interested in seeing how the stock market is doing on a particular day? There are a number of indexes that track specific companies so you can get a feel for how the market is performing. Here are a few of the well-known ones:

Dow Jones Industrial Average: This is the oldest index and is usually referred to as “the Dow.” It tracks the stocks of 30 major companies from a variety of industries. The companies change over the years, but to be included in the index, a company has to be considered extremely strong.

Standard & Poor’s 500 Index: The S&P 500 comprises the 500 leading companies. Because the companies included in this index tend to be the largest, it’s generally considered a good benchmark for large-cap stocks.

Nasdaq Composite Index: This index is simply referred to as “the Nasdaq” and includes nearly 3,000 of the world’s largest technology and biotech companies, such as Amazon, Apple, and Google.

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1. Identify your goals

The first step in creating a portfolio is to determine your financial goals. You can do this by considering three important factors:

Objective: What are you investing for? Examples include retirement, a home, and to preserve your wealth for future generations. By starting with your objective, you’ll have a better idea of how long you have to invest.

Time horizon: How long will it be before you need your money? Knowing this can help you determine if you can handle the ups and downs of the market.

Risk tolerance: How comfortable are you with the potential of losing money in the stock market? By gauging this, you can learn if you want to have a portfolio more heavily weighted in stocks or bonds.

2. Determine your asset allocation

Now that you know your goals, you can move to the next step of dividing your money among stocks, bonds, and cash investments—a process called asset allocation. This is one of the most important steps you can take, because it helps you control your exposure to risk and lets you position your portfolio for long-term success.

Creating a portfolio

To determine your ideal asset allocation, you can use our Investor Questionnaire on vanguard.com. You’ll receive a suggested allocation after answering specific investment-related questions.

3. Implement your asset allocation

After determining your asset allocation, your next step is to implement it and diversify. This is when you choose how your assets will be divided within the major asset classes. It’s called sub-asset allocation.

Selecting a stock allocation: You’ll choose among domestic and international stocks; and companies that are large, medium, and small.

Selecting a bond allocation: You’ll choose among domestic and international bonds; government and corporate bonds; and durations that are long-term, intermediate-term, and short-term.

Please keep in mind that even a well-diversified portfolio doesn’t protect you from a loss caused by an overall decline in the financial markets.

Now that you know about the three major asset classes and

mutual funds, you can learn how to create a portfolio.

Let’s take a look at how we recommend you should do it.

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4. Select your investments

Although it seems counterintuitive, one of the last steps in creating a portfolio is choosing your individual investments. You can select from many different vehicles including mutual funds, individual stocks and bonds, and more. We talked a lot about mutual funds earlier, which is what we recommend using to create a diversified portfolio.

5. Rebalance your portfolio

If you don’t monitor and rebalance your portfolio from time to time, you can drift away from your target asset allocation, becoming more heavily invested in stocks or bonds. When you become more heavily invested in stocks, you may take on more risk than you’re comfortable with. You can manage that risk with disciplined rebalancing.

Conservative portfolio Moderate portfolio Aggressive portfolio

Historical returns 1926–2014 Historical returns 1926–2014 Historical returns 1926–2014

Average annual return 6.7%Best calendar year 29.8%Worst calendar year –10.1%

20% Stocks80% Bonds

Average annual return 8.4%Best calendar year 32.3%Worst calendar year –22.5%

Average annual return 9.6%Best calendar year 45.4%Worst calendar year –34.9%

50% Stocks50% Bonds

80% Stocks20% Bonds

Sample investment portfolios

Take a look at the examples below to see how different asset allocations result in different levels of risk and return over the long term. As you can see, the returns of these hypothetical portfolios suggest just how unpredictable the markets can be in a given year.

When determining which index to use and for what period, we selected the index that we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available. For U.S. stock market returns, we use the Standard & Poor’s 90 Index from 1926 through March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Wilshire 5000 Index from 1975 through April 22, 2005; the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013; and the CRSP US Total Market Index thereafter.

For U.S. bond market returns, we use the S&P High Grade Corporate Index from 1926 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, the Barclays U.S. Aggregate Bond Index from 1976 through 2009, and the Spliced Barclays U.S. Aggregate Float Adjusted Bond Index thereafter.

For U.S. short-term reserve returns, we used the Ibbotson 1-Month Treasury Bill Index from 1926 through 1977 and the Citigroup 3-Month Treasury Bill Index thereafter. These hypothetical illustrations do not represent the return on any particular investments. 10

*Sources: Vanguard and Lipper, a Thomson Reuters Company, as of December 31, 2014. 11

Why costs matter

It’s impossible to predict how the markets will perform.

But there is something you can control that affects your returns:

costs. While they may not seem like a big deal, higher costs

mean less money for you in the long term. That’s because they

can significantly decrease a portfolio’s growth over time.

Costs associated with mutual funds

There are several types of costs associated with mutual fund investing, including:

Expense ratios: Every mutual fund has an expense ratio. This is money deducted from the fund’s assets to pay for annual operating expenses (such as advisory fees and legal and accounting services). The industry average expense ratio for mutual funds is 1.02%. The average expense ratio for Vanguard mutual funds is 0.18%, which is less than one-fifth the industry average.*

Taxes: The profits on a mutual fund investment are typically subject to federal and state taxes, unless you’re investing in a retirement account (like an IRA). In a regular account, you’ll also receive dividend and capital gains distributions that you’ll have to pay taxes on, and this can diminish your returns.

Other costs you may encounter with mutual funds or other investment vehicles include marketing fees, sales charges, and trading costs.

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A look at the impact of higher costs

Review the table below, which portrays a low-cost mutual fund versus the industry average based on a $1 million investment over 10 years.

You’ll notice that if you choose the low-cost fund with an expense ratio of 0.18%, you’ll pay $31,975 in expenses over 10 years. With the high-cost fund, on the other hand, you’ll pay $174,506. That’s a significant amount more. By choosing the lower-cost fund, you could keep $142,531 more of your returns.

How you can control costs

As illustrated by the table to the left, it’s important to choose funds that have lower expense ratios. Index funds, because they’re passively managed and simply track an index, generally have lower expense ratios. You should also consider funds that are tax-efficient. Again, index funds can be a good choice because they generally have less trading associated with them, and as a result, distribute less taxable income in the form of dividends and capital gains.

You can keep more of your returns by focusing on costs and being an expense-conscious and tax-efficient investor.

Fund type Expenses paid

Vanguard average expense ratio 0.18%

$31,975

Industry average expense ratio 1.02%

$174,506

Source: Vanguard.

This hypothetical illustration assumes an annual 6% return for both examples. This illustration does not represent any particular investment nor does it account for inflation. There may be other material differences between investment products that must be considered prior to investing.

Chasing hot-performing stocks and mutual funds can be a

losing strategy. There’s no way to predict how the markets will

perform, which is why we recommend controlling your costs,

diversifying across asset classes to reduce risk, and thinking long

term to reach your investment goals.

Capital gains

When a fund manager sells the stocks or bonds of a mutual fund at a profit, those profits are then distributed to you in the form of capital gains.

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Having long-term perspective is especially important when you consider performance and the power of compounding, which happens when you:

1. Invest money.

2. Receive returns on it in the form of interest, dividends, or capital gains.

3. Reinvest those returns.

See the next page to take a closer look at the power of compounding and the effect it can have on your returns.

A look at total return

You can measure the performance of your portfolio by understanding total return, or the percentage increase or decrease—before taxes—in the value of an investment over a specific time. Total return includes any distributions from the investment and any changes in its market value.

For mutual funds, you can look at total return in the following way:

Capital return (change in the value or price of an investment)

Income return (dividend, capital gains, or interest earned on an investment)

Total return

When total return is calculated, it assumes that income and capital gains distributions are reinvested. Total returns are commonly quoted for time periods of one, five, and ten years.

Understanding performance

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Effect of compounding over time

If you’re patient and disciplined, your money can work for you and make a real difference in your account balance. The following chart illustrates how your money can grow over time due to compounding.

This hypothetical example assumes two initial 10,000 investments that each earn 6% ($600) annually. The flat lower line shows the investment value when those earnings are withdrawn each year. The curved upper line shows the value when earnings are reinvested annually. As the reinvested earnings generate their own annual returns at 6%, the accumulated value accelerates toward the end of the 20-year and 40-year periods. The expense ratio assumed in this example is 0.23%. Taxes are not included in the calculations. This hypothetical example does not represent returns on any particular investments.

$120,000

100,000

80,000

60,000

40,000

20,000

00 5 10 15 20 25 30 35 40

Years

Returns reinvested:$102,857

Returns reinvested:$30,627

Returns not reinvested:$10,000

Effect of compounding over time

If you’re patient and disciplined, your money can work for you and make a real difference in your account balance. The following chart illustrates how your money can grow over time as a result of compounding. The blue line represents an investor who reinvested his or her earnings, such as dividends and capital gains, allowing the returns to work and grow over time. The orange line, on the other hand, shows an investor who did not reinvest his or her earnings (an amount of $23,240 over 40 years), taking them as cash each year and keeping the account steady.

This hypothetical example assumes two initial $10,000 investments that each earns 6% ($600) annually. The flat lower line shows the investment value when those earnings are withdrawn each year. The curved upper line shows the value when earnings are reinvested annually. As the reinvested earnings generate their own annual returns at 6%, the accumulated value accelerates toward the end of the 20-year and 40-year periods. The expense ratio assumed in this example is 0.18%. Taxes are not included in the calculations. This hypothetical example does not represent returns on any particular investments.

$120,000

100,000

80,000

60,000

40,000

20,000

00 5 10 15 20 25 30 35 40

Years

Returns reinvested:$95,706

Returns reinvested:$30,936

Returns not reinvested:$10,000

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You’ve learned the basics: asset classes, asset allocation and

diversification, costs, and much more. As you can see, you don’t

have to be an expert to succeed as an investor—but it does take

planning and discipline.

We’ve talked about all of these throughout this brochure, but to summarize, here are four rules of investing that can help you achieve your objectives.

1. Create clear, appropriate investment goals

You have investment goals whether it’s investing for college, retirement, or something else. Outline these goals, document how much you want to save, and then regularly evaluate how you’re progressing.

2. Develop a balanced portfolio

Because of the financial market’s ups and downs, it’s important to invest across stocks, bonds, and cash investments. That way, when some investments are underperforming, others can help carry the load.

3. Minimize cost

Choosing low-cost and tax-efficient investments can help you keep more of your returns.

4. Maintain discipline

Thinking long term by adopting a buy-and-hold strategy can help you tune out market noise and stay on track with your investment goals.

You can read more about each of these rules in Vanguard’s principles for investing success.

Four rules for successful investing

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What’s next?

These are just the basics of investing, and we’re sure you

still have questions. But know that we’re here to help.

Feel free to contact your relationship team to learn more

and to discuss your unique investment needs.

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© 2015 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

FMINVB 072015

Vanguard Flagship Services®

P.O. Box 1103Valley Forge, PA 19482-1103

Connect with Vanguard® > vanguard.com > 800-345-1344

All investing is subject to risk, including the possible loss of the money you invest.

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.

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.

For more information, visit vanguard.com, or call 800-345-1344, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.