Making Investing Easy

The basics:

Making investing easy

® Vanguard Financial Education Series ® Today’s agenda

1. Taking the first step to investing. 2. Understanding stocks and bonds. 3. Choosing the right investment mix.

4. Where should you invest?

5. How to select a mutual fund. 6. Applying what you’ve learned.

2 Establish a savings program

Save regularly.

Identify your goals. − Save for retirement. − Establish an emergency fund.

3 “I earn just enough money to get by. I’d have to make a lot more before I could increase my savings.”

4 *mythbuster It’s not how much you make that determines whether you get ahead.

The secret to financial success is a lifelong commitment to saving.

Workbook reference: page 6

5 The power of compounding

$310,868 Investment earnings Amount saved

$262,868 $135,940

$54,914 $99,940

$17,384 $7,040 $30,914 $5,384 $48,000 $1,040 $24,000 $36,000 $6,000 $12,000 5 years 10 years 20 years 30 years 40 years Assumes savings of $100 a month and an 8% average annualized rate of return. This example

6 is hypothetical and does not represent the returns from any particular investment. Today’s agenda

1. Taking the first step to investing. 2. Understanding stocks and bonds. 3. Choosing the right investment mix.

4. Where should you invest?

5. How to select a mutual fund. 6. Applying what you’ve learned.

7 Investment categories

Short-term reserves.

Bonds.

Stocks.

8 Short-term reserves

Stable value investment. Examples: Short-term investments. – Money market account. – Certificate of Liquidity. deposit (CD). Risk factor. – Savings account. − Inflation risk.

Workbook reference: page 11

9 Bonds

Debt obligation. Examples: Current interest income. – Treasury bond. – Corporate bond. Fixed maturity. – Municipal bond. Risk factors. – Credit risk. – Interest rate risk.

Workbook reference: page 13

10 Stocks

Represent ownership Examples: rights in a corporation. − Large company stock. Potential for capital − Small company stock. growth and dividend − International stock. income. Fluctuating share price. Risk factors. − Market risk. − Sector risk. − Business risk. Workbook reference: page 14 11 Investment returns (1926–2006) 10.5% Average annual Short-term reserves return

Bonds

Stocks 7.5% Return 5.5% after inflation 3.9% 2.5% 0.9%

3.0% 3.0% 3.0% Inflation rate

Stocks: S&P 500 Index 1926–1970, Dow Jones Wilshire 5000 Index 1971–April 22, 2005, MSCI US Broad Market Index thereafter. Bonds: S&P High Grade Corporate Index 1926–1968, Citigroup High Grade Index 1969–1972, Lehman Long-Term AA Corporate Index 1973–1975, Lehman Aggregate Bond Index thereafter. Short-term Reserves: Citigroup 3-Month Treasury Bill Index. 12 Source: The Vanguard Group. Risk vs. Return (1926–2006)

Percent

Stocks: S&P 500 Index 1926-1970, Dow Jones Wilshire 5000 Index 1971-April 22, 2005, MSCI US Broad Market Index thereafter. Bonds: S&P High Grade Corporate Index 1926-1968, Citigroup High Grade Index 1969-1972, Lehman Long-Term AA Corporate Index 1973-1975, Lehman Aggregate Bond Index thereafter. Short-term Reserves: Citigroup 3-Month Treasury Bill Index. 13 Source: The Vanguard Group. What we’ve learned so far

Short-term reserves Bonds Stocks Objective Stability Income Growth Volatility Low Moderate/high High Inflation risk High Moderate/high Low

14 ® x workssheet

Investment categories

Short term Growth Municipal Liquid Credit quality Fixed maturity date Long term Ownership Microsoft® I.O.U. Stability High inflation risk Income High volatility Money market

15 15 What is “the market?”

Dow Jones Industrial Average. − 30 well-known stocks. Standard & Poor’s 500 Index. − 500 leading stocks. Wilshire 5000 Index. − Broadest measure of U.S. stocks. NASDAQ Composite Index. − Over 4,000 stocks listed on a national computerized system. Workbook reference: page 19

16 Today’s agenda

1. Taking the first step to investing. 2. Understanding stocks and bonds. 3. Choosing the right investment mix.

4. Where should you invest?

5. How to select a mutual fund. 6. Applying what you’ve learned.

17 What do you want from your money?

Why am I saving this money?

When am I going to need this money?

What is my risk tolerance?

18 actioniitem

Write down your goals in order of importance, how much time you have to reach them, how much money you estimate that you’ll need, and how much you’ve saved for the goal already (if any).

Goal Years to goal Amount needed Amount saved 1. $ $ 2. $ $ 3. $ $ 4. $ $ 5. $ $

Workbook reference: page 27

19 “To make money as an investor, you need to spend your time finding the best-performing mutual funds.”

20 20 *mythbuster Studies have shown that choosing a mix of investments is the most important investment decision you’ll make.*

Focus on your mix, not the specific funds.

*The Vanguard Group. Workbook reference: page 28

21 22 What your score means

Vanguard’s suggested investment mixes Overall score 7-22 100% e

m 20% o 23-28 80% c n I 29-35 30% 70%

36-41 40% 60% d e c

n 50% a 42-48 50% l a B 49-54 60% 40%

55-61 70% 30% h t w

o 80%

r 62-68 20% G

69-75 100% Stocks Bonds

23 Model portfolios 1926–2006 Average annual Number of years Your asset allocation Average loss return with a loss 100% bonds 5.5% 13 of 81 -3.1% 20% stocks 80% bonds 6.8% 11 of 81 -4.0% Income 30% stocks 70% bonds 7.4% 13 of 81 -4.7% 40% stocks 60% bonds 7.9% 15 of 81 -5.5% 50% stocks 50% bonds 8.5% 16 of 81 -6.8%

Balanced 60% stocks 40% bonds 8.9% 20 of 81 -7.1% 70% stocks 30% bonds 9.4% 21 of 81 -8.5% 80% stocks 20% bonds 9.8% 22 of 81 -9.8% Growth 100% stocks 10.5% 24 of 81 -12.2%

Stocks: S&P 500 Index 1926–1970, Dow Jones Wilshire 5000 Index 1971–April 22, 2005, MSCI US Broad Market Index thereafter. Bonds: S&P High Grade Corporate Index 1926–1968, Citigroup High Grade Index 1969–1972, Lehman Long-Tern AA Corporate Index 1973–1975, Lehman Aggregate Bond Index thereafter. Short-term Reserves: Citigroup 3-Month Treasury Bill Index. 24 Source: The Vanguard Group. Today’s agenda

1. Taking the first step to investing. 2. Understanding stocks and bonds. 3. Choosing the right investment mix.

4. Where should you invest?

5. How to select a mutual fund. 6. Applying what you’ve learned.

25 Choosing your investments

Years until goal Investment choices 0–2 years Short-term reserves 2+ years Mix of stocks and bonds

26 ® Short-term reserves

Maintain steady value.

Convenient, easily accessed, low cost.

Examples: − Money market account. − Short-term CDs. − Savings account.

27 ® Bonds

High quality. − U.S. government and high-rated corporate.

Short-to-intermediate term. − Short: 1–5 years maturity. − Intermediate: 6–10 years maturity.

Workbook reference: page 38

28 Stocks

Match the U.S. market. − Approximately large companies. − Approximately smaller companies. Diversity with international. − Up to 20% of total stock holdings.

29 ® Today’s agenda

1. Taking the first step to investing. 2. Understanding stocks and bonds. 3. Choosing the right investment mix.

4. Where should you invest?

5. How to select a mutual fund. 6. Applying what you’ve learned.

30 What is a mutual fund?

Short-term reserves Mutual fund Money manager Bonds

Stocks

Workbook reference: page 40

31 31 Mutual fund advantages

Diversified.

Professionally managed.

Investment costs.

Convenient.

32 What is a money market fund?

Invests in short-term, high-quality investments. − CDs. − U.S. government securities. Seeks to provide current income (interest), while maintaining a stable share price.

Dollar in/dollar out.

33 ® What is a bond fund?

Invests in individual bonds. − U.S. government. − Corporate. − Municipal. No fixed maturity with a fund compared to an individual bond.

Emphasizes income rather than growth.

34 ® What is a stock fund?

Holdings consist mainly of stocks.

Typically emphasizes growth rather than income.

35 Two paths to invest for retirement

One decision: Self-directed: − Select your − Complete the retirement date. Investor Questionnaire. − Select your fund. − Choose your − Managed by Vanguard. investment mix. − Select your funds. − Monitor your investment mix.

36 ® One decision

Stocks Bonds Your age at year-end Potential fund choice Investment mix* 10% 18–24 Vanguard Target Retirement 2050 Fund** 90% 10% 25–29 Vanguard Target Retirement 2045 Fund** 90% More aggressive 10% 30–34 Vanguard Target Retirement 2040 Fund** 90% 10% 35–39 Vanguard Target Retirement 2035 Fund** 90%

13% Less aggressive 40–44 Vanguard Target Retirement 2030 Fund 87%

*Approximate allocation targets for each fund as of December 31, 2006. Allocations for date-specific funds will shift (from stocks to bonds and short-term reserves) over time based on an assumed retirement age of 65. **The target allocation of the funds dated 2035 through 2050 are currently identical; however, as time passes, each fund will gradually shift toward a more conservative allocation depending on the maturity date of the fund.

Risk level takes into account the different types of risk applicable to each fund’s asset class and investment style. 37 If you think you’ll retire significantly earlier or later, you may want to consider a fund with an asset allocation more appropriate to your situation. One decision

Stocks Bonds Short-term reserves Your age at year-end Potential fund choice Investment mix*

21% 45–49 Vanguard Target Retirement 2025 Fund 79% 29%

50–54 Vanguard Target Retirement 2020 Fund More aggressive 71%

36% 55–59 Vanguard Target Retirement 2015 Fund 64% 45% 60–64 Vanguard Target Retirement 2010 Fund 55% 1% 65–70 Vanguard Target Retirement 2005 Fund 44% 55% 5% 71+ Vanguard Target Retirement Income Fund 30% Less aggressive 65% *Approximate allocation targets for each fund as of December 31, 2006. Allocations for date-specific funds will shift (from stocks to bonds and short-term reserves) over time based on an assumed retirement age of 65.

Risk level takes into account the different types of risk applicable to each fund’s asset class and investment style. 38 If you think you’ll retire significantly earlier or later, you may want to consider a fund with an asset allocation more appropriate to your situation. Target Retirement Fund glide path

2050 2045 2040 2035 2030 2025

2020

k 2015 c o t s 2010 n i

e g

a 2005 t n e c r e

PP Income

Age

Approximate allocation targets for each fund as of December 31, 2006.

39 Become a Sherlock Holmes of mutual funds

Consider index funds.

Pay close attention to fund costs.

40 Management style goals

Active: Passive (indexed): − Outperform the market. − Match the market. − Rely on the portfolio − Compose a portfolio manager’s judgment. identical to, or a representative sample of, a targeted index.

41 ® Why fund expenses matter $96,684

$68,485

$10,000 $10,000

25 years of investing

This hypothetical example does not represent the Workbook reference: page 51 return on any particular investment. 42 Create your own portfolio

A diversified fund line-up to select from. . .

43 ® Today’s agenda

1. Taking the first step to investing. 2. Understanding stocks and bonds. 3. Choosing the right investment mix.

4. Where should you invest?

5. How to select a mutual fund. 6. Applying what you’ve learned.

44 Four-step investment plan

Make saving a habit.

Enroll in your plan.

Establish your goals.

Complete the Investor Questionnaire.

Workbook reference: page 58

45 To enroll/increase your contribution

Contact: − Vanguard.com® − Participant Services at 800-523-1188. Plan number: 078067

46 ® Where to go for help

Books and publications.

Online services.

Financial planning software.

Workbook reference: page 59

47 47 +vanguardservices • Online calculators and worksheets. • Retirement Resource Center. IRAs. • Investor education.

Visit Vanguard.com Accounts − 529 Plans Workbook reference: page 60

48 Vanguard.com

Secure account balance information at a glance.

Quick-and-easy-transactions with helpful tips.

Personalized performance snapshots.

Easy-to-read library of investment information.

Helpful planning tools to manage personal finances.

49 ® Putting it all together

Establish a savings program.

There are different investments for different objectives. Mutual funds are a low-cost way to diversify.

Asset allocation matters most.

Investing doesn’t have to be difficult.

50 ® For more information about any fund, including investment objectives, risks, charges, and expenses, call The Vanguard Group at 800-523-1188 to obtain a prospectus. The prospectus contains this and other important information about the fund. Read and consider the prospectus information carefully before you invest. You can also download Vanguard fund prospectuses at www.vanguard.com.

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

Although Target Retirement Funds can simplify investment selection, all mutual fund investing is subject to risk. Each Target Retirement Fund invests in up to seven broadly diversified Vanguard funds and is subject to the risks associated with those underlying funds. Diversification does not ensure a profit or protect against a loss in a declining market.

The Vanguard Group, Vanguard, Vanguard Financial Education Series, and Vanguard.com are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners.