Vanguard's principles for investing success - Find a Society

 
Vanguard's principles for investing success - Find a Society
Vanguard’s principles
       for investing success

Authorized by Vanguard Investments Canada Inc. for investor use.
About Vanguard

The Vanguard Group, Inc.                                 Vanguard Investments Canada Inc.

• Founded: 1975                                          • Founded: December 2011

• Corporate headquarters: Valley Forge,                  • Headquarters: Toronto, Ontario, Canada
  Pennsylvania, United States
                                                         • Total assets: $11.0 billion
• Total assets: $5.7 trillion worldwide
                                                         • Number of products: 33 ETFs listed on
• Number of products: More than 350                       Toronto Stock Exchange
  mutual funds and ETFs worldwide

Source: The Vanguard Group, Inc. as of March 31, 2017.
Note: All assets are in CAD.
                                                                        Authorized by Vanguard Investments Canada Inc. for investor use.   2
What makes us different

Our core purpose:
To take a stand for all investors, to treat them fairly
and to give them the best chance for investment success.

                                            Client                Low-cost
                                            focus                 investing

                                                      Long-term
                                                       thinking

                                                                        Authorized by Vanguard Investments Canada Inc. for investor use.   3
Vanguard’s principles for investment success

                           Goals               Balance

                            Cost               Discipline

                                                    Authorized by Vanguard Investments Canada Inc. for investor use.   4
Create clear, appropriate investment goals

• Recognizing constraints is essential to developing an investment plan
• A basic plan will include specific, attainable expectations about
  contribution rates and monitoring
• Discouraging results often come from chasing market returns, an
  unsound strategy that can seduce investors who lack well-grounded
  plans for achieving their goals
• Without a plan, investors can be tempted to build a portfolio based on
  transitory factors such as fund ratings—something that can amount to a
  “buy high, sell low” strategy

                                                                      Authorized by Vanguard Investments Canada Inc. for investor use.   5
Define the goal and constraints

Example of a basic framework for an investment plan

 Objective                                           Save $1,000,000 for retirement, adjusted for inflation

 Constraints                                           30-year horizon
                                                       Moderate tolerance for market volatility and loss; no tolerance for nontraditional risk
                                                       Current portfolio value $50,000
                                                       Monthly net income of $4,000; Monthly expenses of $3,000
                                                       Consider impact of taxes on portfolio allocations and returns

 Saving or spending target                           Ability to contribute $5,000 in first year
                                                     Intention to raise contribution by $500 per year, to a maximum of $10,000 annually

 Asset allocation target                             70% allocated to diversified stock funds; 30% allocated to diversified bond funds

 Rebalancing methodology                             Rebalance annually

 Monitoring and evaluation                           Periodically evaluate current portfolio value relative to savings target, return expectations and
                                                      long-term objective
                                                     Adjust as needed

This example is completely hypothetical. It does not represent any real investor and should not be taken as a guide. Depending on an actual investor’s circumstances, such a plan or
investment policy statement could be expanded or consolidated. For example, many financial advisors or institutions may find value in outlining the investment strategy, i.e. specifying
whether tactical asset allocation will be employed, whether actively or passively managed funds will be used and the like.
Source: Vanguard.
                                                                                                                             Authorized by Vanguard Investments Canada Inc. for investor use.   6
Without a plan, many invest bottom up

Investors tend to buy highly rated funds even as they underperform

Median performance of funds versus style benchmarks                                                       Cash flows for Morningstar-rated funds in periods after the ratings
over the 36 months following a Morningstar rating                                                         were posted
                                                                                                                                                10
                                        0.0%

                                                                                                          Cummulative cash flows ($ billions)
 Annualized 36-month fund performance

                                        -0.5%
                                                                                                5-star                                          5
                                                                                                4-star
                                                                                                3-star
         relative to benchmark

                                                -0.7%                                                                                            0
                                        -1.0%            -0.9%                                  2-star
                                                                  -1.0%                         1-star
                                                                                                                                                 -5
                                        -1.5%

                                                                           -1.6%                                                                -10

                                        -2.0%
                                                                                    -2.0%                                                       -15
                                                                                                                                                      1Yr                      3Yr                        5Yr
                                        -2.5%
                                                5-star   4-star   3-star   2-star   1-star                                                             5-star    4-star    3-star    2-star    1-star

Notes: Data cover the period from January 2002 to December 31, 2016. Morningstar changed its rating methodology during this period, but there was no material
impact on our analysis. The analysis includes all share classes of Canadian equity funds, both live and obsolete. To be included, a fund had to have a Morningstar
Rating and 36 months of continuous performance following the rating date. Fund returns are net of expenses, but not of any loads. The results are relative to the
funds’ category benchmark as defined by Russell, however similar results were achieved relative to MSCI and Standard and Poor’s indexes as well.
Sources: Data on cash flows, fund returns and ratings were provided by Morningstar. Index data to compute relative excess returns were provided by Thomson
Reuters Datastream. More information is available in the Vanguard research paper Mutual Fund Ratings and Future Performance (Philips and Kinniry, 2010).
                                                                                                                                                       Authorized by Vanguard Investments Canada Inc. for investor use.   7
Key takeaways

• Define goals clearly
• Approach planning with a level head
• Create a detailed, specific plan

                                        Authorized by Vanguard Investments Canada Inc. for investor use.   8
Develop a suitable asset allocation using broadly diversified funds

•   A diversified portfolio’s proportions of stocks, bonds and other
    investment types determine most of its return as well as its volatility
•   Attempting to escape volatility and near-term losses by minimizing
    stock investments exposes investors to other types of risk, including
    the risks of failing to outpace inflation or falling short of an objective
•   Realistic return assumptions—not hopes—are essential in choosing
    an allocation
•   Leadership among market segments changes constantly and
    rapidly, so investors must diversify both to mitigate losses and to
    participate in gains

                                                                             Authorized by Vanguard Investments Canada Inc. for investor use.   9
The mixture of assets defines the spectrum of returns

Returns for the 95th and 5th percentiles and on average for various equity/fixed income allocations, 1901–2016

Portfolio allocation       100%        90%         80%        70%         60%        50%        40%         30%         20%        10%         0%         Fixed income
                            0%         10%         20%        30%         40%        50%        60%         70%         80%        90%        100%        Equity

Annual returns 40%                                                                                                                           36.1%
                                                                                                                                  33.0%
                                                                                                                      29.9%
                 30%                                                                                       26.8%
                                                                                               23.7%
                          19.3%                                         19.3%       21.3%
                 20%                 17.6%       16.4%      17.5%

                                                                        6.8%        7.2%        7.6%       8.0%        8.3%       8.7%        8.9%        Average
                 10%      4.7%        5.3%       5.8%        6.3%

                   0%
                            -4.5%     -3.7%
                 -10%                            -4.5%       -5.2%      -6.7%       -7.3%
                                                                                               -9.7%      -11.3%
                 -20%                                                                                                 -13.6%
                                                                                                                                 -16.4%
                                                                                                                                             -19.1%
                 -30%

For illustrative purposes only. The hypothetical portfolios do not represent the return on any particular investment.
Notes: Equities are represented by the DMS Canada Equity Index from 1901 to 1984, and the S&P/TSX Composite Index thereafter. Fixed income is represented by the DMS Canada
Bond Index from 1900 to 1984, the Citigroup World Government Bond Index from 1985 through 2001 and the Bloomberg Barclays Canadian Issues 300MM Index thereafter. Data are
through December 31, 2016.
Sources: Vanguard, using data from Morningstar, Inc. and Barclays.
                                                                                                                   Authorized by Vanguard Investments Canada Inc. for investor use.   10
The importance of asset allocation

Investment outcomes are largely determined by the long-term mixture of assets in a portfolio

Percent of a portfolio's movements over time explained by:

                                                     86% Asset allocation
                                                     14% Security selection and market timing

Note: Calculations are based on monthly returns for 303 Canadian funds from January 1990 to September 2015. For details of the methodology, see the Vanguard research paper The
global case for strategic asset allocation and an examination of home bias (Scott et al., 2016).
Sources: Vanguard calculations, using data from Morningstar, Inc.
                                                                                                                     Authorized by Vanguard Investments Canada Inc. for investor use.   11
Diversification can protect against catastrophic loss

The ten worst and best stocks in the S&P/TSX Index in 2008

Worst performers                                       Return (%)         Best performers                                         Return (%)
Nortel Networks Corp.                                         -89.99      Fording Candadian Coal Trust                                 135.77
Uranium One Inc.                                              -88.45      Eldorado Gold Corp.                                            65.52
Teck Resources Ltd.                                           -82.83      Celestica Inc.                                                 51.64
Nova Chemicals Corporation                                    -81.53      Metro Inc.                                                     43.06
Lundin Mining Corp.                                           -81.13      Fairfax Financial Holdings Ltd.                                38.25
Opti Canada Inc.                                              -80.66      Kinross Gold Corp.                                             23.46
First Quantum Minerals Ltd.                                   -79.09      Agnico-Eagle Mines Ltd.                                        15.63
Sherritt International Corp.                                  -75.70      Goldcorp Inc.                                                  14.21
Inmet Mining Corp.                                            -75.53      George Weston Ltd.                                             13.89
Ivanhoe Mines Ltd.                                            -69.72      Open Text Corp.                                                13.13

Sources: FactSet and Vanguard as of December 31, 2008.
For illustrative purposes only. Please note that this example reflects the financial crisis and, in particular, the fact that the majority
of the decline in stock prices occurred in 2008.
Examples of underlying securities mentioned in this material should not be construed as a recommendation to buy, sell or hold the securities.
                                                                                                                           Authorized by Vanguard Investments Canada Inc. for investor use.   12
Key takeaways

•   A portfolio’s asset allocation is responsible for its risk and return
•   Stocks have the greatest expected return and risk
•   Avoiding stocks and their volatility means assuming additional risks
•   Diversification can protect against catastrophic loss

                                                                            Authorized by Vanguard Investments Canada Inc. for investor use.   13
Sub-asset allocation

 What                  Why             When                              Risks

 Remain diversified    May add value   Suitable for less                 Possible
 over broad market                     risk-averse                       underperformance
 but overweight                        investors
 or underweight                        who are comfortable
 market segment                        with additional
                                       sector risk but
                                       who do not want to
                                       deviate significantly
                                       from a market-cap-
                                       weighted equity
                                       portfolio

                                                      Authorized by Vanguard Investments Canada Inc. for investor use.   14
Sub-asset allocation case study

 Background                   Goal                        Solution
 An investor’s                Investor believes that      Overweight the desired
 U.S. equity portfolio        a bias toward value         sector using value,
 has a risk profile similar   or small-cap stocks         small-cap and/or
 to that of the broad         can enhance                 small-cap value ETFs
 U.S. stock market            long-term returns

 Market-like portfolio        Want small-cap value tilt   Buy small-cap value ETF

                                                             Authorized by Vanguard Investments Canada Inc. for investor use.   15
Asset classes

  Stocks                                              Bonds                                               Cash

  Stocks represent                                    In essence, bonds are                               Guaranteed Investment
  shares of ownership in                              loans to a government                               Certificates (GICs),
  a company. Canada                                   or a company. Over the                              treasury bills and
  stock funds have                                    long term, Canada                                   money market funds
  historically provided the                           bond funds have                                     are all considered cash
  highest long-term                                   provided average                                    investments. All, or
  returns – typically an                              annual returns of about                             nearly all, of the returns
  average of about 8.4%                               7.6% and have                                       from cash investments
  per year.                                           generally been less                                 come from interest.
                                                      volatile than stocks.*

* Source: Stocks are represented by the S&P/TSX Composite Index. Bonds are represented by the Citigroup World Government Bond Index from 1985 through 2001and the
  Barclays Canadian Issues 300MM Index thereafter. Data are from December 31, 1985, through December 31, 2013.
                                                                                                                 Authorized by Vanguard Investments Canada Inc. for investor use.   16
Stocks are risky—and so is avoiding them

• The attempt to escape market risk by investing in stable, lower-
  returning assets can expose a portfolio to other longer-term risks
• Cash or short-term bonds can come with opportunity cost or
  “shortfall risk”
• Over a 30-year horizon a 3% inflation rate reduces a portfolio’s real
  value by 50%
• For investors with longer horizons, inflation risk may outweigh
  market risk, often necessitating a sizable allocation to investments
  such as stocks

                                                                          Authorized by Vanguard Investments Canada Inc. for investor use.   17
Diversify to manage risk

Annual returns for various investment categories ranked by performance, best to worst: 2006-2016

                                                                                                                                                         Canadian equity       Non-Canadian equity
   2006          2007         2008          2009         2010          2011         2012          2013          2014          2015         2016
                                                                                                                                                           S&P/TSX               MSCI EAFE Index
  41.46%       18.55%        12.00%       62.38%        35.10%       10.00%        28.53%       31.57%        23.73%        21.47%        38.48%           Composite Index
                                                                                                                                                                                 MSCI Emerging
                                                                                                                                                           S&P/TSX               Markets Index
  32.08%        9.83%         7.10%       52.03%        17.61%        9.62%        16.00%       12.99%        14.20%        20.24%        21.08%           SmallCap Index
                                                                                                                                                                                 MSCI ACWI Real
                                                                                                                                                                                 Estate Index
  26.38%        5.02%         6.63%       35.05%        12.97%        9.54%        15.33%        8.54%        10.55%        19.46%        7.90%
                                                                                                                                                         Canadian fixed        Non-Canadian fixed
  17.26%        4.51%         5.73%       14.72%        12.39%        6.33%        15.28%        7.60%         9.03%         3.71%        7.74%          income                income

  11.61%        3.96%       -19.51%       13.99%        10.73%        -6.15%        7.19%        4.29%         8.59%         3.65%        6.08%            Bloomberg             Bloomberg Barclays
                                                                                                                                                           Barclays Canadian     Emerging Market
                                                                                                                                                           300MM Index           USD Aggregate
  9.54%         0.90%       -28.78%       12.49%         6.95%        -8.71%        6.55%        2.31%         7.46%         2.42%        3.73%                                  Bond Index
                                                                                                                                                           Citigroup WGBI
                                                                                                                                                           Canada All            Bloomberg Global
  4.01%         -1.43%      -33.00%        5.04%         6.88%        -9.55%        3.27%        0.62%         7.03%         1.61%        1.44%            Maturities            Aggregate Bond
                                                                                                                                                                                 Index (CAD-hedged)
  3.54%         -5.33%      -36.55%        3.62%         6.18%       -11.17%        2.19%        -1.59%        4.12%        -8.32%        -0.34%
                                                                                                                                                         Other
  2.58%        -10.81%      -41.44%        0.98%         5.04%       -16.15%       -2.23%        -2.28%       -2.34%        -9.64%        -0.40%
                                                                                                                                                           Bloomberg
                                                                                                                                                           Commodity Index
  1.68%        -17.48%      -45.49%        -1.71%        2.56%       -16.43%       -3.25%        -3.45%       -9.53%        -13.31%       -2.00%

Notes: Benchmarks reflect the following asset classes—for large-capitalization Canadian equity, the S&P/TSX Composite Index; for small-cap Canadian equity, the S&P/TSX
SmallCap Index; for developed international equity markets, the MSCI EAFE Index, for emerging markets, the MSCI Emerging Markets Index; for commodities, the Bloomberg
Commodity Index; for real estate, the MSCI ACWI Real Estate Index; for Canadian government fixed income, the Citigroup WGBI Canada All Maturities; for Canadian investment-
grade fixed income, the Bloomberg Barclays Canadian 300MM Index; for international fixed income, the Bloomberg Barclays Global Aggregate Bond Index (CAD-hedged); and for
emerging market fixed income, the Bloomberg Barclays Emerging Market USD Aggregate Bond Index.
Source: Vanguard illustration using data from Standard & Poor’s, MSCI, Bloomberg and Citi.
                                                                                                                       Authorized by Vanguard Investments Canada Inc. for investor use.   18
Home bias

            Authorized by Vanguard Investments Canada Inc. for investor use.   19
Home bias—we all have it

 Most country investors are far away from lowest risk equity portfolio
 Risk and returns for various equity portfolios (January 1, 1988–December 31, 2011)
                        10%
                                                                  100% AUS                    100% U.S.
Average annual return

                        9%                                                                       100% CAN
                                                                                             100% U.K.
                        8%
                                                                                                                   100% World ex-U.K.
                        7%

                                                                     100% World ex-CAN
                        6%
                                70% ex-Canadian assets
                                                                                                                                100% World ex-U.S.
                        5%                                                  100% World ex-AUS

                        4%
                          10%          11%         12%   13%             14%             15%             16%             17%              18%             19%
                                                               Average annual standard deviation

 Source: Vanguard calculations using Thomson Reuters Datastream.
 Note: Domestic returns are represented by the MSCI USA Index, MSCI UK Index, MSCI Australia Index, and MSCI Canada Index. Foreign ex domestic returns are represented by
 MSCI All Country World Ex-Country Indices for the US, UK and Australia. Because a comprehensive index for global equities ex Canada is not available from Thomson Reuters, we
 spliced the MSCI EAFE index (CAD) with the MSCI Emerging Markets Index (CAD) and the MSCI USA Index (CAD). All returns denominated in domestic currencies.
                                                                                                                       Authorized by Vanguard Investments Canada Inc. for investor use.   20
Bonds: Why go global?

Bond correlation over time is less than one
Correlation of the monthly change in each country's 10-year government bond yield to that of Canada,
Jan 1998–Nov 2013
1.00

0.75
                                                                                                                                                             0.6
                                                       0.6                                                                                    0.6
             0.5                                                                       0.5                                     0.5
0.50
                           0.4
                                         0.4
                                                                            0.3
                                                                                                                0.3
0.25
                                                                   0.1                            0.1

0.00
          Australia     Belgium        France      Germany         Italy   Japan   Netherlands   South         Spain        Sweden            UK             US
                                                                                                 Korea

Source: Vanguard, based on data from Thomson Reuters Datastream.
                                                                                                  Authorized by Vanguard Investments Canada Inc. for investor use.   21
Canadian equities account for only 4% of world capitalization
But Canada’s stock market ranks No. 4 compared with its GDP (No. 11) and population (No. 35)

Country stock market as a percentage of world market cap
  Rank        Country                                 12/31/2012             2/28/2014   Change
  1           United States                                  45.05              49.06      4.01
  2           United Kingdom                                  8.05                7.95    –0.10
  3           Japan                                           6.90                7.64     0.74
  4           Canada                                          4.26                3.58    –0.68
  5           France                                          3.54                3.44    –0.10
  6           Germany                                         3.03                3.27     0.24
  7           Switzerland                                     2.93                3.17     0.24
  8           Australia                                       3.32                2.71    –0.61
  9           China                                           2.38                1.92    –0.46
  10          Korea                                           2.20                1.59    –0.61

Source: Vanguard – MSCI country weights in Total World Stock Market Index.
                                                                                                  Authorized by Vanguard Investments Canada Inc. for investor use.   22
Home bias in stocks and bonds

 Home bias in domestic equity markets                                                                Home bias in domestic fixed income markets
                          60%                                                                                                40%
                                      Market                                                                                                                      Local market
                                      proportional                                                                                       Market
                          50%                                                                                                                                     overweight

                                                                                                   Weight in global market
                                      allocation                                                                                         proportional                                 52%
Weight in global market

                                                                                    Local                                    30%         allocation
                                                                        23%       market
                          40%
                                                                               overweight
                                                                                                                             20%
                          30%
                                                                                                                                                                                             85%
                          20%                                       54%
                                                                                                                             10%
                                                                                                                                                                    53%
                          10%                             39%
                                                                                                                                                                                      84%
                                                                       67%                                                    0%
                           0%

                          -10%                                                                                               -10%
                                 0%           25%           50%         75%            100%                                         0%        25%           50%         75%         100%
                                            Domestic allocation to domestic equities                                                      Domestic allocation to domestic fixed income

                                  US Equities                  UK Equities                                                          US Equities                    UK Equities
                                  Canadian Equities            Australian Equities                                                  Canadian Equities              Australian Equities
 Source: International Monetary Fund Coordinated Portfolio Investment Survey, Dec. 31, 2012, Barclays and Thomson Reuters Datastream.
 Note: The IMF Coordinated Portfolio Investment Survey was used in conjunction with market capitalization information to determine domestic and foreign investment. The MSCI All
 World All Country index is used to represent the world equity market portfolio. Country weights for domestic equities are represented by the MSCI USA Investable Market Index, the
 MSCI UK Investable Market Index, the MSCI Australia Investable Market Index and the MSCI Canada Investable Market Index. The fixed income market capitalization for the world
 and each individual country is provided by the Bank for International Settlements (BIS). We use market-cap data from the BIS because the data is generally more comprehensive and
 covers all domestic and foreign issuances whereas data from index providers such as Barclays generally cover only the investable portions of the market. Central bank holdings of
 domestic bonds were excluded from our calculations as they represent closely held or unavailable securities. The investment holdings data for a given country can be categorized as
 either “foreign investment by domestic investors” or “domestic investment by domestic investors”. The sum of these equals “total investment by domestic investors”. The percentage
 allocated to domestic securities divides “domestic allocation by domestic investors” by the “total investment by domestic investors”.
                                                                                                                                                Authorized by Vanguard Investments Canada Inc. for investor use.   23
How much should go outside the home market?

Factors affecting the foreign asset allocation decision

               0%                               Historical risk/return                                      Market
               international                 allocation to international                               proportional

                                             Domestic sector variation from
                  No deviation                                                                      High deviation
                                                     world market

                                          Domestic issuer concentration
                  Diverse                                                                   Highly concentrated

 Favour           Low                       Domestic transaction costs                                            High                Favour
Local                                                                                                                             Global
 Market           High                           Domestic liquidity                                              Poor                 Market

                  Advantages                    Domestic asset taxes                               Disadvantages

                  No Impact                 Other domestic risk factors?                         Significant risks

                                                Additional considerations
                                       Regulatory limits and liability matching systems
                                                                                  Authorized by Vanguard Investments Canada Inc. for investor use.   24
Sector differences are large relative to the global economy

Canada has some major differences in sector exposure
                                                                                          Sector differences vs. MSCI ACWI IMI

  Sectors                                                           MSCI USA IMI              MSCI UK IMI         MSCI Australia IMI              MSCI Canada IMI

  Consumer Discretionary                                                            0.8               –2.6                          –8.8                           –6.6
  Consumer Staples                                                                 –0.4                5.2                          –0.8                           –5.7
  Energy                                                                            0.4                6.1                          –3.3                           16.5
  Financials                                                                       –4.5               –0.1                          25.8                           13.7
  Health Care                                                                       2.6               –2.4                          –5.4                           –6.8
  Industrials                                                                      –0.4               –2.9                          –5.5                           –3.8
  Information Technology                                                            5.7              –10.3                         –11.8                           10.9
  Materials                                                                        –2.6                2.5                          12.6                            6.3
  Telecommunication Services                                                       –1.6                3.8                          –1.6                           –1.3
  Utilities                                                                        –0.1                0.7                          –1.4                           –1.4
  Sum of absolute deviations                                                       19.1               36.6                          76.8                           72.9

Yellow shading denotes deviations between 5% and 9.99%.
Red shading denotes deviations 10% or greater.
Source: Vanguard calculations based on FactSet data. Note: Data as of 12/31/2013
                                                                                                             Authorized by Vanguard Investments Canada Inc. for investor use.   25
In conclusion

Home bias is significant in Canada
       and everywhere else too

What to do about it?
       Diversify globally, based on local factors

Home bias exists in bonds too
       Hedging is key to bringing bond volatility down

                                                         Authorized by Vanguard Investments Canada Inc. for investor use.   26
Minimize cost

• Higher costs can significantly depress a portfolio’s growth over long periods
• Costs create an inevitable gap between what the markets return and what investors
  actually earn—but keeping expenses down can help to narrow that gap
• Lower-cost mutual funds have tended to perform better than higher-cost funds over time
• Indexed investments can be a useful tool for cost control

                                                                        Authorized by Vanguard Investments Canada Inc. for investor use.   27
Why cost matters

The long-term impact of investment costs on portfolio balances
Assuming a starting balance of $100,000 and a yearly return of 6%, which is reinvested
                       600,000                                                                                                                         $574,349 No costs
                       550,000
                                                                                                                                                       $532,899 0.25% annual cost
                       500,000

                       450,000
  Portfolio value, $

                       400,000
                                                                                                                                                       $378,923 1.40% annual cost
                       350,000

                       300,000

                       250,000

                       200,000

                       150,000

                       100,000
                                          5                   10                   15                   20                   25                   30
                                                                             Years

Note: The portfolio balances shown are hypothetical and do not reflect any particular investment. The final account balances do not reflect any taxes or penalties that might be due
upon distribution. The Management Expense Ratoio (MER) is used for the expense ratio. MER is the sum of the management expenses incurred by the fund expressed as a
percentage of the average net assets throughout the year.
Source: Vanguard calculations using data from Morningstar.
                                                                                                                            Authorized by Vanguard Investments Canada Inc. for investor use.   28
Reduce cost to help improve return

Average annual returns over the ten years through 2016

                                                      10
   Average annual return for ten years through 2016

                                                       9

                                                       8

                                                       7

                                                       6

                                                       5

                                                       4

                                                       3

                                                       2

                                                       1

                                                       0
                                                                Large-cap                         Mid-cap   U.S. equity   Intermediate-term                    Short-term

                                                                                                  Equity                                   Fixed income
                                                           Median fund in lowest-cost quartile
                                                           Median fund in highest-cost quartile

Notes: All Canada-domiciled mutual funds in each Morningstar category were ranked by their expense ratios as of December 31, 2016. They were then divided into four equal groups,
from the lowest-cost to the highest-cost funds. The chart shows the ten-year annualized returns for the median funds in the lowest-cost and highest-cost quartiles. Returns are net of
expenses, excluding loads and taxes. Both actively managed and index funds are included, as are all classes with at least ten years of returns.
Source: Vanguard calculations, using data from Morningstar, Inc.
                                                                                                                           Authorized by Vanguard Investments Canada Inc. for investor use.   29
Indexing can help minimize cost

Asset-weighted expense ratios of active and indexed investments

                                               Average expense ratio as of December 31, 2016
                                               Actively managed funds                               Index funds                            Difference
  Canadian equity                                                   1.10%                                  0.26%                                  0.84
  International equity                                              1.11%                                  0.42%                                  0.69
  U.S. equity                                                       1.37%                                  0.34%                                  1.03
  Canadian fixed income                                             0.59%                                  0.33%                                  0.26

Notes: “Asset-weighted” means that the averages are based on the expenses incurred by each invested dollar. Thus, a fund with sizable assets will have a greater impact on the
average than a smaller fund. Analysis includes all share classes of funds available for sale in Canada.
Source: Vanguard calculations, using data from Morningstar, Inc.
                                                                                                                         Authorized by Vanguard Investments Canada Inc. for investor use.   30
Low-cost indexing can improve returns

Percentage of active funds outperforming the average return of low-cost index funds
over the ten years through 2016
    1                                                                                            Based on funds surviving after ten years
 0.9                                                                                             Based on survivors plus funds closed or merged

 0.8
 0.7
 0.6
 0.5                                          44%                           42%
 0.4
                                                                                                                                         32%
                                                                                                           28%
 0.3
                22%                                    22%                           20%
 0.2                                                                                                               16%                           16%
                         8%
 0.1
    0
             Large-cap blend               Small-cap blend             International equity:          International equity:        Diversified U.S. fixed
                                                                        Developed markts               Emerging markets                   income

                                                                    Morningstar category

Notes: Data cover the ten years ended December 31, 2016. The actively managed funds are those listed in the respective Morningstar categories.

Sources: Morningstar and Vanguard.
                                                                                                                        Authorized by Vanguard Investments Canada Inc. for investor use.   31
Key takeaways

• Investors cannot control markets, but they can control what they pay to invest
• The lower your costs, the greater your share of an investment’s return
• Lower-cost investments have tended to outperform higher-cost alternatives

                                                                       Authorized by Vanguard Investments Canada Inc. for investor use.   32
Maintain perspective and long-term discipline

• Enforcing an asset allocation through periodic rebalancing can help
  manage a portfolio’s risk
• Spontaneous departures from such an allocation can be costly
• Attempts to outguess the market rarely pay
• Chasing winners often leads to a dead end
• Simply contributing more money toward an investment goal can be a
  surprisingly powerful tool

                                                                        Authorized by Vanguard Investments Canada Inc. for investor use.   33
Ignore the temptation to alter allocations

Market timing versus a market benchmark: A spotty record
Performance of flexible-allocation funds compared with a 60% stock/40% bond benchmark, January 1997-December 2016

 0.7

 0.6

 0.5

 0.4

 0.3

 0.2

 0.1

   0
           Bull Market 1/1/97 -        Bear Market 9/1/00 -         Bull Market 3/1/03 -       Bear Market 11/1/07 -         Bull Market 3/1/09 -
                 8/31/00                    2/28/2003                     10/31/07                  2/28/2009                      12/31/16

Notes: The balanced benchmark consists of the MSCI US Broad Market Index (42%), the MSCI All Country World Index ex USA (18%) and the Barclays U.S. Aggregate Bond Index
(40%). Flexible-allocation funds are those defined by Morningstar as having “a largely unconstrained mandate to invest in a range of asset types.”
Source: Vanguard, using data from Morningstar.
                                                                                                                   Authorized by Vanguard Investments Canada Inc. for investor use.   34
The case for discipline

The importance of maintaining discipline: Failure to rebalance can increase an investor’s exposure to risk
Changes in equity exposure for a rebalanced portfolio and a “drifting portfolio,” 2006–2016
                        70%

                        65%
 Allocation to stocks

                        60%

                        55%

                        50%                                                                                                    Target Allocation
                                                                                                                               Equity Allocation: Semi-annual Rebalance Portfolio
                                                                                                                               Equity Allocation: “Set and Forget Portfolio
                        45%

                        40%
                              2006   2007   2008         2009          2010           2011           2012           2013           2014           2015           2016

                                                                                      Year

Notes: The initial allocation for both portfolios is 30% Canadian equities, 30% international equities and 40% Canadian fixed income. The rebalanced portfolio is returned to this
allocation at the end of each June and December. Returns for the Canadian equity allocation are based on the S&P/TSX Composite Index. Returns for the international equity
allocation are based on the MSCI EAFE, MSCI USA and MSCI Emerging Markets Indexes allocated at their historic market weights. Returns for the fixed income allocation are based
on the Citigroup World Government Bond Index—Canada All Maturities. This hypothetical illustration does not represent the results of any particular investment.
Source: Vanguard, using data provided by Thomson Reuters Datastream.
                                                                                                                         Authorized by Vanguard Investments Canada Inc. for investor use.   35
Ignore the temptation to chase last year’s winner

Fund leadership is quick to change

January 1, 2003
                                                                                                270 funds

December 31, 2007                                             81% (218) underperformed                                                     19% (52) outperformed

December 31, 2012                                                                                                                                                29% (15) out-
                                                                                                                        71% (37) underperformed
                                                                                                                                                                  performed

Note: The chart is based on a ranking of all actively managed Canadian equity funds covered by Morningstar traditional style categories according to their excess returns versus their
stated benchmarks as reported by Morningstar during the five years through 2007.
Sources: Vanguard and Morningstar.
                                                                                                                            Authorized by Vanguard Investments Canada Inc. for investor use.   36
Market timing and performance chasing can be a drag on returns

    How investors’ returns lagged their funds’ returns 2002-2016

                                                                                                                Diversified                      Foreign small-                                                                                                          Emerging Markets
                                                              Balanced   International Equity   U.S. Equity   Emerging Markets   Commodities   cap/mid-cap blend Global Real Estate   Alternative   Taxable Bond      Sector Equity   Municipal Bond   High Yield Bond        Bond
                                                         0
Average anual difference between investor return and

                                                       -0.5   -0.33
                                                                              -0.44             -0.47
                                                                                                                 -0.61            -0.62            -0.62

                                                        -1

                                                                                                                                                                      -1.1
                   fund return (%)

                                                                                                                                                                                      -1.12          -1.15             -1.17
                                                       -1.5                                                                                                                                                                             -1.43

                                                        -2

                                                                                                                                                                                                                                                          -2.14

                                                       -2.5

                                                                                                                                                                                                                                                                            -2.61

                                                        -3

   Notes: The average difference is calculated based on Morningstar data for investor returns and fund returns. Morningstar Investor Return™ assumes that the change in a fund’s total
   net assets during a given period is driven by both market returns and investor cash flow. To calculate investor return, the change in net assets is discounted by the fund’s investment
   return to isolate the amount of the change driven by cash flow; then a proprietary model is used to calculate the rate of return that links the beginning net assets and the cash flow to
   the ending net assets.
   Sources: Morningstar and Vanguard calculations. Data cover the period from January 1, 2002, through December 31, 2016.
                                                                                                                                                                                                                   Authorized by Vanguard Investments Canada Inc. for investor use.         37
Key takeaways

• Because investing evokes emotion, even sophisticated investors should
  maintain long-term discipline
• Abandoning a planned investment strategy can be costly
• Often, the most significant derailer is behaviour—failure to rebalance,
  the allure of market timing and the temptation to chase performance

                                                                        Authorized by Vanguard Investments Canada Inc. for investor use.   38
Important information

Commissions, management fees, and expenses all may be associated with investments in a Vanguard ETF ®. Investment objectives, risks, fees,
expenses, and other important information are contained in the prospectus; please read it before investing. ETFs are not guaranteed, their values
change frequently, and past performance may not be repeated. Vanguard ETFs ® are managed by Vanguard Investments Canada Inc., an indirect
wholly owned subsidiary of The Vanguard Group, Inc.

Date of publication: May 25, 2017.

The opinions expressed in this presentation are those of the individual representative and do not necessarily reflect the opinions of Vanguard Investments
Canada Inc. No implied or express recommendation, offer, or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy is
made in this material. This presentation is not research, investment and/or tax advice and it is not tailored to the needs or circumstances of any individual
investor.

Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. While this information has been
compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of
this information or any results from its use. Information regarding third-party investment fund managers is solely for educational purposes.

All investments, including those that seek to track indexes, are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or
protect against a loss in a declining market. While Vanguard ETFs are designed to be as diversified as the original indexes they seek to track and can provide
greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

In this presentation, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or
may include its affiliates, including Vanguard Investments Canada Inc.

No part of this presentation may be reproduced, distributed, disseminated or referred to, in whole or in part, in any form, including to any investor, without prior
written and express permission by Vanguard Investments Canada Inc. By participating in this presentation or by accepting any copy of the slides presented,
you agree to be bound by these terms and conditions.

© 2017 Vanguard Investments Canada Inc. All rights reserved.

                                                                                                         Authorized by Vanguard Investments Canada Inc. for investor use.   39
Appendix: Vanguard structure

*Vanguard Investments Canada Inc. is a wholly owned indirect subsidiary of The Vanguard Group, Inc.
                                                                                                      Authorized by Vanguard Investments Canada Inc. for investor use.   40
You can also read
NEXT SLIDES ... Cancel