InTheVanguard · Malkiel wroteA Random Walk Down Wall Street in 1973, he explained in plain English why it’s so difﬁcult to outperform market averages, which are unburdened by

Flagship™ Edition

InThe Vanguard®

In This Issue

page 3

Know the risks ofemerging markets

After emerging marketsposted double-digitreturns in recent years,cash flows into thissector’s funds soared.Are investors merelychasing performance, or are they realizing thebenefits of internationaland emerging-marketsstocks in a well-diversified portfolio?

page 5

Several key factors guide our selection of investmentmanagers.

page 8

Case Study: One investor whoput all his eggs in one basketlearned the importance ofdiversification.

There were no fireworks, but birth of indexing sparked a revolutionAs the United States celebrated in 1976 thebicentennial of its historic revolution, a quiet revo-lution was beginning in the investment business.

On August 31, 1976, Vanguard launched FirstIndex Investment Trust—now known as Vanguard®

500 Index Fund. It was the nation’s first indexmutual fund available to individual investors.

Thirty years later, the investment world has been permanently changed.

“The introduction of the First Index InvestmentTrust was one of the few truly seminal dates inthe mutual fund industry,” said John J. Brennan,Vanguard chairman and CEO. “It offered the indi-vidual investor a broadly diversified, low-costinvestment approach that wasn’t available before.”

The reaction to this momentous event? A frownand a shrug. Conventional wisdom said that onlyactively managed funds made sense for individuals.Why would anyone not try to beat the market?

Why use indexing?

One economics professor had an answer to thatquestion. When Princeton Professor Burton G.Malkiel wrote A Random Walk Down Wall Streetin 1973, he explained in plain English why it’s sodifficult to outperform market averages, whichare unburdened by investment managementcosts. Simply tracking an index’s performance,he said, offered a superior long-term strategy.

A Random Walk, which went on to become amainstay in personal finance publishing, proved tobe prescient. By simply buying and holding thestocks listed in the Standard & Poor’s 500 Index,the new Vanguard fund automatically maintained adiversified portfolio with low turnover, which in turnminimized costs and capital gains distributions. Thenumbers added up to sustainable advantages overhigher-cost, actively managed funds.

Still, indexing continued to be largely ignored.“After all, index funds aren’t very profitable forcompanies offering them,” Professor Malkiel saidin a recent interview, “and the financial commu-nity likes to sell profitable products. But it turnedout to be a great deal for investors.”

Statistical snapshots

• 81% of Vanguard index funds outperformed their respective peer-group averages over the ten years ended March 31, 2006.

• When Vanguard 500 Index Fund began operations in 1976, it was one of 360 U.S. stock funds; 149 of these no longer exist.

• 2005 expense ratios for funds tracking the S&P 500 Index: Industry average: 0.59%; Vanguard 500 Index Fund: 0.09%(Admiral Shares) and 0.18% (Investor Shares).

Source of industry data: Lipper Inc.

continued on page 4 >

Summer 2006

2 In The Vanguard > Summer 2006

CONTENTS

New director joins Vanguard board

Amy Gutmann, Ph.D., has joined the board of directors of Vanguard and the board oftrustees of each of Vanguard’s mutual funds. Dr. Gutmann is president of theUniversity of Pennsylvania, a post she has held since July 2004.

“We are pleased to welcome Amy Gutmann as a director of Vanguard and a trustee ofour funds. She brings experience, perspective, and extraordinary intellect to her newrole serving Vanguard fund shareholders,” said Vanguard Chairman John J. Brennan.

Dr. Gutmann, who graduated magna cum laude from Harvard-Radcliffe College in1971, is the seventh independent trustee on Vanguard’s board. ■

New offerings: Lower-cost shares and more Target Retirement options

Vanguard Emerging Markets Stock Index Fund has begun offering low-expenseAdmiral™ Shares. The expense ratio for the new shares is estimated at 0.30%, lessthan one-sixth of the 1.91% expense ratio of the average emerging markets mutualfund (source: Lipper Inc., May 2006).

Vanguard has broadened the lineup of its popular Target Retirement Funds, extendingthe target dates through 2050 and giving investors the ability to select a fund thatmore closely matches their expected retirement date. ■

A new ETF arrives; more are on the way

Vanguard’s new Dividend Appreciation Index Fund offers two low-cost share classes:traditional Investor Shares and exchange-traded shares. Vanguard also has filed a reg-istration statement with the Securities and Exchange Commission for two new stockindex funds, Vanguard Mid-Cap Value Index Fund and Vanguard Mid-Cap GrowthIndex Fund. The new funds will offer both Investor Shares and exchange-tradedshares. With their introduction, Vanguard’s ETF lineup will grow to 26 offerings cover-ing domestic and international equity markets. ■

Investment advisory changes for two funds

Vanguard recently changed the investment advisory assignments of Vanguard Mid-Cap Growth Fund. The fund’s assets have been reallocated equally between ChartwellInvestment Partners, L.P., an advisor already overseeing part of the fund, and a newadvisor, William Blair & Company, L.L.C. Provident Investment Counsel no longerserves as an advisor to the fund.

AllianceBernstein L.P. has been added to the advisory team of Vanguard Global EquityFund, joining Marathon Asset Management, LLP, and Acadian Asset Management Inc.AllianceBernstein also manages portions of Vanguard International Value Fund,Vanguard Windsor™ Fund, Vanguard U.S. Growth Fund, and the Growth Portfolio ofVanguard Variable Insurance Fund. ■

Investing Your Moneypage 3

Investing in a hot sector like emerging marketspresents both opportunities and risks.

page 5

We’re very choosy about outside managers forour actively managed funds.

page 6

Fund Face-Off. Vanguard Morgan Growth Fundand Vanguard Growth Equity Fund.

Market Barometerpage 7

A summary of financial markets’ performance.

Managing Your Wealthpage 8

Case Study: Learning the importance of diversification.

page 10

Portfolio managers talk about bond investing inan environment of rising interest rates.

page 11

Logging on to Vanguard.com gets more secure.

Retirement Matterspage 12

It’s never too late to start investing for retirement.

page 13

How to make the right decision about your401(k) assets when you leave a job or retire.

At Your Servicepage 14

Moving your brokerage assets to Vanguarddoesn’t have to mean a tax bite.

page 15

Experience the convenience of online accountmanagement.

The Vanguard Viewpointpage 16

Why Vanguard thinks defined contribution planscan help Americans retire comfortably.

AT A GLANCE

Registration statements relating to the securities named above have been filed with the Securities and Exchange Commission but have not become effective. These securities may not be sold, nor mayoffers to buy be accepted, prior to the time that the registration statement becomes effective. Thiscommunication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall therebe any sale of these securities in any state in which such offer, solicitation, or sale would be unlawfulprior to registration or qualification under the securities laws of any such state. Copies of the finalprospectus, which is subject to change, can be obtained from Vanguard. Please note that a preliminaryprospectus is subject to change.

FUND NEWS

Are emerging-market investorsreally on the right track?

During the three years ended April 30, 2006, theaverage emerging-markets fund returned 44% per year, according to Lipper Inc. This robust per-formance came on the heels of a slightly negativeaverage return for such funds for the prior three-year period. The recent exceptional gains piquedinvestor interest in faraway corners of the globesuch as Brazil, China, and South Korea. Accordingto Lipper, cash flows into emerging-markets fundsin 2005 were 27 times what they were in 2000.

Are investors performance-chasing, or are theysimply catching up on decades of research aboutthe benefits of holding international and emerging-markets stocks in a well-diversified portfolio?

Opportunities and risks

On the opportunity side, emerging markets areexpected to enjoy faster growth than developedmarkets, and faster economic growth usuallytranslates into higher returns for investors. Also,these markets offer diversification that can helpreduce overall portfolio risk. Emerging marketsdon’t always march in lockstep with other stockmarkets: Zigs in China and Brazil, for example, mayhelp offset zags in the United States, moderating aportfolio’s overall volatility.

Over the short term, however, the risks of investing in emerging markets can be extreme.Developing economies have periodically beenplagued by financial crises and cycles of boom andbust. Many investors remember the 1997 marketcollapse in Thailand and the Russian debt default in1998. By the end of the third quarter of 1998, themarket fallout from these events had reduced thevalue of the Select Emerging Markets Index bynearly 50% in a one-year period. And in late springof this year, emerging markets hit a rocky patchthat sent them down more than 10% in May alone.

Dangers of performance-chasing

Although the long-term case for emerging markets remains compelling, cash-flow data may suggest that investor interest in developingcountries has less to do with portfolio theorythan with performance-chasing. Most of the new cash invested in emerging markets in 2005followed hot on the heels of the funds’ excep-tional returns.

“We’ve seen big pickups in sectors before,” saidFrancis Kinniry, a principal in Vanguard’s InvestmentCounseling & Research group. “These episodeshaven’t always ended well for investors. Withemerging markets there’s a troubling history ofeuphoria, then collapse. Sectors that outperformdon’t outperform forever. It’s worth noting thatfrom 1988 through April of this year, emergingmarkets’ volatility has been 60% higher than thatof the U.S. markets, and 40% higher than that ofdeveloped international markets.”

What’s the correct asset allocation?

To determine the appropriate allocation toemerging markets, you need to weigh yourexpectations for returns against your potentialregret should your portfolio underperform in theshort term. If you are looking to establish a long-term allocation, Vanguard suggests that you consider committing for the long haul 2% or 3%of your stock portfolio to emerging markets—aweighting consistent with these developing markets’ share of global stock market values.

On the other hand, if you are simply chasing per-formance, you may stumble on one of the veritiesof finance: Markets tend to return to equilibrium.Periods of enthusiastic buying are frequently followed by periods of grief—that is, the worsttime to buy an investment is often when it looksthe most appealing. ■

Connect with Vanguard™ > www.vanguard.com > 800-276-7230 3

INVESTING YOUR MONEY



Indexing gains momentum

As time went on, though, the logic of indexingbecame clear. By the 500 Index Fund’s 20th anniver-sary in 1996, the indexing revolution had taken hold.

Although still considered a niche product, indexfunds were gaining momentum, in part because ofVanguard’s success in launching index funds thatwent beyond U.S. large-capitalization stocks, includ-ing bond and international stock funds.

Today, indexing is a permanent feature of the invest-ment landscape. Vanguard 500 Index Fund is thenation’s largest mutual fund. Altogether more than $1trillion, or nearly 12% of U.S. mutual fund assets, isinvested in index funds that track broad and narrowbenchmarks in virtually every market worldwide.1

“I think indexing is still in its infancy,” said George U.Sauter, Vanguard’s chief investment officer. “I think

it will continue to grow to be many multiples of its current size, both in assets and share of market.”

Indexing’s success has spawned a number ofinnovations, including exchange-traded funds(ETFs), which have grown rapidly because theyallow intraday trading of indexed investments.

While Professor Malkiel acknowledges the meritsof ETFs, he expresses some caution about theirusefulness for the average investor. “You can buyan ETF at 10:30 a.m. and sell it at 2 p.m., but myown sense is that market-timing is not a winningstrategy,” Professor Malkiel said. “But there aregoing to be people who will want to do it. To theextent you can get them to do it in an ETF, theydon’t create extra costs for buy-and-hold investorsin traditional index funds.”

Taking a ‘total market’ approach

Despite the array of index products availabletoday, Professor Malkiel said the best strategyfor most investors is to hold just a few broadlydiversified index funds.

“Everybody should index at least some part of theirportfolio, especially their retirement funds,” saidProfessor Malkiel, who retired last year after 28 yearsas a trustee of Vanguard funds. “I recommend atotal-market index fund—one that follows the entireU.S. stock market. And I recommend the sameapproach for the U.S. bond market and internationalstocks, including those in emerging markets.”

The soundness of his advice has been confirmedby research and endorsed by an increasing num-ber of financial experts. Conventional wisdom hasbeen overturned, and index funds are now widelyused as foundational investments for individualsand institutions alike. ■

1 As of March 31, 2006. Source: Lipper Inc. Mutual funds are subject to market risk. Investments in bond funds aresubject to interest rate, credit, and inflation risk. Foreign investinginvolves additional risks, including currency fluctuations and politicaluncertainty. Diversification does not protect against a loss in a declin-ing market or ensure a profit. The performance of an index is not anexact representation of any particular investment, as you cannot investdirectly in an index. Results may vary for other time periods.

The views expressed are Professor Malkiel’s. Before you invest, consideryour own objectives and risk tolerance.

Quick Points

> Vanguard 500 Index Fund, the nation’s first index fund for individual investors, is 30 years old.

> Indexing has proven itself across various market segments since 1976.

> It’s wise to invest a core portion of your portfolio in a broad-market index fund.

Indexing’s long-term track record

Average annual total returns: Periods ended June 30, 2006

1 year 5 years 10 years 20 years

Vanguard 500 Index Fund 8.49% 2.37% 8.24% 10.86%Average Large-Cap Core Fund 7.47 0.68 6.79 9.45

Vanguard Total Bond Market Index Fund –1.04% 4.40% 5.93% 6.86%*Average Intermediate Investment Grade Debt Fund –0.92 4.33 5.31 6.07*

Source of average-fund information: Lipper Inc.Note: Industry averages exclude the performance of funds that underperformed and were subse-quently closed, creating a “survivorship bias” that artificially enhances the track record of com-petitor funds.

The performance data shown represent past performance, which is not a guarantee offuture results. Investment returns and principal value will fluctuate, so investors’ shares,when sold, may be worth more or less than their original cost. Current performance maybe lower or higher than the performance data cited. For performance data current to themost recent month-end, visit our website at www.vanguard.com.

*Since the December 11, 1986, inception of Vanguard Total Bond Market Index Fund.

continued from page 1 >

An expanded version of thisarticle can be found atwww.vanguard.com/visit/index

Connect with Vanguard > www.vanguard.com > 800-276-7230 5


Like investing itself, selecting managers is part art, part science

Vanguard is known for indexing expertise, butalso has an extensive lineup of actively managedmutual funds. In all, 74 of our U.S. funds are runby managers who select securities in an effort tobeat, not match, index benchmarks.

Vanguard’s investment professionals managesome of these portfolios, but we’ve also hired 27 outside firms to manage various funds. OurPortfolio Review Department (PRD), which monitors fund performance, is always on thelookout for additional investment talent.

“We employ a rigorous approach to selecting managers,” said Principal Joe Brennan, who leads PRD, which recommends advisory firms to Vanguard’s board of directors. “We look at many things that can be placed in three broad categories: the investment team, its approach to investing, and the team’s performance.”

People with the ‘PM’ gene

The first consideration is the investment team.PRD reviews the team’s credentials and tenure,of course, but also wants to understand thefirm’s depth. How, for example, would it handlethe loss of a key manager?

Advisors should have a consistent investment philosophy, and a passion and instinct for investingitself. “Portfolio management is part art, part science,” said Mr. Brennan. “Some managersseem to have a ‘PM gene’ that lets them assimi-late lots of information and make sense amid themarket noise.”

For every 100 firms PRD considers, 10 to 20 are researched in depth, and a half dozen areinterviewed at length. “Most of what we need to know about a firm, we discover through con-versations with its people,” Mr. Brennan said.

A refined approach

An advisory firm’s investment approach is vitallyimportant, too. The firms represent a wide varietyof investment methods, but each has a well-

defined, repeatable system that guides securityselection and produces results.

“We’re looking for people who have perfected anapproach by managing through different marketcycles,” Mr. Brennan said. “If you’re continuallychanging your process, it’s not a good sign.Conviction matters.”

For insights into a manager’s process, PRD looks at his or her response to a variety of market condi-tions. Often it is during market downturns or in periods marked by large inflows or sizable with-drawals of assets that managers are truly tested,Mr. Brennan said.

Naturally, the actual holdings in a portfolio shouldreflect the manager’s approach. A value fund, forexample, shouldn’t have a lot of growth stocks.“We look at the portfolio and ask, ‘Is this whatwe would expect to find in this type of fund?’And if not, we want to understand why,” he said.

Expected returns

Similarly, when evaluating performance, PRDexpects a certain type of fund to perform in acertain way at certain times. If the actual returnsare quite different, PRD’s analysts find out why.Was the manager especially smart or merely fortunate? Did the manager take unusual risks or depart from the fund’s investment style?

“A manager’s ability to produce superior returnsover the long term is important,” Mr. Brennanadded. “But we’re just as interested in how thereturns were achieved.”

“It’s not simply a question of ‘good’ or ‘bad’ per-formance,” he said. “We expect long-term returnsto be consistent with the fund’s philosophy. Wedon’t expect the returns of large-capitalizationstock funds, for instance, to mirror those ofsmall-cap funds.”

Ultimately, Vanguard seeks the same characteris-tics in fund managers that a wise investor looks forwhen investing with any firm, including a mutualfund company: a stable, expert managementteam, a well-defined approach, and competitivelong-term performance. ■

Fund Face-OffMorgan Growth Fundand Growth Equity Fund



Vanguard Morgan™ Growth and Growth EquityFunds both invest primarily in large-capitalizationcompanies that are believed to have strong earnings-growth potential. But that’s where thesimilarities end.

Morgan Growth relies on a multimanager approach,while Growth Equity relies on one advisor.Although Morgan Growth’s advisors have the flexi-bility to stray from the benchmark, overweightingor underweighting individual sectors, GrowthEquity’s advisor employs a “sector-neutral” strategythat keeps variations from the benchmark small.Growth Equity concentrates on earnings growth inchoosing stocks; Morgan Growth looks for earningsgrowth, but also carefully considers a stock’s price.This adherence to a “growth at a reasonable price”strategy is reflected in Morgan Growth’s lowerprice/earnings and price/book ratios.

Growth Equity’s intense focus on earningsgrowth typically leads to much higher turnover inits portfolio. Any company that doesn’t meet orexceed Growth Equity’s earnings expectations isa strong candidate for sale.

For detailed performance information, updatedmonthly, visit Vanguard.com®. There, you’ll alsofind a useful Compare funds tool in theResearch Funds & Stocks area. ■

Note: As with all investments, there are risks.The performance data shown represent past perfor-mance, which is not a guarantee of future results.Investment returns and principal value will fluctuate, soinvestors’ shares, when sold, may be worth more orless than their original cost. Current performance maybe lower or higher than the performance data cited. Forperformance data current to the most recent month-end, visit our website at www.vanguard.com.

Ask the ExpertWhat’s the relationship betweenbond price and yield?

Bond prices and yields react oppositely tochanges in overall interest rates.

When rates rise, yields of bonds and bond fundsgenerally also rise. But the market value of a bondand the share price of a bond fund typically godown because the coupon rates (the fixed, period-ic payments) of the bond or the underlying bonds

in a fund become less attractive than the higherrates offered by newly issued bonds of similarquality. Conversely, when interest rates fall, anexisting bond’s coupon rate becomes more attrac-tive to investors, which boosts the price.

“Be careful about choosing a bond fund basedsolely on the fund’s yield,” says Frank Ambrosio,an analyst in Vanguard’s Investment Counseling &Research group. “A higher yield can indicate lowercredit quality or greater time to maturity, both ofwhich could lead to greater share-price volatilityand higher risk than you’re willing to tolerate.” ■

Data as of May 31, 2006 Morgan Growth Fund Growth Equity Fund

Fund advisor(s) Wellington ManagementCompany, LLP

Franklin PortfolioAssociates, LLC

Vanguard Quantitative Turner InvestmentEquity Group Partners, Inc.

Performance benchmark Russell 3000 Growth Index Russell 1000 Growth Index

Price/earnings ratio 19.2x 26.6x

Price/book ratio 3.5x 4.1x

Earnings growth rate 20.6% 19.6%

Turnover rate1 88% 147%

Number of holdings 339 82

Median market capitalization $16.2 billion $25.0 billion

Top ten holdings as percentage of assets 15.5% 25.4%

Three largest sectors 1. Information 1. Information (percentage of assets) technology, 29% technology, 27%

2. Health care, 17% 2. Health care, 19%3. Consumer 3. Consumer

discretionary, 15% discretionary, 16%

Expense ratio2 0.41% 0.88%

Average annual returns3 One year, 12.1% One year, 10.3%Five years, 2.5% Five years, –1.2%Ten years, 8.2% Ten years, 5.9%

Source: Vanguard. 1 As of the most recent fiscal year.2 As of the most recent fiscal year. Morgan Growth figure is for Investor Shares.3 Periods ended May 31, 2006. Morgan Growth figures are for Investor Shares.

The investment environment

The second quarter of 2006 was nothinglike the first quarter. After bursting out ofthe gate early in the year, stocks turned tailin early May when it appeared that infla-tion was quickening, economic growthwas slowing, and interest rate hikesweren’t going away.

U.S. stocks

• The Dow Jones Wilshire 5000 Index, a proxyfor the broad U.S. stock market, returned –1.9%for the April–June quarter. Small-capitalizationshares (as measured by the MSCI US Small Cap1750 Index) returned –4.7%.

• The chart below presents the price/earningsratio for the S&P 500 Index based on “operating”earnings, which exclude extraordinary and otheritems, and on “reported” earnings, whichinclude these items. There is no consensusabout which one is a better measure of marketvaluation or sentiment.

Global equity markets

• The MSCI EAFE Index, a broad measure ofinternational developed markets, returned 0.7%in U.S. dollars. Returns from Europe were solidlypositive—though they were well off the first-quarter pace—while the Pacific region declined,in large part because of Japan’s drop. The emerg-ing markets, a star over the past year or so, fellsharply during the quarter.

U.S. bonds

• The Federal Reserve Board hiked its target forthe federal funds rate two more times during thequarter, nudging the rate to 5.25%.

• The Lehman Aggregate Bond Index, a broadmeasure of taxable, investment-grade U.S.bonds, recorded a slightly negative return,reflecting a drop in the price of existing bondsthat has resulted from the rise in interest rates.


MARKET BAROMETER > SECOND-QUARTER 2006

Maturity

3 months

2 years

5 years

10 years

30 years

Dec. 31, 2005

4.07%

4.40

4.35

4.39

4.54

Mar. 31, 2006

4.60%

4.82

4.81

4.85

4.89

June 30, 2006

4.98%

5.15

5.09

5.14

5.19

Year-to-datechange(percentage points)

0.91

0.75

0.74

0.75

0.65

Source: Vanguard.

U.S. Treasury-issue yields96 989492 00 02 04 0690

15

20

25

30

35

40

45

50

15

20

25

30

35

40

45

50

Last observation: June 2006.Sources: Standard & Poor’s Corporation; Crandall, Pierce & Company.

Reported P/E Ratio

Operating P/E Ratio

S&P 500 price/earnings ratio

15-year mean P/EOperating: 20.56Reported: 24.45

96 9892 00 02 04 069490

50

100

150

200

250

300

350

400

450

50

100

150

200

250

300

350

400

450

MSCI EAFE Index

Tokyo Nikkei Average

S&P 500 Index

Daily datayear-end 1989 = 100

Last observation: June 30, 2006.Sources: Standard & Poor’s Corporation; Dow Jones and Company; Crandall, Pierce & Company.

International equities

Lesson learned: Diversification is essential at any age

When Carl opened the quarterly statement forhis and his wife’s Vanguard accounts last April,his jaw dropped.

In three months, their retirement savings—invested nearly 100% in a single bond fund—hadlost $23,000.

Carl knew that the decline was relatively small in percentage terms; he and his wife, Judy, havemore than $1 million in Vanguard assets. But itstill stung. “I realized I needed to do some betterplanning, and get an expert opinion,” said the 83-year-old retired college psychology professor.

Unsure of the right way to approach his and Judy’ssituation, Carl turned to Vanguard and our new,streamlined financial planning offerings for help.

Cause for concern

Fortunately for Carl and Judy (not their real names),the sharp decline in assets had no immediateimpact on their lifestyle. A state pension throughCarl’s former employer, along with Social Securitybenefits and his part-time psychology practice, provide adequate income to meet living expenses.

Their retirement assets, however, are intended to be the primary financial resource for Judy, 11 years younger than Carl, should she survivehim. “Judy isn’t included as a survivor on my pen-sion because it would have drastically reduced the


MANAGING YOUR WEALTHCase Study

Carl and Judy’s new portfolio

Fund PercentageVanguard LifeStrategy Conservative Growth Fund 90%Underlying holdings and percentage of fund as of April 30, 2006:

Vanguard Total Bond Market Index Fund: 30%

Vanguard Asset Allocation Fund: 25%

Vanguard Total Stock Market Index Fund: 20%

Vanguard Short-Term Investment-Grade Fund: 20%

Vanguard Total International Stock Index Fund: 5%

Vanguard Total Stock Market Index Fund 10%

monthly payment,” Carl said. “Instead, I chose thehigher payment and have been regularly investinga portion of it.”

That’s why the loss was so worrisome. “If I passaway before Judy, she will have little guaranteedincome,” he said. “We can’t afford a $20,000-plus loss every three months.”

A free financial plan

After contacting Vanguard to determine theirnext steps, Carl learned about our new VanguardFinancial Planning Services. Launched last April,these services include timely, personal advicefrom financial planners on a broad range ofissues, such as asset allocation, investmentselection, retirement needs, and investing for a child’s education.

Carl first completed an investor questionnairedetailing the couple’s investment goals and riskcomfort level. The information forms the basis ofVanguard’s plan recommendations.

Not surprisingly, given Carl’s age and concernover Judy’s future financial security, his respons-es to the questionnaire indicated the need for aconservative investment approach that protectedtheir savings. However, he thought he’d beentaking that kind of approach all along by investingpredominantly in a bond fund.

The magic word: Diversify

As interest rates have risen over the past two-plusyears, bonds have not been the safe haven thatinvestors often perceive them to be. Climbingrates have caused the prices of bonds and the netasset value of many bond funds to fall, as olderbonds paying lower rates in the fund portfolioshave declined in value.

That was what had happened to the fund Carland Judy invested in, said Vanguard plannerCraig Arnold. “Between January and April, theper-share value of the fund dropped almost 3%,”said Mr. Arnold, who worked with Carl and Judy.But the sharp loss in assets wasn’t just due tofalling bond prices—it was also due to havingtheir eggs in one basket.


Need investment advice?Ask Vanguard

Vanguard offers advice on a wide range of investment matters:

• Free financial plan forinvestors bringing $100,000in new assets to Vanguard.

• Financial plan for a fee of $1,000 for other existing clients with$100,000 to $250,000 invested at Vanguard.

To learn more, call us toll-free at 800-276-7230.

Notes:

Our financial planning services are available only for portfolios with a minimum of $100,000.Vanguard Financial Planning Services are provided by Vanguard Advisers, Inc., a registered investment advisor.LifeStrategy Funds are subject to the risks of their underlying funds.

“Craig said the magic word was ‘diversify,’” Carlsaid. “No single fund is always going to avoidgoing down, no matter what kind it is.”

Stocks: A leap ‘across a wide river’

A short time after Carl submitted the initial ques-tionnaire, Mr. Arnold sent him a detailed financialplan recommending a well-diversified portfolio of50% bond funds and—somewhat surprisingly toCarl—50% stock funds. Investors often perceivethat the older they are, the more they need toinvest in the “safety” of bonds. However, the rightstock/bond proportion depends on one’s objectivesand risk tolerance as well as the time horizon.

“Carl and Judy were not currently tapping theirassets, and also expressed a desire to haveenough wealth to pass on to their four children,”Mr. Arnold said. “Their investment horizon couldbe many more years, so stocks are appropriateto help weather market ups and downs, as wellas aid in their portfolio’s growth over time.”

Including stocks at this stage of life meant a bigchange in mindset for Carl. “It’s like leaping acrossa river, a very wide river,” he said. “But I felt thatwe had to have the chance for some growth, morethan bonds seem to offer.”

Simple choice

Mr. Arnold’s plan gave Carl the choice of two different types of portfolios that would meet therecommended 50% bond/50% stock allocation.The first was a selection of seven individualVanguard stock and bond funds that offered Carlcontrol over the exact percentages in which theportfolio was invested. The second was simpler;it called for investing in just two funds: 80% inVanguard LifeStrategy® Conservative GrowthFund, a “fund-of-funds,” and 20% in VanguardTotal Stock Market Index Fund.

Consulting with Mr. Arnold by phone, Carl decidedon the simpler portfolio, with a slight modification.“Being more conservative, I chose an allocation of90% LifeStrategy fund and just 10% Total StockMarket Index,” he said. “I didn’t want us to be tooextended in stocks.”

The combined fund target allocation is roughly40% stocks, 60% bonds. Most important, itoffers exposure to many types of investments,from short-term bonds to even a small portion ofinternational stocks (see accompanying table).Although diversification does not ensure a profitor protect against a loss in falling markets, it doesgive Carl and Judy a better chance of offsettingfunds that are going down with others that aregoing up.

A better position

With the allocation decision made, Carl immedi-ately executed the transactions that put the planinto action. From start to finish, getting a personalfinancial plan tailored for his and Judy’s long-termfuture took Carl about five weeks. Also, as part ofthe new financial planning service, Vanguard willcontact Carl next year to begin annual portfoliocheckups, at no cost, to determine whether theirplan requires adjusting.

Carl still winces when he thinks of opening theApril statement. But he does feel more confidentthat his and Judy’s savings have a better chanceof being there when she needs them. “The diver-sification should help prevent the kind of jarringexperience I had before,” he said. “In that sense, I can see how our portfolio is better positionedthan it was.” ■

Rising interest rates: How do theyaffect your investment mix?

In late May, portfolio managers from Vanguard’sFixed Income Group, which oversees nearly $300 billion in assets, talked with In The Vanguardabout bond investing in an environment of risinginterest rates.

Christopher Ryon, Gregory Nassour, David Glocke,and Gregory Davis discussed the implications ofrate changes for both individuals and portfoliomanagers, the yield differences between U.S.Treasury bonds and other fixed income invest-ments, and the potential impact of rising U.S.budget and current account deficits on the fixedincome markets.

These excerpts are from the complete discussion,which appears online at www.vanguard.com/visit/interest.

Is there any reason for individual investors torespond to rising interest rates by changing, say,their mix of bond and money market funds?

Mr. Ryon: Investors should have their time horizondefined and know what their assets are supposedto fund. If you plan to make a tuition payment or adown payment on a home within the next year, amoney market fund makes sense. Over a longertime frame, bonds are appropriate.

Bond returns can be broken down into three com-ponents: principal, income, and income-on-income.If you reinvest your dividends, the biggest driver ofyour returns over long periods will be the income-on-income portion. Short-term fluctuations of inter-est rates won’t be important. In fact, rising interestrates could help, as the income-on-income part ofyour return will grow at a higher rate.

What are the implications of rising rates for a bondfund manager?

Mr. Nassour: In a rising rate environment, duration(or a fund’s sensitivity to interest rates) is going tobe a key factor. Earlier this year, we were in the

bearish (short-duration) range in the short- andintermediate-term funds to protect against risingrates. Since then, we’ve still been defensive in the short-term funds, and on the short-end of the neutral range for the intermediate- and long-term funds.

Mr. Davis: Credit quality also plays into it. If theFederal Reserve Board is very active in raisingrates, then borrowers—the corporations—havehigher funding costs. A lower-quality companywith higher funding costs could face more diffi-culties than a higher-quality name.

What’s the current risk/reward picture for Treasury bond funds compared with other fixedincome options?

Mr. Nassour: The yield advantage for corporatebonds versus Treasuries has decreased since2002. There’s been a quality compression, whichmeans you’re not being paid as much to purchaselower-quality bonds as you used to be.

Mr. Glocke: And for credit spreads to widen out,it may take more of a downturn in the economy.Spreads have tightened because there’s been aglobal savings glut, and a lot of cash has flowedinto fixed income.

Mr. Davis: For TIPS (Treasury inflation-protectedsecurities), the break-even inflation rate (the ratethat would give TIPS and Treasuries the sameyield) is near its highest point in several years. If realized inflation climbs higher than the break-even rate, there’s still value in these securities. Ifinflation falls below the break-even rate, howev-er, you’ll see the opposite effect. Regardless, foran investor with a long-term horizon, TIPS can bea good diversification tool because there is less-than-perfect correlation with Treasuries.

Mr. Ryon: Municipal bonds have been perform-ing very well versus Treasuries, which meansthat the relative value of municipals versusTreasuries has decreased. But the decision ofhow to mix your taxable and tax-exempt assetsencompasses many different factors. ■


MANAGING YOUR WEALTH

Note: A portfolio manager’s opinions about a given investment or securities market are subject to change.

New logon security is coming to Vanguard.com

If you’re a registered user of Vanguard.com, you’llsoon be seeing some changes in the process youuse to log on for secure access to your accounts.In the coming months, our website will imple-ment new technology to help you further protectyour identity and account information.

You may have noticed one change already: Afteryou enter your user name, you’re taken to a newpage to enter your password. This allows us toapply additional security checks, increasing ourability to safeguard your personal information.

Log on and picture this . . .

Splitting the user name and password is just thefirst step. Sometime in the next few months,you’ll receive an e-mail from Vanguard introduc-ing you to the rest of the new logon process. Toset up your security, you’ll be asked to followthree steps:

1. Pick an image and assign a caption to it. Fromthen on, whenever you enter your user name atVanguard.com, you’ll always see your chosenimage and caption. That will verify that you’re inVanguard’s secure site.

2. Choose three questions from a list and pro-vide answers. These questions and answers,which are known only to you and Vanguard, willhelp prevent unauthorized users from logging onto your account even if they somehow learn youruser name and password.

3. Decide whether you want Vanguard to “recog-nize” your computer for future logons. Vanguardhas the ability to recognize computers you useregularly to access our website—even multiplecomputers, such as your work and homemachines. If you permit it, we can use this abilityto further protect you: If your user name andpassword are entered from a computer we do

not recognize, we will require that one of yoursecurity questions be answered before the logoncan proceed. (Note that if you are logging onfrom a shared or public computer, you would notwant Vanguard to recognize that machine.)

We are able to recognize computers you use toaccess our website because we assign a uniqueidentifier, called a “cookie,” to each machine. Ourcookies are stored on your computer’s hard drive,and they contain only the machine identification—not your logon or any other personal information.

You can see a preview of the new process nowat www.vanguard.com/visit/enhancedlogon.

Staying safe online: A two-way street

While the new logon process will help increaseyour information security online, that does notmean you should let down your guard at home.

“We will always do our part to protect your personal information, as the new logon shows,”said Tim Thornton, a principal in Vanguard Web Services. “But staying safe online is a partnership—you have to do your part by beingvigilant and securing your computer.”

Vanguard recommends using antivirus softwareand updating it weekly. It’s also wise to use afirewall and upgrade your computer’s operatingsystem and Web browsers when new versionsbecome available.

Read more about how to protect yourself and yourcomputer at www.vanguard.com/security. ■


MANAGING YOUR WEALTH

Also look for ‘My Messages’

You will see another onlineenhancement when you log on to Vanguard.com: My Messages.

My Messages provides safeand convenient access toinformation related to youraccounts, such as the status of certain transactions or anyissues you report. Since thisnew feature is different fromtraditional e-mail notifications,we will include personalaccount information—includingbrokerage account alerts, suchas when a CD you hold isredeemed because of a call orif your good-till-canceled (GTC)order expires.

Better late than never when saving for retirement

Retirement goals sometimes take a back seat toother priorities, such as buying a house, raisingkids, or paying for college. Can we ever make upfor lost time?

“The later you start saving, the more challengesyou face, but you can do it,” said John Ameriks,an analyst in Vanguard’s Investment Counseling &Research group. “Many people do the bulk oftheir saving over the last 15 years of their career.But you need to be motivated and have a realisticplan to succeed.”

Get started today

Whether it’s a 401(k) or a 403(b), the place tostart is an employer-sponsored plan. Contributethe maximum, if possible, which is $15,000 in2006 ($20,000 for investors age 50 and older).Many employers will match all or part of yourcontribution to their plan.

“Not putting in enough to get that full match islike telling your boss ‘Thanks, but I’d rather notcash that part of my paycheck,’ ” Ameriks said.

Once you’ve maxed out your employer-sponsoredplan contributions, open an individual retirementaccount (IRA). Both traditional and Roth IRAs letyou invest in a variety of mutual funds, stocks,bonds, and cash investments, but each has itsown eligibility requirements and tax advantages.

With a traditional IRA, you invest on a tax-deferred basis—you won’t owe taxes on earningsuntil you withdraw assets in retirement.Depending on your situation, contributions mayalso be deductible on your federal income taxreturn. With a Roth IRA, you won’t get a taxdeduction now, but your investment earnings willgrow tax-deferred and withdrawals are tax-freeduring retirement.

You can contribute up to $4,000 to an IRA for the2006 tax year. And if you’re age 50 or older, a“catch-up” provision allows you to save evenmore—up to $5,000 for 2006.

Keep costs low

No matter how you invest, costs matter. While astock or bond fund with a lower expense ratiowon’t automatically perform better than a higher-cost fund, the more similar their holdings, themore the fund with lower costs will tend to outperform the higher-cost fund over time.

Manage the risks

Recognizing your late start, choose an asset alloca-tion of stocks, bonds, and cash investments withthe appropriate balance of risk and growth poten-tial. A 100% allocation in stocks offers the mostpotential reward, but carries the most market risk.Putting all of your savings in cash investments lowers investment risk but makes it harder toreach your savings goals or stave off the asset-eroding effects of inflation. Consider targetedretirement funds: Each fund’s asset allocationadjusts over time, becoming more conservative as you near your projected retirement date.

An immediate annuity (or income annuity) canhelp mitigate the risk of outliving your savings.You make an initial lump-sum investment inreturn for a series of payments throughout yourretirement. However, these investments usuallyfeature high minimum contributions and fees.Generally, annuities should be considered onlyafter you have exhausted other options, such as 401(k)s and IRAs.

Adjust your retirement expectations

Even if you ratchet up your contributions now, youstill may have to rethink your retirement strategy.Consider working part-time, moving to a smallerhome, or postponing your retirement to make asmoother transition to your new lifestyle.

“You can maintain your current lifestyle andreduce your standard of living during retirementor cut back today and save more to head off a biglifestyle change later,” Ameriks said. “Ultimately,you must decide which retirement strategy isright for you.” ■


RETIREMENT MATTERS

Leaving your job? Don’t forget your 401(k)

When you change jobs or retire, one of the mostimportant decisions you have to make is what todo with the money you’ve saved in your 401(k)or other employer-sponsored retirement plan.Because this money may represent a significantportion of your retirement savings, it’s vital thatyou make the right decision.

What to do when changing jobs

If you switch jobs, you generally have the followingoptions:

• Roll your money over into a traditional IRA.

• Roll your money over into your new employer’splan (if allowed by the new plan).

• Keep your money in your former employer’splan (if your balance is $5,000 or more).

• Take a lump-sum distribution.

The first three options all keep your moneygrowing tax-deferred. However, for most people,rolling over the money into an IRA is the bestchoice, according to Martin Schamis, CFP®, afinancial planner with Vanguard FinancialPlanning Services.

With an IRA, you are likely to have a wider range of investment choices, a broader array of services,and lower costs than you would have in anemployer plan, Mr. Schamis said. And if you con-solidate your assets, you’ll have less paperwork,and you’ll be able to take retirement distributionsfrom a single account.

“Sometimes, we find that people have a collectionof 401(k) plans from their previous employers,” Mr. Schamis said. “Generally, you have a lot morecontrol over the money if you consolidate yourassets in a single IRA.”

What you don’t want to do is take a lump-sumdistribution, or “cash out” from your plan. Whenyou cash out, you risk losing up to half of yourwithdrawal to taxes and penalties, and you losethe benefits of tax-deferred growth.

And be careful, Mr. Schamis said, if you havecompany stock in your retirement plan. “If youhold a large amount of company stock that hasappreciated in value, a rollover may not alwaysbe the best choice, so you should consult afinancial and tax advisor before deciding what to do,” he said.

What to do when retiring

When you retire, you generally have theseoptions:

• Roll your money over into a traditional IRA.

• Keep your money in your former employer’splan (if your balance is $5,000 or more).

• Turn your money into an income stream(through an income annuity).

• Take a lump-sum distribution.

Just as when you’re changing jobs, you’ll havethe most flexibility if you roll over your moneyinto an IRA, Mr. Schamis said. Consolidating yourassets into a single IRA can simplify the task ofkeeping beneficiary designations up-to-date andmake it easier if someone else, such as yourspouse, has to take over your finances.

If you want to create an income stream for retirement, you can use some of the money to purchase an income or deferred annuity. If youchoose instead to take a lump-sum distributionfrom your plan at retirement, you’ll have to payimmediate taxes on the money. You will also runthe risk of spending your retirement assets tooquickly or making poor investment decisions earlyon, which could leave you with little money for your later retirement years. ■


RETIREMENT MATTERS

Note: If you take withdrawals from an IRA or 401(k) before age 591⁄2, you may have to pay ordinary income tax plus a 10% federal penalty tax onwithdrawals.

How Vanguard can help

If you’re rolling over $100,000or more into a VanguardIRA®, our retirement advisors can take care of allthe paperwork for you andcan even make fund recom-mendations. You may alsoqualify for a complimentaryfinancial plan from VanguardFinancial Planning Services.

To find out more, call us toll-free at 800-276-7230.

Trading stocks online?It’s easier than ever

If you use Vanguard.com to buy and sell stocks,you’ll notice a few changes this summer that willmake the online trading process simpler andmore intuitive.

Recently, we asked a sampling of VanguardBrokerage Services clients for their thoughtsabout online trading. Based on their feedback,we’ve created a “guided path” to address com-mon questions about the trading process andallow you to make smart decisions concerningyour brokerage assets.

Before you initiate a trade, you’ll be able to choosebetween the guided path and the standard tradingprocess. (If you’re an experienced trader, you’llprobably prefer to take the standard route.)

Here’s a summary of what you’ll find on theguided path:

• At the start of each trade, we’ll tell you howmuch money is available in your brokerageaccount and remind you of any open orders thatmay affect your transaction.

• When we ask you to choose an order type(market or limit), we’ll explain the differencebetween the two methods so that you candecide which is best for you.

• We’ve made it easier to get real-time quoteson the securities you’re trading and to under-stand how each aspect of a quote (such as ask-ing price or market volume) affects your trade.

• We’ll display your progress at each step alongthe way.

In short, we’re providing the information youneed, when you need it. ■


AT YOUR SERVICE

Moving brokerage assetsneed not be taxing

If you own individual stocks and bonds that you’dlike to move to Vanguard, you may not know thatyou can transfer them without incurring capitalgains taxes.

You don’t have to liquidate your brokerage assetsbefore moving them to another investment com-pany. You can simply do what’s called an in-kindtransfer, which eliminates the need for complicat-ed transactions and costly tax penalties. And it’s alot easier than you may think.

As a Vanguard Brokerage Services client, you canconsolidate almost all of your other brokerageholdings here at Vanguard. That includes stocks,bonds, options, most mutual funds, listed limitedpartnerships, and unit trusts you hold elsewhere.In many cases, there’s just one simple Vanguardform to fill out, and you can get the processstarted at Vanguard.com in a matter of minutes.

A host of advantages

Why would you want to transfer brokerageassets to Vanguard? For one thing, you alreadyknow about Vanguard’s low costs, uncompro-mised integrity, and exceptional client service.And you’re probably familiar with our competitivebrokerage commissions and account fees.

But there’s another important advantage to con-sider: the convenience and simplicity of havingone centralized location for all your investments.Imagine no longer having to sort through a pile of account statements from different investmentfirms. Imagine not having to keep track of whatyou own where. You’ll be able to log on toVanguard.com and manage your entire portfolio in one place.

To initiate an in-kind transfer to your existingVanguard Brokerage Services® account—or toopen an account if you’re not currently a client—call Vanguard Brokerage Services at 800-992-8327,Monday through Friday from 8 a.m. to 8 p.m.,Eastern time. ■

See what you can dowith your accounts online

When you let Vanguard.com help you manageyour accounts, you never have to make a phonecall or wait for the mail. Whether you want tomove money quickly, order literature, changeyour address, or simply check your account bal-ance, our website gives you secure access toyour accounts and common account-relatedtasks at any hour.

Why not explore your opportunities online? Forexample, our Forms & Literature page is yourgateway to investment literature, prospectuses,and the forms you need to open or manage youraccounts. Click the Forms link at the top of anywebpage. You can download the material orrequest it by mail.

If you’re Web-registered, you can perform simpleaccount tasks online in minutes. Log on to youraccount and click the Accounts & Activitiestab to buy, sell, or exchange funds anytime.


AT YOUR SERVICE

You can take it with you:Podcasts on Vanguard.com

Listen up: Vanguard podcasts offer an exciting newway to learn about investing and personal finance.

Podcasts are audio files available on the Internetthat you can listen to on your computer or down-load to your portable media player, such as aniPod. You decide when and where to listen,whether you’re working out or commuting to work.

Plain Talk on Investing™, a series dedicated to providing practical investment tips to you, kickedoff this new venture this summer. Topics for thefirst four episodes are: insights on creating a finan-cial plan, why low costs matter, how index fundscan work for you, and preparing for retirement.

To change your address and other personal infor-mation, click My Profile.

The Account Options tab is the place to viewthe options you’ve established, set up new ones,or make changes online—all at your conven-ience. Some popular choices include:

• Electronic banking services. Move moneybetween your Vanguard funds and your bankaccount.

• Recurring transfers. Schedule regular invest-ments into your Vanguard funds from your bankaccount, transfers from your Vanguard funds toyour bank account, or exchanges between yourVanguard funds.

Of course, Vanguard phone associates arealways ready to help you. However, you can besure that we provide an extremely high level ofsecurity when you transact your Vanguard busi-ness online. If you’re not already Web-registered,take a minute to see how easy it is to controlyour investments online. From the homepage,click Sign up for access. ■

Look for Vanguard podcasts in the news area ofour Personal Investors homepage or in a varietyof external websites that allow you to subscribeto podcasts. The service is free, and you cansubscribe to all episodes using iTunes, MyYahoo!, or a variety of other podcast tools andservices. Or you can select just the episodesthat interest you and listen to them onVanguard.com. To learn more about Vanguardpodcasts, go to www.vanguard.com/podcast.

Another new way to stay connected withVanguard news and insights is RSS—ReallySimple Syndication. This free service takes thelatest headlines from articles on Vanguard.comand makes them available to you on your customized news pages (like My Yahoo! or My MSN) or in your stand-alone RSS reader software. Clicking any headline will take youdirectly to the full article on Vanguard.com. ■

© 2006 The Vanguard Group, Inc. All rights reserved. Vanguard Advisers, Inc.,and Vanguard Marketing Corporation,Distributors. ITV 072006

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

Americans’ retirement in jeopardy?Not with DC plans

America’s retirement landscape has changed considerably in recent years, and the changes have created some worries. With traditional defined ben-efit (DB) pension plans under pressure, employersincreasingly have asked employees to shoulder theprimary responsibility for retirement investing usingdefined contribution (DC) plans, such as the 401(k).As a result, a number of political analysts and econ-omists are questioning whether American workersare up to the challenge. Will employees saveenough and make sound investment decisions tosecure a comfortable retirement? Some say no,calling the situation a “crisis.” At Vanguard, we thinksuch reactions are excessive, especially consideringthe many advantages of DC plans.

Greater access

Traditional pensions—under which employeesreceive payments based on salary and years ofservice—certainly have helped some Americansretire comfortably. But these plans have never covered the majority of workers. Only 22% ofemployees today are covered by a DB plan.Meanwhile, DC plans have increased employeeaccess to company-sponsored retirement pro-grams. About 53% of U.S. workers are eligible to participate in DC plans, according to theInvestment Company Institute.

Portability

To receive a sizable pension, an employee mustremain with a company for many years—a toughprospect for today’s job-switching workforce.Assets held in DC plans, however, are portable.To keep savings growing tax-deferred, balances

often can be left in a former employer’s plan ortransferred to another tax-deferred account, suchas an IRA. And these assets can be passed on toan employee’s heirs, unlike a pension payment.

Inflation protection

Most DB payments are fixed, so inflation erodestheir purchasing power. In contrast, a 401(k) orother DC plan invested in a mix of stocks andbonds can provide a fair measure of inflation protection—a compelling advantage, especiallysince retirees are living longer.

Improvements to 401(k) plans

As the 401(k) marks its 25th anniversary inNovember, employers and participants can celebrate the fact that these plans have gottenbetter with age. Features such as automaticenrollment and automatic contribution increasesare helping employees save more. Simplifiedinvestment options based on sound asset alloca-tion principles are gaining popularity. Finally, manyplans are becoming more generous. We surveyed30 Vanguard corporate clients that recently frozetheir DB plans and found that three-quartersimplemented an additional contribution foremployees on top of an existing match withintheir DC plans.

Better information, planning tools

Employees are more aware than ever of theneed to plan for retirement. At the same time,better investment information and planning toolsare widely available to help employees makesound investment choices.

The new pension landscape requires employers andemployees to share responsibility for providing forretirement. When they do, the facts show that DCplans can help Americans to retire comfortably. ■

THE VANGUARD VIEWPOINT

For information about Vanguard funds,Vanguard Brokerage Services, or youraccount, call us toll-free Mondaythrough Friday from 8 a.m. to 10 p.m.and on Saturday from 9 a.m. to 4 p.m.,Eastern time: 800-276-7230.

For automated fund and account information 24 hours a day, 7 days a week, call Vanguard Tele-Account®:800-662-6273.

Send your written comments to:The Vanguard GroupP.O. Box 2600 Valley Forge, PA 19482-2600

Overnight Mailing AddressThe Vanguard Group400 Devon Park DriveWayne, PA 19087-1815

We welcome your feedback via e-mail:[email protected]

Vanguard, Connect with Vanguard,Vanguard Brokerage Services,Vanguard.com, Vanguard Tele-Account, Vanguard IRA, Admiral, InThe Vanguard, Windsor, Morgan,LifeStrategy, Plain Talk on Investing,and the ship logo are trademarks ofThe Vanguard Group, Inc.

Standard & Poor’s 500 and 500 aretrademarks of The McGraw-HillCompanies, Inc. and have beenlicensed for use by The VanguardGroup, Inc. Vanguard mutual fundsare not sponsored, endorsed, sold, orpromoted by Standard & Poor’s, andStandard & Poor’s makes no repre-sentation regarding the advisability of investing in the funds.

All other marks are the exclusiveproperty of their respective owners.

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

For more information, visit www.vanguard.com, or call 800-276-7230 for Vanguard funds, 800-522-5555 for Vanguardannuity products, and 800-992-8327 for non-Vanguard funds offered through Vanguard Brokerage Services, to obtainfund and annuity contract prospectuses. Investment objectives, risks, charges, expenses, and other importantinformation are contained in the prospectuses; read and consider them carefully before investing.

Vanguard Brokerage Services is a division of Vanguard Marketing Corporation.

GROWTH AND INCOME FUNDS 40 500 Index Investor Shares (8/31/1976) VFINX

540 500 Index Admiral™ Shares (11/13/2000) VFIAX328 Capital Value (12/17/2001) VCVLX82 Convertible Securities (6/17/1986) VCVSX R3

608 Diversified Equity (6/10/2005) VDEQX57 Dividend Growth (5/15/1992) VDIGX65 Equity Income Investor Shares (3/21/1988) VEIPX

565 Equity Income Admiral™ Shares (8/13/2001) VEIRX93 Growth and Income Investor Shares (12/10/1986) VQNPX

593 Growth and Income Admiral™ Shares (5/14/2001) VGIAX307 Large-Cap Index Investor Shares (1/30/2004) VLACX

5307 Large-Cap Index Admiral™ Shares (2/2/2004) VLCAX1220 PRIMECAP Core (12/9/2004) VPCCX R3123 REIT Index Investor Shares (5/13/1996) VGSIX R3

5123 REIT Index Admiral™ Shares (11/12/2001) VGSLX R3934 Selected Value (2/15/1996) VASVX R3101 Tax-Managed Growth & Income Investor Shares (9/6/1994) VTGIX R5

5101 Tax-Managed Growth & Income Admiral™ Shares (11/12/2001) VTGLX R585 Total Stock Market Index Investor Shares (4/27/1992) VTSMX

585 Total Stock Market Index Admiral™ Shares (11/13/2000) VTSAX124 U.S. Value (6/29/2000) VUVLX

6 Value Index Investor Shares (11/2/1992) VIVAX506 Value Index Admiral™ Shares (11/13/2000) VVIAX22 Windsor™ Investor Shares (10/23/1958) VWNDX

5022 Windsor™ Admiral™ Shares (11/12/2001) VWNEX73 Windsor™ II Investor Shares (6/24/1985) VWNFX

573 Windsor™ II Admiral™ Shares (5/14/2001) VWNAXGROWTH FUNDS

98 Extended Market Index Investor Shares (12/21/1987) VEXMX598 Extended Market Index Admiral™ Shares (11/13/2000) VEXAX213 FTSE® Social Index Investor Shares (5/31/2000) VCSIX

9 Growth Index Investor Shares (11/2/1992) VIGRX509 Growth Index Admiral™ Shares (11/13/2000) VIGAX859 Mid-Cap Index Investor Shares (5/21/1998) VIMSX

5859 Mid-Cap Index Admiral™ Shares (11/12/2001) VIMAX26 Morgan™ Growth Investor Shares (12/31/1968) VMRGX

2.64% 8.49% 2.37% 8.24% 12.00%2.70 8.59 2.45 — 0.533.43 8.71 — — 5.975.22 15.99 7.16 9.03 8.961.64 9.24 — — 8.854.29 9.88 1.29 5.72 7.626.25 10.54 5.67 9.57 11.226.34 10.73 — — 5.901.65 7.63 2.79 8.86 11.451.74 7.80 2.94 — 2.572.72 9.11 — — 7.462.77 9.18 — — 7.433.33 13.71 — — 11.65

13.21 19.23 18.92 14.89 14.9613.23 19.32 — — 21.652.97 5.93 10.53 9.42 9.342.69 8.55 2.49 8.33 10.682.71 8.63 — — 4.663.27 9.74 3.84 8.39 10.423.32 9.85 3.91 — 1.931.34 5.34 5.94 — 7.846.25 12.34 4.39 9.20 11.406.30 12.46 4.48 — 4.083.86 9.29 5.61 10.01 12.413.93 9.41 — — 8.094.30 8.57 6.28 10.20 12.714.33 8.70 6.38 — 5.86

5.48% 14.07% 8.89% 9.51% 12.17%5.57 14.25 9.00 — 6.410.85 8.22 1.07 — –2.11

–0.77 5.88 1.03 7.27 9.25–0.72 5.95 1.13 — –2.47

4.42 14.43 10.08 — 11.474.50 14.57 — — 13.251.19 10.66 2.69 8.31 10.84

8/2006 S8/2006 S

11/2006 A7/2006 S6/2006 S

9/2006 S11/2006 A11/2006 A11/2006 A11/2006 A

8/2006 S8/2006 S

11/2006 A9/2006 S9/2006 S

12/2006 A8/2006 S8/2006 S8/2006 S8/2006 S

11/2006 A8/2006 S8/2006 S6/2006 S6/2006 S6/2006 S6/2006 S

8/2006 S8/2006 S

10/2006 A8/2006 S8/2006 S8/2006 S8/2006 S

11/2006 A

Vanguard® Performance ProfileSummer 2006

COMPARATIVE INDEXES S&P 500 Index Dow Jones Wilshire 4500 Index Dow Jones Wilshire 5000 IndexRussell 2000 Index MSCI® EAFE® Index Lehman Aggregate Bond Index Lehman Municipal Bond Index Citigroup 3-Month T-Bill Index

2.71% 8.63% 2.49% 8.32%5.51 13.87 9.03 9.323.51 10.03 4.06 8.478.21 14.58 8.50 9.05

10.16 26.56 10.02 6.39–0.72 –0.81 4.97 6.22

0.28 0.88 5.05 5.792.19 3.95 2.16 3.68

The performance data shown represent past performance. Past performance—and especially short-term past performance—is no guarantee of future results. Investmentreturns and principal value will fluctuate, so investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higherthan the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com. Some funds assess purchase,redemption, and/or account maintenance fees. The performance data shown do not reflect deduction of these fees. If they did, performance would be lower. Details onthese fees and adjusted performance figures can be found in the Fee-Adjusted Returns section.

Next Report/Fund Ticker Year To Since ProspectusNo. Vanguard Fund Name (Inception Date) Symbol Fees Date 1 Year 5 Years 10 Years Inception◆ Online•

Average Annual Total Returns ForPeriods Ended June 30, 2006

FPP_ITV_072006.qxp 7/17/06 10:19 AM Page 1

526 Morgan™ Growth Admiral™ Shares (5/14/2001) VMRAX59 PRIMECAP Investor Shares◆◆ (11/1/1984) VPMCX R3

559 PRIMECAP Admiral™ Shares◆◆ (11/12/2001) VPMAX R3114 Strategic Equity◆◆ (8/14/1995) VSEQX102 Tax-Managed Capital Appreciation Investor Shares (9/6/1994) VMCAX R5

5102 Tax-Managed Capital Appreciation Admiral™ Shares (11/12/2001) VTCLX R523 U.S. Growth Investor Shares (1/6/1959) VWUSX

523 U.S. Growth Admiral™ Shares (8/13/2001) VWUAXAGGRESSIVE GROWTH FUNDS

111 Capital Opportunity Investor Shares◆◆ (8/14/1995) VHCOX R35111 Capital Opportunity Admiral™ Shares◆◆ (11/12/2001) VHCAX R35483 Consumer Discretionary Index Admiral™ Shares (7/14/2005) VCDAX R45484 Consumer Staples Index Admiral™ Shares (1/30/2004) VCSAX R4

51 Energy Investor Shares (5/23/1984) VGENX R3551 Energy Admiral™ Shares (11/12/2001) VGELX R3

5480 Energy Index Admiral™ Shares (10/7/2004) VENAX R424 Explorer™ Investor Shares◆◆ (12/11/1967) VEXPX

5024 Explorer™ Admiral™ Shares◆◆ (11/12/2001) VEXRX5486 Financials Index Admiral™ Shares (2/4/2004) VFAIX R4544 Growth Equity (3/11/1992) VGEQX52 Health Care Investor Shares◆◆ (5/23/1984) VGHCX R3

552 Health Care Admiral™ Shares◆◆ (11/12/2001) VGHAX R35485 Health Care Index Admiral™ Shares (2/5/2004) VHCIX R45487 Information Technology Index Admiral™ Shares (3/25/2004) VITAX R45481 Materials Index Admiral™ Shares (2/11/2004) VMIAX R4301 Mid-Cap Growth (12/31/1997) VMGRX53 Precious Metals & Mining◆◆ (5/23/1984) VGPMX R3

861 Small-Cap Growth Index (5/21/1998) VISGX48 Small-Cap Index Investor Shares (10/3/1960) NAESX

548 Small-Cap Index Admiral™ Shares (11/13/2000) VSMAX860 Small-Cap Value Index (5/21/1998) VISVX116 Tax-Managed Small-Cap (3/25/1999) VTMSX R5

5488 Telecommunication Services Index Admiral™ Shares (3/11/2005) VTCAX R45489 Utilities Index Admiral™ Shares (4/28/2004) VUIAX R4

INTERNATIONAL FUNDS 227 Developed Markets Index (5/8/2000) VDMIX R2533 Emerging Markets Stock Index Investor Shares (5/4/1994) VEIEX R179 European Stock Index Investor Shares (6/18/1990) VEURX R2

579 European Stock Index Admiral™ Shares (8/13/2001) VEUSX R2129 Global Equity (8/14/1995) VHGEX126 International Explorer™◆◆ (11/4/1996) VINEX R281 International Growth Investor Shares (9/30/1981) VWIGX R2

581 International Growth Admiral™ Shares (8/13/2001) VWILX R246 International Value (5/16/1983) VTRIX R272 Pacific Stock Index Investor Shares (6/18/1990) VPACX R2

572 Pacific Stock Index Admiral™ Shares (8/13/2001) VPADX R2127 Tax-Managed International (8/17/1999) VTMGX R5113 Total International Stock Index (4/29/1996) VGTSX R2

EXCHANGE-TRADED FUNDS 954 Consumer Discretionary ETF (1/26/2004) VCR

Return based on net asset value Return based on market price

955 Consumer Staples ETF (1/26/2004) VDCReturn based on net asset value Return based on market price

964 Emerging Markets ETF (3/4/2005) VWOReturn based on net asset value Return based on market price

1.27% 10.88% 2.85% — 2.70%3.80 16.02 5.26 12.72% 15.263.88 16.19 — — 9.165.93 13.01 11.63 12.89 13.732.26 9.38 2.77 8.43 10.672.27 9.41 — — 5.73

–6.07 5.12 –3.57 1.59 10.68–5.94 5.37 — — –2.29

3.21% 13.25% 6.18% 14.49% 14.06%3.25 13.36 — — 10.821.33 — — — –2.205.07 7.84 — — 7.80

16.47 37.25 25.08 17.99 15.0016.51 37.33 — — 28.1313.58 29.77 — — 31.044.05 13.13 6.64 9.85 9.584.13 13.32 — — 10.523.96 12.08 — — 8.59

–0.29 9.73 –0.65 5.91 8.432.40 12.10 7.93 16.42 19.252.44 12.21 — — 9.14

–3.19 0.53 — — 1.76–4.57 4.26 — — 1.04

7.40 20.43 — — 11.515.48 17.15 2.03 — 11.67

26.92 72.86 35.20 12.40 8.485.67 14.80 9.83 — 7.896.89 13.78 8.96 9.80 11.166.92 13.90 9.06 — 9.778.03 12.64 11.01 — 9.517.33 13.50 11.03 — 13.70

14.00 18.67 — — 16.085.27 5.74 — — 18.83

10.19% 26.81% 9.90% — 3.85%6.14 33.25 20.35 7.26% 8.02

13.54 24.96 10.43 10.20 9.9613.59 25.06 — — 11.029.02 22.33 13.54 11.55 12.07

11.61 29.34 16.19 — 14.519.76 28.27 9.39 7.08 12.829.88 28.52 — — 10.52

11.11 31.03 12.93 8.32 11.673.53 31.40 8.71 1.00 2.113.58 31.50 — — 10.68

10.31 27.26 10.02 — 5.199.53 27.60 10.89 6.35 6.18

1.37% 0.94% — — 3.04%1.40 1.06 — — 3.08

5.08 7.86 — — 7.595.38 8.13 — — 7.72

6.18 33.36 — — 21.325.31 33.69 — — 21.52

4/2006 S4/2006 S4/2006 S6/2006 S8/2006 S8/2006 S8/2006 S8/2006 S

6/2006 S6/2006 S8/2006 A8/2006 A9/2006 S9/2006 S4/2006 S6/2006 S6/2006 S4/2006 S5/2006 S9/2006 S9/2006 S9/2006 S4/2006 S4/2006 S6/2006 S9/2006 S8/2006 S8/2006 S8/2006 S8/2006 S8/2006 S4/2006 S4/2006 S

6/2006 S6/2006 S6/2006 S6/2006 S5/2006 S6/2006 S4/2006 S4/2006 S6/2006 S6/2006 S6/2006 S8/2006 S6/2006 S

4/2006 S

4/2006 S

9/2006 S




951 Energy ETF (9/23/2004) VDEReturn based on net asset value Return based on market price

963 European ETF (3/4/2005) VGKReturn based on net asset value Return based on market price

965 Extended Market ETF (12/27/2001) VXFReturn based on net asset value Return based on market price

957 Financials ETF (1/26/2004) VFHReturn based on net asset value Return based on market price

967 Growth ETF (1/26/2004) VUGReturn based on net asset value Return based on market price

956 Health Care ETF (1/26/2004) VHTReturn based on net asset valueReturn based on market price

953 Industrials ETF (9/23/2004) VISReturn based on net asset value Return based on market price

958 Information Technology ETF (1/26/2004) VGTReturn based on net asset value Return based on market price

961 Large-Cap ETF (1/27/2004) VVReturn based on net asset value Return based on market price

952 Materials ETF (1/26/2004) VAWReturn based on net asset value Return based on market price

939 Mid-Cap ETF (1/26/2004) VOReturn based on net asset value Return based on market price

962 Pacific ETF (3/4/2005) VPLReturn based on net asset value Return based on market price

986 REIT ETF (9/23/2004) VNQReturn based on net asset value Return based on market price

969 Small-Cap ETF (1/26/2004) VBReturn based on net asset value Return based on market price

938 Small-Cap Growth ETF (1/26/2004) VBKReturn based on net asset value Return based on market price

937 Small-Cap Value ETF (1/26/2004) VBRReturn based on net asset value Return based on market price

959 Telecommunication Services ETF (9/23/2004) VOXReturn based on net asset value Return based on market price

970 Total Stock Market ETF (5/24/2001) VTIReturn based on net asset valueReturn based on market price

960 Utilities ETF (1/26/2004) VPUReturn based on net asset value Return based on market price

13.57% 29.79% — — 34.46%13.57 29.91 — — 34.50

13.58 25.06 — — 14.1013.57 25.20 — — 15.07

5.56 14.27 — — 11.465.50 14.12 — — 11.43

4.00 12.13 — — 7.773.93 12.17 — — 7.78

–0.71 5.97 — — 2.90–0.50 6.27 — — 2.99

–3.17 0.55 — — 1.81–3.13 0.61 — — 1.84

9.17 19.49 — — 16.099.09 19.53 — — 16.05

–4.55 4.28 — — –3.40–4.40 4.18 — — –3.35

2.79 9.27 — — 7.062.85 9.41 — — 7.11

7.40 20.44 — — 13.037.41 20.49 — — 13.02

4.50 14.57 — — 13.944.53 14.47 — — 13.95

3.58 31.51 — — 18.032.87 30.82 — — 18.55

13.26 19.35 — — 25.0613.26 19.48 — — 25.02

6.96 13.95 — — 10.976.81 13.75 — — 10.80

5.71 14.92 — — 8.695.36 14.56 — — 8.49

8.13 12.82 — — 13.087.98 12.72 — — 12.98

13.98 18.67 — — 15.9513.88 18.60 — — 15.87

3.33 9.88 3.91% — 2.893.33 9.93 3.88 — 2.89

5.30 5.76 — — 16.905.26 5.74 — — 16.88


4/2006 S

8/2006 S

8/2006 S

4/2006 S

8/2006 S

4/2006 S

4/2006 S

4/2006 S

8/2006 S

4/2006 S

8/2006 S

8/2006 S

9/2006 S

8/2006 S

8/2006 S

8/2006 S

4/2006 S

8/2006 S

4/2006 S



966 Value ETF (1/26/2004) VTVReturn based on net asset value Return based on market price BALANCED FUNDS

78 Asset Allocation Investor Shares (11/3/1988) VAAPX578 Asset Allocation Admiral™ Shares (8/13/2001) VAARX

2 Balanced Index Investor Shares (11/9/1992) VBINX502 Balanced Index Admiral™ Shares (11/13/2000) VBIAX724 LifeStrategy® Conservative Growth (9/30/1994) VSCGX122 LifeStrategy® Growth (9/30/1994) VASGX723 LifeStrategy® Income (9/30/1994) VASIX914 LifeStrategy® Moderate Growth (9/30/1994) VSMGX56 STAR® (3/29/1985) VGSTX

302 Target Retirement 2005 (10/27/2003) VTOVX303 Target Retirement 2015 (10/27/2003) VTXVX304 Target Retirement 2025 (10/27/2003) VTTVX305 Target Retirement 2035 (10/27/2003) VTTHX306 Target Retirement 2045 (10/27/2003) VTIVX308 Target Retirement Income (10/27/2003) VTINX103 Tax-Managed Balanced•• (9/6/1994) VTMFX R527 Wellesley® Income Investor Shares (7/1/1970) VWINX

527 Wellesley® Income Admiral™ Shares (5/14/2001) VWIAX21 Wellington™ Investor Shares (7/1/1929) VWELX

521 Wellington™ Admiral™ Shares (5/14/2001) VWENX

6.34% 12.45% — — 10.34%6.40 12.65 — — 10.40

3.10% 8.83% 5.01% 8.95% 11.17%3.13 8.94 — — 5.251.67 5.40 4.46 7.81 8.981.71 5.55 4.55 — 3.701.95 5.64 4.98 7.39 8.553.78 11.04 5.43 8.16 9.870.82 2.69 4.63 6.88 7.842.68 7.97 5.35 7.91 9.331.91 7.82 6.07 9.18 10.920.09 2.07 — — 5.661.31 5.18 — — 7.591.87 6.58 — — 8.713.02 9.32 — — 10.673.74 11.13 — — 11.89

–0.28 1.00 — — 4.621.11 4.65 3.97 7.17 8.322.01 2.86 6.08 8.67 10.632.06 2.95 6.17 — 6.163.71 9.50 6.91 9.79 8.343.75 9.65 7.04 — 6.82

BOND FUNDS 36 GNMA Investor Shares** (6/27/1980) VFIIX

536 GNMA Admiral™ Shares** (2/12/2001) VFIJX29 High-Yield Corporate Investor Shares (12/27/1978) VWEHX R3

529 High-Yield Corporate Admiral™ Shares (11/12/2001) VWEAX R3119 Inflation-Protected Securities Investor Shares (6/29/2000) VIPSX

5119 Inflation-Protected Securities Admiral™ Shares (6/10/2005) VAIPX314 Intermediate-Term Bond Index Investor Shares (3/1/1994) VBIIX

5314 Intermediate-Term Bond Index Admiral™ Shares (11/12/2001) VBILX71 Intermediate-Term Investment-Grade Investor Shares (11/1/1993) VFICX

571 Intermediate-Term Investment-Grade Admiral™ Shares (2/12/2001) VFIDX35 Intermediate-Term Treasury Investor Shares** (10/28/1991) VFITX

535 Intermediate-Term Treasury Admiral™ Shares** (2/12/2001) VFIUX522 Long-Term Bond Index (3/1/1994) VBLTX28 Long-Term Investment-Grade Investor Shares (7/9/1973) VWESX

568 Long-Term Investment-Grade Admiral™ Shares (2/12/2001) VWETX83 Long-Term Treasury Investor Shares** (5/19/1986) VUSTX

583 Long-Term Treasury Admiral™ Shares** (2/12/2001) VUSUX132 Short-Term Bond Index Investor Shares (3/1/1994) VBISX

5132 Short-Term Bond Index Admiral™ Shares (11/12/2001) VBIRX39 Short-Term Investment-Grade Investor Shares (10/29/1982) VFSTX

539 Short-Term Investment-Grade Admiral™ Shares (2/12/2001) VFSUX



–0.81% 0.26% 4.52% 6.01% 8.52% 5.25%–0.76 0.37 4.60 — 4.69 5.35

1.06 3.00 6.29 6.09 9.17 7.481.13 3.15 — — 6.81 7.61

–1.67 –1.63 6.85 — 7.80 2.40◆◆

–1.65 –1.54 — — –0.74 2.49◆◆

–1.90 –2.84 5.22 6.41 6.35 5.55–1.86 –2.78 — — 4.03 5.62–1.25 –1.67 5.33 6.25 5.97 5.65–1.20 –1.57 5.42 — 5.49 5.76–1.49 –1.73 5.03 6.17 6.71 5.00–1.41 –1.56 5.18 — 5.00 5.16–5.04 –6.79 6.60 7.55 7.37 5.78–5.44 –7.70 6.61 7.03 8.70 6.15–5.37 –7.57 6.72 — 6.45 6.28–4.74 –6.13 6.37 7.35 8.08 5.10–4.66 –5.97 6.51 — 5.88 5.26

0.54 0.89 3.40 5.09 5.17 5.250.57 0.96 — — 2.61 5.321.32 2.35 3.71 5.19 7.40 5.111.38 2.47 3.80 — 4.08 5.22

9/2006 S9/2006 S9/2006 S9/2006 S9/2006 S9/2006 S8/2006 S8/2006 S9/2006 S9/2006 S9/2006 S9/2006 S8/2006 S9/2006 S9/2006 S9/2006 S9/2006 S8/2006 S8/2006 S9/2006 S9/2006 S

* 30-day yield for bond funds as of June 30, 2006.**The U.S. government backs the fund’s underlying investments but not its shares’ net asset value.

8/2006 S

5/2006 S5/2006 S8/2006 S8/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 P6/2006 P6/2006 P6/2006 P6/2006 P6/2006 P8/2006 S5/2006 S5/2006 S7/2006 S7/2006 S


30-Day Next Report/Fund Ticker Year To Since Current ProspectusNo. Vanguard Fund Name (Inception Date) Symbol Fees Date 1 Year 5 Years 10 Years Inception◆ Yield* Online•



MONEY MARKET FUNDS (TAX-EXEMPT AND TAXABLE)11 Admiral™ Treasury Money Market** (12/14/1992) VUSXX62 CA Tax-Exempt Money Market (6/1/1987) VCTXX33 Federal Money Market** (7/13/1981) VMFXX95 NJ Tax-Exempt Money Market (2/3/1988) VNJXX

163 NY Tax-Exempt Money Market (9/3/1997) VYFXX96 OH Tax-Exempt Money Market (6/18/1990) VOHXX63 PA Tax-Exempt Money Market (6/13/1988) VPTXX30 Prime Money Market (6/4/1975) VMMXX45 Tax-Exempt Money Market (6/10/1980) VMSXX50 Treasury Money Market** (3/9/1983) VMPXX

TAX-EXEMPT INCOME FUNDS••100 CA Intermediate-Term Tax-Exempt Investor Shares (3/4/1994) VCAIX

5100 CA Intermediate-Term Tax-Exempt Admiral™ Shares (11/12/2001) VCADX75 CA Long-Term Tax-Exempt Investor Shares (4/7/1986) VCITX

575 CA Long-Term Tax-Exempt Admiral™ Shares (11/12/2001) VCLAX18 FL Long-Term Tax-Exempt Investor Shares (9/1/1992) VFLTX

518 FL Long-Term Tax-Exempt Admiral™ Shares (11/12/2001) VFLRX44 High-Yield Tax-Exempt Investor Shares (12/27/1978) VWAHX

5044 High-Yield Tax-Exempt Admiral™ Shares (11/12/2001) VWALX58 Insured Long-Term Tax-Exempt Investor Shares (9/30/1984) VILPX

558 Insured Long-Term Tax-Exempt Admiral™ Shares (2/12/2001) VILQX42 Intermediate-Term Tax-Exempt Investor Shares (9/1/1977) VWITX

542 Intermediate-Term Tax-Exempt Admiral™ Shares (2/12/2001) VWIUX31 Limited-Term Tax-Exempt Investor Shares (8/31/1987) VMLTX

531 Limited-Term Tax-Exempt Admiral™ Shares (2/12/2001) VMLUX43 Long-Term Tax-Exempt Investor Shares (9/1/1977) VWLTX

543 Long-Term Tax-Exempt Admiral™ Shares (2/12/2001) VWLUX168 MA Tax-Exempt (12/9/1998) VMATX14 NJ Long-Term Tax-Exempt Investor Shares (2/3/1988) VNJTX

514 NJ Long-Term Tax-Exempt Admiral™ Shares (5/14/2001) VNJUX76 NY Long-Term Tax-Exempt Investor Shares (4/7/1986) VNYTX

576 NY Long-Term Tax-Exempt Admiral™ Shares (5/14/2001) VNYUX97 OH Long-Term Tax-Exempt (6/18/1990) VOHIX77 PA Long-Term Tax-Exempt Investor Shares (4/7/1986) VPAIX

577 PA Long-Term Tax-Exempt Admiral™ Shares (5/14/2001) VPALX41 Short-Term Tax-Exempt Investor Shares (9/1/1977) VWSTX

541 Short-Term Tax-Exempt Admiral™ Shares (2/12/2001) VWSUX

2.16% 3.90% 2.11% 3.68% 3.86% 4.71%1.55 2.82 1.62 2.39 3.19 3.652.20 3.97 2.08 3.73 5.78 4.811.55 2.83 1.61 2.43 3.17 3.691.56 2.85 1.62 — 2.38 3.711.58 2.87 1.69 2.57 2.91 3.731.58 2.87 1.65 2.53 3.23 3.782.23 4.03 2.09 3.77 6.52 4.931.58 2.90 1.69 2.58 3.93 3.782.09 3.74 1.94 3.51 5.10 4.54

0.06% 0.24% 4.03% 5.08% 5.31% 3.96%0.10 0.31 — — 3.30 4.040.18 0.82 4.93 5.84 6.77 4.250.22 0.90 — — 4.10 4.33

–0.14 0.12 4.95 5.81 6.22 4.20–0.10 0.19 — — 4.29 4.28

0.59 1.77 4.93 5.63 7.27 4.360.63 1.84 — — 4.66 4.440.04 0.50 4.95 5.73 7.87 4.070.08 0.58 5.02 — 4.86 4.150.12 0.47 3.92 4.85 5.90 4.020.16 0.55 3.98 — 3.97 4.100.75 1.28 2.86 3.90 5.03 3.670.79 1.35 2.92 — 3.05 3.75

–0.04 0.42 4.79 5.63 6.36 4.180.00 0.50 4.86 — 4.74 4.26

–0.38 0.12 4.45 — 4.50 4.13–0.28 0.11 4.63 5.50 6.73 4.10–0.24 0.19 4.69 — 4.86 4.18–0.54 –0.45 4.73 5.60 6.42 4.04–0.50 –0.38 4.80 — 4.93 4.12

0.07 0.54 4.96 5.63 6.63 4.12–0.23 0.03 4.82 5.54 6.71 4.21–0.19 0.10 4.88 — 5.00 4.29

1.20 2.11 2.19 3.19 4.76 3.481.24 2.19 2.25 — 2.41 3.56

4/2006 S7/2006 S4/2006 S7/2006 S7/2006 S7/2006 S7/2006 S4/2006 S6/2006 S4/2006 S

7/2006 S7/2006 S7/2006 S7/2006 S7/2006 S7/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 S6/2006 S7/2006 S7/2006 S7/2006 S7/2006 S7/2006 S7/2006 S7/2006 S7/2006 S6/2006 S6/2006 S

* 30-day yield for bond funds; 7-day yield for money market funds (as of June 30, 2006). The money market yields listed more closely reflect the current earnings of the fund or portfolio than the average annual total returns shown.

**The U.S. government backs the fund’s underlying investments but not its shares’ net asset value. Performance figures assume the reinvestment of dividends and capital gains distributions; the figures are pre-tax and net of expenses, and all are unaudited. An investment in amoney market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency; although a money market fund seeksto preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

7- Or30-Day Next Report/

Fund Ticker Year To Since Current ProspectusNo. Vanguard Fund Name (Inception Date) Symbol Fees Date 1 Year 5 Years 10 Years Inception◆ Yield* Online•


30-Day Next Report/Fund Ticker Year To Since Current ProspectusNo. Vanguard Fund Name (Inception Date) Symbol Fees Date 1 Year 5 Years 10 Years Inception◆ Yield* Online•

49 Short-Term Federal Investor Shares** (12/31/1987) VSGBX549 Short-Term Federal Admiral™ Shares** (2/12/2001) VSGDX32 Short-Term Treasury Investor Shares** (10/28/1991) VFISX

532 Short-Term Treasury Admiral™ Shares** (2/13/2001) VFIRX84 Total Bond Market Index Investor Shares (12/11/1986) VBMFX

584 Total Bond Market Index Admiral™ Shares (11/12/2001) VBTLX

0.94% 1.61% 3.53% 5.06% 6.16% 5.09%0.99 1.71 3.60 — 3.84 5.190.84 1.56 3.57 4.96 5.30 4.950.92 1.73 3.71 — 3.90 5.11

–0.93 –1.04 4.40 5.93 6.86 5.32–0.89 –0.95 — — 3.46 5.41

9/2006 S9/2006 S9/2006 S9/2006 S8/2006 S8/2006 S


VANGUARD 529 COLLEGE SAVINGS PLAN4515 500 Index Portfolio (12/17/2002)4509 Aggressive Growth Portfolio (12/12/2002)4521 Balanced Index Portfolio (12/16/2002)4512 Conservative Growth Portfolio (12/16/2002)4517 Growth Index Portfolio (12/17/2002)4510 Growth Portfolio (12/16/2002)4524 High Yield Bond Portfolio (12/11/2002)4513 Income Portfolio (12/16/2002)4523 Inflation-Protected Securities Portfolio (12/11/2002)4528 Interest Accumulation Portfolio (10/15/2004)4516 Mid-Cap Index Portfolio (12/17/2002)4511 Moderate Growth Portfolio (12/11/2002)4519 Small-Cap Index Portfolio (12/16/2002)4522 Total Bond Market Index Portfolio (12/16/2002)4520 Total International Stock Index Portfolio (12/11/2002)4514 Total Stock Market Index Portfolio (12/11/2002)4518 Value Index Portfolio (12/11/2002)

7.91% — — 11.30%11.87 — — 14.784.98 — — 8.812.37 — — 6.545.43 — — 9.077.21 — — 10.582.60 — — 7.67

–0.27 — — 2.94–1.99 — — 4.80

3.44 — — 3.0213.96 — — 19.524.81 — — 8.32

13.33 — — 20.29–1.44 — — 2.5226.91 — — 23.379.31 — — 12.66

11.82 — — 15.62

Portfolio Since 7- Or 30-DayNo. Vanguard Portfolio Name (Inception Date) 1 Year 5 Years 10 Years Inception◆ Current Yield*

Standardized Average Annual TotalReturns As Of June 30, 2006

VANGUARD® VARIABLE ANNUITY†69 Balanced (5/23/1991)

603 Capital Growth (5/1/2003) 145 Diversified Value (2/8/1999)

8 Equity Income (6/7/1993) 68 Equity Index (4/29/1991) 10 Growth (6/7/1993)

146 High Yield Bond (6/3/1996) 86 International (6/3/1994)

143 Mid-Cap Index (2/9/1999) 64 Money Market (5/2/1991)

147 REIT Index (2/9/1999) 144 Short-Term Investment-Grade (2/8/1999) 160 Small Company Growth (6/3/1996) 67 Total Bond Market Index (4/29/1991)

604 Total Stock Market Index (5/1/2003) VANGUARD® FIXED ANNUITY Annual Effective Interest Rate as of 6/30/2006 (Subject to change)

1250 Vanguard Fixed Annuity—Single 5††

9.23% 6.59% 9.40% 10.18% —15.64 — — 17.47 —7.08 6.97 — 6.92 —

10.01 5.42 9.05 10.35 —8.19 2.07 7.87 9.96 —4.91 –3.82 1.42 5.39 —2.72 5.89 5.53 5.45 7.39%

29.49 9.83 7.26 8.15 —14.29 9.72 — 12.24 —3.90 1.90 3.55 3.66 5.11

18.80 18.37 — 16.68 —2.12 3.44 — 4.17 5.18

13.93 6.45 12.66 12.02 —–1.20 4.06 5.55 6.03 5.30

9.43 — — 14.56 —

5.10%

*30-day yield for bond funds and portfolios; 7-day yield for money market funds and portfolios (as of June 30, 2006). The money market yields listed more closely reflect the currentearnings of the fund or portfolio than the average annual total returns shown.

For more information about The Vanguard 529 College Savings Plan, call 866-734-4530 or visit www.vanguard.com to obtain a Program Description, which includes investmentobjectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor and Underwriter. If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only availablefor investments in such a state’s qualified tuition program. The Vanguard 529 College Savings Plan is a Nevada Trust administered by the Board of Trustees of the College Savings Plans ofNevada which is chaired by the State Treasurer. The Vanguard Group, Inc., serves as the Investment Manager and through its affiliate, Vanguard Marketing Corporation, markets and distributesthe Plan. Upromise Investments, Inc., serves as Program Manager and has overall responsibility for the day-to-day operations, including effecting transactions. The Plan’s portfolios, although they invest in Vanguard mutual funds, are not mutual funds. Investment returns are not guaranteed and you could lose money by investing in the plan.


Portfolio Since No. Vanguard 529 Portfolio Name (Inception Date) 1 Year 5 Years 10 Years Inception◆


Fund SinceNo. Vanguard Fund Name (Inception Date) 1 Year 5 Years 10 Years Inception◆


VANGUARD TAX-MANAGED FUNDS®

103 Tax-Managed Balanced•• (9/6/1994) Return Before TaxesReturn After Taxes on DistributionsReturn After Taxes on Distributions and Sale of Fund Shares

102 Tax-Managed Capital Appreciation Investor Shares (9/6/1994) Return Before TaxesReturn After Taxes on DistributionsReturn After Taxes on Distributions and Sale of Fund Shares

5102 Tax-Managed Capital Appreciation Admiral™ Shares (11/12/2001)Return Before TaxesReturn After Taxes on DistributionsReturn After Taxes on Distributions and Sale of Fund Shares

101 Tax-Managed Growth & Income Investor Shares (9/6/1994) Return Before TaxesReturn After Taxes on DistributionsReturn After Taxes on Distributions and Sale of Fund Shares

5101 Tax-Managed Growth & Income Admiral™ Shares (11/12/2001)Return Before TaxesReturn After Taxes on DistributionsReturn After Taxes on Distributions and Sale of Fund Shares

127 Tax-Managed International (8/17/1999) Return Before TaxesReturn After Taxes on DistributionsReturn After Taxes on Distributions and Sale of Fund Shares

116 Tax-Managed Small-Cap (3/25/1999) Return Before TaxesReturn After Taxes on DistributionsReturn After Taxes on Distributions and Sale of Fund Shares

3.63% 3.97% 7.17% 8.32%3.16 3.77 7.00 8.152.90 3.58 6.52 7.60

8.30 2.77 8.43 10.678.11 2.53 8.19 10.435.65 2.27 7.35 9.48

8.33 — — 5.738.13 — — 5.235.68 — — 4.63

7.48 2.49 8.33 10.687.19 2.12 7.87 10.145.25 1.98 7.13 9.28

7.56 — — 4.667.26 — — 4.065.31 — — 3.68

26.02 10.02 — 5.1925.60 9.62 — 4.8517.40 8.56 — 4.34

12.37 11.03 — 13.7012.23 10.84 — 13.518.22 9.54 — 12.10

After-Tax Returns. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and(2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period. If a fund incurs a loss, which generates a tax benefit, the postliquidationafter-tax return may exceed the fund’s other return figures. These after-tax performance data reflect the deduction of a 1% redemption fee on shares held less than five years.

After-tax returns are calculated using the highest individual federal income tax rates in effect at the time of each distribution; they do not reflect the impact of state and local taxes.Your after-tax return depends on your individual tax situation and, therefore, may differ from the return presented here. In addition, the after-tax returns for Vanguard funds reflectthe reduced tax rates on ordinary income, qualified dividend income, and short-term and long-term capital gains that went into effect in 2003. However, they do not reflect thereduced rates on “qualified dividend income.” If you own fund shares in a tax-deferred account such as an individual retirement account or 401(k) plan, this information does notapply to your investment because these accounts are not subject to current taxes. After-tax total returns are available for many of the Vanguard funds on our website, Vanguard.com®.


GROWTH AND INCOME FUNDS 101 Tax-Managed Growth & Income Investor Shares (9/6/1994) VTGIX R5

5101 Tax-Managed Growth & Income Admiral™ Shares (11/12/2001) VTGLX R5GROWTH FUNDS

102 Tax-Managed Capital Appreciation Investor Shares (9/6/1994) VMCAX R55102 Tax-Managed Capital Appreciation Admiral™ Shares (11/12/2001) VTCLX R5

AGGRESSIVE GROWTH FUNDS 5483 Consumer Discretionary Index Admiral™ Shares (7/14/2005) VCDAX R4116 Tax-Managed Small-Cap (3/25/1999) VTMSX R5

INTERNATIONAL FUNDS 533 Emerging Markets Stock Index Investor Shares (5/4/1994) VEIEX R1127 Tax-Managed International (8/17/1999) VTMGX R5

BALANCED FUNDS 103 Tax-Managed Balanced•• (9/6/1994) VTMFX R5

7.48% 2.49% 8.33% 10.68%7.56 — — 4.45

8.30% 2.77% 8.43% 10.67%8.33 — — 5.51

— — — –4.14%12.37% 11.03% — 13.70

31.94% 20.12% 7.16% 7.94%26.02 10.02 — 5.19

3.63% 3.97% 7.17% 8.32%

Fund Ticker SinceNo. Vanguard Fund Name (Inception Date) Symbol Fees 1 Year 5 Years 10 Years Inception◆


Fee-Adjusted Returns. In accordance with SEC regulations, the returns presented below take into account certain fees that may apply to Vanguard funds.These fees are detailed in the chart below. For some funds, fees are levied on purchases or redemptions to offset the costs of buying and selling portfolio securities. For oth-ers, fees are assessed on redemptions made within certain time periods after a purchase to discourage short-term trading. All purchase and redemption fees are paid directly tothe fund to compensate long-term shareholders for the costs of trading activity. Note that one-year performance figures are not fee-adjusted for fees incurred on sharesheld less than one year. In addition, Vanguard index funds apply a $10 annual maintenance fee, which is not reflected in the figures, to accounts with balancesbelow $10,000. If these fees were included, performance would be lower.

The funds or securities referred to herein that are offered by The Vanguard Group and track an MSCI index are not sponsored, endorsed, or promoted by MSCI, and MSCI bears noliability with respect to any such funds or securities. For such funds or securities, the prospectus or the Statement of Additional Information contains a more detailed description ofthe limited relationship MSCI has with The Vanguard Group. Russell is a trademark of The Frank Russell Company. S&P 500® and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The VanguardGroup, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisabilityof investing in the funds. “FTSE®“ is a trademark jointly owned by the London Stock Exchange plc and The Financial Times Limited and is used by FTSE International Limited underlicense. FTSE International Limited does not sponsor, endorse, or promote the fund; is not in any way connected to it; and does not accept any liability in relation to its issue, opera-tion, and trading. Vanguard, Vanguard Brokerage Services, Vanguard.com, Wellington, Admiral, Explorer, LifeStrategy, Morgan, STAR, Vanguard Tax-Managed Funds, Vanguard ETF,Vanguard ETFs, Wellesley, Windsor, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners.For more information, visit www.vanguard.com, or call 800-662-7447 for Vanguard funds, 800-522-5555 for Vanguard annuity products, and 800-992-8327 for non-Vanguard funds offered through Vanguard Brokerage Services®, to obtain fund and annuity contract prospectuses. Visit our website, call 866-499-8473, or con-tact your broker to obtain a product description and prospectus for Vanguard ETF Shares. Investment objectives, risks, charges, expenses, and other important information are contained in these documents; read and consider them carefully before investing. © 2006 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. FPPITV 072006

Fee Codes

R1—0.5% purchase fee and 0.5% redemption fee.R2—2% redemption fee on shares held less than 2 months.R3—1% redemption fee on shares held less than 1 year.R4—2% redemption fee on shares held less than 1 year.R5—1% redemption fee on shares held less than 5 years.

◆Since-inception returns for less than one year are not annualized. ◆◆Yield stated in real terms; not adjusted for projected inflation.

••Next Report/Prospectus Online: The fund’s next annual report (A), semiannualreport (S), or prospectus (P) is expected to be available on our website (Vanguard.com)no later than the last day of the indicated month. Account statements are postedonline approximately eight days after the end of each calendar quarter.

••Although the income from a municipal bond fund is exempt from federal tax, capitalgains realized either through a fund’s trading or from your redemption of shares aretaxable. For some investors, a portion of the fund’s income may be subject to stateand local taxes, as well as the alternative minimum tax.

◆◆Closed to new investor accounts.Except for a few authorized institutions, investors may not purchase or redeemVanguard ETFs™ directly from the issuing fund. Instead, investors must buy or sellVanguard ETF™ Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor will incur brokerage commissions and may paymore than net asset value when buying and receive less than net asset valuewhen selling. The total returns shown do not reflect any payments of brokeragecommissions.

†† Share prices for the Vanguard Variable Annuity are accumulation unit values thatreflect the investment results of the respective portfolios as well as the reinvestmentof all dividends and capital gains, reduced by daily mortality, expense risk, and admin-istrative expense charges. The one-year, five-year, ten-year, and since-inception periodreturns, considered “Standardized,” are adjusted for the $25 annual fee charged oncontracts valued at less than $25,000. With respect to contracts issued in New YorkState, performance figures shown are based on the actual performance of VanguardVariable Insurance Fund as if the contracts were being offered in New York prior totheir first New York offering date in November 1992. The Vanguard Variable Annuity is a flexible-premium variable annuity issued by Peoples Benefit Life InsuranceCompany, Cedar Rapids, Iowa (NAIC No. 66605), Form No. Series VVAP U 1101 (inFlorida, Form No. VVAP U 1101-FL, in Oregon, Form No. VVAP U 1101-OR), and in New York State only, by Transamerica Financial Life Insurance Company, Purchase,New York (NAIC No. 70688), Form No. VVAPA U 1101, without agent representation.The Vanguard Group administers the contract for its issuers. Its variable annuity andinvestment costs rank among the lowest in the industry, according to Morningstar,Inc., June 2006. The Vanguard Group, Peoples Benefit Life Insurance Company, andTransamerica Financial Life Insurance Company do not provide tax advice. Investorsare encouraged to consult a tax advisor for information on how annuity taxationapplies to their individual situations.

†† The Vanguard Fixed Annuity—Single 5, single-premium deferred annuity, Policy Form94-522, or applicable state variation, is issued by Jefferson Pilot LifeAmericaInsurance Company, service address: Greensboro, NC.


Documents

InTheVanguard · Malkiel wroteA Random Walk Down Wall Street in 1973, he explained in plain English why it’s so difﬁcult to outperform market averages, which are unburdened by