Vanguard funds are classified as conservative if their share prices are expected to remain stable or to fluctuate only slightly. Keep in mind that investments that offer stability of principal typically are the most vulnerable to income risk—the possibility that the income from the investment will fluctuate over brief periods—and tend to produce lower long-term returns than riskier assets. Such funds are appropriate for the short-term reserves portion of a long-term investment portfolio, for investors with short-term investment horizons (no longer than three years), and for investors whose tolerance for share-price fluctuations is very low or whose employment or financial situation is precarious.
Plain Talk About Risk
The portfolio’s total return and yield will fluctuate, as short-term interest rates fluctuate. Such fluctuations can be wide. Falling interest rates could cause the portfolio’s income—and thus its total return—to decline. Rising rates could cause the portfolio’s income and total return to rise. The portfolio is also subject to:
Income risk: The chance that the fund’s income will decline because of falling interest rates. Because the fund’s income is based on short-term interest rates—which can fluctuate significantly over short periods—income risk is expected to be high.
Manager risk: The chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.
Credit risk: The chance that the issuer of a security will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that security to decline. Credit risk should be very low for the fund because it invests only in securities that are considered to be of high quality.
Industry concentration risk: The chance that there will be overall problems affecting a particular industry. Because the fund will invest more than 25% of its assets in securities of companies in the financial services industry, the fund’s performance will depend to a greater extent on the overall condition of that industry.