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Fund expects market to cool off

Expect stocks and bonds to cool off in the second half from the sizzling double-digit returns racked up through June, says the Vanguard Group, the country's second-largest mutual fund organization.

With uncertainty surrounding economic and interest rate outlooks, Vanguard looks for stocks and bonds to return 9 percent or less through year end. That's a far cry from the 15 to 20 percent or higher returns achieved by many mutual funds since Jan. 1.

Second-half returns from stock price appreciation and dividends may total 8 to 9 percent, Vanguard predicts, while bond returns from interest payments may range from 6.3 to 7.5 percent.

Vanguard president John J. Brennan says investors should approach the second half cautiously, using a disciplined approach to buy stocks and bonds by dollar cost averaging.

(By investing the same amount regularly, a buyer using dollar cost averaging gets fewer shares when market prices are high and more shares when markets correct to lower levels.)

"I don't see a collapse coming," Brennan said. "But there will be corrections along the way."

Ian MacKinnon, Vanguard's bond portfolio chief, David Fowler, manager of the Vanguard U.S. Growth Portfolio, and Brennan were interviewed during a recent stop in Minneapolis to meet shareholders. The Valley Forge, Pa.-based fund group manages 88 portfolios with more than $152-billion in assets.

MacKinnon thinks the bond market may be in for trouble if the economy perks up in the third or fourth quarter from this quarter's slowdown.

"We're less optimistic that a major slowdown has been engineered," he said. "We expect the slowdown to be temporary after a quarter or two. When the economy re-accelerates in the third or fourth quarter, it will be very negative for the bond market."

Despite market bear predictions that mutual fund investors will sell all at once when a major correction sends prices lower, Brennan doesn't see that happening.

"Thirty-million investors don't do anything together," he said. "Those predictions are dated by a significantly more sophisticated investor base."