VANGUARD ASSET ALLOCATION FUND INC, 497, 2001-01-12

VANGUARD ASSET ALLOCATION FUND INC
497, 2001-01-12

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT (NO. 33-23444) UNDER THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO.

POST-EFFECTIVE AMENDMENT NO. 19

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 22

VANGUARD MALVERN FUNDS

(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)

P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON JANUARY 12, 2001, PURSUANT TO PARAGRAPH (B) OF RULE 485.

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VANGUARD ASSET ALLOCATION FUND

INVESTOR SHARES

JANUARY 12, 2001

This prospectus
contains financial data
for the Fund through
the fiscal year ended
September 30, 2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]

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VANGUARD ASSET ALLOCATION FUND

PROSPECTUS

January 12, 2001

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CONTENTS

1 FUND PROFILE

3 ADDITIONAL INFORMATION

3 MORE ON THE FUND

8 THE FUND AND VANGUARD

9 INVESTMENT ADVISER

10 DIVIDENDS, CAPITAL GAINS, AND TAXES

12 SHARE PRICE

12 FINANCIAL HIGHLIGHTS

14 INVESTING WITH VANGUARD
14 Buying Shares
15 Redeeming Shares
17 Other Rules You Should Know
19 Fund and Account Updates
20 Contacting Vanguard

GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT

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FUND PROFILE

INVESTMENT OBJECTIVE
The Fund seeks to provide maximum long-term total return (share price plus
income) while incurring less stock market risk than a fund made up entirely of
stocks.

INVESTMENT STRATEGIES
The Fund allocates its assets among common stocks, bonds, and money market
instruments in proportions consistent with the adviser's evaluation of their
expected returns and risks. These proportions are changed from time to time as
market expectations shift. The Fund may be up to 100% invested in any one of the
three asset classes.

o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods because of rising interest rates.
Interest rate risk will range from low to high for the Fund, depending on
the amount of Fund assets invested in bonds.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another over the past ten years. In addition, there is a table
that shows how the Fund's average annual total returns compare with those of
relevant market indexes over set periods of time. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.

-----------------------------------------------------
ANNUAL TOTAL RETURNS
-----------------------------------------------------
[SCALE -10 to 50%]
1991 25.59%
1992 7.51%
1993 13.49%
1994 -2.32%
1995 35.46%
1996 15.73%
1997 27.32%
1998 25.40%
1999 5.21%
2000 4.95%
-----------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was 14.31% (quarter ended December 31, 1998), and the lowest return for
a quarter was -4.57% (quarter ended March 31, 1994).

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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Asset Allocation Fund 4.95% 15.33% 15.26%
Standard & Poor's 500 Index -9.10 18.33 17.46
Composite Index* 0.59 14.71 14.99
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*Weighted 65% in the S&P 500 Index, 35% in the Lehman Brothers Long U. S.
Treasury Bond Index.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on those incurred in the fiscal year ended September 30, 2000.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.42%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.44%

The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.

-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$45 $141 $246 $555
-------------------------------------------------

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.

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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Asset Allocation Fund's expense ratio in fiscal year 2000 was
0.44%, or $4.40 per $1,000 of average net assets. The average flexible mutual
fund had expenses in 1999 of 1.39%, or $13.90 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a fund--such
as account maintenance, reporting, accounting, legal, and other administrative
expenses.
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PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed $3,000; $1,000 for IRAs and custodial
in June and December; capital gains, accounts for minors
if any, are distributed in December
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER AssetA
Mellon Capital Management
Corporation, San Francisco, Calif., VANGUARD FUND NUMBER
since inception 078

INCEPTION DATE CUSIP NUMBER
November 3, 1988 922020102

NET ASSETS AS OF SEPTEMBER 30, 2000 TICKER SYMBOL
$8.76 billion VAAPX

SUITABLE FOR IRAS
Yes
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MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.

The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the

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4
Fund's management, may change investment strategies or policies in the interest
of shareholders without a shareholder vote unless those strategies or policies
are designated as fundamental. Note that the investment objective of the Fund is
not fundamental, and may be changed without a shareholders vote.

Finally, you'll find information on other important features of the Fund.

MARKET EXPOSURE
The Fund allocates its assets among stocks, bonds, and money market instruments
in proportions that depend on the risks and returns projected by the adviser for
each asset class.

STOCKS
The Fund typically invests a portion of its assets in stocks.

[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index (S&P 500 Index), a widely
used barometer of market activity. (Total returns consist of dividend income
plus change in market price.) Note that the returns shown do not include the
costs of buying and selling stocks or other expenses that a real-world
investment portfolio would incur. Note, also, that the gap between best and
worst tends to narrow over the long term.

----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
----------------------------------------------------------

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.

The Fund will typically hold a diverse group of stocks intended to parallel
the performance of the S&P 500 Index, which is dominated by large-capitalization
stocks. Stocks are evaluated using a "dividend discount" model, which provides
an estimate of the total return of the S&P 500 Index based on the expected
earnings of each company in the index.

BONDS
The Fund typically invests a portion of its assets in bonds.

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5
[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS BECAUSE OF
RISING INTEREST RATES. INTEREST RATE RISK IS HIGH FOR LONG-TERM BONDS SUCH
AS THOSE PURCHASED BY THE FUND. FOR THE FUND OVERALL, INTEREST RATE RISK
WILL RANGE FROM LOW TO HIGH, DEPENDING ON THE AMOUNT OF FUND ASSETS
INVESTED IN BONDS.

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PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds of
comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond for
the price you paid--you would probably have to lower your asking price. On the
other hand, if interest rates were falling and 4% bonds were being offered, you
should be able to sell your 5% bond for more than you paid.
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The Fund will typically invest its bond allocation in a pool of long-term
U.S. Treasury bonds, which usually mature in 10 to 30 years. It may also hold
other "full faith and credit" obligations of the U.S. government.

The U.S. government guarantees the timely payment of interest and principal
for its Treasury bonds, but does not guarantee their prices. In other words,
while Treasury bonds enjoy the highest credit ratings, their prices--like the
prices of other bonds in the Fund--will fluctuate with changes in interest
rates.

The adviser evaluates the attractiveness of potential bond investments
based on their current yield-to-maturity, which is an estimate of total return
that considers a bond's purchase price, redemption value, time to maturity,
yield, and time between interest payments.

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PLAIN TALK ABOUT
TYPES OF BONDS

Bonds are issued (sold) by many sources: Corporations issue corporate bonds;
the federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those issued by the Government National
Mortgage Association (GNMAs). Each issuer is responsible for paying back the
bond's initial value as well as making periodic interest payments.
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PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to more
than 30 years (long-term). The longer a bond's maturity, the more risk you, as a
bond investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks of price fluctuations to get higher interest income; short-term bond
investors should be willing to accept lower yields in return for less
fluctuation in the value of their investment.
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SECURITY SELECTION
Mellon Capital Management Corporation (Mellon Capital), the adviser, selects
securities for the Fund based on asset allocation decisions, rather than
decisions about the attractiveness of individual stocks or bonds. Specifically,
the adviser tries to determine the mix of common stocks, bonds, and money market
instruments (cash reserves) that offers the best combination of potential return
and risk. The aim is to maximize the long-term total return of the Fund while
incurring less stock market risk than a portfolio made up entirely of stocks. At
any given time, the adviser may allocate all, a portion, or none of the Fund's
assets to large-capitalization U.S. stocks, long-term U.S. Treasury bonds, or
cash reserves.

For the Fund's stock allocation, the adviser uses a diversified portfolio
of stocks selected to parallel the performance of the S&P 500 Index or it uses
S&P 500 stock index futures. For the Fund's bond allocation, the adviser uses
long-term (10- to 30-year maturities) U.S. Treasury bonds. For the Fund's cash
reserves allocation, the adviser can use a variety of money market instruments,
including U.S. Treasury bills, government agency securities, high-quality
commercial paper, and certificates of deposit.

The adviser uses a computer model to estimate return and risk of each asset
class and then implements shifts in allocations in a disciplined manner. The
adviser believes that, within the fluctuation of the financial markets, there
are occasional brief periods in which the market values of the asset classes do
not reflect their true value. The adviser attempts to capitalize on these
perceived imbalances by changing the mix of the Fund's holdings in the three
asset classes. There are no limitations on the amount of the Fund's assets that
may be allocated to stocks, bonds, or money market instruments; it can be up to
100% invested in any one of the three asset classes.

Since the Fund's asset allocation changes according to the adviser's timely
projection of risk and return, the Fund may exhibit higher volatility than
balanced funds with static allocations.

Historical evidence indicates that correctly timing portfolio allocations
among asset classes has been a difficult strategy to implement successfully on a
consistent basis. Although Mellon Capital has substantial experience in asset
allocation, there can be no assurance that the adviser will consistently
anticipate which asset class will perform best in the future.

The Fund's investment results could suffer, for example, if only a small
portion of the Fund's assets were allocated to stocks during a significant stock
market advance, or if a major portion of its assets were allocated to stocks
during a market decline. Similarly, the Fund's short-term investment results
could also suffer if the Fund were substantially invested in bonds at a time
when interest rates increased.

<PAGE>

[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF ALLOCATING THE FUND'S NET ASSETS AMONG STOCKS, BONDS,
AND MONEY MARKET INSTRUMENTS.

The Fund is generally managed without regard to tax ramifications.

OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks, bonds, and money market instruments, the
Fund may make certain other kinds of investments to achieve its objective.

The Fund may invest, to a limited extent, in foreign securities.

The Fund may also invest in stock and bond futures and options contracts,
which are traditional types of derivatives. Under normal circumstances, the
market value of these contracts and options may represent up to 50% of the
Fund's assets. (Under unusual circumstances, the Fund may hold futures equal in
value to 100% of its net assets.)

Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a fund. The Fund will not use
futures for speculative purposes or as leveraged investments that magnify the
gains or losses of an investment. The Fund will keep separate cash reserves or
short-term, cash-equivalent securities in the amount of the obligation
underlying any futures contract.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
o To use as an investment tool when reallocating assets among stocks, bonds,
and money market instruments. For example, the adviser may wish to
reallocate 10% of the Fund's assets from stocks to bonds. To implement this
change rapidly and with low transaction costs, the adviser may sell stock
index futures and purchase bond index futures.

The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.

o Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
o Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
o Each Vanguard fund reserves the right to stop offering shares at any time.

<PAGE>

o Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
o Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.

See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.

TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.

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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as taxable
income. As of September 30, 2000, the average turnover rate for all asset
allocation funds was approximately 29%, according to Morningstar, Inc.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $570 billion.
All of

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the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.

Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.

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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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INVESTMENT ADVISER

Mellon Capital Management Corporation (Mellon Capital), 595 Market St., Suite
3000, San Francisco, CA 94105, the adviser to the Fund, is an investment
advisory firm founded in 1983. Mellon Capital is a wholly owned subsidiary of
MBC Investment Corporation, which itself is a wholly owned subsidiary of Mellon
Financial Corporation. As of September 30, 2000, Mellon Capital managed about
$92 billion in assets. The firm manages the Fund subject to the control of the
trustees and officers of the Fund.

Mellon Capital's advisory fee is paid quarterly, and is based on certain
annual percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Mellon Capital's advisory fee may be increased or
decreased, based on the cumulative total return of the Fund over a trailing
36-month period as compared with the cumulative total return of the Asset
Allocation Composite Index over the same period. This index is a composite
benchmark, 65% of which is made up of the S&P 500 Index and 35% the Lehman
Brothers Long U.S. Treasury Bond Index. Please consult the Fund's Statement of
Additional Information for a complete explanation of how advisory fees are
calculated.

For the fiscal year ended September 30, 2000, the advisory fee represented
an effective annual rate of 0.11% of the Fund's average net assets before a
decrease of 0.01% based on performance.

The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.

In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.

<PAGE>

arrangements will be communicated to shareholders in writing. In addition, as
the Fund's sponsor and overall manager, The Vanguard Group may provide
investment advisory services to the Fund, on an at-cost basis, at any time.

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PLAIN TALK ABOUT
THE FUND'S ADVISER
The managers primarily responsible for overseeing the Fund's investments are:

WILLIAM L. FOUSE, CFA, Chairman Emeritus of Executive Committee for Mellon
Capital Management Corporation. He has worked in investment management since
1953, has been with Mellon Capital since its founding in 1983, and has managed
the Fund since its inception in 1988. Education: B.A. and M.B.A., University of
Kentucky.

THOMAS F. LOEB, Chairman and Chief Executive Officer of Mellon Capital
Management Corporation. He has worked in investment management since 1970, has
been with Mellon Capital since its founding in 1983, and has managed the Fund
since its inception in 1988. Education: B.A., Fairleigh Dickinson University;
M.B.A., University of Pennsylvania.
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DIVIDENDS, CAPITAL GAINS, AND TAXES

FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December. You can
receive distributions of income dividends or capital gains in cash, or you can
have them automatically reinvested in more shares of the Fund.

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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from any stock
holdings and the interest it receives from any money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term depending on whether the fund held the securities for one year or
less, or more than one year.
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BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
o Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.

<PAGE>

o Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
o Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
o Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
o A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
o Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.

FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.

INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.

TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.

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PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price would drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
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<PAGE>

SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by dividing the net assets of the
Fund by the number of Fund shares outstanding.

Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.

A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's board of trustees.

The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."

FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.

<PAGE>

--------------------------------------------------------------------------------
VANGUARD ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------

NET ASSET VALUE, $24.11 $22.90 $21.53 $18.27 $17.03
BEGINNING OF YEAR
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.03 .80 .79 .74 .69
Net Realized and
Unrealized Gain (Loss) 1.61 2.50 2.33 4.29 1.82
on Investments
--------------------------------------------------------------------------------
Total from Investment
Operations 2.64 3.30 3.12 5.03 2.51
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (1.00) (.91) (.74) (.72) (.66)
Distributions from
Realized Capital (.96) (1.18) (1.01) (1.05) (.61)
Gains
--------------------------------------------------------------------------------
Total Distributions (1.96) (2.09) (1.75) (1.77) (1.27)
--------------------------------------------------------------------------------
NET ASSET VALUE, END $24.79 $24.11 $22.90 $21.53 $18.27
OF YEAR
================================================================================
TOTAL RETURN 11.36% 14.68% 15.24% 29.42% 15.27%
================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions) $8,761 $8,182 $5,637 $3,738 $2,341
Ratio of Total Expenses
to Average Net Assets 0.44% 0.49% 0.49% 0.49% 0.47%
Ratio of Net
Investment Income to
Average Net Assets 4.18% 3.49% 3.80% 3.96% 4.17%
Turnover Rate 29% 11% 60% 10% 47%
================================================================================

--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $24.11 per share.
During the year, the Fund earned $1.03 per share from investment income
(interest and dividends) and $1.61 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.

Shareholders received $1.96 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.

The earnings ($2.64 per share) minus the distributions ($1.96 per share)
resulted in a share price of $24.79 at the end of the year. This was an increase
of $0.68 per share (from $24.11 at the beginning of the year to $24.79 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 11.36% for the year.

As of September 30, 2000, the Fund had $8.76 billion in net assets. For the
year, its expense ratio was 0.44% ($4.40 per $1,000 of net assets); and its net
investment income amounted to 4.18% of its average net assets. It sold and
replaced securities valued at 29% of its net assets.
--------------------------------------------------------------------------------

<PAGE>

--------------------------------------------------------------------------------
INVESTING WITH VANGUARD

This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details of
our many shareholder services for individual investors. A separate booklet, The
Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.

BUYING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES

ACCOUNT MINIMUMS
TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular accounts; $1,000 for IRAs
and custodial accounts for minors.
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.

HOW TO BUY SHARES
BY CHECK: Mail your check and a completed account registration form to Vanguard.
When adding to an existing account, send your check with an Invest-By-Mail form
detached from your last account statement. For addresses, see Contacting
Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption
from another Vanguard fund. All open Vanguard funds permit exchange purchases
requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED
INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Know for specifics.
BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard.

YOUR PURCHASE CHECK
When investing by check, make the check payable to: The Vanguard Group-78.

YOUR PURCHASE PRICE
You buy shares at a fund's next-determined NAV after Vanguard accepts your
purchase request. As long as your request is received before the close of
regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time),
you will buy your shares at that day's NAV. This is known as your TRADE DATE.

<PAGE>

PURCHASE RULES YOU SHOULD KNOW
o THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
o U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and
drawn on a U.S. bank.
o LARGE PURCHASES. Vanguard reserves the right to reject any purchase request
that may disrupt a fund's operation or performance. Please call us before
attempting to invest a large dollar amount.
o NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
o FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares
at any time, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.

REDEEMING SHARES

HOW TO REDEEM SHARES
Be sure to check Other Rules You Should Know before initiating your request.
ONLINE: Request a redemption through our website at Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For
telephone numbers, see Contacting Vanguard.
BY MAIL: Send your written redemption instructions to Vanguard. For addresses,
see Contacting Vanguard.

YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined NAV after Vanguard accepts your
redemption request, including any special documentation required under the
circumstances. As long as your request is received before the close of regular
trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your TRADE DATE.

TYPES OF REDEMPTIONS
o CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a
check, normally within two business days of your trade date.
o EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your
redemption to purchase shares of another Vanguard fund. All open Vanguard funds
accept exchange redemptions requested in writing. Most Vanguard funds--other
than the stock and balanced index-oriented funds--also accept exchange
redemptions requested online

<PAGE>

or by telephone. See Other Rules You Should Know for specifics.

o WIRE REDEMPTIONS. When redeeming from a money market fund, bond fund, or the
Preferred Stock Fund, you may instruct Vanguard to wire your redemption proceeds
to a previously designated bank account. Wire redemptions are not available for
Vanguard's other funds, except by exchanging into a bond or money market fund
first. The wire redemption option is not automatic; you must establish it by
completing a special form or the appropriate section of your account
registration. Also, wire redemptions must be requested in writing or by
telephone, not online. A $5 fee applies to wire redemptions under $5,000.
Money Market Funds: For telephone requests accepted at Vanguard by 10:45 a.m.,
Eastern time, the redemption proceeds will arrive at your bank by the close of
business that same day. For other requests accepted before 4 p.m., the
redemption proceeds will arrive at your bank by the close of business on the
following business day.
Bond Funds: For requests accepted at Vanguard by 4 p.m., Eastern time, the
redemption proceeds will arrive at your bank by the close of business on the
following business day.

REDEMPTION RULES YOU SHOULD KNOW
o SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain
types of accounts, such as trust, corporate, nonprofit, or retirement accounts.
Please call us before attempting to redeem from these types of accounts.
o POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of your redemption in-kind--that is, in the form of securities--if we
believe that a cash redemption would disrupt the fund's operation or
performance. Under these circumstances, Vanguard also reserves the right to
delay payment of your redemption proceeds for up to seven days. By calling us
before you attempt to redeem a large dollar amount, you are more likely to avoid
in-kind or delayed payment of your redemption.
o RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds
will not be made available to you until the Fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
Vanguard Fund Express(R).
o SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
o PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check
payable to a different person or send it to a different address. However, this
requires the written

<PAGE>

consent of all registered account owners, which must be provided under signature
guarantees. You can obtain a signature guarantee from most commercial and
savings banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
o NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
o EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days at any time. In addition, Vanguard funds
can suspend redemptions and/or postpone payments of redemption proceeds at times
when the New York Stock Exchange is closed or during emergency circumstances, as
determined by the U.S. Securities and Exchange Commission.

OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS
o AUTOMATIC. In setting up your account, we'll automatically enable you to do
business with us by regular telephone, unless you instruct us otherwise in
writing.
o TELE-ACCOUNT(TM). To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a personal identification number (PIN).
Call Tele-Account to obtain a PIN, and allow seven days before using this
service.
o PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the following information exactly as
registered on the account:
o Ten-digit account number.
o Complete owner name and address.
o Primary Social Security or employer identification number. o Personal
Identification Number (PIN), if applicable.
o SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's
telephone transaction service at any time, without notice.

o SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone exchanges (in or out),
except for IRAs and certain other retirement accounts.

VANGUARD.COM

o REGISTRATION. You can use your personal computer to review your account
holdings, to sell or exchange shares of

<PAGE>

most Vanguard funds, and to perform other transactions. To establish this
service, you can register online.
o SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund do not permit online exchanges (in or out), except for IRAs
and certain other retirement accounts.

WRITTEN INSTRUCTIONS
o "GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction
instructions that are not in "good order." This means that your instructions
must include:
o The fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account.
o Signature guarantees, if required for the type of transaction.*
*For instance, signature guarantees must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address.

RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses due to fraud, so long as
we reasonably believe that the person transacting on an account is authorized to
do so. Please take precautions to protect yourself from fraud. Keep your account
information private and immediately review any account statements that we send
to you. Contact Vanguard immediately about any transactions you believe to be
unauthorized.

UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.

LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a fund and
increase the fund's costs for all shareholders, Vanguard limits account activity
as follows:
o You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A NON-MONEY
MARKET FUND during any 12-month period.
o Your round trips through a non-money market fund must be at least 30 days
apart.
o All funds may refuse share purchases at any time, for any reason.
o Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange, at any time, for
any reason.
A "round trip" is a redemption from a fund followed by a purchase back into the
same fund. Also, a "round trip" covers transactions accomplished by any
combination of methods,

<PAGE>

including transactions conducted by check, wire, or exchange to/from another
Vanguard fund. "Substantive" means a dollar amount that Vanguard determines, in
its sole discretion, could adversely affect the management of the fund.

UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.

INVESTING WITH VANGUARD THROUGH OTHER FIRMS

You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. If you invest with
Vanguard through an intermediary, please read that firm's program materials
carefully to learn of any special rules that may apply. For example, special
terms may apply to additional service features, fees, or other policies.

LOW BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment.
Vanguard deducts a $10 fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.

FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES
We will send you quarterly portfolio summaries to help you keep track of your
accounts throughout the year. Each summary shows the market value of your
account at the close of the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar year.

AVERAGE COST REVIEW STATEMENTS
For most taxable accounts, average cost review statements will accompany the
quarterly portfolio summaries. These statements show the average cost of shares
that you redeemed during the current calendar year, using the average cost
single category method.

CONFIRMATION STATEMENTS
Each time you buy, sell, or exchange shares, we will send you a statement
confirming the trade date and amount of your transaction.

TAX STATEMENTS
We will send you annual tax statements to assist in preparing your income tax
returns. These statements, which are generally mailed in January, will report
the previous year's

<PAGE>

dividend and capital gains distributions, proceeds from the sale of shares, and
distributions from IRAs or other retirement plans.

REPORTS
You will receive financial reports about your funds twice a year--in May and
November These comprehensive reports include an assessment of the fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the fund's financial
statements, which include a listing of the fund's holdings.
To keep the funds' costs as low as possible (so that you and other
shareholders can keep more of the funds' investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more shareholders have the same last name and address, we send just one fund
report to that address--instead of mailing separate reports to each shareholder.
If you want us to send separate reports, however, you may notify our Client
Services Department.

CONTACTING VANGUARD
ONLINE
VANGUARD.COM
o Your best source of Vanguard news
o For fund, account, and service information
o For most account transactions
o For literature requests
o 24 hours per day, 7 days per week

VANGUARD TELE-ACCOUNT(R)
1-800-662-6273
(ON-BOARD)
o For automated fund and account information
o For redemptions by check, exchange, or wire
o Toll-free, 24 hours per day, 7 days per week

INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at 1-800-952-3335)
o For fund and service information
o For literature requests n Business hours only

CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at 1-800-749-7273)
o For account information
o For most account transactions
o Business hours only

INSTITUTIONAL DIVISION
1-888-809-8102
o For information and services for large institutional investors
o Business hours only

<PAGE>

VANGUARD ADDRESSES
REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110

REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900

REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600

REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815

FUND NUMBER
Always use this fund number when contacting us about Vanguard Asset Allocation
Fund-78.

<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

GLOSSARY OF INVESTMENT TERMS

ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.

BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.

CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.

CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.

COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.

DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.

EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.

FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.

INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.

INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.

NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index; also known as
indexing.

PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.

PRINCIPAL
The amount of money you put into an investment.

SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.

TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.

VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.

YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.

<PAGE>

[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600

FOR MORE INFORMATION
If you'd like more information about
Vanguard Asset Allocation Fund, the
following documents are available
free upon request:

ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.

STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.

The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.

All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.

To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:

THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600

TELEPHONE:
1-800-662-7447 (SHIP)

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
WWW.VANGUARD.COM

If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:

CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)

TEXT TELEPHONE:
1-800-749-7273

INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or you
can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: [email protected], or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.

Fund's Investment Company Act
file number: 811-5628

P078 012001

<PAGE>

VANGUARD ASSET ALLOCATION FUND

FOR PARTICIPANTS

JANUARY 12, 2001

This prospectus
contains financial data
for the Fund through
the fiscal year ended
September 30, 2000.

[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]

<PAGE>

VANGUARD ASSET ALLOCATION FUND

PARTICIPANT PROSPECTUS

January 12, 2001

--------------------------------------------------------------------------------
CONTENTS

1 FUND PROFILE

3 ADDITIONAL INFORMATION

3 MORE ON THE FUND

8 THE FUND AND VANGUARD

9 INVESTMENT ADVISER

10 DIVIDENDS, CAPITAL GAINS, AND TAXES

11 SHARE PRICE

11 FINANCIAL HIGHLIGHTS

13 INVESTING WITH VANGUARD

14 ACCESSING FUND INFORMATION BY COMPUTER

GLOSSARY (inside back cover)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk/(R)/" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus is intended for participants in employer-sponsored
retirement or savings plans. Another version--for investors who would like to
open a personal investment account--can be obtained by calling Vanguard at
1-800-662-7447.
-------------------------------------------------------------------------------

<PAGE>

FUND PROFILE

INVESTMENT OBJECTIVE
The Fund seeks to provide maximum long-term total return (share price plus
income) while incurring less stock market risk than a fund made up entirely of
stocks.

PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods because of rising interest rates.
Interest rate risk will range from low to high for the Fund, depending on
the amount of Fund assets invested in bonds.
o Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

-----------------------------------------------------
ANNUAL TOTAL RETURNS
-----------------------------------------------------
[SCALE -10% to 50%]
1991 25.59%
1992 7.51%
1993 13.49%
1994 -2.32%
1995 35.46%
1996 15.73%
1997 27.32%
1998 25.40%
1999 5.21%
2000 4.95%
-----------------------------------------------------

<PAGE>

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.42%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.44%

The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of the given period.

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.

<PAGE>

--------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed in June and AssetA
December; capital gains, if any, are
distributed in December VANGUARD FUND NUMBER
078
INVESTMENT ADVISER
Mellon Capital Management Corporation, San CUSIP NUMBER
Francisco, Calif., since inception 922020102

INCEPTION DATE TICKER SYMBOL
November 3, 1988 VAAPX

NET ASSETS AS OF SEPTEMBER 30, 2000
$8.76 billion

--------------------------------------------------------------------------------

The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote unless
those strategies or policies are designated as

<PAGE>

fundamental. Note that the investment objective of the Fund is not fundamental,
and may be changed without a shareholders vote.
Finally, you'll find information on other important features of the Fund.

MARKET EXPOSURE
The Fund allocates its assets among stocks, bonds, and money market instruments
in proportions that depend on the risks and returns projected by the adviser for
each asset class.

STOCKS
The Fund typically invests a portion of its assets in stocks.

BONDS
The Fund typically invests a portion of its assets in bonds.

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[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS BECAUSE OF
RISING INTEREST RATES. INTEREST RATE RISK IS HIGH FOR LONG-TERM BONDS SUCH
AS THOSE PURCHASED BY THE FUND. FOR THE FUND OVERALL, INTEREST RATE RISK
WILL RANGE FROM LOW TO HIGH, DEPENDING ON THE AMOUNT OF FUND ASSETS
INVESTED IN BONDS.

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PLAIN TALK ABOUT
TYPES OF BONDS
Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those issued by the Government National
Mortgage Association (GNMAs). Each issuer is responsible for paying back the
bond's initial value as well as making periodic interest payments.
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Since the Fund's asset allocation changes according to the adviser's timely
projection of risk and return, the Fund may exhibit higher volatility than
balanced funds with static allocations.

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[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF ALLOCATING THE FUND'S NET ASSETS AMONG STOCKS, BONDS,
AND MONEY MARKET INSTRUMENTS.

The Fund is generally managed without regard to tax ramifications.

OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks, bonds, and money market instruments, the
Fund may make certain other kinds of investments to achieve its objective.

The Fund may invest, to a limited extent, in foreign securities.

COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
o Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
o Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
o Each Vanguard fund reserves the right to stop offering shares at any time.

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8
o Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.

See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.

THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $570 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.

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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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INVESTMENT ADVISER

For the fiscal year ended September 30, 2000, the advisory fee represented
an effective annual rate of 0.11% of the Fund's average net assets before a
decrease of 0.01% based on performance.

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The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.

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PLAIN TALK ABOUT
THE FUND'S ADVISER
The managers primarily responsible for overseeing the Fund's investments are:

DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December.

Your dividends and short-term capital gains distributions will be
reinvested in additional Fund shares and accumulate on a tax-deferred basis if
you are investing through an employer-sponsored retirement or savings plan. You
will not owe taxes on these distributions until you begin withdrawals from the
plan. You should consult your plan administrator, your plan's Summary Plan
Description, or your tax adviser about the tax consequences of plan withdrawals.

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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from any stock
holdings and the interest it receives from any money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term depending on whether the fund held the securities for one year or
less, or more than one year..
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The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."

<PAGE>

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PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 2000 with a net asset value (price) of $24.11 per share.
During the year, the Fund earned $1.03 per share from investment income
(interest and dividends) and $1.61 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.

Shareholders received $1.96 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.

<PAGE>

INVESTING WITH VANGUARD

The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
o If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
o If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.

INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.

TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.

In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern
time, you will receive that day's net asset value.

EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.

Before making an exchange to or from another fund available in your plan,
consider the following:
o Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
o Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
o Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.

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ACCESSING FUND INFORMATION BY COMPUTER

VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.