Vanguard's Principles for Investing Success

27 June 2013 | Investing



There are certain fundamental principles that we believe give all investors the best chance for investment success.

First, create clear, appropriate investment goals.

A sound investment plan begins by having appropriate investment goals that are measurable and attainable.

Appropriate goals could include…

  • Saving a certain amount for retirement,
  • Preserving wealth for future generations,
  • Sustaining philanthropy for charitable causes,
  • And funding pension obligations.

Success in pursuing a goal should not depend on outsize market returns, nor upon impractical saving or spending requirements. Instead, investors should create a detailed, specific and realistic plan for each goal, and reevaluate their plans periodically.

That leads to the next principle…

Develop a suitable asset allocation using broadly diversified funds. 

In other words…invest with balance.

When building a portfolio to meet a specific goal, it’s critical to select a combination of assets suitable for that goal. This asset allocation should be built upon reasonable expectations for risk and returns.

As you can see here, over long periods portfolios with larger stock allocations, seen on the right, have provided higher average returns than allocations that emphasise bonds, seen on the left.  But the higher returns from stocks came with greater volatility.

And yet, while stocks look more risky, avoiding them can introduce other risks, such as falling short of reaching a goal because of inflation.  For investors with longer time horizons, those inflation risks may actually outweigh market risks.

This is why choosing an asset allocation that balances stocks and bonds can allow investors to manage their risk exposures. And just as important is using prudent return assumptions.

Within the asset classes, broad diversification is also essential, because performance leadership changes constantly within asset classes.

Another principle that’s essential is…

Minimise cost.

You can’t control the markets, but you can control the effects of costs.

The lower an investment’s cost, the greater the share of returns that can be kept by investors. And research suggests that, over time, lower-cost investments have tended to outperform those with higher costs.

To keep even more of their returns, investors should manage for tax efficiency. After all, they can’t control the markets, but they can control the bite of costs and taxes.

Finally, the principle that keeps the first three functioning properly…

Maintain perspective and long-term discipline.

Even the most experienced investors may, at times, be tempted to make impulsive decisions, try to outguess the markets, chase recent strong performance, or even become overwhelmed and unable to implement an investment strategy.

It’s best for investors to stay focused on the factors they can control…such as how much they invest.

This chart shows the dramatic impact not just of saving consistently, but of increasing the amount being saved, year after year.

A higher rate of saving can be a more powerful and reliable contributor to building wealth than trying for higher returns by increasing the level of risk in a portfolio.

In short, discipline and perspective can help investors to remain committed to their long-term investment programs…even through periods of market uncertainty. 

These four principles…

Create clear, appropriate investment goals…

Develop a suitable asset allocation using broadly diversified funds…

Minimise cost…

And maintain perspective and long-term discipline…

…are the enduring, time-tested principles embedded in the Vanguard culture…and that guide us in serving our clients every day.


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