Vanguard’s principles for investing success
The words investing success can mean different things to different people. Being clear on what success means is key to mapping out a plan to help achieve it.
Although investing can seem perplexing and complex, success is largely within one’s control. Having a tailored investment strategy can go a long way to reducing the stress and noise associated with investment decisions. In our research paper, Vanguard’s Principles for Investment Success , we offer four investing principles designed to help investors focus on what’s important to them and give them the best chance for investment success.
Create clear, appropriate investment goals
There is no one-size-fits-all plan for reaching financial objectives. Goals are unique to an investor’s situation, preferences, and aspirations. Identifying and prioritizing financial intentions allows investors to focus on what matters most, in an order that works for them. It also helps them decide where they’re willing to compromise.
Once investors set and prioritize goals, they can figure out how much—and for how long—they’ll need to save. The value any portfolio achieves over time is the sum of two elements: savings (the amount an investor puts into their portfolio) and investment returns. Much of the discussion about investment success tends to focus on investment returns, but both elements are crucial in reaching a goal. Time is a key factor here. For short time horizons, savings—which is within an investor’s control—is the driving force in achieving an investment goal. As the time horizon increases, investment returns increase in importance.
Savings and investment returns both contribute to the achievement of any investment goal
Over any given goal horizon, an investment balance is the sum of savings (the amount an investor puts into the investment portfolio) plus the investment returns on the total amount invested.
Notes: The calculation for the contribution of savings and investment returns is as follows: Assuming a 4% real return (after inflation), we calculate how much an investor needs to invest annually to achieve a given investment goal for different time horizons, varying from 0 years (now) to 40 years. Savings represent the amount invested (the principal). Contributions are assumed to be the same every year relative to the year investing begins.
Source: Vanguard.
Keep a balanced and diversified mix of investments
Stocks are risky, but so is avoiding them. Stocks are more volatile in the short run, but historically they’ve outperformed cash-equivalent assets in the long run. By spreading investments across stocks and bonds and among sectors and countries, an investor can reduce overall portfolio volatility while also safeguarding against unnecessarily large losses.
An appropriate asset allocation takes into account an investor’s risk tolerance—how much volatility they can tolerate in their portfolio—and risk capacity—their ability to withstand a loss in their portfolio (a reflection of their time horizon and cash flow needs). Factoring in an investor’s time horizon and their tolerance for risk can lead to a tailored portfolio that’s suitable to personalized situations.
Minimize costs
Market movements and financial returns are hard to predict, but costs are often controllable. The two broad types of costs that investors can minimize are (1) taxes and (2) investment costs, which include expense ratios, transaction costs, and sales charges. Together, these costs cut into investment returns, sometimes significantly. To reduce these expenditures, and help improve returns, an investor can:
· Seek out lower-cost funds. The evidence is clear: Lower-cost mutual funds have historically outperformed higher-cost mutual funds after costs.1
· Implement tax-advantaged and tax-efficient investment strategies, where available. These strategies might include retirement account options, reducing transaction activity, and having a strategic plan for tax-efficient asset location.
Maintain perspective and long-term discipline
Discipline in investing is the ability to adhere, over time, to an investment plan. It’s natural to want to react to market volatility, but acting on that emotion can lead to an impulsive decision, like panic selling during an unstable market. Taking a long-term perspective can help an investor maintain discipline and avoid a potentially harmful emotional move.
The importance of maintaining discipline: Reacting to market volatility can jeopardize returns
What if investors shifted to cash at the bottom of the COVID downturn and stayed there until the market recovered?
Notes: Stocks are represented by the MSCI All Country World Index; bonds are represented by the Bloomberg Global Aggregate Bond Index (USD Hedged). Cash is represented by the Bloomberg U.S. Treasury 1–3 Month U.S. Treasury Bill Index. Returns are in nominal terms.
Sources: Vanguard calculations, using data from Morningstar, Inc.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Staying the course can help increase an investor’s chance of success, but so can other actions, like making regular contributions to a portfolio, and increasing them over time.
Other actions that can increase the likelihood of reaching an investment goal? A consistent plan to rebalance a portfolio, a disciplined spending strategy, and a regularly scheduled date to monitor and review goals.
Our four principles can help investors focus on the aspects within their control, so they can build tailored plans to help them achieve investing success.
1Lawrence, Stephen, and Jan-Carl Plagge, 2023. The Case for Low-Cost Index-Fund Investing. Vanguard research.
Note: All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Publication date: December 2023
The information contained in this material may be subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc.
Certain statements contained in this material may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.
While the information contained in this material has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.
This material is not a recommendation, offer or solicitation to buy or sell any security, including any security of any investment fund or any other financial instrument. The information contained in this material is not investment advice and is not tailored to the needs or circumstances of any investor, nor does the information constitute business, financial, tax, legal, regulatory, accounting or any other advice.
The information contained in this material may not be specific to the context of the Canadian capital markets and may contain data and analysis specific to non-Canadian markets and products.
The information contained in this material is for informational purposes only and should not be used as the basis of any investment recommendation. Investors should consult a financial, tax and/or other professional advisor for information applicable to their specific situation.
In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its subsidiaries or affiliates, including Vanguard Investments Canada Inc.