Four principles for investing success
Goals
Create clear, appropriate investment goals.
An investment goal is essentially any plan investors have for their money. Many of us aspire to achieve a certain quality of life or fund a specific business objective. Being explicit about one’s investment goals helps investors turn their aspirations into reality. They should also understand that over time, both savings (the amount they invest initially and over time) and investment returns (what the investment earns) will play crucial roles in achieving any investment goal.
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: This hypothetical illustration does not represent the return on any particular investment, and the rate of return is not guaranteed. The calculation for the contribution of savings and investment returns was determined as follows: Assuming a fixed 4% real return over inflation and equal annual contributions, we calculated how much an investor needs to invest annually to achieve a given investment goal for different time horizons, varying from 0 years (when investment begins) to 40 years after investment begins. Savings represent the amount invested (the principal). Contributions (in real terms) are assumed to be the same every year relative to the year investing begins.
Source: Vanguard.
Balance
Keep a balanced and diversified mix of investments.
Once an investor has set clear and appropriate investment goals, the next step in developing a plan is to define the mix of investments to help achieve their goals. This process is also known as defining an asset allocation. By diversifying investments across stocks and bonds and among sectors and countries, an investor can reduce overall portfolio volatility and help guard against unnecessarily large losses. When considering what mix of investments is appropriate for them, investors should bear in mind the benefit of having a portfolio that matches their level of comfort with the ups and downs of markets.
A portfolio's mix of assets defines its range of returns
Top 5%, bottom 5%, and average annual returns for various global stock/global bond allocations, 1901–2022
Notes: Data are from Dimson-Marsh-Staunton (DMS) dataset for 1901–2022. Annualized nominal geometric returns are in dark green. The 5th and 95th percentiles are plotted below and above asset mixes. Bar length indicates the range, from 5th to 95th percentile, of annual returns for each allocation; the longer the bar, the larger the variability. The numbers next to each bar represent the average nominal annual returns for that allocation for the 122 years covered.
Sources: Vanguard calculations, using DMS global returns data from Morningstar, Inc. (the DMS World Equity Index and the DMS World Bond Index, both in nominal and real terms). The dataset includes returns from Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Russia, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
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.
Cost
Minimize costs.
While markets and financial returns may be hard to predict, one thing investors can control is costs. There are two broad categories of costs investors should try to minimize: taxes and investment costs, which can include expense ratios, transaction costs, and sales charges. Together, these costs cut into investment returns.
Higher costs can significantly depress a portfolio's growth
Assuming a starting balance of $100,000 and a yearly return of 6%, which is reinvested
Notes: The portfolio balances shown are hypothetical and do not reflect any particular investment. In this example, the accounts return 6% annually, then investment costs are taken at the end of the year. The rate of return is not guaranteed. The final account balances do not reflect any taxes or penalties that might be due upon distribution. Costs are one factor that can impact returns. There may be differences between products that must be considered prior to investing.
Source: Vanguard calculations.
Discipline
Maintain perspective and long-term discipline.
Discipline in investing is the ability to adhere, over time, to an investment plan. Once investors have created a plan by defining their goals, choosing an appropriate asset allocation, and minimizing costs, discipline is what will help them get them closer to achieving their objectives.
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.
Notes:
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
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.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Diversification does not ensure a profit or protect against a loss.
We recommend that you consult a tax or financial advisor about your individual situation.
