Investing success. How do you know if you’re achieving it with your portfolio?

Investing success. How do you know if you’re achieving it with your portfolio? Scott Donaldson of Vanguard Investment Strategy Group and Bryan Lewis of Vanguard Personal Advisor Services® say success should be based on your financial goals and not on the return you think you need.

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Amy Chain: Scott, I’d like to ask you to answer a question that came in from Ervindra from Tennessee who asks, “How does Vanguard define success in an investment portfolio? Is there a widely accepted definition or are there different versions of success, depending on the portfolio?”

Scott Donaldson: Sure, sure. It’s something, and Bryan hit on a lot of issues in evaluating your portfolio, creating a plan is all vitally important. I think I’d probably start by saying making sure from defining investment success. You don’t want it to have to be relied upon achieving some level of outsize returns. You also don’t want the success of your investment plan to be determined or contingent upon what I would say are unrealistic savings or spending goals. And kind of a great example of that, I think, would be you have an investor who decides they feel they need a million dollars on the day they retire. They’re 30 years old, and part of their plan to achieve that million dollars is saving $2,000 a year. Again, unrealistic. There’s not an investment portfolio in the world that’s going to be able to solve that or make that strategy successful. Significant outsize returns would be needed considering that you need to be a little more realistic, define clear goals in order to be able to measure exactly what you’re striving for.

Amy Chain: And when you say goals, what I think you mean is “I’d like to have enough money to replace X percent of my income in retirement” as opposed to “I’d like to have X percent returns in my portfolio.” Set a specific goal, talk about what you want to do with the money, and then create a plan that will help you accomplish that. Is that fair?

Scott Donaldson: Sure, I can probably explain it in a simple example. So let’s say an investor decides that they need a certain amount of income a year once they retire. They’ve got a certain size of a portfolio or assets that’re able to help them achieve that income. And the return determination to achieve that annual income, let’s say, is calculated at about 4% a year. So when they’re evaluating their required return of 4% a year, if that’s what they’re achieving, but they then look at—I mean everybody wants to achieve the greatest amount of return absolutely possible. But if you look at your portfolio over history or the last year and you’ve gotten 4 or maybe even 5 or 6, but then you then look at the broad stock market and see that it was up 12. There’s no reason you should be upset about that or determine that your investment strategy is a failure because it did exactly what you were trying to do, and you didn’t have your portfolio set up or established to achieve the 12. That’s more of a desired return. The required is something people need to focus on more so, not just outperforming their neighbor or outperforming the market necessarily, is to set the portfolio up to meet their specific goals.

Amy Chain: Bryan, how can we help them determine what their required return is?

Bryan Lewis: It’s a question I’m asked quite frequently, and really the goal, when you think about it, is, especially around this goals-based approach, is we want to get you from point A to point B. And to Scott’s point about managing the returns and your expectations, when you start thinking about how much risk should you be taking to get from point A to point B, if we can get you, for example, say, to retirement with less risk, you know, it’s important, and you need to look at it that way versus, say, somebody who’s looking for 8, 9, 10% on a consistent basis. Not only are they likely going to be disappointed, they’re likely going to be taking on more risk than they truly should be.

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