Steps for setting up your financial plan

As an investor the hardest part can be getting started. Bryan Lewis of Vanguard Personal Advisor Services® explains how investors should approach setting up their financial plans.

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Amy Chain: This question is from Patricia in California, and Patricia asks “Can you help me understand what I need to do to get started? I truly don’t know how to invest or make it work. Can you help me with that?”

Bryan Lewis: It’s such a great question. It’s a question that I’m asked quite frequently, and when you start thinking about how to build a plan and a strategy and really where to get started, you really want to start with defining your goals, right? You need to know what you’re investing for. You really need to define whether it’s for retirement, am I saving for college, paying off or buying a home? And once you’re able to clearly define those goals, you can start shifting towards thinking about the portfolio. How do you start building the portfolio? And once you start looking at this, Vanguard follows what we call a top-down approach. What that means is you first want to start with your overall mix of stocks and bonds, so you want to define your asset allocation. And then when you start doing that, and there’s tools on the Vanguard website if you need help along the way, and once you’re able to start defining that, you can start looking at the suballocations. You can start looking at, all right, if I’m on the stock side looking at U.S. versus international, and then start looking at my large-, mid-, and small-cap value versus growth, and then more importantly as you look to build this portfolio, you want to use very low-cost investments, particularly mutual funds, to build this portfolio around. And by using these low-cost investments, you’re just increasing the likelihood through low-cost investing that, again, you’re keeping more of the returns, which we’ll talk more about this evening. And as you build the portfolio, really the last component to it is selecting the underlying investments. And a lot of clients come to me, and I have this conversation quite frequently, is they do what we call a bottom-up approach, and that’s where they begin to start selecting the investments, whether it be on a performance basis or if you start looking at how highly rated they are. And when you start building that portfolio from the ground up, you start to have a portfolio that’s complex, it can be very eclectic as far as the holdings, and you could be less diversified than you actually believe you are. And when you start looking at the portfolio, that’s when I help my clients clearly define what their goals are, build the portfolio, take into account the tax efficiency of it, and, more importantly, when you build the plan, you still have to remain very disciplined once you execute and start the plan. And really this goes to all investors, right, whether you’re starting off at a young age or you might be later in your career and you’re just beginning the process to start saving towards retirement, as an example. You really need to be able to be disciplined with that and execute. For example, when you think of rebalancing, you need to be able and stay committed to looking at the portfolio maybe once or twice a year and be active in the sense of save as much as you can and just resist the urge to or the temptation to get out of the investments as an example when the market’s down. You know, if you follow these types of principles, the four founding principles for Vanguard, you’re just going to increase the likelihood that the portfolio is, and you’re going to be able to really meet some of these longer term objectives that we have established.

Amy Chain: So if I could summarize, it sounds like you’re saying start with your goals. Figure out where you’re going before you get going anywhere. Decide what your proper asset allocation should be based on those goals. Only then do you decide what investments should comprise that portfolio and make sure you’re taking costs into consideration along the way.

Bryan Lewis Exactly.

Amy Chain: And then once you have a plan, stick with it.

Important information

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This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

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