The best approach to investing


During periods of market volatility it can be difficult to stay disciplined and stick to your financial plan. Vanguard investing experts Kahlilah Dowe and Don Bennyhoff offer perspective on why ignoring short-term market events and continuing to focus on your long-term investing goals is the best approach.

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Notes:
For more information about Vanguard funds, visit vanguard.com, or call 877-662-7447, to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

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.

Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

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

Advisory services are provided by Vanguard Advisers, Inc. (VAI), and registered investment advisor.

© 2016 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

TRANSCRIPT 

Matt Benchener: And we actually have our first live question coming in from John. So, John, you won the prize today for the first live question. Thank you. John asks, “I’m fearful over the drop in my funds. More to the point, I’ve seen nothing but negative economic news everywhere, not just at home.” So I’m assuming not just in the U.S. “What to do?” So a lot of fear out there, negative economic news on the horizon. We’ve seen a pretty meaningful drop to start the year in the stock market. What should somebody like John do? What should he be thinking about?

Kahlilah Dowe: Yes, so it’s tough because, like John mentioned, if you listen to the headlines, it seems as though it’s all negative. And I speak with clients who say should I even be invested in the market right now? I think it’s important to keep in mind your longer-term goals and kind of ask the question why am I investing to begin with? So really taking a step back and thinking about your longer-term goals that brought you to the investments that you have in the portfolio. The fear part of it, I think that’s the toughest part because oftentimes it can’t be linked to something specific that happened. It’s more a matter of what could happen in the markets. And that uncertainty has always been there. That markets have been more volatile lately than what we’ve seen in the recent past, but that uncertainty is always present in the market. And so I would say definitely avoid or try to avoid making any decisions based on that fear. The other thing I would say is when you think about the portfolio returns that you’re seeing this year, keep in mind that this is just one year. Actually, we’re in the beginning of the year, but think about what the portfolio has done in 2014 and 2013, 2012. We saw great returns in the markets during those times. And so for most investors, even though you’ve seen possibly some negative returns this year, all is not lost because you still may be in a positive position when you look at it on average. So I would say just try to keep that perspective when you think about changes that you may need to make.

Don Bennyhoff: Yes, I guess I can add maybe we can pull up a chart. I think it would be sort of important, especially for investors. I think a lot of people focus on average returns, so the chart, for example, here is a historical look at the returns on just simply stocks and bonds dating back to 1926. And what it’s illustrating is, effectively, each of the dots represents a single year, and the returns for stocks, a diversified stock portfolio, as well as diversified bond portfolio. So stock and bond returns in a particular year. And most people understand that sort of you invest in stocks because they give you higher returns. Well, the other side of that is you get the higher returns for bearing higher risk, and part of that risk is not getting the return you expect. So the chart actually is a visual representation of sort of what normal returns have been over the long run for stocks and bonds, a little more than 10% for stocks and about 5½% for bonds. But when you look at sort of on a year-by-year basis, what you see is that normal stock and bond returns aren’t delivered as often as most people think they are on average. And so when you look at the shaded areas, from left to right, that’s the equity returns. And what you see is the vertical shaded bar is a range of 2%, two percentage points in either direction around that 10% long-run average. So between 8 and 12% for stocks, and the same thing on the Y axis, top to bottom, for bonds was between 3 and 7%. If you look at where those two shaded areas meet, you only see two dots, and that means that in only two of those years, stocks and bonds provided returns that were even in the range of their normal return. So setting your expectations is a big part of being a successful investor, and part of that is understanding that more often than not, the returns you expect won’t be delivered exactly as you expect them to be. And therein is why you need to sort of let time be your guide and allow time to work for you because now in addition to your contributions, you have the returns. Sometimes they’re better; sometimes they’re worse. But over time, that’s when you start to see the risk premium that you’re investing for, whether it’s that extra risk from stocks or a little bit extra risk from bonds compared to cash. Things like that play out.

Matt Benchener: I think that’s a great chart because you can imagine, you know, we’re all investors too. You know, we work here; but we’re all investors too. It can easily be jarred by market drops or even a year where returns seem to be all over the place, but that kind of perspective is really helpful. We believe that we’re going to get these quote/unquote “average returns” in a given year is true over the long term, but-

Kahlilah Dowe: Right.

Matt Benchener: —but not in a short period of time.

Don Bennyhoff: Exactly.

Kahlilah Dowe: And I would just add to that and say, you know, just because you’re not seeing the returns that you expect to see or even negative returns, that’s not necessarily an indicator that you’re doing something wrong. You know, so I think investors have to keep that in mind that negative returns and lower than average returns can be a normal part of investing, which is one of the reasons why we focus on taking such a long-term perspective on it.

Important information: For more information about Vanguard funds, visit vanguard.com, or call 877-662-7447, to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

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.
Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

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

Advisory services are provided by Vanguard Advisers, Inc. (VAI), and registered investment advisor.

© 2016 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.