3 factors to achieving long-term investing success


When it comes down to it, achieving success with long-term investing depends on three key factors. Vanguard experts Bryan Lewis, Frank Chism, and Matt Piro explain how having an appropriate asset mix, keeping an eye on costs, and maintaining discipline and focus through short-term market swings can help you be more successful.

Notes:
All investing is subject to risk, including the possible loss of the money you invest. 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.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
© 2016 The Vanguard Group, Inc. All rights reserved.


TRANSCRIPT

Jon Cleborne: Why don’t we talk about the keys to success of building a long-term portfolio and how should we think about the foundational elements of that? So, Frank, I’d kick that to you, and, Bryan, feel free to jump in here.

Bryan Lewis: Absolutely.

Frank Chism: Yes. So when we start with—Before you invest anything, and it’s the same way we like to think about, if you’re going to build a house you need a plan. Anything you do, you have to set out, “What are my goals?” So our key philosophy is start with your goals, and then you want to have a balanced even approach to that, you want to pay attention to cost, and then you want to be disciplined. So just to give you a brief example and, then, Bryan can talk a little more specifically about how you go about doing these things. But the goals are very simple. What are you saving for, what are you investing for? Is this for retirement, are you trying to fund your kid’s education? You know, what are your goals as you see them, what’s the time horizon for those goals? Those should be definitive goals that you have written down, that you understand, and you have to have steps in place to reach those. You should take a balanced approach, and you have to have a balanced portfolio. You have to have things that are going to move different directions at different times in the market. So if you have volatility in stocks, that’s why we always suggest you’re going to have some bonds as well. So you have to have a balanced approach. Cost is very important, and that’s something I know is going to come up quite a bit this evening. But the only thing you can really control about your investments is how much are you paying for them? You can’t control the market or the outcome of the market, so cost is important. And then, finally, discipline. And I think Bryan and his colleagues, this is where they really help with that, is if two-thirds of our folks are saying they’re somewhat sure of what they’re doing, it helps to have your plan and stick to it. And it helps to have someone who can help you say, “Hey, this was our plan, and things look rocky out there right now, but we said this is what we’re going to do, and we’re going to stick to it regardless of what we see in the near term.

Matt Piro: Yes, Frank, but I might just jump in on the cost side of things because we do have some data here on the expenses. And I think sometimes clients forget how much cost can really erode their returns. So what we’re showing you here is how that happens with an expense ratio of 1.2%. So as you look over time, you can see how much of your returns you’re losing to expenses. And that grows to be quite a significant number if you look out 25 years. That’s about a third of your return that goes away to costs, which is why we think about cost so much. You know, if you look at a lower-cost option, say something around 20 basis points, or 0.20% roughly, you’ll see how much less you give up to cost from your return. So that’s why it’s critically important for us to focus on cost and help investors really understand the impact cost has on the returns they ultimately, you know, they reap the benefits of.

Bryan Lewis: And to take a look at that even further, talking with my clients that I help manage their portfolios, you really have to—obviously, we all want to make money but what is the money for, what’s its purpose, right. Is it for retirement, is it paying off a house, is it building a legacy for your family? And once you’re able to clearly define those goals, to Frank’s point, you’re able to focus more on building that portfolio, and we do follow a top-down approach. And, essentially, what that means is you first want to determine your stock-bond ratio, your asset allocation. Certainly, you do want to have some cash for your day-to-day living expenses as well as for emergencies, but focusing on the stock and bonds to build that portfolio to really lead to getting you to the long end of the objective, which is meeting your goal. And once you’re able to determine the asset allocation, which is again which I’ll help my clients work through, based on their situation, you can start going into, alright, how much U.S. exposure should I have? How much international exposure should I have? And then you can start to drill down on large-, mid-, small-company exposure, value versus growth. And the last piece to this that we select in the planning process is actually the securities or the mutual funds that you ultimately go with. And that’s where, to our point, you really want to focus on using low-cost investments to achieve that. And the last piece that Frank brought up was the discipline, right. You need to stay committed, start as early as you can, and really save as often as you can to set yourself up for success in the long run.

Important information
All investing is subject to risk, including the possible loss of the money you invest. 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.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
© 2016 The Vanguard Group, Inc. All rights reserved.