Vanguard leaders discuss the four key principles to investor success

With the markets at all-time highs and interest rates beginning to climb, many investors are concerned that both stocks and bonds may soon collapse. So how should you invest right now? It’s all about following Vanguard’s four key principles to investor success.

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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.
  • Bond funds are subject to the risk that an issuer will fail to make payment on time, and the bond prices will decline because of rising interest rates or negative perceptions of an issue’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.
  • Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

TRANSCRIPT

 

Emily Farrell: So, Bryan, I thought this was a really great one to start off with. Lori from Wisconsin asked us, “What on earth should I do with my money?” I think a lot of us ask that question sometimes. She says, “Stocks are high and going to fall, interest rates are going to rise, so bonds will fall. Help!” All right, can you help?

Bryan Lewis: Absolutely. There’s a lot of uncertainty in the markets today. Stocks have done well, interest rates have started to go up, and the Fed’s indicated that they may potentially increase rates a few more times this year. So what’s the impact on fixed income or bonds? And the truth be told, really nobody knows for sure, right. There’s no guarantees with even this is even going to happen as far as with rates going up. The question I get frequently is, “What do I do with all this uncertainty?”

And, really, if you follow Vanguard’s four key principles when it comes to investing, we believe over time it could increase, or at least the potential to increase the likelihood that you’re a successful investor. So in order to answer the question what should you do, you first have to have a plan or a strategy, right? You need to be able to clearly define your goals. Examples include, are you saving for retirement, your child’s education? And then once you’re able to clearly define those goals, you can start focusing on actually building the portfolio.

Right, you’re going to first start with a target asset allocation, which is the percentage between stocks and bonds and cash. Then once you determine that allocation, you can start focusing on actually building the portfolio. Vanguard encourages you to focus on using low-cost and balanced mutual funds.

The last piece to this, which is a very important component, is discipline. You need to be able to avoid the temptations to market time or chase performance. You need to reevaluate the portfolio throughout the year, maybe once or twice, look to see if you have to rebalance the portfolio, and you need to save. You need to save as often as you can. And over time, if you follow this, we do believe you’re going to increase the chance of at least being a successful investor.

The question becomes, you know, different sides of the equation, you could have an investor who’s all cash and a lot of uncertainty in the market, you’re concerned, investing is inherently emotional, and, over time, nobody knows, as I mentioned. And the other side of the equation is somebody who’s fully invested, what do you do? And, again, it comes all back to the strategy and the plan that you put together and reevaluating your current portfolio relative to your target asset allocation.

And for those in cash, you could certainly look to maybe move the money over the next few months versus say over the next few years because even though you’re not in the market, you’re still exposed to risk in a different kind, which is your shortfall risk, which means over a long run if you’re not getting the growth, you may fall short of meeting your objectives. You also could fall short when you look at inflation risk. Right, you’re not earning much say in cash investments.

And then those who are fully invested, again, back to your target allocation, you want to make sure you’re within 5% of your target at all times. And for somebody who’s potentially within that range, you may not have to do anything; but for somebody who’s drifted from that, it may present an opportunity to rebalance the portfolio. But it has nothing to do with trying to time the market and chase returns because, again, nobody knows for sure.

Emily Farrell: Right. And I think it’s, actually, a very good level set for our conversation today; and I think that last principle, discipline, is what maybe we’re going to be kind of honing in on, whether deliberately or not, because when there is uncertainty and emotion, that’s kind of the hardest part for, I think, all of us.

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.

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

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved.