Financial wellness

Principles for investing success in four figures

February 14, 2024

financial wellness illustration

The start of the year is a great time to get aware of and aligned with the four Vanguard-recommended principles for investment success. Our principles focus on the things within your control, so you can create an actionable plan that takes you closer to your goals, one step at a time.

Both investment returns and savings contribute to the achievement of an investment goal—but only one of those variables is within an investor’s control. A savings goal target should be achievable, no matter the available time horizon.

Over any given goal horizon, an investment balance is the sum of savings (the amount an investor puts into the investment portfolio) plus the investment returns on the total amount invested.

Graphic shows how the proportions of savings and investment returns in contributing to an investment goal changes over time. Three pie charts above an x-axis labeled “Goal horizon (Years)” show these proportions at different goal horizons: 2-year, 10-year, and 30-year. The charts show that as the goal horizon increases, the contribution to the goal amount from savings diminishes and the contribution to the goal from investment returns increases. At 2 years, the contribution proportions are 94% savings, 6% investment returns; at 10 years, they are 80% savings, 20% investment returns; at 30 years, they are 51% savings, 49% investment returns. To the left of the pie charts, two people are shown, one of whom is throwing a ball toward the pie charts as if toward a target.

Notes: This hypothetical illustration does not represent the return on any particular investment, and the rate of return is not guaranteed. The calculation for the contribution of savings and investment returns was determined as follows: Assuming a fixed 4% real return over inflation and equal annual contributions, we calculated how much an investor needs to invest annually to achieve a given investment goal for different time horizons, varying from 0 years (when investment begins) to 40 years after investment begins. Savings represent the amount invested (the principal). Contributions (in real terms) are assumed to be the same every year relative to the year investing begins.

Source: Vanguard.

A portfolio’s mix of assets defines its range of returns. A balanced and diversified mix of investments can help an investor reduce overall portfolio volatility and help guard against unnecessarily large losses.

Top 5%, bottom 5%, and average annual returns for various global stock/global bond allocations, 1901–2022.

Graphic shows bars representing the top 5%, bottom 5%, and average annual returns for six different global stock/global bond asset allocations for the period from 1901 through 2022. The vertical axis represents annual return. The horizontal axis represents asset allocations that move from 100% bonds/0% stocks on the left to 0% bonds/100% equity on the right. Six bars are arranged horizontally, each labeled with its asset allocation and each showing the top 5% (95th percentile), bottom 5% (5th percentile), and average annual returns for that allocation. A double-pointed arrow runs under the bars, labeled “Less risk” on the far left and “More risk” on the far right.

Notes: Data are from Dimson-Marsh-Staunton (DMS) dataset for 1901–2022. Annualized nominal geometric returns are in dark green. The 5th and 95th percentiles are plotted below and above asset mixes. Bar length indicates the range, from 5th to 95th percentile, of annual returns for each allocation; the longer the bar, the larger the variability. The numbers next to each bar represent the average nominal annual returns for that allocation for the 122 years covered.

Sources: Vanguard calculations, using DMS global returns data from Morningstar, Inc. (the DMS World Equity Index and the DMS World Bond Index, both in nominal and real terms). The dataset includes returns from Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Russia, South Africa, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

Higher costs can significantly depress a portfolio’s growth. While markets and financial returns may be hard to predict, one thing an investor can control is costs. That includes both taxes and investment costs like expense ratios, transaction costs, and sales charges.

Assuming a starting balance of $100,000 and a yearly return of 6%, which is reinvested. Costs may include both taxes and investment costs like expense ratios, transaction costs, and sales charges.

Graphic shows a line chart that plots after-cost returns for four portfolios, each with a different level of cost, over time. The y-axis represents portfolio value in dollars. The x-axis represents time in years, running from zero on the left to 30 on the right. Four lines are shown, each of which plots after-cost returns for a different portfolio: one with costs at 0.1%; one with costs at 0.7%; one with costs at 1.3%; and one with costs at 2.0%. Over time, the difference in value of each portfolio becomes more marked; the lower the costs of the portfolio, the higher the ending portfolio value. From lowest- to highest-cost portfolio, values at 30 years are as follows: For a portfolio with costs at 0.1%, the value at 30 years is $557,383; for a portfolio with costs at 0.7%, the 30-year value is $465,899; for a portfolio with costs at 1.3%, the 30-year value is $389,846; and for a portfolio with costs at 2.0%, the 30-year value is $317,081. To the left of the lines’ starting point, a man is shown facing the lines with his hands in his pockets, in front of a large circle with a dollar sign in front of it.

Notes: The portfolio balances shown are hypothetical and do not reflect any particular investment. In this example, the accounts return 6% annually, then investment costs are taken at the end of the year. The rate of return is not guaranteed. The final account balances do not reflect any taxes or penalties that might be due upon distribution. Costs are one factor that can impact returns. There may be differences between products that must be considered prior to investing.

Source: Vanguard calculations.

A higher contribution rate, consistently maintained with discipline, can be a powerful factor in achieving objectives. A higher savings rate can lead to faster goal achievement, even when annual return is less attractive.

Chart shows years needed to reach $500,000 using different contribution rates and market returns. All scenarios assume an initial contribution of $10,000 and annual contributions of $5,000 to start.

Infographic shows line chart that plots how many years would be needed to save $500,000 under three scenarios—higher savings, higher return, and baseline—that assume different contribution rates and market returns. The y-axis represents dollars. The x-axis represents time, with zero on the left and a right-facing arrow on the right. Three curving lines are shown, each of which plot the outcomes of one of the scenarios. The lines start at the same point but diverge over time, with the line representing the higher-savings scenario reaching the goal first, followed by the line representing the higher-return scenario, and (much later) by the line representing the baseline scenario. Under the higher-savings scenario (4% annual return, 5% savings increase), 39 years would be needed to reach the goal; under the higher-return scenario (6% annual return, 0% savings increase), 45 years would be needed; and under the baseline scenario (4% annual return, 0% savings increase), 69 years would be needed. To the left of the lines’ starting points, a man is shown, carrying a watering can and walking toward a houseplant that is taller than him.

Notes: Each scenario starts with an initial contribution of $10,000 made in Year 1, with the first annual contribution of $5,000 made in Year 2. The portfolio balances shown are hypothetical and do not reflect any particular investment. There is no guarantee that investors will be able to achieve similar rates of return. The final account balances do not reflect any taxes or penalties that might be due upon distribution.

Source: Vanguard.

Vanguard’s four pillars are detailed in our research paper, Vanguard’s Principles for Investing Success. These pillars represent an enduring philosophy centered on giving investors the best chance for investing success. They are designed to help investors stay on track by focusing on the things that are within their control. 

Illustration shows four icons in a row. Below each icon is a label; below each label is a brief caption. From left to right, the principles shown are goals, balance, cost, and discipline. For goals, the icon is a mountaintop with a flag and the caption is “Create clear, appropriate investment goals.” For balance, the icon is a set of scales; the caption is “Keep a balanced and diversified mix of investments.” For cost, the icon is two stacks of coins; the caption is “Minimize costs.” For discipline, the icon is a stopwatch; the caption is “Maintain perspective and long-term discipline.”
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Notes:

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.

Investments in bonds are subject to interest rate, credit, and inflation risk.

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

We recommend that you consult a tax or financial advisor about your individual situation.

Vanguard’s Principles for Investing Success is a body of research that intends to capture important and evergreen considerations for investors across regions and with a robust view of the markets. To capture evergreen consideration, Vanguard selected the Dimson-Marsh-Staunton dataset to further this research because it provides a long-time series on annual returns on stocks, bonds, bills, inflation and currencies for 35 markets. Of the 35 markets covered, 23 (the DMS 23) have 124-year histories from 1900 to 2023. The remaining 12 markets have start dates in the second half of the 20th century, with either close to or more than 50 years of data. Together with the DMS 23, these make up the DMS 35. Vanguard believes the unrivalled breadth and quality of its underlying data as a global authority on long-run asset performance.

Contemporaneous data for several well-known US and ex-US indices (S&P500, Bloomberg Agg, MSCI ex-US and Bloomberg Global ex-US) is only available going back to 2000. The last 25 years was a period of lower interest rates, which may not offer a full picture of the role of stocks and bonds in a portfolio. DMS offers a longer time series of data and a global view. 

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