Vanguard's Principles for Investing Success

Focus on the things you can control

An overarching theme runs through the management of our clients’ assets and the guidance we provide to them: Focus on the things that are within your control.

Although investing can seem perplexing and complex, success is largely within an investor’s control. Four investing principles have been intrinsic to our company since our inception. These four pillars of investing represent an enduring philosophy centered on giving investors the best chance for financial success.

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Principles for Investing Success

Vanguard Head of Enterprise Advice Methodology Joel Dickson explains four timeless principles to help investors focus on what they can control.  

Video transcript:

Joel Dickson: Vanguard's principles for investment success represent an investment philosophy, the investment philosophy that we think aligns with Vanguard's mission and core purpose, which is to take a stand for all investors, treat them fairly, and give them the best chance for investment success.

Your success as an investor is driven by your actions and the things that you have control over. The amount that you save, how you're spending, how much risk you're taking, how much cost you pay are all largely within your control and will ultimately drive your long-term success.

Goals

A good goal is one that you can articulate that aligns with your objective and your definition of success for your financial life, but also one that is reasonable and honestly, more importantly, achievable.

Balance

Balance is about having an appropriate, diversified mix of investments that allows you, in conjunction with your savings, to achieve the goals that you have over time. It's about diversification. It's about incorporating your risk appetite.

Cost

Cost matter because it's not about what you earn, it's about what you're able to keep or spend toward your goal. One of the largest differences between what your portfolio might return and what you ultimately can spend is the cost of the investments and in many cases taxes that may lead to lower returns. Costs are enduring and over time compound to make very large differences in the outcomes for investors.

Discipline

Success is driven by discipline. The discipline of sticking to your plan and understanding your goals is an important part of ensuring that long term success. Principles for investment success stand over time across different market environments, as the investment landscape changes, as investors, attitudes and approaches change, these principles remain.

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Four principles for investing success

Goals

Create clear, appropriate investment goals.

An investment goal is essentially any plan investors have for their money. Many of us aspire to achieve a certain quality of life or fund a specific business objective. Being explicit about one’s investment goals helps investors turn their aspirations into reality. They should also understand that over time, both savings (the amount they invest initially and over time) and investment returns (what the investment earns) will play crucial roles in achieving any investment goal. 

Savings and investment returns both contribute to the achievement of any investment goal

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.

Chart shows the changing proportions of savings and investment returns in contributing to an investment goal over time. The y-axis of the chart is labeled “Portion of contribution to investment goal,” with “0%” on the bottom and “100%” on the top. The x-axis is labeled “Goal horizon” and runs from zero on the left to “40-year” on the right, with “2-year,” “10-year,” and “30-year” called out in between. A general arc is shown in the chart, running from the bottom of the lower left side to a little above the midpoint of the right side (at roughly 65%). Pale blue and teal define this arc, with pale blue representing savings and teal representing investment returns. The chart shows 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. Three sets of data are called out along the arc, for the 2-, 10-, and 30-year points along the x-axis, showing the proportion of savings and investment returns at each point. 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.

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.

Balance

Keep a balanced and diversified mix of investments.

Once an investor has set clear and appropriate investment goals, the next step in developing a plan is to define the mix of investments to help achieve their goals. This process is also known as defining an asset allocation. By diversifying investments across stocks and bonds and among sectors and countries, an investor can reduce overall portfolio volatility and help guard against unnecessarily large losses. When considering what mix of investments is appropriate for them, investors should bear in mind the benefit of having a portfolio that matches their level of comfort with the ups and downs of markets.

A portfolio's mix of assets defines its range of returns

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

Bar chart shows the top 5%, bottom 5%, and average annual returns for different global stock/global bond asset allocations for the period from 1901 through 2022. The vertical axis represents the 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. The “100% bonds, 0% stocks” bar shows 95th-percentile returns of 21.9%, 5th-percentile returns of –15.3%, and average annual returns of 4.7%. The “80% bonds, 20% stocks” bar shows 95th-percentile returns of 20.6%, 5th-percentile returns of –14.5%, and average annual returns of 5.6%. The “60% bonds, 40% stocks” bar shows 95th-percentile returns of 24.5%, 5th-percentile returns of –17.0%, and average annual returns of 6.4%. The “40% bonds, 60% stocks” bar shows 95th-percentile returns of 25.0%, 5th-percentile returns of –20.8%, and average annual returns of 7.1%. The “20% bonds, 80% stocks” bar shows 95th-percentile returns of 29.0%, 5th-percentile returns of –21.6%, and average annual returns of 7.7%. The “0% bonds, 100% stocks” bar shows 95th-percentile returns of 34.3%, 5th-percentile returns of –21.8%, and average annual returns of 8.1%.

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. 

Cost

Minimize costs.

While markets and financial returns may be hard to predict, one thing investors can control is costs. There are two broad categories of costs investors should try to minimize: taxes and investment costs, which can include expense ratios, transaction costs, and sales charges. Together, these costs cut into investment returns.

Higher costs can significantly depress a portfolio's growth

Assuming a starting balance of $100,000 and a yearly return of 6%, which is reinvested

Line chart 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%. As time progresses, 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.

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.

Discipline

Maintain perspective and long-term discipline.

Discipline in investing is the ability to adhere, over time, to an investment plan. Once investors have created a plan by defining their goals, choosing an appropriate asset allocation, and minimizing costs, discipline is what will help them get them closer to achieving their objectives.

The importance of maintaining discipline: Reacting to market volatility can jeopardize returns

What if investors shifted to cash at the bottom of the COVID downturn and stayed there until the market recovered?

Line chart shows the importance of maintaining discipline during volatile market events, using the Covid-19 market drawdown of 2020 as a case study. The y-axis represents the portfolio return, running from –10% on the bottom to 50% on the top. The x-axis represents time, running from January 2018 through October 2022. A single teal line plots the returns for a 60/40 stock/bond portfolio from the start of the period to March 2020, at which point the single line diverges into two lines for the rest of the period: A teal line that plots the post-March 2020 portfolio returns where the investor kept the 60/40 allocation, and a brown line that plots post-March 2020 portfolio returns where the investor fled to cash from March 18, 2020 through July 28, 2020. The brown line is markedly lower than the teal line. Three pieces of callout text are shown. On the upper left, one piece of text runs next to an arrow pointing to where the line diverges; it reads “COVID downturn: What if investors moved to 100% cash from the bottom of the market in March 2020 until the recovery in July 2020?” To the right, callout text summarizes the ending portfolio return for each of the two paths. The top callout reads “21% return for investors who kept 60%/40% stock/bond allocation.” The bottom callout reads “–2% return for investors who fled to cash from March 18, 2020, through July 28, 2020.”

Notes: Stocks are represented by the MSCI All Country World Index; bonds are represented by the Bloomberg Global Aggregate Bond Index (USD Hedged). Cash is represented by the Bloomberg U.S. Treasury 1–3 Month U.S. Treasury Bill Index. Returns are in nominal terms.

Sources: Vanguard calculations, using data from Morningstar, Inc.

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.

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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