Keys to Investing Success
Define clear goals, invest with balance and diversification, minimize cost, and maintain discipline.
These core investing principles are united by a common theme: Focus on the things within your control. By attending to the things you and your advisor can influence, rather than uncontrollable factors such as the markets, the economy, or the performance of an individual security or strategy, you give yourself the best opportunity for investing success.
Create clear, appropriate investment goals
- Define clear, realistic goals and design an investment plan that meets your individual needs. If needed seek out professional help.
- A sound investment plan can help you stay focused and avoid temptations such as performance chasing or reacting impulsively to market turbulence.
- Investors often flock to highly rated funds. However, there’s no guarantee that a fund’s recent success will persist. The chart below shows that the highest- rated funds lagged their benchmarks by the greatest amount over the subsequent three years. Conversely, the funds with the lowest ratings did the best job of tracking their benchmarks.
Develop a suitable asset allocation using broadly diversified funds
- The right asset allocation is critical. It should be based on your individual goals and constraints and strike the right balance between risk and return.
- If you assume too little risk, you may fail to stay ahead of inflation or to achieve long-term goals. Yet, if you assume too much risk, you may take on levels of volatility that tempt you to abandon your strategy.
- A portfolio that diversifies across the financial markets is less vulnerable to the impact of significant swings in performance by any one segment.
Take control of your costs; keep more of your returns
- You can’t control the markets, but you can often control what you pay to invest. Every dollar you
- pay in fees is a dollar less earning a return for you, and that can make an enormous difference over time.
- Index funds and ETFs tend to have costs that are among the lowest in the mutual fund industry.
Maintain perspective and long-term discipline
- Abandoning a planned investment strategy can be costly, and some of the most significant factors are behavioral: the failure to rebalance, the allure of market-timing, and the temptation to chase performance.
- Working with an advisor can help you keep a long-term perspective and resist the reactionary impulses that all investors sometimes face.
All investing is subject to risk, including possible loss of principal.
Diversification does not ensure a profit or protect against a loss.
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.
© 2015 The Vanguard Group, Inc. Used with permission.