Ever since Vanguard was founded in 1975, the same four principles have guided investors through the numerous ups and downs of market cycles and aim to help them stay on track. While investors can’t influence or even reliably predict market movements, these four principles focus on the things investors can control.

1. Set clear goals

The first step in any investing journey should be to think about your goal: What would you like to achieve with your investments? You may be working towards a property purchase or saving for retirement. How much money will you need for your goal? Also think about when and how you want to achieve this goal, what savings you already have and what part of your monthly income you can regularly put towards your goal. Clear goals can help you stay focused, especially when markets are temporarily in turmoil. 

2. Stay balanced

The point of investing is to generate a return. But every return opportunity comes with a corresponding level of risk. Think about how comfortable you are with investment risk. The prices of shares and bonds naturally fluctuate, with some asset classes more volatile than others. More risk typically comes with greater return opportunities, so you’ll need to decide for yourself: How much volatility can you accept without losing sleep? You can influence the volatility of your overall portfolio by finding a mix of shares (higher return opportunities, higher risks) and bonds (lower return opportunities, lower risks) that suits you.

No matter whether your portfolio tilts more strongly towards shares or bonds, always make sure your investments are diversified. Spreading your money over hundreds of different companies rather than investing in individual shares or bonds reduces your overall investment risk and gives you a much better chance of achieving your goals. And it’s easy with funds and exchange-traded funds (ETFs), which track an index but are traded like shares.

3. Keep costs low

You may think that paying a higher price will buy you better quality. That can occasionally be true with some products, but it’s not the case with investing. Every pound you pay in fees comes at the expense of your returns. Make sure you know what you’re paying and keep your costs low. Especially when you’re investing for the long term, this effect can add up. As the chart below shows, even a small difference in costs can add up to thousands of pounds in missed returns over a 30-year period.

Growth of a £10,000 initial investment over a 30-year period, assuming 5% growth per annum

This hypothetical example assumes an investment of £10,000 over 30 years. Annual compounding is used for both the assumption of 5% average growth per annum and the investment costs. Costs are applied to average annual growth of 5% for each year. As it is hypothetical, this example does not represent any particular investment.
Source: Vanguard

4. Maintain discipline and stay the course

A solid plan and a low-cost, well-balanced portfolio can only achieve their potential if you stick with them. That can be difficult sometimes, as reacting to market movements is tempting. This is especially true if you read the financial pages of newspapers with experts urging investors to take action. When markets are climbing, everyone wants a piece of that pie, and when fear rules, some head for the nearest exit and sell their investments. But there’s a good chance they’ll be trailing market movements, buying when prices are near their peak or selling at the bottom. Even professional investors can’t reliably time the markets¹, so staying the course will often give you the best chance of investment success.

That also means making sure your asset allocation – the weighting of shares and bonds within your portfolio – doesn’t drift too far from its target. Periodically rebalance your portfolio to make sure a 60% allocation to shares doesn’t turn into 50% during a downturn or 70% during a rally, which would no longer reflect the risk and return profile you chose at the outset.

It is in our nature to take action when we think something has gone wrong. If our car breaks down, we go to the garage to fix it. It is therefore tempting when markets are falling to think something has gone wrong and feel urged to do something. However, markets regularly fall. It is part of what investing is about and it is perfectly normal. In our experience, maintaining discipline, sticking to the plan and rebalancing your portfolio works. It’s never comfortable losing money on paper, but it is something all long-term investors experience at some point.

 

¹ Dr. Jan-Carl Plagge, David J. Walker, CFA and Andrew Hon, 2021. The Case For Low-Cost Investing, Vanguard Research.