At Vanguard, we’ve always emphasised the value of a low-cost, long-term and diversified investment philosophy. I’ve recently watched with concern the phenomenal price appreciation of a handful of stocks on Wall Street, despite no meaningful change to their fundamentals – the typical gauge of a company’s health and future value.
There is a distinct difference between investing and speculation. Investors take the long view with the hypothesis that a company’s share price will increase based on an improvement in its fundamentals, such as the profits it makes and the cash flow it generates. With speculation like the kind we’ve seen in the past few days, the buyer is betting that someone will buy the investment from them at a higher price. It’s called the Greater Fool Theory.
The markets have historically rewarded those who take a long-term view. That’s one of the attributes of Vanguard’s Principles for Investing Success, along with setting clear investment goals, ensuring that portfolios are well-diversified across asset classes and regions, and keeping investment costs low.
Speculation has destroyed many more fortunes than it has created. The shares that have risen so spectacularly in price will find their equilibrium. In time, they typically – and sometimes painfully – correct. It’s no way to invest your retirement savings, or the money you’ve set aside for a home or a child’s education.
Tune out the noise and stay the course – two time-tested Vanguard investment philosophies that continue to serve investors well.
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