To get started, every investor should:
- Create or revisit investment goals, make sure they fit;
- Develop an appropriate resource allocation using widely diversified funds;
- Control costs; And
- Maintain vision and long-term discipline.
The first step to creating a good investment plan is integral. A fourth step is needed to reap the potential long-term benefits of that plan. Vanguard Successful investment policies Provide a detailed primer in all 4 steps. For our research on this and other topics, see Vanguard’s framework for building a diverse portfolio worldwide.
We also believe that you should periodically adjust your holdings to match your target asset mix.
Getting back into your target mix, or rearranging seems easy but often becomes emotionally difficult. Because it sells assets that have performed better for you and you need to buy those that haven’t done well.
In a market downturn, restructuring may require investing in assets that are losing value. “It violates our insights,” said Stephen Otkus, head of investor research at Vanguard.
Investment is a long-term proposal, most suitable for achieving long-term goals. Vanguard forecasts only modest gains for the 10-year period starting in the fourth quarter of 2019. We expect a globally diversified, 60% stock / 40% bond portfolio to provide annual returns in the 3.5% -6.3% range, for example. * (For details, see our 2020 Economic and Financial Markets Outlook, A new era of uncertainty.) Our investment strategists expect long-term gains even though there is a big downturn in stocks despite the “big risk”. But you need to invest, even in difficult times, to maximize your chances of capturing long-term prospects for market growth.
* These potential outcomes for long-term investment returns are generated by the Vanguard Capital Markets model3 (VCMM) and our investment strategy reflects the collective vision of the group. Return estimates exclude the effects of investment costs, taxes, and inflation. The expected risk premium – and the uncertainty surrounding those expectations – is one of the qualitative and quantitative inputs used in Vanguard’s investment methodology and portfolio building process.
Important: Estimates and other information generated by VCMM about the probability of different investment outcomes are speculative, do not reflect the actual investment outcomes and do not guarantee future outcomes. The distribution of return results from VCMM stems from 10,000 simulations for each modeled asset class. Simulations until September 30, 2019. Results from the model may vary with each use and over time. For more information, please see the notes section.
All investments are at risk, including the potential loss of money you invest. Be aware that fluctuations in financial markets and other factors can reduce the value of your account. There is no guarantee that any specific asset allocation or combination of funds will meet your investment objectives or give you a certain income level.
Diversity does not guarantee gain or protect from loss.
Important: Estimates and other information generated by VCMM about the probability of different investment outcomes are speculative, do not reflect the actual investment outcomes and do not guarantee future outcomes. VCMM results will vary with each use and time.
VCMM estimates are based on a statistical analysis of historical data. Future income may behave differently from the historical patterns contained in the VCMM. More importantly, VCMM can underestimate the unselected extreme negative situations in the extreme historical period on which the model is based on assumptions.
VCMM is a proprietary financial simulation tool developed and maintained by Vanguard’s initial investment research and consulting team. The model predicts future income distribution for a wide array of broad asset classes. This asset class includes the U.S. and international equity markets, several maturities of the U.S. Treasury and the corporate fixed income market, the international fixed income market, the U.S. money market, commodities and specific alternative investment strategies. The theoretical and empirical basis for the Vanguard Capital Markets model is that the returns of different asset classes reflect the compensation required by investors to bear different types of systematic risk (beta). A key part of the model is to estimate the dynamic statistical relationship between risk factors and asset returns, derived from statistical analysis based on monthly financial and economic data available since the early 1960s. The Monte Carlo simulation method is used to highlight the causes of risk and the approximate correlation between asset classes and uncertainty and chaos over time. The model often generates a large set of simulated results for each asset class on the horizon. In this simulation the prediction is obtained by calculating the measure of the central tendency. The results produced by the tool will vary with each use and time.