Investing is not a one-way ticket to riches. Both novice and expert investors have periods of good and poor performance. Success or failure is driven largely by the markets, but how we behave also has a huge impact.
In a recent article for Financial Analysts Journal, Vanguard founder Jack Bogle summarized the rules for successful investing he developed over his 65-year career. They’ve been tried and tested through different market conditions, and we’re reproducing them here so everyone can potentially benefit.
1.) Invest you must
The biggest impediment investors face is not market volatility, but not investing in the first place. History shows that investing — as opposed to simply saving — is necessary to generate a reasonable return over the long run.
2.) Time is your friend
Investing is a virtuous habit best started as early as possible. Thanks to the “magic” of compounding (simple math, really), even modest investments made in one’s 20s can grow to surprising amounts over the course of an investment lifetime.
3.) Impulse is your enemy
Eliminate emotion from your investment programme. Have rational expectations for future returns, and avoid changing those expectations in response to the ephemeral noise coming from Wall Street. Understand that what may seem like unique insights are typically shared by millions of others.
4.) Basic arithmetic works
Net return is simply the gross return of your investment portfolio minus the costs you incur. Keep your investment expenses low, for the tyranny of compounding costs can devastate the miracle of compounded returns.
5.) Stick to simplicity
Basic investing is simple: an appropriate allocation between equities, bonds, and cash reserves; a diversified selection of securities; and a thoughtful awareness of risk exposure, return expectations, and (once again) cost.
6.) Never forget reversion to the mean
This is the theory that investment prices and returns eventually move back towards their long-term averages. In other words, strong performance a fund one year is highly likely to revert to the market norm — and often below it.
7.) Stay the course
Changing your strategy at the wrong time can be a devastating mistake. Just ask investors who sold stocks and moved to the “safety” of cash during the depths of the global financial crisis of 2007–2008, only to miss out on the subsequent bull market. It’s better to stick to your long-term plan, making small adjustments here and there as needed.
Success in many areas of life comes down to following common-sense rules, and investing is no different. But success is never guaranteed, as markets can fall as well as rise. However, Vanguard believes that incorporating these rules into your investment plan could increase your chance of achieving investment success.
John C. Bogle, 88, is Founder of The Vanguard Group, Inc., and President of the Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as Chairman and Chief Executive Officer until 1996 and Senior Chairman until 2000.
Vanguard is the largest mutual fund organization in the world. Headquartered in Malvern, Pennsylvania, Vanguard comprises approximately 170 mutual funds with current assets totaling more than $4 trillion. Vanguard 500 Index Fund, the largest fund in the group, was founded by Mr. Bogle in 1975. It was the first index mutual fund.
In 2004, TIME magazine named Mr. Bogle as one of the world’s 100 most powerful and influential people, and Institutional Investor presented him with its Lifetime Achievement Award. In 1999, Fortune designated him as one of the investment industry’s four “Giants of the 20th Century.”