4 Principles for Investing Success

The process of investing can seem overwhelming for first-time investors. The process can be more complicated if you do not know how much to save or invest. However, by following the Vanguard’s principles for Investing (Vanguard is a mutual fund company with over $4 trillion in global assets), you stand a chance in this highly competitive market.

1. Define Your Investment Goals

Setting goals is one of the most vital aspects of any investment strategy. Clearly define them and ensure they are attainable so that you can develop a plan to achieve the goals at every life stage. For instance, if you want to save one million dollars, you should clearly determine how you will reach the goal and the possible constraints that you are likely to face along the way. 

The most important aspects are:

  • Time Horizon
  • Your Risk Tolerance 

Below is an illustration of the above tip:

principles for investing - simple framework with ETFs
Figure 1. A simple framework for an investment plan

2. Asset Allocation

Having a balanced portfolio entails the development of an asset allocation strategy that supports your investment goals. The strategy should balance the potential risks and rewards, and thus, you should have diversified portfolio holdings. This is arguably the most important of the principles for investing

Investing in shares is a risky venture; however, they offer a possibility of higher returns. On the other hand, bonds can provide lower returns even though they are steadier. These differences can help you in building an ideal investment portfolio for your investment goals

Figure 2. The mixture of assets determines the range of returns

The above shows you why it’s a waste of time to focus on Stock Selection  – determine the right asset mix because it’s the most important of the Principles for Investing

how asset allocation works and why it's important ETFs and index investing fixed income
The right balance between Stocks and Bonds will determine your risk and potential returns

3. Keep Costs To A Minimal

The future is unpredictable, so making money from your investments is not about predicting the future. Your ultimate goal should be controlling your costs. Keep them low so that you can get more returns. Remember that even though the investment costs can seem small, they will become substantial when compounded over the years.

The figures below show how costs impact on investment. You can also leverage our calculator to understand impact of fees. 

Keeping costs minimal is relatively easy with Index Investing and ETFs

Principles for Investing - costs reduced with index investing and etfs
Figure 3. The long-term impact of investment costs on portfolio balances
Principles for Investing - costs impact etfs
Figure 4. Impact of costs on investor returns

4. Maintain Long-Term Perspective

Sometimes, emotions can make you make mistakes when investing. This is because investing provokes strong emotions such as anger, greed, excitement, and fear, and at times, you may find yourself giving in to your impulsive behaviours. Maintaining a disciplined approach and having a long-term perspective in your investment strategy can help you avoid making impulsive decisions.

It is important to set up a routine to rebalance your portfolio (i) because the asset classes can drift from your target asset allocation as on the chart below and (ii) because your situation can change and you may want to be be more/less aggressive 

rebalancing ETFs Fixed Income
Figure 5. The importance of maintaining discipline: Failure to rebalance cab increase investor's exposure to risk

Read More: 10 Mistakes to Avoid in Investing

Here are some of the common mistakes to avoid


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