Investing might seem complex, but taking a little time to learn about it can really pay off. It's one of the best ways to meet your financial goals.
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These are educational videos for wealth management clients to self-provision educational content to supplement their Family Legacy conversations.
Investing strategies
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Investing costs
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Explore Vanguard's Principles for Investment Success (Goals, Balance, Cost and Discipline) through the video series below. This video series was developed with the investor in mind and presented in a way that is relatable to novice investors of all ages.
Utilize the Investing Principles Workbook as you watch the videos to reflect on your own goals and investing approach to meet them.
Introduction
Video length: 2 minutes 44 seconds
0:15
By way of introduction, we are Jennifer Bailey and Heather Winslow Walker.
0:21
We are family legacy specialists who help prepare family members for future roles and responsibilities.
0:27
We're thrilled to be here today to help you develop knowledge about investing.
0:32
This will be an informative series for those beginning their financial journey or for those looking to refresh their perspectives on investing fundamentals.
0:41
This course was developed with you in mind and will be presented in a way that will make things relatable and easy to understand.
0:49
The video course will be complemented with an Investing Foundations workbook.
0:54
During the video, we will pause and ask you to visit the workbook to either reflect on what you've learned or capture specific information relevant to your own investing situation.
1:06
Heather will take you through what you can expect to learn from this education series.
1:11
Over the course of this series, you will learn how to focus on Vanguard's 4 principles of investing, Goals, Balance, Costs, and Discipline.
1:23
You're going to get the chance to explore your personal approach and philosophy to investing and understand the importance of setting both short and long term goals to effectively manage your investments.
1:35
We'll define and compare asset classes such as cash, bonds and stocks, and you'll come to understand the similarities and differences between mutual funds and exchange traded funds or ETFs.
1:48
You'll learn about the value of diversification and also understand how to identify and evaluate the impact of costs in investment selection.
1:58
And finally, you're going to understand the Vanguard philosophy, stay the course, and how investor behavior can impact returns.
2:06
Throughout this video series, we will be focusing on Vanguard's 4 principles of investing.
2:12
Like Heather mentioned, they are goals, balance, costs, and discipline.
2:19
We'll begin with the principle of goals.
2:21
To get started, launch video #2 Investing Foundation's goals so we can begin our investing journey together.
Goals
Video length: 4 minutes 11 seconds
0:10
Goals are where we begin our investing journey.
0:13
At the end of the day, this is the cornerstone of investing.
0:17
If you don't know what you're saving and investing for, you might lose sight of that goal along the way.
0:24
It's crucial to 1st reflect on what you really want to invest towards.
0:29
And when we think about goals here at Vanguard, we like to put them into two buckets.
0:34
The first bucket is short term goals or anything you've identified as happening one to five years from now.
0:43
This could be having an emergency fund in case of something coming up, planning an overseas vacation, buying a new car, or maybe even purchasing your first home.
0:55
The second bucket is your long term goals, or anything you've identified as happening more than five years out.
1:03
Depending on how much thought you've given to your goals in the past, this category might be a little harder to define for yourself because the goals might not be as tangible or immediate.
1:14
Long term goals will be different for everyone, but common goals are things like retirement, college education for kids, charitable considerations, and maybe even thinking about legacy planning for generations that haven't been born yet.
1:30
Whatever your goals, a helpful guideline can be organizing them into these two buckets to provide you with a time frame of when you expect to achieve those goals.
1:41
This informs your investing time horizon, or the amount of time you will have your money invested before you pull it out to be used to fund your goal.
1:51
We know that thinking about goals, especially long term ones, can be a little difficult or overwhelming.
1:58
You may not understand what your goals have to do with your investing process either.
2:03
Imagine you want to visit a friend, but you don't know where they live.
2:08
Would you get in your car, start driving, hoping you'll eventually find them?
2:12
Probably not.
2:14
You'd be more likely to 1st ask for their address and then use a navigational system to map your route there.
2:22
Think of your investment plan as a map to get you to your financial goal.
2:26
It will help you set your destination and the route that will get you there.
2:31
And like plotting out a road trip, investment planning doesn't have to be complicated and it doesn't need to take a long time.
2:40
Now it's your turn to reflect and think about what you are saving for.
2:45
Pause the video and take some time to determine some of your personal short and long term goals.
2:53
Use your Investing Foundations Workbook to record your goals under the section titled What are Your Savings Goals?
3:01
Remember, goals aren't set in stone and can be changed.
3:06
Give yourself space to assess and make changes to your goals and plans if needed over time.
3:12
Remember the illustration of mapping out a road trip route?
3:16
If you come across construction on your road trip, you might need to take a detour to reach your destination.
3:22
The same is true of investing.
3:24
You have the freedom to re examine your plans as you go and fine tune if necessary.
3:30
This wraps up our video on the first investment principle of goals.
3:35
We leave you with these five steps to help keep you on track.
3:45
If you're interested in learning more, join us for the next video where we will focus on the principle of balance found on video #3 titled Investing Foundations Balance Part One.
Balance
Video length: 12 minutes 44 seconds
0:10
Welcome to Part 2 of Vanguard's Education series on investing foundations.
0:15
Last time, we focused on starting your investing journey by identifying goals and mapping out a timeline in which you plan to achieve those goals.
0:24
In this video, we will focus on the second investing principle, balance, and define terms like asset allocation and diversification.
0:34
To understand asset allocation, imagine that you and a friend are getting ready to make a pizza together.
0:41
As you roll out the dough, the circular pizza crust represents your investment portfolio, the vehicle you use to house your investments.
0:51
Now comes an important decision for you and your friend.
0:54
Knowing that you like different toppings, how will you split up the pizza?
0:59
You decide to divide the pizza into two main sections, 60% pepperoni for your friend and 40% mushroom for you.
1:09
This is like how we think about the concept of asset allocation, the way you divide your portfolio among stocks, bonds, and short term or cash investments.
1:23
It's the first thing you should consider when getting ready to purchase investments because it has the biggest effect on the way your portfolio will perform to achieve your goals.
1:33
You may hear percentages like 60/40 or 80/20 when we talk about your portfolio's asset allocation.
1:41
This reflects 60% stocks and 40% bonds, or 80% stocks and 20% bonds.
1:50
Even though there are three asset classes, bonds and cash are sometimes grouped together.
1:56
Different asset classes tend to act in specific ways, kind of like how different toppings will bring unique flavors to your pizza.
2:04
By choosing how to divide your portfolio, you have a certain amount of control over the experience you'll have as an investor.
2:12
There's no best asset allocation, just like there's no perfect pizza for everyone.
2:17
It all depends on what makes you comfortable and gives you a good shot at meeting your goals.
2:23
Before we get started, let's define two important investment terms.
2:28
If you hear about investment or market volatility, this is the degree to which the value of an investment or an entire market fluctuates.
2:38
The greater the volatility, the greater the difference between the investments or markets, high and low prices, and the faster those fluctuations occur.
2:49
And you'll definitely hear the term returns in relation to investing.
2:54
Returns are the profit you get from investing money.
2:58
Keep in mind that returns can be positive or negative.
3:03
Let's dig into asset allocation some more by exploring asset class characteristics.
3:08
So the three main asset classes are stocks, bonds, and cash.
3:15
They differ from one another regarding their association with risk and reward.
3:20
Risk and reward have a directly correlated relationship.
3:24
The higher the risk, typically the higher potential for reward or return.
3:30
Remember, returns can be positive or negative.
3:34
With riskier investments, there can be both the higher potential for positive returns and the higher potential for negative returns.
3:44
When we think of the three asset classes, think of it in this way.
3:48
Cash is easily accessible and liquid.
3:52
Bonds are alone and stocks are something you own.
3:57
Let's go deeper on each of the asset classes, starting with cash.
4:01
Cash is the asset class with the lowest risk and lowest potential for return.
4:08
Going back to the goals and the timeline you identified after the last video, cash investments are typically money you expect to need in the next year for your short term goals.
4:20
If this was money you had earmarked as your emergency fund, you would want that money to be as safe and as accessible as possible.
4:29
The reason that cash investments are considered low risk is because there's a low probability of the value of that investment changing drastically in a short amount of time.
4:40
For example, if you put $1.00 into a money market fund, you can generally expect to get that dollar back plus a bit of earned interest.
4:51
Next, we have the category of bonds.
4:54
Of the three asset classes, cash, bonds and stocks, Bonds are the asset class that we often hear from clients.
5:03
They are the least familiar with.
5:05
Jen, we often get asked the question, what is a bond?
5:08
How do you respond to that?
5:10
So Simply put, a bond as a loan.
5:13
When you invest in bonds, you're essentially providing a loan to the issuer, which could be a company or government looking to raise money.
5:22
Examples could be a government looking to fund the process of building a new bridge or school, or a company looking to put more resourcing into research and development.
5:33
The issuer agrees to pay you back the face value of the loan on a specific date and to pay your periodic interest payments along the way, usually twice a year.
5:44
Bonds issued by companies give you no ownership rights, so you don't necessarily benefit from the company's growth.
5:51
But you won't see as much impact when the company isn't doing as well either, as long as it still has the resources to stay current on its loans.
5:59
Another question we're often asked is what is the benefit of investing in bonds?
6:05
Bonds give you 2 potential benefits when you hold them as part of your portfolio.
6:10
First, they give you a stream of income.
6:13
Second, they offset some of the volatility you might see from owning stocks.
6:18
If you buy a bond, you can simply collect the interest payments while waiting for the bond to reach maturity, the date the issuer has agreed to pay back the bonds face value.
6:27
However, you can also buy and sell bonds on the secondary market, which is a place where investors buy and sell to each other rather than buying directly from an issuer.
6:41
After bonds are initially issued, they're worth will fluctuate like a stock would.
6:46
If you're holding the bond of maturity, the fluctuations won't matter.
6:50
Your interest payments and the amount the bond was worth when issued won't change.
6:55
But if you buy and sell bonds, you'll need to keep in mind that the price you'll pay or receive is no longer the face value of the bond.
7:04
The bond susceptibility to changes in value is an important consideration when choosing your bonds.
7:10
In short, they give you 2 benefits.
7:13
They provide you a stream of income typically paid off twice a year, and they offset some of the volatility when you own stocks in your portfolio.
7:24
Jen, another question we get is, why are bonds risky compared to cash?
7:29
Several factors can influence the risk you carry as a bondholder.
7:33
Bonds are typically riskier investments when compared to cash because the price or value of a bond can increase or decrease depending on interest rates.
7:43
Bonds with longer maturities are more sensitive to these interest rate changes and generally offer higher yields, so they're more attractive to potential buyers.
7:53
Let's discuss one more question that comes up from clients regarding bonds.
7:58
I've heard bonds have credit ratings.
8:01
Would you mind sharing a little bit more about what that's about?
8:04
There are organizations such as Standard and Poor's, Moody's Investor Service and Fitch Ratings, which rate the quality of each bond by assigning a credit rating, so you know how likely it is that you'll get your expected payments.
8:19
If the rating is low, the bond may have a high yield, but it will also have a risk level, more like a stock.
8:27
On the other hand, if the bonds rating is very high, you could be relatively certain that you'll receive the promised payments.
8:35
If you would like to gain more knowledge about bonds, please visit vanguard.com to learn more.
8:41
Now that we learned a bit about bonds, let's explore the last of the three asset classes, Stocks.
8:48
When you buy a stock, you own a piece of the company that issues it.
8:53
When people talk about investing in stocks, they're usually referring to common stock.
8:58
These kind of stocks give you the opportunity to join in the success of public companies, and as such, they're an investment that can really grow your portfolio because you're a part owner of the company that issues your stock.
9:12
It's pretty simple.
9:13
For the most part.
9:14
When the company makes money, you make money.
9:18
There are a couple of ways you'll see this part ownership reflected.
9:22
1st, the price of each share of stock or single unit of ownership can increase in value.
9:29
If you buy 50 shares at $10 a share and then the share price increases to 15, you're now $250 richer.
9:38
The company can also choose to issue a dividend to shareholders, which is a distribution of the interest or income produced by a funds holdings to its shareholders, or a payment of cash or stock from a company's earnings to each stockholder.
9:54
Say the issuer of your 50 shares of stock announces a $2.00 dividend.
10:00
That means you'll be paid $100, which you can use to buy more shares if you wish.
10:05
We talked about stocks being the riskiest category on the spectrum, largely because of the potential for quick fluctuation and value over shorter periods of time, such as weeks or months, The value of a particular stock can fluctuate based on a lot more than the actual performance of the company.
10:26
If investors think the company could be headed for tough times because a competitor releases a new product or because the company hasn't been growing as fast as everyone expected, the stock price may go down.
10:39
On the other hand, potential good news about a company can push the stock higher even if nothing has actually changed.
10:48
And of course, the overall performance of the economy and markets will affect the stocks price too.
10:54
But over the long term, the main determinant of the stocks performance is how successful the underlying company has actually been.
11:03
Larger companies tend to be more stable than smaller companies, but they also have less room for growth.
11:10
We will continue our discussion of the balance principle in the next video, but let's review what we've covered so far.
11:17
Once you have your goals in place, the next step is to determine your asset allocation.
11:23
Which pieces of your metaphorical pizza will you devote to ingredients like cash, bonds, and stocks?
11:31
Remember, with bonds, think loan.
11:34
With stocks, think own within those key asset classes, you'll want to add diversification to your portfolio, making sure that not all of your investments behave in the same way.
11:48
Next up, we'll talk about investment vehicles and specific ways to consider diversifying your investments.
11:56
As we conclude the first part of balance, it's now your turn to reflect and determine how to choose the right asset allocation for you.
12:04
Locate the section titled Start with Your Asset Allocation and How can you Choose the Right Asset Allocation in your Investing Foundations workbook?
12:15
Read the information and then carve out some time to take the investor questionnaire found on vanguard.com to determine your own asset allocation.
12:24
Please join us for the next Investing Foundations video #4 to continue to learn more about the principle of balance.
Balance pt. 2
Video length: 8 minutes 17 seconds
0:22
In this video, we'll continue our focus on the second investing principle, balance, and we'll discuss the similarities and the differences between mutual funds and exchange traded funds.
0:35
Now that you better understand the asset classes that make up your portfolio, how do you create balance and variety in your investments?
0:43
Once you've chosen your asset mix, you'll select specific investments.
0:48
By building a diversified portfolio or making sure that you're not putting all of your eggs in one basket, you can vastly lower your risk.
0:58
We've all heard stories about the great grandfather who bought a share of Coca-Cola stock in the 1920s and who's now a multimillionaire.
1:07
But what about everyone else?
1:09
The problem with identifying a single investment that's going to make a ton of money over the next few decades is that no one has a crystal ball.
1:17
Sure, now Coca-Cola looks like a smart investment, but back then this legendary investor put several $100, which at the time was a large sum of money, into something that was far from a sure thing.
1:32
To further explain diversification, Heather will share an example about two farmers.
1:38
These farmers have land next to one another and each decides to plant their crops for the season.
1:44
The first farmer knows that apples have historically grown well in this region, so they decide to plant all apple crops.
1:52
The second farmer decides to plant apples, but also adds orange and pear crops to the mix.
1:59
All seems to be going well through the growing season, but right as harvest time comes around, a parasite enters the scene and takes out every apple crop in the region.
2:10
Having only planted apples, the first farmer has nothing to show for their harvest this year.
2:16
The second farmer also lost their apple crop, but the oranges and pears survived.
2:22
Investments work a lot like this illustration.
2:25
Having a diverse spread of investments helps create more security that not all your investments will behave identically when market events occur.
2:34
There's always a risk of losing money when you invest.
2:37
The good news is that you can avoid one type of risk, the risk of investing everything in a company that goes under by buying hundreds or even thousands of stocks or bonds at a time, also known as securities.
2:50
This is what's called diversification.
2:53
It works best when you buy into multiple industries and include companies of all different sizes because this variety helped even out the UPS and the downs.
3:04
Sounds great, you might think, but where am I going to get the money for thousands of investments in individual securities and the time to find them?
3:12
We recognize that choosing specific stocks and bonds can be the most intimidating part of investing.
3:18
How do you find the most promising investments?
3:21
What if you're wrong?
3:22
Will you lose everything?
3:24
Let's hear how Heather would respond.
3:26
Fortunately, there's a solution to this problem.
3:30
Mutual funds and exchange traded funds.
3:34
Both kinds of funds hold hundreds or thousands of stocks, bonds, or both, so you don't have to bet everything on one company.
3:42
They also allow you to build a diversified portfolio even if you don't have hundreds of thousands of dollars to invest.
3:50
To go back to our farmer illustration, buying individual securities is like purchasing individual fruit, while buying ETFs and mutual funds is like purchasing a fruit basket.
4:03
For example, if you wanted to own stock in a company like Apple, you could buy Apple stock directly, or you could buy an ETF or a mutual fund that owns Apple stock along with hundreds of other companies too.
4:20
Buying shares of a fund is a way to indirectly own the stocks or bonds owned by the fund.
4:26
Mutual funds and ETFs are generally very similar, but there are some nuances in how you experience them as an investor.
4:34
Mutual funds own a portfolio of stocks or bonds, and they're priced at the end of each day based on the closing prices of every security owned by the fund.
4:45
When you buy or sell mutual fund shares, the price you'll pay or receive is that night's closing price, which occurs at 4:00 Eastern Time.
4:54
Exchange traded funds, more commonly known as ETFs, also own a portfolio of stocks or bonds, but shares of these funds trade throughout the day, like stocks with constantly shifting prices.
5:09
Because of this real time pricing, ETFs don't give investors the ability to set up automatic investments or withdrawals in a portfolio.
5:19
With the mutual fund, on the other hand, you as the investor can set up automatic investments or withdrawals, meaning you can schedule money to go into or out of your portfolio at scheduled times.
5:33
The last key difference between the fund types is investment minimums.
5:38
With mutual funds, you pay a foot in the door investment minimum or an amount of money that must be invested before you can then buy shares of the mutual fund.
5:48
With ETFs, the investor can purchase shares of the fund from the beginning without meeting a minimum threshold investment.
5:58
Some of these differences come down to preference.
6:00
As an investor, if you desire more variety in your investment product choices, a mutual fund might appeal to you.
6:08
If you prefer a more hands on approach to investing, the real time pricing of ETFs might sound more attractive.
6:16
We invite you to take a few minutes to see the differences between mutual funds and exchange traded funds by looking at one of Vanguard's funds, Vanguard S&P 500, on Vanguard's website, vanguard.com.
6:30
Take some time toggling back and forth between the Blue Admiral Shares mutual fund link and the ETF link to see the similarities and differences.
6:40
We encourage you to look at each of the funds you're investing in to learn more about their asset allocation type and cost.
6:47
To wrap up the investing principle of balance, let's look at the highlights.
6:52
Start by determining your asset allocation.
6:56
Which pieces of your metaphorical pizza will you devote to cash, bonds, and stocks within those key asset classes?
7:06
Which investment vehicle is most appropriate for you, mutual funds, ETFs, individual securities, or a combination?
7:16
Next, ensure that you have considered diversification in your selections.
7:22
You want investments that are going to behave differently from one another and balance each other out in times of volatility.
7:30
And finally, consider international exposure as part of your diversification strategy when constructing your portfolio.
7:40
Take a look at your Investing Foundations Workbook to refresh yourself on the concepts we discussed in this video.
7:47
Review the sections titled Protect Yourself through Diversification and Choose Your Investments.
7:55
If you're interested in learning more about another important factor in investing costs, then continue on to video #5.
Cost
Video length: 7 minutes 33 seconds
0:10
Welcome to the third of Vanguard's Investing Foundations Principles, costs.
0:15
Last time we focused on understanding terms such as asset class and asset allocation, as well as diversifying your portfolio to manage risk.
0:25
In this video, we will focus on the investing principle of costs and what you can control about your investing journey.
0:33
Costs are an important element of what makes Vanguard distinctive.
0:36
Our mission is to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
0:45
One of the ways we embody this mission is keeping our investors costs low so that investors keep more of their returns.
0:54
Those savings can really add up, especially in the long term.
0:59
Research suggests that lower cost investments tend to outperform higher cost alternatives.
1:05
You can't control the markets, but you can control the bite of costs and taxes.
1:12
Every investment has a cost, even if you don't realize you're paying it.
1:17
At Vanguard, we believe in providing transparency into the fees that our clients are paying.
1:23
There are many kinds of costs, but they all have one thing in common.
1:28
If the money is going somewhere else, it's not going to you.
1:32
Let's first focus on one kind of cost you can expect to run into most often, the expense ratio.
1:40
An expense ratio is a percentage associated with operating cost of a fund or other type of investment.
1:48
Expense ratios are calculated by dividing the funds total expenses by its total assets.
1:55
Think of this cost as the keeping the lights on fee to maintain the fund or investment.
2:01
Compared to the industry, Vanguard's expense ratios are very low.
2:06
But because you can run into high expense ratios across the industry, we want to review how to pay attention to the cost that can be built into the price of a fund.
2:16
To illustrate the effect of cost on investment outcomes, we show a simple investment simulation to fund a goal over 30 years with varying levels of investment costs.
2:28
For simplicity, we assume a fixed 6% nominal rate of return compounded annually.
2:36
In all cases, investors have a starting balance of $100,000.
2:42
This chart illustrates how much cost can affect long term portfolio growth.
2:48
In the lowest cost scenario, the investor pays point 1% of assets and expenses each year.
2:55
In the other three scenarios, the investor pays .7%, one point 3%, and 2%.
3:04
The potential impact on portfolio balances over three decades is large.
3:09
At the end of those 30 years, owning the lowest cost portfolio means having a balance that is a little more than $240,000 higher than the one produced by the highest cost portfolio.
3:23
The ending balance for the lowest cost portfolio is also strikingly higher than those of the other two portfolios at a little over $557,000.
3:35
It's ending balance is approximately $91,000 higher than that of the second lowest cost portfolio and approximately $167,000 higher than that of the second highest cost portfolio.
3:51
Expense ratios are only one kind of cost to consider as an investor.
3:57
You won't see expense ratios on your statement.
4:00
The cost is deducted from your returns before they get to you.
4:04
So for example, your mutual fund might return 5%, but if your expense ratio is 1%, you'll only see a 4% return, meaning you'll lose 1/5 of your return right off the bat.
4:19
The money from the mutual fund expense ratio goes directly to the fund to pay management and administrative costs, which could vary widely depending on the fund and the company.
4:30
Many fund companies, including Vanguard, offer shares that allow you to pay a lower expense ratio if you make a large investment check to make sure you're paying the lowest costs you qualify for.
4:42
Another way that costs can come into play is how your portfolio is taxed.
4:47
If you're participating in a lot of buying and selling of securities or shares of funds within a taxable account, like an individual or joint brokerage account, be aware that your trade activity is likely to have tax consequences come tax time.
5:02
The more you move money around, the more it may cost you.
5:06
Some mutual funds also have commissions, which are costs charged when you buy or sell securities.
5:14
These costs go directly to the broker through which you buy your fund shares.
5:19
All Vanguard ETFs and Vanguard mutual funds can be bought and sold online in your Vanguard brokerage account without paying any Commission.
5:28
Don't be fooled by marketing tactics.
5:30
Some funds may charge extremely low expense ratios but add front and back end loads, which are sales fees charged on the purchase or sale of some mutual fund shares.
5:42
Front end loads are charged one time as the investor buys the fund shares, and back end loads are charged as the investor sells the fund shares.
5:50
At Vanguard, we strive to hold down your investing costs so you keep more of your returns.
5:56
You won't run into front or back end loads with our funds.
6:01
There are also purchase and redemption fees out there.
6:04
In some firms, you may get charged a purchase fee for simply entering into the mutual fund.
6:10
And if you want to actually redeem your investment, take it out and sell it.
6:15
Then it might cost you another fee just to access your money.
6:19
Once again.
6:20
Keep in mind that costs are an element of investing that is in your control.
6:26
Consider investing in low cost mutual funds in ETFs to stay on top of expense ratio costs.
6:33
Ensure that your trading decisions are deliberate and thoughtful considering possible tax consequences and incurrence of additional costs.
6:43
Also consider using tax efficient funds for less tax efficient investments.
6:50
And finally, think about using low cost investment providers.
6:55
If you are looking for a refresher of what we discussed in this video, please visit your Investing Foundations workbook and look for the section titled Understanding Costs.
7:10
If you are interested in learning more about another important factor about investing discipline, then continue to video number six.
Discipline
Video length: 9 minutes 28 seconds
0:10
Welcome to the discipline principle of Vanguard's education series on investing foundations.
0:16
Last time, we focused on understanding the costs you may incur as an investor and controlling the impact of those costs where you can.
0:26
In this video, we will focus on the investing principle of discipline, maintaining your perspective and challenging yourself to think about investments.
0:36
In the long term, investing can provoke strong emotions in the face of market turmoil.
0:44
Some investors may find themselves making impulsive decisions or conversely, becoming paralyzed, unable to implement an investment strategy or rebalance a portfolio as needed.
0:56
Discipline and perspective, which includes impartial financial advice for those who want it, can help investors remain committed to a long term investment program through periods of market uncertainty.
1:09
Before we dive into the topic more deeply, consider the following scenario.
1:15
Let's say the market is experiencing a sharp decline and you see the value of your investments taking a downturn.
1:24
What would be your reaction?
1:27
Do you A do nothing B sell the investments that are losing your money or C rebalance your portfolio?
1:39
Take a moment to think about what you are most likely to do and keep this answer in mind as we continue.
1:45
Let's look at a real life example of the impact of reacting impulsively in the midst of market volatility.
1:53
The recent past has given a classic example of the cost of exiting the market during volatile times.
2:01
The chart you see shows the impact of fleeing from a 6040 stock bond asset allocation during the COVID market decline in March 2020.
2:13
We assume that some investors abandoned their original asset allocation of 60% stocks and 40% bonds in March 2020 at the bottom of the market and moved to 100% cash until the market recovered in July 2020 when they moved back to their starting 6040 split.
2:35
Our chart shows 2 paths, 1 sticking to one's asset allocation and two abandoning one's plan if only for a few months.
2:45
Investors who stayed the course and stuck with their original asset allocation during the March 2020 sell off recovered more quickly and earned superior returns than investors who moved to 100% cash for those months and experienced a loss.
3:03
Think about the answer you gave to the multiple choice question earlier.
3:07
Now that you have a bit more insight, what do you think of your answer now?
3:11
Do you still agree?
3:13
Did you select option C rebalancing?
3:17
If you did not, you might have skipped over this option because it was unfamiliar.
3:21
But rebalancing is an important element of staying the course in your investment journey.
3:27
It might seem surprising that your portfolio's risk level could change even if you didn't change any of your investments.
3:34
But when one asset class is doing better than the others, your portfolio could become overweighted in that asset class.
3:43
For example, imagine you selected an asset allocation of 50% stocks and 50% bonds.
3:51
If stocks returned 30% in the next year, you might find that your new asset mix is more like 56% stocks and 44% bonds.
4:03
In this example, you have too much in stocks and not enough in bonds.
4:08
This could leave you open to unintended risk.
4:12
Having a larger than planned allocation to stocks may seem harmless when stock prices are up, but no market rally lasts forever and when the tide turns, you'll be overexposed to the drop.
4:26
You have a couple of options to achieve rebalancing in this scenario.
4:31
You could direct money to your bond investments to bring your portfolio back in balance.
4:37
Money could come from new investments or from distributions.
4:42
You could also move money from your stock portfolio into your bond portfolio.
4:48
This will immediately realign you with your target.
4:52
Note that if you invest in a taxable account, selling investments that have gained value will most likely mean you'll owe taxes.
5:01
To avoid this, you could rebalance only within your tax advantage accounts.
5:08
You can ask a tax advisor if you have questions about your own situation.
5:13
It can be hard to convince yourself to rebalance.
5:17
Selling winning shares probably goes against your instincts, but it reflects one of the simplest strategies of investing wisdom Buy low, sell high.
5:28
If you don't rebalance, you'll wind up with an asset mix that doesn't match your risk tolerance.
5:34
Check your portfolio at least once a year, and if your mix is off by at least five percentage points, consider rebalancing.
5:44
Keep in mind, though, that life changes, and so might your goals and risk level.
5:49
There are a lot of reasons you might need to rethink the amount of risk you're taking.
5:54
If something significant has changed with your overall goal or with your life circumstances, you should check your asset mix and see if it still works for you.
6:04
For example, your timeline is always growing shorter, and asset mix that worked for a goal that was originally 20 years away might not be appropriate when your goal is now only five years away.
6:18
The amount you're shooting for may change, too, if you find out you need less or more than expected.
6:24
You may also discover that your risk tolerance isn't as high as you thought it was.
6:30
Seeing your balance drop significantly might not be too scary in theory, but the reality is often harder to take.
6:38
If you find that you can't stomach the ups and downs, it's time to change your plan.
6:44
Even in the face of logical information, the prospect of pain in losing our money can cause us as investors to make rash decisions.
6:54
To give yourself the best chance for investment success, maintain your perspective and long term mindset.
7:01
Stick with your asset allocation, but don't be afraid to re evaluate during different phases or events in your life.
7:09
Rebalance your portfolio when you find yourself overexposed to risk compared to your target asset allocation.
7:17
Start early and remember that the power that saving and consistency can have for your returns over time.
7:25
And finally, as you approach your goals, be sure to reduce your investment risk.
7:33
Through this series, we first considered goals and what we're truly aiming to achieve with an investment portfolio.
7:41
We then discussed balance and how to mitigate risk by building our portfolio out of investments that will react differently from one another during market events.
7:52
We focused on controlling costs, keeping them low so more money is returned to you as the investor.
7:59
And finally, we examined the importance of staying disciplined in your investment approach and reassessing as needed.
8:07
Take a few moments to revisit your Investing Foundations Workbook and revisit the section on the Principle of Discipline, which you can find starting at the page that is titled Why Should You Stay the Course.
8:23
These pages will provide you with a recap of what we reviewed in this video.
8:27
We encourage you to make a plan and determine what your next steps will be in your investing journey.
8:34
Use the table in your Investing Foundations workbook to plan out your next steps and identify dates to accomplish them.
8:42
Additionally, please take some time to review the supplemental materials linked on this page.
8:48
If you have any questions about getting started or continuing your investing journey, please talk with a Vanguard representative and learn more about how we can best support you.
8:59
Thank you for investing in your development.
9:01
Your feedback is important to us.
9:04
Please take the short survey at the end of this course.
9:08
We look forward to hearing from you.
9:10
This concludes the Vanguard Investing Foundations video series.
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