The four principles for investment success


It sometimes seems that the process for investing money is made much harder than it should be.

Whether you are investing on behalf of yourself, putting your savings aside every month, or making decisions on behalf of a large corporate, there are four princples for investment that are worth keeping in mind.

These principles are set out in the investment philosophy followed by Vanguard, one of the world’s largest investment companies.

Vanguard was founded by John Bogle who created low cost funds designed to make investing simple.

Fans of Bogle are called Bogleheads and supporters include Warren Buffet who wrote that Bogle is the person who has done the most for investors by urging them to invest in ultra-low-cost index funds.

The four principles, however, apply beyond just personal investing and to a range of decisions we face.

1. Set clear goals

You need different approaches for short-term and long-term needs.

The same investment plan cannot be used to save for a house deposit, school fees or for retirement – you need a different approach for each one.

For short-term needs, you may better off with ways of saving money that are safer.

For long-term needs you may be happier with more fluctuation if you don’t need the money for a while, but much less comfortable with volatility if you are close to retirement.

2. Diversify asset allocation

You don’t know what is going to do better at any given period.

Quite often, something that does poorly one year can be the best performer next year.

Trying to pick winners usually results in you losing your stake.

The option that appears to work best is to keep a wide selection and pick from the entire market. The more you have in your collection, the less impact any one pick has on your results.

3. Minimise cost

Investors can’t control markets.

What they can do is control the costs of investing.

Every pound paid in fees or commissions reduces the returns to the investor.

Most managed funds do worse than an unmanaged index fund that tracks the market.

Worse, some managed funds are simply “closet” indexers, where they take large fees but simply follow the market.

Pick low-cost options wherever possible.

4. Be disciplined and think long-term.

Investing is a marathon, not a sprint.

The power of long-term investing lies in the ability of investments to compound over time.

With a long enough time-horizon small, regular investments can add up to a large return.

The mistake some people make is to react emotionally to short-term volatility and make quick, rash decisions.

Being discipled and following a long-term strategy is the best way to counter emotional responses.

Set your strategy, make your decisions and then get on with other, more important things.

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