If you had to boil down to the 12 most important investing principles, what would they be?
No need to guess.
In his latest book, Jack Brennan, the former CEO of Vanguard and now President Emeritus of that company, answered the question in a recently published book, “A Clearer Discourse on Investing: Lessons for Life. “
In an interview, Brennan discussed these principles:
1. Develop a financial game plan. Developing a financial game plan is the first task on your to-do list. What are your goals, what is your risk tolerance? âYou have to be strategic about it,â Brennan said. “You don’t have to hire McKinsey to be strategic about this, but you have to think about it.”
2. Become a disciplined saver. What is the best financial advice that Brennan offers to those who ask this question? âBe a disciplined saver, whether you’re 22 and just starting out, or you’re 70 and retired, living below your means,â he said. âIt gives you great financial flexibility as you go along. And, very importantly, it gives you the firepower to use the markets to your advantage, to provide you with additional financial security. “
3. Start investing early and keep going. Equally important in becoming a disciplined saver is to start investing early. âThe difference between starting early and even a little late is day and night,â said Brennan.
4. Invest with balance and diversification. It is a fundamental part of investing. Long-term returns of various assets will decline to a normal number. âSometimes growth stocks would be better than value and vice versa, but when you look at 25+ years and it’s a short time for most of us from an investment perspective , they rally around certain numbers, âBrennan said. âSo be diverse. Do not think that you can choose this or that action.
Equally important is having a balanced portfolio. âThe older you get, the more stability you need in your wallet for peace of mind than anything else,â said Brennan.
5. Control your costs. âWe took a small business and made it into a meaningful, cost-driven sort of business,â said Brennan. âAnd the cost is the only known part of the investment. There is risk, return and cost. Neither of the first two is known in advance. The cost is.
6. Manage risks prudently. âYou have to be prepared to take risks to get rewards in the markets,â Brennan said. âOtherwise, you would have to buy treasury bills and roll them up every 90 days. You will lose ground because of inflation every 90 days.
If you take risks, manage them wisely in your personal financial, emotional, and intellectual context, Brennan said.
7. Be a buy and hold investor. The world wants you to be a trader. But even professional investors haven’t beaten the market, Brennan said. âTo think that any of us can do it isâ¦ it’s a race frankly,â said Brennan. âI would say buy and hold, rinse and repeat. Just keep buying and holdingâ¦ this is the winning strategy for investors.
8. Avoid unmissable fads and opportunities. Many investors like to tell you about dot-com stocks they bought that have gone up in value, but they rarely end up telling you how the company went bankrupt. It’s never a âwinning strategyâ to chase must-see fads and opportunities, said Brennan. “And generally, it is not only not winning is a losing strategy to follow these fads.
9. Eliminate distractions. Brennan also recommends resisting the barrage of news and information about daily market movements. Today, financial television treats what happens in the markets as a sporting event. âIt’s so easy to get distracted,â Brennan said. “That’s why I’m coming back to rule # 1, which is to have a plan.”
And “your plan does not include being distracted by the latest news,” he said.
10. Maintain a long-term perspective. Yes, you probably receive quarterly reports on your mutual funds and stocks. But you have to focus on your long-term goals, said Brennan. âYou have to think long term,â he said. “What happens today, tomorrow, next year, the next decade, frankly, is not very relevant because it is what happens in the end that counts, not what happens in periods. intermediaries. “
11. Give your portfolio an occasional tune-up. Your investment plan shouldn’t be on autopilot, Brennan said. You have to find a balance between being too committed with your money and not committed enough. So, if your target asset allocation is 80% stocks and 20% bonds and it is now 90/10, you will need to rebalance your portfolio to get back to its target asset allocation. Part of the focus could also include the use of tax-efficient ETFs that did not exist 20 years ago. âIt’s important to review the plan periodically, but not too often,â he said.
12. Define enough. Know when you have enough money to meet all of your goals. If you know when you’ve had enough, you might think differently about philanthropy or your estate plan or take more risks, Brennan said.
Bottom Line: If you follow these 12 principles, whether you’re 22 or 62, âyou’re going to end up in a very satisfied and very financially secure place,â said Brennan.