We Believes

During my time at Vanguard, I worked in our institutional processing department for six years.  We had minimal interaction with investors, and as a result, many people in our department were not aware of the specifics of investing.  Fortunately, I worked in the retail customer service department for several years beforehand, so I came into the department with sufficient exposure.

After the markets crashed in late-2008, a friend from the retail side and I were eating lunch and he mentioned the bore of reciting Vanguard's investment philosophy to every caller.  The irony was that I had not thought about it since I left that division, and the more thought I gave it, the more I felt people in my new department should be aware of our company's investment beliefs.  Therefore, I created a Powerpoint to present the concept to them in an abbreviated fashion.

Vanguard is a solid investment company, anchored by these sound strategies and beliefs.  Some are how to succeed and some are how to not fail, but each of them is worth considering (and in the case of his entry, sharing) and I always appreciated the fact that it was never referred to as their "creed."

We Believe:

• Investing is for meeting long-term goals; saving is better for short-term goals: Money that investors may need in the short-term (two years or less) should be kept in short-term investments which protect capital. These include money market funds (a fund that invests in short-term financial instruments such as cash), bank accounts, or government bonds (Gilts). Clients should only consider investments in the stock market or corporate bonds when they have money to put away to help meet a longer-term objective.
• Broad diversification, with exposure to all parts of the stock and bond markets, reduces risk: If an investment portfolio does not fairly reflect the overall investment market in terms of balanced asset allocation (the process of dividing investments amongst different asset classes such as stocks, bonds and cash) and investment style (such as growth or value), we believe clients are taking additional risk. We judge that this is unlikely to pay off over the long term.
• An investor's most important decision is selecting the mix of assets to be held in a portfolio, not selecting the individual investments themselves: Deciding on the mix and proportion of stocks, bonds, and cash in a portfolio is critically important - much more so than deciding on individual assets or funds. To work out the asset allocation that's best for each individual, investors need to consider factors such as their financial needs, their tolerance of risk and the length of time they want to invest.
• Consistently outperforming the financial markets is extremely difficult: Economic uncertainties, random market movements, and the rise and fall of individual companies mean it is extremely difficult for anyone - including professional investors - to beat the market in the long term. An active manager buys or sells shares (or bonds) in order to meet a particular investment objective. Therefore, typically actively managed funds have higher operating and transaction costs which can eat into returns. So we believe it makes sense to begin by considering funds that follow an index.
• Minimizing cost is vital for long-term investment success: Costs matter a great deal because investment returns are reduced pound for pound by the fees, commissions, transaction expenses and any taxes incurred. Investors as a group earn somewhat less than the market return after subtracting all those costs. Therefore, by minimizing costs, investors improve their odds of meeting their investment objectives.
• Investors should know how each investment fits into their plans, and why they own that particular asset: Investors need to be clear why they own each particular investment. Knowing the characteristics of each investment and the role it plays in a diversified portfolio increases investors' chances of selecting suitable investments that can be held for the long term.
  Risk has many dimensions and investors should weigh 'shortfall risk' - the possibility that a portfolio will fail to meet longer-term financial goals - against 'market risk', or the chance that returns will fluctuate.
  In the long run, what matters most is whether your investments enable you to meet your objectives. Earning enough to meet objectives is much more important than whether investments suffer interim declines or trail a market benchmark. But many investors react only to market risk. They may bulk up on stocks when markets are doing well, taking on more market risk than they realize. Conversely, they're tempted to reduce allocations to stocks in response to market downturns. In truth, to achieve long range goals, most investors need to accept some level of risk from equities.
• Market-timing and performance-chasing are losing strategies: Market-timers who buy and sell frequently, hoping to 'catch the wave' as securities rise and fall, need to be very sure that their timing is right. Otherwise, they stand to lose money from market movements while also paying significant transaction costs. As many investors say: it's time in the markets that counts, not timing the markets. Also, market fashions change - often very suddenly. There is no guarantee that a performance-chasing strategy, asset class (a type of investment such as stocks, bonds or cash), or fund that has performed well will continue to perform well next year, next month - or even tomorrow.
• An investor should not expect future long-term returns to be significantly higher or lower than long-term historical returns for various asset classes and sub-classes: The major asset classes (equities, bonds, cash investments) have long histories and well established risk/reward characteristics. When estimating future returns for asset classes or sub-asset classes, long-term historical returns are a good place to start. Vanguard expects that returns from various sub-classes of the stock market will be similar to each other over long periods. Also, Vanguard expects that the long-term return for equities will be higher than that for bonds, and that bond returns will, in turn, exceed returns on cash investments over long periods.

Investors should always remember that no method for predicting market returns is perfect. Past performance is not indicative of future results.  Contrariwise, "you have to stand for something or else you'll fall for anything."  That is especially true when it comes to a fool and his money.

A lot of this article was reprinted from Vanguard.com