Opinion: Former Vanguard CEO: 5 Obstacles Investors Are Facing Now and How to Overcome Them

When I joined Vanguard in 1982, the company’s flagship fund was not the renowned 500 Index Fund VFINX, + 0.18%, but the venerable Wellington Fund VWELX, + 0.04%. Founded by Walter Morgan just before the great stock market crash of 1929, Wellington reflects the fundamental principles of successful investing: balance; diversification; discipline; low costs and a long-term orientation.

These principles are a solid foundation for a prudent investment program and also serve as a sound business strategy that Vanguard has been successfully adhering to since its founding. I have been fortunate to learn a great deal from my predecessors and colleagues, Vanguard clients, and investment professionals with whom I have been associated during my 40 years in the investment industry. I’ve compiled these lessons into a new book, “Talk More Directly About Investing,” which is timely given some of the challenges investors face today. I will address five current challenges and offer strategies to address them. Some require going on offense, while others need strong defense. 1. Unrealistic Expectations: From its lowest point in March 2009, the S&P 500 SPX, -0.02% has produced a total return of 652% (18.1% on an average annualized basis) through March 2021, including an extraordinary rally 81% since the COVID-19 Accident in early 2020. The last twelve years have seen returns well above the historical average. In fact, from 1926 to 2020, US stocks provided much more modest average annual returns of 10.3%. These recent heady returns have sparked unbridled exuberance among some market participants. According to data reported by Piper Sandler, total share volume has doubled from 2019 levels, a considerable increase driven primarily by retail investors. It reminds me of the “trees grow to the sky” mentality of 1999 before the burst of the tech bubble. What to do now? Play defense. Don’t assume future returns will be so generous and resist the urge to “panic buy” for fear of missing the next big rally. If you have a well thought out asset allocation based on your personal goals, time horizon, and risk tolerance, stick with it. And if you expect less generous returns in the future, consider increasing the amount you save. 2. Speculation: The dark side of a 12-year bull market is the resurgence of short-term trading in individual stocks and speculation on everything from cryptocurrencies to non-fungible tokens. Frankly, I have a hard time seeing why one would commit money to something without underlying intrinsic value and questionable economic purpose. Furthermore, the heavily promoted zero commissions and commercial video game-like apps have only fanned the flames. Here defense is asked again. Maintain widely diversified mutual funds and long-term exchange-traded funds. Use time to your advantage rather than trying to choose the best time to invest. 3. Low Interest Rates – Persistently low interest rates have led many investors to wonder: Where did my income go? Interest rates will eventually go up, but no one knows when and by how much. The implications of low rates for average investors, and especially people who live off the income generated by their investment portfolio, are profound. Consider that an investment of $ 100,000 in 90-day US Treasury bills in November 2006 would have earned interest of $ 1,250 over three months. The same investment today, and for most of the last 10 years, generated income of just $ 25, a 98% decrease in productivity from an investment in the world’s safest instrument. The story is similar for US 10-year Treasuries BX: TMUBMUSD10Y, which have suffered an 80% decline in revenue over the past 12 years. Equally important: low rates present a significant risk of principal loss for longer-maturing bonds (and bond funds) when interest rates rise. In the meantime, consider committing the infringement and seeking other means of generating income: 1) reducing your holdings in underperforming money market funds and 2) increasing your allocation to high-quality, dividend-paying stocks. At the same time, don’t seek returns or be fooled by “too good to be true” investment arguments that offer “high returns without risk.” 4. The Threat of Higher Inflation: For the past three decades, inflation in the United States has been low, leading some investors to dismiss it as a threat. However, veteran investors will recall that inflation reached double-digit levels in the late 1970s. For the period 1973-1982, the annual inflation rate averaged 8.7%. At that rate, a car that costs $ 20,000 would be priced at $ 21,740 a year later. Five years later, the price of the same car would be $ 30,351. Of course, it’s not just expensive items that are affected by inflation. Virtually everything you buy costs more, from a gallon of milk to a pair of running shoes. It is safe to assume that inflation will be a factor to one degree or another during your investment life. For this reason, it is vital to consider inflation when calculating how your investments will grow over time. Inflation is also an important consideration in portfolio construction. Real (ie, inflation-adjusted) returns on cash investments have not kept pace with inflation. Bonds are also particularly vulnerable because a considerable part of their yield consists of interest payments, which are worth a little less each year in an inflationary period. (At one point in the 1970s, the bonds were jokingly known as “certificates of forfeiture.”) As such, most long-term investors should have a significant stake in stocks, which provide more stable dividends and the potential to increase substantially in value. .

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Wiley

5. Social media: Most of us are constantly bombarded by business and market news. As you switch between news and social media on your phone or tablet, you will see countless posts or headlines that could force you to take action. Ignore the wisdom of influencers and incessant tweets, as they can tempt you to make moves that are not in your best interest. The noise on social media is irrelevant to long-term investors who buy and hold. It is better that you seek to inform yourself about the markets and invest in reputable media. The strategies outlined here won’t make you rich overnight; I know of no strategies that achieve that noble goal. Rather, they offer a game plan for steadily moving toward long-term investment success. Jack Brennan is the former president and CEO of Vanguard. He is the author of More Straight Talk on Investing: Lessons for a Lifetime (Wiley, 2021), published recently. Also read: $ 1 million? $ 500,000? The importance of your retirement ‘number’, at any age More: The housing market looks like a bubble. It’s time for the Fed to worry.