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12 Most Important Principles of Investing

Robert Powell talks to former Vanguard CEO Jack Brennan about the critical actions investors and retirement savers—of every age—need to take.

If you had to boil down to the 12 most important principles of investing, what would they be?

No need to guess.

In his latest book, Jack Brennan, the former CEO of Vanguard and now that company’s chairman emeritus, has answered the question in a just-published book, "More Straight Talk on Investing: Lessons for a Lifetime."

In a interview, Brennan discussed those 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’s your risk tolerance? “You have to be strategic about it,” said Brennan. “You don't have to hire McKinsey to be strategic about it, but you have to think about it.”

2. Become a disciplined saver. What’s the best financial advice Brennan offers to those who ask that question? “Be a disciplined saver, whether you're 22 and starting out, or you're 70 and in retirement, live below your means,” he said. “It gives you great financial flexibility as you go forward. And, very importantly, it gives you fire power to use markets to your advantage, to give you incremental financial security.”

3. Start investing early and keep it up. Equally important to becoming a disciplined saver is to start investing early. “The difference between starting early and even slightly late is night and day,” said Brennan.

4. Invest with balance and diversification. It’s a fundamental part of investing. The long-term returns of various assets are going to regress to a normal number. “Sometimes growth stocks would be better than value and vice versa, but when you look over 25 years and that's a short timeframe for most of us, from an investment standpoint, they coalesce around certain numbers,” said Brennan. “So be diversified. Don't think you can pick this stock or that stock.”

Having a balanced portfolio is equally important. “The older you get, you need a little stability in your portfolio as much for peace of mind as anything else,” said Brennan.

5. Control your costs. “We took a little company and made it into some kind of meaningful company with a focus on cost,” said Brennan. “And cost is the only known part of investing. There's risk, return and costs. Neither of the first two are knowable in advance. Cost is.”

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6. Manage risk prudently. “You have to be willing to take risks to get rewards in the markets,” said Brennan. “Otherwise, you should buy T-bills and roll them every 90 days. You'll lose ground to inflation every 90 days.”

If you do take risks, manage it prudently within your personal financial, emotional and intellectual context, said Brennan.

7. Be a buy-and-hold investor. The world wants you to be a trader. But not even professional investors beat the market, said Brennan. “To think any one of us can do it is—is a fool's errand frankly,” said Brennan. “I would say buy-and-hold, rinse and repeat. Just keep buying and just keep holding… it's the winning strategy for investors.”

8. Avoid fads and “can’t-miss” opportunities. Many investors are fond of telling you about the dot-com stock they purchased that rose in value, but rarely do they finish the story of how the company went belly up. It’s never a “winning strategy” to chase fads and can’t-miss opportunities, said Brennan. “And generally, it's not only not winning, it's a losing strategy to follow these fads.”

9. Tune out distractions. Brennan also recommends resisting the barrage of news and information about the daily movements of the markets. Today, financial TV treats what’s going on the markets like a sporting event. “It's so easy to get distracted,” said Brennan. “It's why I come back to rule No. 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 are likely receiving quarterly reports about your mutual funds and stocks. But you need to be focused on your long-term objectives, said Brennan. “You need to think in long-term chunks of time,” he said. “What happens today, tomorrow, the next year, the next decade, frankly, isn’t very relevant because it's what happens at the end that matters, not what happens in the interim periods of time.”

11. Give your portfolio an occasional tuneup. Your investment plan shouldn’t be on autopilot, said Brennan. You have to strike a balance between being too engaged with your money and not engaged enough. So, if your target asset allocation is 80% stocks and 20% bonds and now it’s 90/10, you’ll need to rebalance your portfolio back to its target asset allocation. Part of the tuneup might also include using low-cost tax efficient ETFs that didn’t exist 20 years ago. “Revisiting the plan on a periodic, but not too often, basis, is important,” he said.

12. Define enough. Know when you have enough money to meet all your goals. If you know when you have enough, you might think differently about philanthropy or your estate plan or taking on greater risk, said Brennan.

Bottom line: If you follow these 12 principles, whether you're 22 or 62, “you're going to end up in a very satisfied, very secure place from a financial standpoint,” said Brennan.