To begin with, every investor should:
- Create or revisit investment goals, making sure they’re appropriate;
- Develop a suitable asset allocation using broadly diversified funds;
- Control cost; and
- Maintain perspective and long-term discipline.
The first 3 steps are integral to developing a good investment plan. The fourth step is required to enjoy the potential long-term benefits of that plan. Vanguard’s Principles for Investing Success provide a detailed primer on all 4 steps. For our research on these and other issues, see Vanguard’s framework for constructing globally diversified portfolios.
We also believe you should periodically adjust your holdings to keep them in line with your target asset mix.
Getting back to your target mix, or rebalancing, sounds simple but often turns out to be psychologically difficult. That’s because it requires selling assets that have performed better for you and buying those that haven’t done as well.