When some people think of investing, they focus on the potential for great rewards—the possibility of buying unknown stocks that increase in value many times over.
Other people focus on the risk—the possibility of losing everything in a market crash or on a bad stock pick.
Who's right? Well, it's true that all investing involves some risk. It's also true that investing is one of the best ways to increase the amount of money you have available to meet your goals (although an expectation of immediate riches is highly unrealistic).
In fact, there's typically a direct relationship between the amount of risk involved in an investment and the potential amount of money it could make.
Different types of investments fall all along this risk-reward spectrum. No matter what your goal is, you can find investments that could help you reach your goal without taking on unnecessary risk.
See more about the risk of different investment types
Time is on your side
Here's the secret ingredient that can make investments less risky: time.
Based on past history, if you invested in the stock market for 1 year, your chance of losing money would be greater than 1 in 4. But if you invested for 10 years, that number would drop to about 1 in 25—and after 20 years, to zero.*
Some caveats
If you invest in just a handful of stocks or in a bunch of stocks in the same industry, time won't necessarily make your portfolio any safer. Just ask someone who held Enron stock or e-commerce stocks for years, only to see their value vanish overnight.
The reason it works for diversified investment portfolios is that over time, there tend to be more "winners" than "losers." And the investments that gain money offset the ones that go bust.
Also, you have to leave your money invested the entire time. If you pull your money out when your balance has fallen and then start buying again when prices are back up, you'll just dig yourself into a hole.
See more about keeping performance in perspective
The more time you have, the more you benefit from compounding
Not only can the passage of time help lower your investment risk, it can potentially increase the rewards of investing.
Imagine you place 1 checker on the corner of a checker board. Then you place 2 checkers on the next square and continue doubling the number of checkers on each following square.
If you've heard this brainteaser before, you know that by the time you get to the last square on the board—the 64th—your board will hold a total of 18,446,744,073,709,551,615 checkers.
No, we're not promising to double your money every year! But this principle—known as "compounding"—is important to understand: When your starting amount is higher, your increases are higher too. And over time, it can seriously add up.
As a rule of thumb, if your investments returned 6% annually, you would double your investment about every 12 years.
For example, if you earn 6% on a $10,000 investment, you'll make $600 in the first year. But then you start the second year with $10,600—during which your 6% returns net you $636.
In the 20th year of this hypothetical example, you'll earn more than $1,800—and your balance will have increased more than 200%.
Another caveat
If you take your earnings out of your account and spend them every year, your balance will never get any bigger—and neither will your annual earnings. So instead of making more than $20,000 over 20 years, you'd only collect your $600 every year for a total of $12,000.
If you instead leave your money alone, as you can see below, your "earnings on earnings" will eventually grow to be larger than the earnings on your original investment.
Leave your earnings invested and watch compounding go to work
This hypothetical illustration assumes a $10,000 investment and an annual 6% return. The illustration doesn't represent any particular investment, nor does it account for inflation, and the rate is not guaranteed.
What's next?
The best way to make these concepts work for you is to build a diversified portfolio with the right level of risk.
Start with your asset allocation
FAQs
Rest easy knowing the cash in your Vanguard Cash Plus bank sweep is eligible for FDIC coverage up to $1.25 million for individual accounts and $2.5 million for joint accounts. You can keep all your money in the bank sweep or diversify into 5 available Vanguard money market funds (each with a $3,000 minimum investment).
What is 60/40 strategy? ›
The “60/40 portfolio” has long been revered as a trusty guidepost for a moderate risk investor—a 60% allocation to equities with the intention of providing capital appreciation and a 40% allocation to fixed income to potentially offer income and risk mitigation.
What is the downside of a 60/40 portfolio? ›
Inflation is the biggest risk to a 60/40 portfolio because it can trigger central bank tightening which pushes up real rates, which weighs both on equities and bonds.
What is Vanguard's best performing fund? ›
Vanguard High-Yield Corporate Fund (VWEAX)
The Vanguard High-Yield Corporate Fund is the company's top performing bond fund over the past decade. It features a high-yield, intermediate-term fixed income portfolio.
Can Vanguard go bust? ›
Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
Is Vanguard safe from collapse? ›
So, what if Vanguard's brokerage fails? First, the chances of Vanguard failing are miniscule. That said, let's talk about brokerage accounts for a minute. Brokerage accounts are not backed by the FDIC but by the Securities Investor Protection Corp (SIPC), which protects accounts up to $500,000.
Is the Vanguard 60 40 portfolio dead? ›
The long-popular 60% stocks-40% bonds portfolio remains alive and well and has proved to be successful despite a rough 2022, according to a key Vanguard Group researcher.
Is 60/40 investing dead? ›
While many analysts and experts predicted the demise of the 60/40 rule at the close of 2022 — a particularly brutal year for both stocks and bonds — this long-term investment strategy is looking favorable once again in 2024 and beyond.
What is the average annual return of a 60 40 portfolio? ›
The Stocks/Bonds 60/40 Portfolio is a High Risk portfolio and can be implemented with 2 ETFs. It's exposed for 60% on the Stock Market. In the last 30 Years, the Stocks/Bonds 60/40 Portfolio obtained a 8.28% compound annual return, with a 9.63% standard deviation.
How often should you rebalance a 60 40 portfolio? ›
A portfolio is rebalanced at regular intervals, such as annually or quarterly, irrespective of asset price movements. Threshold or price-based rebalancing. A limit is set on how far the portfolio can deviate from your desired target mix, such as a 60/40 stocks-to-bonds mix.
Bond outlooks improve, but stocks' prospects drop on the heels of 2023′s rally. Better things lie ahead for bonds, but the prospects for stocks, especially U.S. equities, are less rosy.
Why is the 60/40 portfolio dead? ›
The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore. It was convenient, it was easy, and it's over. We don't trust stocks and bonds completely to do the job of providing income, growth, inflation protection, and downside protection anymore.”
Who is Vanguard's biggest competitor? ›
Fidelity and Vanguard are two of the largest investment companies in the world. Fidelity boasts over 43 million individual investors and $1 1.5 trillion in assets under administration (AUA). 1 Meanwhile, Vanguard has more than 30 million investors and $8.5 trillion in assets under management.
What is a realistic rate of return in retirement? ›
Generating sufficient retirement income means planning ahead of time but being able to adapt to evolving circ*mstances. As a result, keeping a realistic rate of return in mind can help you aim for a defined target. Many consider a conservative rate of return in retirement 10% or less because of historical returns.
Is Vanguard financially stable? ›
About Vanguard
Vanguard's mission is to "take a stand for all investors, to treat them fairly, and to give them the best chance for investment success."6 It prides itself on its stability, transparency, low costs, and risk management.
Should I keep money in the Vanguard Settlement fund? ›
While you're not required to have a balance in your settlement fund at all times, keeping some money in the settlement fund has these advantages: You're more likely to have money to pay for purchases on the settlement date, when your account will be debited for the amount you owe.
Can Vanguard money market lose money? ›
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.
Are Vanguard accounts protected? ›
Vanguard accounts are protected by Securities Investor Protection Corporation (SIPC) insurance. This insurance covers up to $500,000 in securities and up to $250,000 in cash if the firm fails. This coverage is automatic and doesn't require any action on the part of Vanguard clients.
