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 the 60/40 rule? ›
What is the 60/40 rule? The 60/40 portfolio is a simple investment strategy that allocates 60 percent of your holdings to stocks and 40 percent to bonds. It's sometimes referred to as a “balanced portfolio.” The 60/40 rule has been widely recognized and recommended by financial advisors and experts for decades.
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.
Is VOO ETF a good investment? ›
The Vanguard S&P 500 ETF (VOO 0.08%) is one of the best ways to invest in the S&P 500, which has been a pretty smart strategy over the long term. Since 1965, the S&P 500 has produced a total return of 10.2% annualized. The Vanguard ETF has an expense ratio of just 0.03%, so you get to keep most of your gains.
Can Vanguard go bust? ›
In the unlikely event that we become insolvent, your money and investments would be returned to you as quickly as possible, or transferred to another provider.
Is Vanguard safe from collapse? ›
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.
What is the Warren Buffett Rule? ›
The Buffett Rule is the basic principle that no household making over $1 million annually should pay a smaller share of their income in taxes than middle-class families pay. Warren Buffett has famously stated that he pays a lower tax rate than his secretary, but as this report documents this situation is not uncommon.
Is 40% bond too much? ›
The 60% equity allocation provides the lion's share of the returns as a simple yet effective exposure to broad economic growth. And no one wants too much risk, so the 40% bond allocation is a simple way to diversify the portfolio and avoid excessive risk.
Why is 60/40 portfolio dead? ›
With broad stock market benchmarks down 19% for the year and bonds down 13%, a 60/40 mix of the two suffered its worst performance since the global financial crisis in 2008. This disappointing showing was followed by a chorus of pundits heralding the death of the 60/40 portfolio as a viable investment strategy.
What is the average real return of a 60 40 portfolio? ›
As a result, 60/40 returned 17.2%, far above its historical annual median return of +7.8%. In 2022, central banks raised interest rates to tame the highest inflation rate in 40 years amid the tightest labor market in 50 years. This was the most aggressive rate-hiking cycle since the Paul Volcker era in the early 1980s.
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.
At what age should you have a 60 40 portfolio? ›
As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. Adjust those numbers according to your risk tolerance. If risk makes you nervous, decrease the stock percentage and increase the bond percentage.
Is QQQ better than VOO? ›
Average Return. In the past year, QQQ returned a total of 31.29%, which is higher than VOO's 27.22% return. Over the past 10 years, QQQ has had annualized average returns of 18.44% , compared to 12.65% for VOO. These numbers are adjusted for stock splits and include dividends.
Is it better to invest in VTI or VOO? ›
Or, you could also invest in both, for example, by putting half in VOO and half in VTI. Here's a summary of which one to choose: If you want to own only the biggest and safest stocks, choose VOO. If you want more diversification and exposure to mid-caps and small-caps, choose VTI.
Is spy better than VOO? ›
Over the long run, they do compound—those fee differences—and investors have been putting a lot more money into VOO versus SPY. That is the reason why we view VOO slightly better than SPY. And that is just the basic approach, which is the lower the investor can pay, the better the investment is.
Is my money secure in Vanguard? ›
Money market funds and other securities held in the Vanguard Brokerage Account are eligible for SIPC coverage. Securities in your brokerage account are protected up to $500,000. To learn more, visit the SIPC's website. Up to $250,000 by FDIC insurance.
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.
Is Vanguard a good place to put my money? ›
Vanguard is the king of low-cost investing, making it ideal for buy-and-hold investors and retirement savers. But beginner investors and active traders will find the broker falls short despite its $0 stock trading commission, due to the lack of a strong trading platform and accessible educational resources.
Is Vanguard safe long term? ›
Long-term investors will appreciate Vanguard's low fees. With zero-commission brokerages, continuous coverage of trendy stocks like Tesla Inc. (ticker: TSLA) and the extreme fluctuations of meme stocks like GameStop Corp. (GME), it's easy to overlook the benefits of a buy-and-hold strategy.
