Investing

'How you really build wealth': 3 'tried-and-true' tips from the former CEO of Vanguard

"You need to separate your serious money from your play money. Your serious money is your retirement plan."

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Jack Brennan, the former CEO of Vanguard, began writing his first book, "Straight Talk on Investing," in 2002, following an era that he describes as "extraordinary in the history of investing." Market-watchers had just witnessed a rapid bull run followed by the bursting of a speculative bubble in tech stocks.

In response to the chaos, Brennan, whose investing firm pioneered the use of low-cost index funds, set out to write a guide on how to slowly build wealth over a lifetime by following classic investing strategies.

An updated version of the book, "More Straight Talk on Investing," hit shelves earlier this year, and Brennan tells Grow that investors are once again living in unusual times. "This period right now reminds me of the end of the 20th century, with trees growing to the sky, rampant trading, and speculation in headlines," he says. "It seems like a good time to provide a counterbalance. The noise level in the markets is so high right now, it's fun to present tried-and-true advice for how you really create wealth."

Here are three of his top tips for long-term investing success.

Make a plan and stick to it

When investors get too euphoric about good news in the market, or too fearful when their investments decline, they're prone to making rash investment decisions that can derail their portfolios, Brennan says. "All you need to do is find one person who bailed last March and is now 100% behind where they would have been."

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Brennan's solution: Make a long-term plan that you can stick with. "This thing doesn't have to be 50 pages long. But outline what you're hoping to accomplish with your investments over a particular time span," he says. Especially for younger investors, "this allows you to think long term and realize that what happens this decade is irrelevant to your long-term financial future."

An easy way to stick to that mindset is to try to keep yourself from obsessively monitoring financial headlines or daily swings in your portfolio. Instead, determine how often you'll look in on your account, and try to stick to that schedule, he says. "For me, it's a trick. Look on your birthday. Or New Year's. It can be whenever you want. Tax time, so you have all your statements."

Separate your money into 'buckets'

Brennan has observed a surge in trading among retail investors alongside the explosion in financial advice being offered on social media. Investing in the latest, hottest thing on the market can be fine, he says, as long as you do it responsibly. "You need to separate your serious money from your play money. Your serious money is your retirement plan," he says. "You need to treat that differently than the account you're trading meme stocks in or following advice from an influencer. If readers of my book come away with one thing, it should be that."

That's not to say that some traders don't find success by day trading stocks or cryptocurrencies, "but there is little evidence that anyone has ever traded themselves to wealth," he says.

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Think of your assets in "buckets" that you put toward various financial goals, Brennan says. "One of those buckets is your emergency fund. That should be in the bank or invested in short-term bonds," he says. "The defined-contribution retirement system has made it easy to set aside money for long-term goals."

For intermediate-term goals, such as buying a home, it's important that investors calibrate their risk so that a sudden crash in the market as the goal approaches doesn't throw plans into flux. "I have a 529 plan for my grandkids. The oldest turns 18 eight years from now," he says. "That happens to be in a target-date fund that's now starting to get more conservative as that deadline approaches."

Take advantage of investing innovations, but be careful

Among the greatest contributors to investor success in recent decades have been innovations among financial firms that have made it cheaper and easier for individuals to get inexpensive access to a diverse array of investment options, Brennan says.

"We're at the best point there has ever been for individual investors," he says. "Costs have gone through the floor. Broad-market ETFs give you diversification, tax-efficiency, and liquidity. You can create a diversified portfolio at such a low cost. And target-date funds allow you to set it and forget it if you want to do that."

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Brennan anticipates more changes. "I think the one you're most likely to see is private equity," he says, referring to investments in private companies (either directly or through a fund) that are typically only available to high-net-worth investors. Brennan thinks that these and other forms of private investing, such as venture capital and certain types of private real estate investing, will soon become more available to retail investors at lower costs.

If they do, it will be important for investors to assess the fees, risks, and potential returns of such assets, and above all, to scrutinize who is offering them. "It's been the case with almost every good innovation that the best institutions have taken advantage of it, whether it was indexing or ETFs," he says. "You always want to see what the smart institutions are doing. With these assets that will be coming to market that will be higher cost and come with heavy incentives, the partner you choose matters even more."

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