They can help you keep on track, no matter what the markets are doing.
EVERY TIME THE MARKET DROPS dramatically, some investors begin to wonder: Would I be better off in cash? “Even in strong markets, there are usually days and even weeks that can test an investor’s mettle,” says Nick Giorgi, investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank. “But you shouldn’t lose sight of what you’re investing for.”
In this Q&A, Giorgi shares several best practices that long-term investors can use to approach the market’s ups and downs. For a deeper dive, read Staying the Course Through Volatility: A Disciplined Financial Strategy Roadmap from the Chief Investment Office.
Q: Is there any way to anticipate market drops?
A: Not consistently—even for seasoned investors, it can be difficult to spot those events in advance. But aligning your investments to your tolerance for risk can help you come to terms with—and potentially minimize the impact of—periodic volatility when it strikes. If you know a market setback is likely to come sooner or later, you might think the solution is to pull your money out of the market just before prices fall. But the stakes of not staying invested can be high. If you jump in and out of the market, you’ll almost inevitably find yourself on the sidelines when prices push higher. And you could also miss out on dividends, share buybacks and interest payments that may continue even amid periods of volatility. Generally, the longer you hold an investment, the more potential there is to see positive returns.
Adhering to these best practices can help you weather the inevitable ups and downs that are a normal part of investing.
Investing consistent amounts steadily over time helps you buy more
shares when prices are low and fewer shares when prices are
Over time, the proportion of stocks, bonds and cash you own can
shift. Rebalancing helps ensure that your investments remain aligned
with your preferences.
Automatically reinvesting the dividends that some stocks pay lets you
increase your holdings and possibly compound any growth in stock
“If you jump in and out of the market, you’ll almost inevitably find yourself on the sidelines when prices push higher. And you could also miss out on dividends, share buybacks and interest payments that may continue even amid periods of volatility.”—Nick Giorgi, investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank
Q: Should I be doing anything to prepare for future market disruptions?
A: It depends on your timeline for investing. If you’re nearing retirement or know that you may need access to cash soon, you might want to revisit your asset allocation. If you have years before retirement, it’s helpful to remember that temporary market declines happen quite often, even during periods when stocks are mostly moving higher. Long-term investors tend to balance the overall risk of their portfolios by owning a diversified mix of stocks, bonds and cash. Over longer periods, proper diversification can help to increase the likelihood that you’ll have some assets that may gain value even while others decline.
Q: Are there any other rules of long-term investing that I should consider following?
A: In addition to maintaining a diversified portfolio, these three best practices can help (see slideshow above):
Portfolio rebalancing is the process of regularly reviewing your investments and making adjustments to bring them back in line with your preferred asset allocation if market movements or other issues create an imbalance. You might sell stocks, for example, when market advances have increased their value—and their relative weight in your portfolio—and use the proceeds to invest in bonds or cash.
Dollar-cost averaging, or investing small amounts on a consistent basis over time—say, for instance, by setting up automatic deductions from your paycheck—can help you avoid investing too much when the market is high and too little when the market is low. Especially in a declining market, that can help preserve value.
Dividend reinvestment, or the practice of reinvesting dividends into additional purchases of the underlying stock, is another way to add to your investments automatically. And it also helps you take advantage of compounding—in essence, earning a return on your return. The impact can be considerable. Reinvested dividend income accounted for nearly 40% of the total return of the S&P 500 between 1930 and 2020.1
If you’re like most investors, your goals and ability to tolerate various levels of risk will evolve over time, and you’ll need to adjust your investing strategy periodically. But with the principles of long-term investing, you should be able to keep moving toward your financial goals.
1Chief Investment Office. Data of December 31, 2019.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S" or “Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation.
Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.
Opinions are those of the author and subject to change. The investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance and investment goals. Due to the time-sensitive nature of the content and because investment opinions may have changed since the time any comments.
Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
Keep in mind that dollar-cost averaging cannot guarantee a profit or prevent a loss in declining markets. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.