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How to Think Like a Successful Long-Term Investor

June 25, 2019

WE’RE CURRENTLY ENJOYING the longest bull market in history. Still, anyone who’s been an investor during this 10-plus-year stretch has experienced volatile days and even weeks that made them wonder: Is it time for me to get out of the market?

In this Q&A, Nick Giorgi, investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank, shares insights on the way successful long-term investors approach the market’s ups and downs. For a deeper dive, read Principles for Successful Long-Term Investing 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 successful long-term investors understand that risk is part of investing. They’ve learned that the longer you hold an investment, the more likely it is your returns will be positive. They know that if you pull out of the market, you may find yourself on the sidelines when prices push higher, and you may miss out on dividends, share buybacks and interest payments.

 

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3 Tactics for Long-Term Investing

Adhering to these best practices can help you weather the inevitable ups and downs that are a normal part of investing. 

1 Dollar Cost Averaging

Investing consistent amounts steadily over time helps you buy more shares when prices are low and fewer shares when prices are high.

2 Portfolio Rebalancing

Over time, the proportion of stocks, bonds and cash you own can shift. Rebalancing helps ensure that your investments remain aligned with your preferences.

3 Dividend Reinvestment

Automatically reinvesting the dividends that some stocks pay lets you increase your holdings and possibly compound any growth in stock prices.

Successful long-term investors have learned that the longer you hold an investment, the more likely it is your returns will be positive. —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 the next market downturn?

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. Successful 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 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 tactics 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 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.

 

Reinvested dividend income accounted for more than 40% of the total return of the S&P 500 between 1930 and 2017.

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 more than 40% of the total return of the S&P 500 between 1930 and 2017. 1

 

If you’re like most investors, your goals and ability to tolerate various kinds of risk will evolve over time, and you’ll need to adjust your investing plan periodically. But the principles of successful long-term investing should continue to serve you well.

 

1Morningstar: Data as of January 18, 2019.

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