June 25, 2019
WE'RE CURRENTLY ENJOYING the longest bull market in history.1 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 several best practices that long-term investors use to approach the market’s ups and downs. For a deeper dive, read Principles for Successful Long-Term Investing from the Chief Investment Office.
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.investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank
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.
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 more than 40% of the total return of the S&P 500 between 1930 and 2017.2
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.
1“What If the Bull Market Just Never Ended,” Bloomberg, April 24, 2019.
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 were made by research analysts, the latest Merrill Lynch investment opinion and investment risk rating for any particular security discussed should be reviewed, including important disclosures, before making an investment decision.
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.
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