How to Think Like a Successful Long-Term Investor (2024)

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 Rodrigo Serrano, 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, Serrano shares several best practices that long-term investors can use to approach the market’s ups and downs.

Q: Is there any way to anticipate market drops?

A: Notconsistently — 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 also could miss out on potential 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.

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 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 rebalancingis 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 events 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 averagingor investing small amounts on a consistent basis over time — say, for instance, using 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, 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. Dividends have contributed 37% of total returns for the S&P 500 since 1936.1

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.

¹BofA Global Research, May 11, 2023

Important Disclosures

Opinions are as of 06/22/2023 and are subject to change.

Investing involves risk including possible loss of principal. Past performance is no guarantee of future results.

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

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 (“BofA Corp.”).

Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad.Bonds are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government. Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.

Keep in mind that dollar-cost averaging cannot guarantee a profit or prevent a loss. 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.

Dividend payments are not guaranteed and are paid only when declared by an issuer’s board of directors. The amount of a dividend payment, if any, can vary over time.