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By Michael Schoonmaker - January 28, 2019
Market uncertainty is something we all know about, but 2018 made us feel its effects in a big way. Turbulent markets can tempt us to forget about our long-term goals, kind of like the snooze button entices us to stay in bed instead of getting up to exercise.
No one knows how the markets will move next. But there are time-tested strategies that can help you stay focused on your future.
When market volatility, political events or financial headlines dominate news feeds, investors may feel compelled to make emotional choices. As a result, the thrill of higher returns often drives them to buy at the peaks. On the flip side, panic during declines causes investors to sell low and lock in losses. Both actions are opposite of what a well-structured investment plan would have you do.
Instead, take advantage of market swings by investing regularly. An easy way to do this is to set up an automatic investment plan. This means you invest a set amount every month from your bank or paycheck. It lets you buy more shares when prices are low, and fewer shares when prices are high.
To get the full benefit from this technique, known as dollar cost averaging1, be prepared to continue investing at regular intervals, even during economic downturns.
INVESTING REGULARLY MAY RETURN A LOT LATER
Hypothetical calculations with a $2,500 initial investment and monthly (weekly) investments over 40 years earning a rate of 6% annually. Assumes reinvestment of all gains, dividends and interest, and does not include fees, expenses, or taxes. If all taxes, fees, and expenses were reflected, the reported value would be lower.
Source: American Century Investments Future Value Calculator. Financial Calculators from Dinkytown.net. ©2018 KJE Computer Solutions, LLC.
The impulse to jump in and out of the markets (or even temporarily sit on the sidelines) can be strong. Even if you're feeling lucky, making money and avoiding losses is more than just guessing at the market's direction. Research confirms your best strategy is not trying to time the market but spending time in the market with a well-developed investment plan.
Remember, time is on your side when investing for long-term goals. The chances of generating positive returns in your portfolio improve the longer you stay invested.
Jumping In and Out of the Market May Cost Your Portfolio
Growth of $10,000 in the S&P 5002, 20 Years Ending Dec. 31, 2018.
Market declines or investments with lower returns can actually present potential buying possibilities—especially if you're practicing the principles above: investing automatically and staying in the markets.
Say you have a portfolio made up of stocks, bonds and cash, and market volatility has decreased the value of your bonds and increased the value of your stocks. To avoid too much stock risk, you could rebalance to get the percentages back to your original allocations.
In that case, you may sell top performers and buy more of the investments whose value has declined. This is the definition of buying low and selling high.
Rebalance Your Portfolio (Hypothetical Examples)
You may have decided to allocate 60% to stocks, 30% to bonds and 10% to cash investments.
If market activity causes the stock portion to increase significantly, this may leave you exposed to more stock risk than you intended.
Buying more bonds and money markets and selling stocks to get back to your original allocation.
Another core investing principle is diversification, which means spreading your money across many kinds of investments that respond differently to market changes. This helps manage volatility.
How? Choosing investments that don't react the same way to market conditions can help balance performance risks. When one asset type isn't doing so well, another may be in favor.
In addition, diversification should go beyond the general categories of stocks, bonds and cash. Each of these can be split further into more specialized categories to take advantage of different parts and behaviors of the markets.
Beware, investing your money with different financial institutions or having stocks, bonds and money markets does not mean your investments are necessarily diversified. That's particularly true if they all act the same when markets move.
Source: American Century Investments.
The hypothetical scenario is an example of what a diversified portfolio might look like.
These strategies can help you stay grounded and focused on your long-term goals when the markets want to take you on a wild ride. Let us help you put them into practice—that's why we're here.
Need help putting these time-tested principles into action?
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1 Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.
2 ©2019 Standard & Poor’s Financial Services LLC. The S&P 500® Index is composed of 500 selected common stocks most of which are listed on the New York Stock Exchange. It is not an investment product available for purchase.
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Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
Diversification does not assure a profit nor does it protect against loss of principal.