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By Michael Schoonmaker - May 12, 2018
Investment markets, like the weather, can be unpredictable. While we all hope for consistent sunny skies and market highs, the clouds will eventually roll in. But with proper planning and an eye on your long-term goals, you can position your portfolio to weather various market conditions. Here are four time-tested strategies that can help.
No one can predict the optimal time to buy and sell investments, just like meteorologists can't guarantee the exact time and amount it will rain at your house (if at all). 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 improves the longer you stay invested.
When market alerts, political events and financial news dominate headlines and fill up newsfeeds, investors may feel compelled to make emotional decisions. As a result, the thrill of higher returns often drives investors to buy at the peaks, while panic amid declines causes them to sell low and lock in losses. That's the opposite of what a well-structured investment plan would have you do.
You can't control the markets, or the weather, but you can control how you react: Research has shown that your investment success is largely in your hands—your savings rate, your mix of stocks and bonds and how well you stick to your plan during times of crisis.
Instead of being distracted by short-term market trends, keep your long-term plan in mind. If necessary, you can make modest adjustments to your investment mix. But if you're still tempted to bail during market downturns, it may be better to limit portfolio reviews to a set schedule, instead of when you may be reacting to headlines.
Buying low and selling high is better for long-term investing, as investments with lower or negative returns could actually be a potential buying opportunity. Here are a couple of ways to think about it.
First, you may have a portfolio made up of stocks, bonds and cash investments. If market volatility has caused the value of your bonds to go down and the stocks to go up, you may want to rebalance, or get the percentages back to your original allocations, to avoid too much stock risk. In that case, you'd sell some of your top performers and buy more of the investments whose value has declined.
You may have decided to allocate 60% of your portfolio to stocks, 30% to bonds and 10% to cash investments.
Out of Balance
If market activity causes the value of the stock portion of your portfolio to increase significantly, you'll have a greater percentage invested in stocks, leaving you exposed to more risk than you intended.
Second, you can take advantage of market swings with an automatic investment plan. If you invest a set amount every month, over time you'll buy more shares when the price is low and fewer shares when the price is high. To fully take advantage of this strategy, known as dollar-cost averaging, you should be prepared to continue investing at regular intervals, even during market downturns.
We believe you should consider diversifying by investing in a variety of assets. That means spreading your money across many kinds of investments to help manage volatility.
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 investment markets. For example, in the stock portion of your portfolio, you can choose funds that invest in companies of various sizes or locations (example: U.S. or non-U.S.). You can also choose funds that select companies based on a particular investing style, such as growth or value.
Sample Allocation: A Mix of Asset Classes Suited to Your Needs
* The hypothetical scenario is an example of what a well-diversified portfolio might look like. This approach can address your objectives and comfort with risk and help you stay focused on your long-term goals.
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Diversification does not assure a profit nor does it protect against loss of principal.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
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.
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.