Long Term Investment Strategies: 4 Rules on How to Invest Long Term (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." He continues, "Whatever the markets do, the following best practices can help you avoid costly pitfalls as you work toward reaching your financial goals."

1. Understand your comfort level with risk

"When you commit your money to financial markets, it's important to keep in mind that risk is involved," says Serrano. Temporary market declines happen quite often, even during periods when stocks are mostly rising.

It also helps to recognize that there are different kinds of risk. Buying stocks exposes you to market risk — the chance that share prices will fall and your investments will be worth less than their original price. Bonds tend to be somewhat less volatile than stocks, but they come with other potential risks. These include credit risk, the possibility that a bond issuer could fail to make interest payments and return your principal, and interest rate risk, the chance that interest rates could rise, causing your bonds to lose value while you hold them.

"Understanding how much risk you're comfortable taking on and aligning your investments to your risk tolerance can help you come to terms with periodic volatility," says Serrano, who notes that it's crucial to try to avoid hasty, emotion-driven moves that could have long-term consequences. "If you sell at market lows, you could lock in losses," he says. "And if volatility drives you to excessive caution — say, by making you want to keep your money in cash — that may feel reassuring, but it could mean that you might miss the opportunity for potential future gains."

2. Avoid the temptation to time the market

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 spotting market downturns in advance is extremely difficult — and 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," Serrano says. "And you could also miss out on dividends, share buybacks and interest payments that may continue even amid periods of volatility."

— Rodrigo Serrano,
investment strategist in the Chief Investment Office,
Merrill and Bank of America Private Bank

In addition, big returns can happen on relatively few trading days, raising the stakes of a mistimed market exit. For example: An investor who missed the 10 best-performing days of the S&P 500 since January 1, 1990 would have seen a compound annual growth rate of 7.4% versus the 9.9% gain they might have earned for each year had they remained in the market during those 10 days.Footnote¹

In some cases, the longer you hold an investment, the more potential there is to see positive returns. That can be truer of equities, which can be unpredictable and volatile over shorter time periods, but have done well historically over the long term.Footnote² "You can use time in the market — as opposed to timing the market — to your advantage," Serrano says.

3. Embrace diversification

Building a portfolio with a mix of different assets — stocks, bonds and cash — can help you balance the overall risk level of your investments. In the short term, the overall return of a diversified portfolio may be less than what you'd see from a small group of assets that are doing well at that moment. But those moments rarely last. "Over longer periods, proper diversification can help even out your returns so that some of your assets can potentially be gaining value as others may decline," Serrano says.

— Rodrigo Serrano,
investment strategist in the Chief Investment Office,
Merrill and Bank of America Private Bank

But diversifying isn't enough. As markets shift, your allocation to certain asset classes can expand or shrink, and you'll want to bring them back in line with your goals and timelines. One best practice useful in helping to maintain a chosen level of diversification is regularly reviewing and, if necessary, rebalancing investments, Serrano adds. Say, for instance, that you've allocated 60% of your portfolio to equities. After a particularly good year in the markets, equities could represent 75% of the value of your portfolio, and you may want to make adjustments to bring equities back in line with your chosen allocation.

4. Stay focused on your goals

Your willingness and ability to tolerate various kinds of risk are likely to evolve over time as will your goals — the priorities you're investing for. That's another major reason to rebalance your portfolio periodically. But as you do, it's important to continue to make decisions thoughtfully, keeping the principles of long-term investing firmly in mind.

Investors committed to leaving their money in the markets for the long term frequently employ certain basic strategies to help them meet their goals, such as reinvesting the dividends their stocks earn and dollar-cost averaging (or the process of investing small amounts on a consistent basis over time). Investing a fixed dollar amount on a regular basis — 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.

"Knowing why you've chosen the investments you have and how they help you manage risk can increase the likelihood that you'll stay disciplined amid changes in the markets and your life," Serrano says. "Then by revisiting your mix of assets and rebalancing as needed, you can continue to give yourself the potential for success."