Long-term investing: Core principles every investor should know

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They can help you keep moving toward your goals, no matter what the markets are doing.
On-screen disclosure:
Please read important information at the end of this program. Recorded on 3/21/2024.
[Chris Hyzy speaking]
Hello and welcome. We know that every day investors are bombarded with noise in the news.
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Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
From geopolitical events to the U.S. election cycle, to changes in inflation and interest rates, it's easy to get distracted. Even with all the change going on around us, there are ways to stay focused on your financial goals and your reasons for investing in the first place.
We recently published an Investment Insights report to help you do just that.
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Read the CIO report "Steer the Course of Your Financial Future:
A Guide for Long-term Investors."
It's called "Steer the Course of Your Financial Future, a Guide for Long Term Investors."
I'm here today with Kirsten Cabacungan, a lead author of the report, to discuss these ideas and what they can mean for you. Kirsten, thanks for joining me today.
[Kirsten Cabacungan speaking]
Thanks for having me.
[Chris Hyzy speaking]
Let's talk about staying grounded and disciplined. That speaks to an investment process. So how do you think about that?
[Kirsten Cabacungan speaking]
For a long-term investor, you want to first know yourself as an investor.
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Kirsten Cabacungan
Investment Strategist, Chief Investment Office
Merrill and Bank of America Private Bank
You want to establish what are your financial goals? What do you ultimately want to achieve here? And then you want to figure out what are some of the parameters that you have around that?
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Knowing yourself as an investor:
  • Your financial goals
  • Your risk tolerance
  • Your time horizon
  • Your liquidity needs
"What's your risk tolerance? What's the time horizon?" And those are the things that will help determine what strategic asset allocation you might hold in a portfolio.
The next part of it, though, is the investment process.
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Consider investments that are appropriate for you
and leverage portfolio construction tools.
You want to have this rigorous process that looks at what are the investments I might hold in my portfolio, and then you want to lean on some of the portfolio construction tools that are available to you, to manage that over time.
But the key part here that I'll mention is that this process is not a set it and forget it type of thing.
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Revisit your financial goals and investment strategy
on a regular basis, such as once or twice a year.
You want to schedule a regular meeting, maybe that be every half year, every year, to figure out, "Have my goals changed? Has my risk tolerance changed?" Maybe there's been a life event that might adjust some of these characteristics around my investor profile.
So, these are the things that you want to continue to monitor. And staying close to that process helps you to minimize any emotional reactions to things that you might see in the headlines.
[Chris Hyzy speaking]
That's a good point. You use the word anchor, you use discipline, we talked about staying grounded. That's especially important when we talk about volatility.
Is volatility normal? And how could we mitigate some of that?
[Kirsten Cabacungan speaking]
Yes, I would say volatility is normal. Volatility is integral to the investing process, right?
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Volatility is normal and can offer potential opportunities
to rebalance or add to your investments.
It offers long-term investors, sometimes, an opportunity to rebalance portfolios if a certain area of the portfolio has drifted from the optimal target range or it even offers an opportunity to add to your investments. So, I wouldn't think of volatility as a negative thing. It's normal. It's something to monitor, to understand, but it's integral to a long-term investor's journey.
[Chris Hyzy speaking]
I know on a day-to-day basis, it can be somewhat concerning or fearful. But over time, as you said, those are pockets of opportunity.
And speaking of that, is time an opportunity? Is time on our side?
[Kirsten Cabacungan speaking]
Time is definitely on the side of a long-term investor. Trying to time the market is very challenging. It involves two important decisions: You have to decide when to get out and then when to get back in. And that decision to get back in is very challenging at times.
And if you try to time the market and you're sitting on the sidelines, you also risk the, missing on some of the upside if the market bounces back. So, if you miss even just the 10 best days in a decade, that has historically translated into more dampened returns relative to an investor who had stayed invested through that 10-year period.
[Chris Hyzy speaking]
In some cases, people don't think about having too much cash as a risk, but it could be a reinvestment risk. How do you think about that?
[Kirsten Cabacungan speaking]
Yeah, so, cash yields in the last few years have been definitely compelling…
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The role of cash:
  • Has a definite place within portfolios
  • Over-allocating to cash has potential risks in
    opportunity costs
  • Could miss out on appreciation in equities
    over the long term
…and there's definitely a place for cash within the portfolio. But over allocating to cash comes with a risk. There's an opportunity cost there. You're missing out some of the appreciation gains that you might find within the equity holdings of your portfolio.
The longer you sit in cash, also, the chances of outperforming equities over a long period of time diminish.
Again, it's rooted back into what are your goals, the long-term financial goals that you have for yourself and how do you achieve that? It's by sticking to your asset allocation.
[Chris Hyzy speaking]
Okay, Kirsten, let's go to the final question. It's about being nimble. We talked about being disciplined, sticking to your anchor, but there's also a need of course correcting, being able to adjust, as we said before, diversification.
Can you talk to that, how important that is?
[Kirsten Cabacungan speaking]
Diversification is very important to a long-term investor's journey. You want to hold a mix of assets within your portfolio, because if you put all your eggs in one basket, it leaves you vulnerable.
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Potential benefits of diversification:
  • Can help to minimize risk
  • If one area of a portfolio declines,
    another could provide some defense
A mix of assets, a blend of assets, helps to minimize some of the risks. If one area of the portfolio declines, the other areas might provide some defense.
The other part of it is the market is continuing to evolve. The S&P 500, the top leaders today look very different to what they looked like 10 years ago, 20 years ago, 30 years ago. There's different trends and different themes that are driving different leaders. And so that tells us the future will also look different.
So, you want to keep a diversified approach.
[Chris Hyzy speaking]
Excellent. So, staying nimble, being disciplined, sticking to the anchor, course correcting, mitigating volatilities, all about the investment process.
Thanks for joining me, Kirsten.
[Kirsten Cabacungan speaking]
Thanks for having me.
[Chris Hyzy speaking]
And thank you all for joining me. We hope these ideas will help you chart a course for your financial future.
Remember, sticking to a disciplined strategy and staying invested during times of volatility are two of the core principles for doing so. And if you're working with an advisor, be sure to reach out to them directly about what these ideas can mean for you.
On-screen disclaimers:
Important Disclosures
The opinions expressed are as of 03/21/2024 and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
All recommendations must be considered in the context of an individual investor's goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors.
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
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.

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[End of transcript]
Knowing your financial goals and what you ultimately want to achieve are essential to pursuing long-term investment success, says Kirsten Cabacungan with the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. In this conversation with Chief Investment Officer Chris Hyzy, Cabacungan discusses how to maintain a disciplined approach and stay anchored in your goals, even during the market's ups and downs.
The two also discuss the somewhat surprising benefits that volatility can offer, the potential risks of holding too much cash, and why — when it comes to investing — time is definitely on your side.

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