The Best Investment Strategy? Staying Invested

What do you tell that friend looking for investing tips in these unpredictable times?

Here’s what I say to anyone tempted to make changes in their portfolio based on the latest headlines: The most important thing you can do is stick with the basics.

Set up a diversified portfolio focused on your long-term goals and rebalance it regularly. If you want help getting started and don’t yet have a financial plan, consider working with a professional.

Above all, don’t jump in and out of the pool, so to speak. Staying invested can take willpower and fortitude, as it did last March. But doing so in 2020 probably would have paid off. Brian Nick, our Chief Investment Strategist, created a chart that shows the tale of two investors, who both began 2020 with the same portfolios of 50 percent stocks and 50 percent bonds. One sold all their stocks on March 31 and experienced losses, remaining only invested in bonds; the other rebalanced while staying fully invested and therefore experienced significant growth.

This is only a snapshot in time, of course, but the point holds true over the long run: Investors may miss crucial rebounds by attempting to “time” their participation. Instead of jumping in and out of markets, or shifting strategies frequently, they should follow a more consistent approach.

It’s important to note that there is still near-term risk from a stalled recovery to a slower-to-anticipated vaccine rollout. The way we see it at TIAA is that a bright light lies ahead for investors, but only at the end of a dark tunnel. The next few quarters could certainly continue to be volatile. After that, the probable end to the health crisis should help distressed parts of the economy stage a strong comeback, bolstered by consumers’ resilience and unusually high savings rates.

Additionally, market watchers are starting to worry about potential inflation as global interest rates tick up a bit and the economy improves – though those same factors could help stock growth as well.

So, how do you ride out the possible bumps along the way to that bright light? That takes us back to diversification. Many people wonder just what investment professionals mean when they say to diversify, but it’s relatively straightforward: Depending on your personal goals, holding a tailored mix of investment holdings that do well under different conditions can provide more growth potential while managing the risk of losses.

With your personal investing needs in mind, you could then consider some specific investing ideas. Our Global Investment Committee 2021 Outlook suggests spots where a return to “normal” has not already been priced into markets:

• Cyclical parts of the global equity market have begun to perform well, for example, but still have some catching up to do as the economy normalizes.
• With the shift to online commerce expected to continue, industrial real estate should continue to benefit from demand for storage, shipping and logistics.
• The U.S. dollar is expected to fall further with a new federal stimulus package and trade policy, which could help emerging-markets fixed income investments.

It’s also important to periodically “rebalance” your portfolio. My general guidance is to be cautious about rebalancing based on emotion, rumors or superstition, as short-term news and data can be contradictory. Instead, you should focus on your own risk tolerance and rebalance on a pre-determined schedule, such as quarterly or annually.

If this makes sense to you in theory but feels complicated in practice, consider using tools that are designed to help. Target-date funds, available in most retirement plans, automatically diversify and rebalance investments over time with your retirement year as the goal. Some even include annuities that can provide guaranteed income in retirement. You could also consider a managed account in which a professional advisor does the investing and rebalancing for you, typically charging a fee to keep your portfolio balanced to match your risk level.

Again, understanding your own risk tolerance and long-term goals, then building an investment portfolio to match, are the keys to feeling confident enough to ride out market volatility. Those are the best investment tips anyone could offer.

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