A: It’s helpful to remember that mild and even sharper pullbacks are a normal part of investing,” Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, advises. “Pullbacks of 5% happen on average three times a year, and markets have historically rebounded quickly.”1 Declines of 10% to 20% happen every two and a half years, and severe declines of 20% to 40%, usually associated with recessions, occur every 8.6 years, he adds. “But even those have recovered within about 14 months on average.”2
Did you know: A hypothetical investment in the S&P 500, left alone from 1931 until today, would have produced a return of nearly 20,000%. By missing the 10 best days of each decade, your return would have only been 38%.3
While it’s tempting to seek the perceived safety of cash, selling your assets could mean that you’ll lose the potential for those assets to recover when markets rebound. If you’re thinking about pulling out of the markets, it may help to keep this in mind, Hyzy says: A hypothetical investment in the S&P 500, left alone from 1931 until today, would have produced a return of nearly 20,000%. But by missing the 10 best days of each decade, your return would have only been 38%.3
Instead of liquidating your assets, stay focused on your goals, Hyzy suggests. With them in mind, review your portfolio to make sure you’re sufficiently diversified, and consider making tactical adjustments as needed. For instance, you may want to rebalance your portfolio to maintain your ideal asset allocation. “Asset allocation and diversification can help to reduce your level of risk and mute the impact of any market pull backs,” Hyzy notes.
As you rebalance your assets or put new cash to work, a process called dollar-cost averaging — or investing small amounts on a consistent basis over time — could help you avoid investing too much when the market is high and too little when the market is low. Especially in a declining market, that can help preserve value.
For more tips and insights, read “Fine-Tune Your Investments for Rising Inflation — and Slower Growth.”