Your frequently asked questions on volatility answered

Historically, down markets have rebounded — these strategies can help you manage risks through today’s ups and downs, says our Chief Investment Office

VOLATILITY IS ALWAYS A CHALLENGE for investors, and so far in 2022 it has been nonstop. What’s going on? “We believe that markets are undergoing some big shifts right now as they struggle to price in inflation and come to terms with slower growth,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “But we also believe that once inflation peaks, the volatility should ease and positive profits growth should eventually return.”

In the meantime, what can investors consider doing? “During periods of sharp volatility, markets try to anticipate and react to headlines and events. But that doesn’t mean you should,” Hyzy says. Rather than attempting to keep pace with daily fluctuations, review your long-term investment strategy, and try to remember that as a long-term investor, time is on your side. As uncomfortable as volatility can be, “what history tells us is that staying invested for the long term has paid off,” Hyzy adds.

Missing the 10 best days per decade has a significant effect on cumulative returns

19,020% Cumulative price return including the 10 best days per decade and 38% Cumulative price return excluding the 10 best days per decade.

Source: S&P, BofA US Equity & Quant Strategy. 1930 – June 1, 2022.

Below, he and other members of the Chief Investment Office offer insights to help you put this year’s sometimes extreme market ups and downs in perspective, as they answer five questions advisors have been hearing from clients around the country.

Hit + after each question to see their answers and explore more resources.

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Q. Should I sell some or all of my equities and revert to cash until this volatility subsides?

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.”

Q: With so many geopolitical risks right now, is it a good idea to own international stocks?

A: Though geopolitical tensions are elevated and U.S. stocks have outperformed the world in recent years, don’t overlook the diversification and potential growth benefits of international stocks. “They may provide stronger dividends than their U.S. counterparts,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, and 81% of global growth, 39% of global market capitalization and 70% of consumer spending take place beyond U.S. shores.⁴ Also worth considering: Many emerging economies provide the raw materials that may be critical to rebuilding global infrastructure and supply chains.

History shows that it may be especially important to have international exposure during inflationary times.

Finally, history shows that it may be especially important to have international exposure during inflationary times, Hyzy adds. “Going back to 1973, when inflation has risen above 2%, international developed markets have produced average equity returns of 10.5%, while emerging markets have returned 13%.”⁵

Q: What do rising interest rates mean for my fixed income investments?

“While your bonds’ market value may temporarily go down, your principal payment at maturity doesn’t.”
— Joseph Curtin, head of CIO Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank

A: Just as it may not be the best move to sell equities in a down market, investors should resist abandoning bonds for fear that rising interest rates will diminish their value. “Bonds can provide predictable cash flow and diversification, which over time can help to shield your portfolio from unexpected events,” says Joseph Curtin, head of CIO Portfolio Management in the Chief Investment Office for Merrill and Bank of America Private Bank. “While your bonds’ market value may temporarily go down, your principal payment at maturity doesn’t.”

A better approach to consider, suggests Curtin, is this: Review your bond holdings, and plan to use the next maturity date as a reinvestment opportunity. “Today’s rising rate environment provides us with the opportunity to buy new bonds with higher interest rates, which should generate higher cash flows in the future,” he explains. High-quality bonds also potentially offer a diversification benefit that cash cannot.

For more tips and insights, read “Understanding and Managing Fixed Income in a Rising Rate Environment.”

Q: Why have stock and bond values been going down together?

“The market is starting to transition to a period more attractive to fixed income investors, when bonds can serve their traditional role as a stabilizer and income producer.”
— Marci McGregor, senior investment strategist, Chief Investment Office, Merrill and Bank of America Private Bank

A: While bonds generally have performed well when stocks have struggled, and vice versa, 2022 has witnessed “some of the most unique circumstances we have encountered in decades,” says Marci McGregor, senior investment strategist for the Chief Investment Office, Merrill and Bank of America Private Bank. The economy is currently at an inflection point, moving away from near-zero interest rates and monetary easing into a period of higher rates and tighter money. “The market is starting to transition to a period more attractive to fixed income investors, when bonds can serve their traditional role as a stabilizer and income producer,” says McGregor. “As the cycle matures, the historical relationships between equities and bonds will likely return, and diversification will potentially benefit portfolios.”

Q: What can I do to better manage risk in my portfolio going forward?

“A balanced portfolio is a good way to smooth out periodic volatility.”
— Joseph Curtin, head of Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank

A: With frequent market pullbacks and rallies expected over the next couple of years, “a balanced portfolio is a good way to smooth out periodic volatility,” says Joseph Curtin, head of Portfolio Management in the Chief Investment Office for Merrill and Bank of America Private Bank. That means staying diversified within and across stocks and bonds. Adding an allocation to commodity funds can help further position your portfolio for rising interest rates and inflation.

Curtin adds, “Rebalancing can help you maintain a risk tolerance that’s right for you, lock in profits you’ve earned and, potentially, buy new assets at attractive prices.” It also provides you with the opportunity to take a more disciplined approach to tax-loss harvesting.

For more strategies to help you stay invested through volatile periods, read the CIO’s “Staying the Course: A Disciplined Financial Strategy Roadmap.”

¹ BofA Global Research, January 2022

² Chief Investment Office; Yardeni Research; Bloomberg. Data as of January 31, 2022.

³ S&P, BofA US Equity & Quant Strategy. 1930 - June 1, 2022

⁴ IMF, 2021; MSCI, 2021; World Bank, 2020.

⁵ MSCI EAFE Net TR; MSCI Emerging Markets Net TR; CIO Inflation ABCs; Portfolio Strategy, April 2022.

Important Disclosures

Opinions are as 06//27/22 and are subject to change.

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.

The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC and wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).

Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government. Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risk related to renting properties, such as rental defaults. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.

Keep in mind that dollar cost averaging cannot guarantee a profit or prevent a loss. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.