Investing Basics

This is your starting point for building fundamental investing skills, finding the right approach for you and learning to invest for your unique goals.
Building a portfolio tab 1 of 3
Navigating market volatility tab 2 of 3
Ongoing monitoring and management tab 3 of 3

Determining your asset mix

How do you decide which investment types should make up your portfolio? Determining an asset allocation can help you make that decision.Footnote 3

Your asset allocation is shaped by four main factors

  • Your financial goals
  • Your time horizon, or how many years until you need access to the money
  • Your comfort with risk — or market volatility — and capacity to take on risk
  • How much readily available cash you need access to (also called liquidity)

Asset allocation: An essential guide

Article

Is diversification the same as asset allocation?

Diversification means more than spreading your investments across different asset classes (which is what asset allocation is). It also involves choosing a broad selection of investments within the various asset classes. With stocks and bonds, you can diversify by company size, particular industries or even geography.

Asset allocations for three different risk levels

Conservative  Tab 1 of 3 Moderate  Tab 2 of 3 Aggressive  Tab 3 of 3
The chart is titled "Asset allocations for three different risk levels." The chart contains three pie charts with sample allocations. From left to right, the pie labeled Conservative (lower risk/lower potential return) is 71 percent bonds, 5 percent cash/money markets and 24 percent stocks; the chart labeled Moderate is 41 percent bonds, 1 percent cash/money markets and 58 percent stocks; and the chart labeled Aggressive (high risk/higher potential return) is 8 percent bonds, 1 percent cash/money markets and 91% percent stocks.
Conservative Portfolio
For investors who are predominantly risk averse. Primary focus is on portfolio stability and preservation of capital. Investors using this Allocation Profile should be willing to achieve investment returns (adjusted for inflation) that are low or, in some years, negative, in exchange for reduced risk of principal loss and a high level of liquidity. A typical portfolio will be heavily weighted toward cash and fixed income asset classes.
Moderate Portfolio
For investors who are willing to take a moderate level of risk. Primary emphasis is to strike a balance between portfolio stability and portfolio appreciation. Investors using this Allocation Profile should be willing to assume a moderate level of volatility and risk of principal loss. A typical portfolio will primarily include a balance of the fixed income and equity asset classes.
Aggressive Portfolio
For investors who are willing to take substantial risk. Primary emphasis is on achieving above-average portfolio appreciation over time. Investors using this Allocation Profile should be willing to assume a significant level of portfolio volatility and risk of principal loss. A typical portfolio will have exposures to various asset classes but will be heavily weighted toward the equity asset class.
Source: Chief investment Office,Footnote 1 July 2023. Strategic Asset Allocations account for impact of taxes on investment income and realized capital gains. Illustrations are for clients with low tax sensitivity.
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Why risk tolerance and time horizon matter

This chart illustrates how different investing approaches, from the most conservative (100% cash) to the most aggressive (100% equities) and degrees in between, have performed over time.
The approach you choose will depend on your goal, risk tolerance and time horizon. If you don't need the money right away, you have more time to ride out the stock market ups and downs. Therefore, you could withstand higher risks such as a heavier investment in growth stocks or high-yield bonds to pursue potentially higher returns.
A graphic showing the best, worst and average annual returns for five different investment portfolios over time. See link below for a full description. 100% cash Best year: 15% Average return: 4% Worst year: 0% 25% equity/75% fixed income Best year: 29% Average return: 8% Worst year: -14% 50% equity/50% fixed income Best year: 28% Average return: 10% Worst year: -16% 75% equity/25% fixed income Best year: 33% Average return: 12% Worst year: -27% 100% equity Best year: 37% Average return: 13% Worst year: -37%
Source: Chief Investment Office.Footnote 1 As of February 28, 2023. For illustrative purposes only. Note: Historical returns are based on an analysis of actual investment returns from 1977 to 2022. Results shown are based on indexes and are illustrative; they assume reinvestment of income, no transaction costs or taxes, and the allocation remains constant over time. Past performance does not guarantee future results.
Index sources: Stocks: S&P 500; Bonds: ICE BofA U.S. Broad Market Bond Index; Cash ICE BofA 3-Month T-Bill Total Return Index. Direct investment cannot be made in any index. Diversification and asset allocation do not ensure a profit or protect against loss in declining markets.

Read the full article

Risk tolerance: What is it — and how can I measure it?

Finding investments that support your asset allocation

There are a wide variety of investment options to choose from. Start here to learn more.

Stocks

Stocks, also called equities, represent shares of ownership in individual companies. The value of your investments reflects how well those businesses perform.
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Fixed Income and Bonds

Fixed income refers to investment securities that pay investors fixed interest payments until the maturity date. Bonds are a type of fixed income investment.
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Cash and Cash Equivalents

Cash and cash equivalents such as money market funds are among the safest and most liquid investments. Most portfolios have at least some percentage of cash or equivalents.
Learn more

Mutual Funds

Mutual funds are baskets of securities that are usually actively managed (they're managed by professionals). They offer access to many different stocks or bonds through a single share.
Learn more

ETFs

ETFs are baskets of securities that track a particular index or industry. Like mutual funds, they offer access to many different stocks or bonds through a single share.
Learn more

Read the full article

Mutual Funds or ETFs: How do I choose?

Did you know?

Merrill can help you find the right investments for your portfolio. Idea Builder transforms available data and organizes stocks, mutual funds and ETFs by theme, making it easy to find investments that align with your interests.
If you'd rather have Merrill investment professionals choose your investments and manage your portfolio for you, you might want to look into Merrill Guided Investing, an investment advisory program.Footnote 2
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Visit the Morningstar Classroom and enhance your investing knowledge with a series of courses that graduate from basic to more advanced concepts for different asset types as well as entire portfolios, with helpful quizzes to test your knowledge along the way.
The courses within the Portfolio series walk you through building a portfolio, determining your asset allocation, defining your risk and more.
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What is volatility?

Volatility measures how largely and quickly prices move for a security or a market index. In a volatile market, prices can swing drastically in one direction or another
This chart illustrates times of volatility and correlation to crisis. The chart shows significant dips on the following dates: 2001 Tech Bubble/ 9/11 attacks; 2008 Great Recession; 2019-2020 COVID-19 This chart illustrates times of volatility and correlation to crisis. The chart shows significant dips on the following dates: 2001 Tech Bubble/ 9/11 attacks; 2008 Great Recession; 2019-2020 COVID-19
The chart displays the S&P 500 index performance 2000-2022. It is not possible to invest directly in an index.

Weathering periods of volatility

This chart illustrates what would have happened if you had invested $1,500 in the year 2000. Notice that while the investment experienced periods of loss (most notably during the Great Recession of 2008), it still managed to grow close to $4,000 by 2022. While downturns can be scary, this chart shows that keeping your money in the market can pay off.

Maintain your focus during volatile days

The market can have a shaky day, month or even year. At times of extreme market volatility, it's easy to overreact, by either selling at a loss to exit the market entirely or doing nothing while trying to ignore what's happening.

What can you do when the markets get volatile?

Article

Long-term investing: Core principles every investor should know

Article

Psychology of investing

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Managing your emotions and avoiding common pitfalls

Having a plan for what you're going to do in times of volatility can help you avoid emotional investing.
This exhibit shows a bar chart illustrating how excluding the best days of performance for the S&P 500 drastically cuts down returns. The S&P 500 Compound Annual Growth Rate from January 1, 1990 to June 30, 2023 is as follows: Fully invested 10.1%; Less 5 Best 8.6%; Less 10 Best 7.6%; Less 20 Best 5.9%; Less 30 Best 4.4%; Less 40 Best 3.2%; Less 50 Best 2.0%. This exhibit shows a bar chart illustrating how excluding the best days of performance for the S&P 500 drastically cuts down returns. The S&P 500 Compound Annual Growth Rate from January 1, 1990 to June 30, 2023 is as follows: Fully invested 10.1%; Less 5 Best 8.6%; Less 10 Best 7.6%; Less 20 Best 5.9%; Less 30 Best 4.4%; Less 40 Best 3.2%; Less 50 Best 2.0%.
See how, historically, excluding the best days of performance for the S&P 500 has drastically cut down the returns over time.
Source: Bloomberg. Chief Investment Office.Footnote 1 Data as of June 30, 2023. FOR INFORMATIONAL PURPOSES ONLY. Data reflects S&P 500 Total Return Index performance going back to 1990 incrementally omitting top performing days (chart encompasses data from 1/1/1990-6/30/2023). It is not possible to invest directly in an index. Past performance is no guarantee of future results.

Even the financial pros know they can't "time the market"

"Timing the market' means basing your investing decisions on an educated guess — or hunch — that the market will rise or fall at a particular time. By trying to time the market, and perhaps getting out when markets are down, you risk missing out on substantial potential growth if they rise again, as the chart at left demonstrates. Instead, try to stay invested for the long term. That way you won't risk missing out on the best days of performance and can make your investments work harder for you.

Did you know?

Dollar-cost averaging is the practice of setting up investment purchases of a fixed amount over time. Using this strategy allows you to have a structured investing plan that doesn't depend on what the market is doing at any given point in time, and it can help you stay focused on your investing goals in times of market downturns.Footnote 4

Read the full article

How to use dollar cost averaging

Rebalancing your portfolio

Once you're invested, it's important that you monitor your portfolio and rebalance it as needed, even if your financial goals haven't changed.

How your asset allocation could change over time

The chart is titled 'How your asset allocation could change over time.' There are two of pie charts with allocations and horizontal scales with low risk on the left and high risk on the right. The first is dated December 31, 2008, and the allocation is 35% bonds, 5% cash/money markets and 60% stocks, and the risk level is in the middle. The second is dated June 30, 2023, and the allocation is 8% bonds, 1% cash/money markets and 91% stocks, and the risk level is medium high. The chart is titled 'How your asset allocation could change over time.' There are two of pie charts with allocations and horizontal scales with low risk on the left and high risk on the right. The first is dated December 31, 2008, and the allocation is 35% bonds, 5% cash/money markets and 60% stocks, and the risk level is in the middle. The second is dated June 30, 2023, and the allocation is 8% bonds, 1% cash/money markets and 91% stocks, and the risk level is medium high.
Chief Investment Office.Footnote 1 July 2023. Strategic Asset Allocations account for impact of taxes on investment income and realized capital gains. Illustrations above are for clients with low tax sensitivity.

What is portfolio drift?

Portfolio drift occurs when natural movements in the market change your asset allocation. For example, if your stocks outperform your fixed income investments significantly, your portfolio will have a higher percentage of funds allocated to stocks than you originally started out with.
Consider a somewhat cautious investor who chose a moderate risk level for her portfolio in 2008. By May 2022, her allocations look quite different from what she started out with because the stocks outperformed the other investment types, even with the dramatic decline in the stock market in March 2020. This exposes the investor to more risk than she is comfortable with.
This example shows drift over many years, but drift can happen over a period as short as 6 months.

Reasons to rebalance your portfolio

  • Your asset allocation has changed due to portfolio drift
  • Your financial goals have changed or you've reached a financial goal
  • You've reached a new life stage and have a different risk tolerance

Why is it important to periodically revisit your asset allocation strategy?

Article

Tax considerations to keep in mind

If you're investing in a taxable account, you may pay taxes on interest earned, dividends distributed and/or profit you make from selling investments (capital gains tax). Certain strategies can help minimize your taxes.

Tax-aware investment strategies you should consider

Article

4 tax moves to consider early in your career

Article

Did you know?

With some investment types, holding them for longer periods of time means paying less in capital gains taxes. Investments sold less than a year after they're bought will have short-term capital gains taxes, which are higher than the rate for investments held over a longer term.

Common questions

If you're looking for more information, check out these responses to some of the most common questions about investing.
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Investing involves risk including possible loss of principal. Past performance is no guarantee of future results.

Footnote 
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 popup, and wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
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."). 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.

Footnote 
Please review the applicable Merrill Guided Investing Program Brochure (PDF) or Merrill Guided Investing with Advisor Program Brochure (PDF) for information including the program fee, rebalancing, and the details of the investment advisory program. Your recommended investment strategy will be based solely on the information you provide to us for this specific investment goal and is separate from any other advisory program offered with us. If there are multiple owners on this account, the information you provide should reflect the views and circumstances of all owners on the account. If you are the fiduciary of this account for the benefit of the account owner or account holder (e.g., trustee for a trust or custodian for an UTMA), please keep in mind that these assets will be invested for the benefit of the account owner or account holder. Merrill Guided Investing is offered with and without an advisor. Merrill, Merrill Lynch, and/or Merrill Edge investment advisory programs are offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") and Managed Account Advisors LLC ("MAA") an affiliate of MLPF&S. MLPF&S and MAA are registered investment advisers. Investment adviser registration does not imply a certain level of skill or training.
The Chief Investment Office (CIO) develops the investment strategies for Merrill Guided Investing and Merrill Guided Investing with Advisor, including providing its recommendations of ETFs, mutual funds and related asset allocations. Managed Account Advisors LLC (MAA), Merrill's affiliate, is the overlay portfolio manager responsible for implementing the Merrill Guided Investing strategies for client accounts, including facilitating the purchase & sale of ETFs and mutual funds in client accounts and updating account asset allocations when the CIO's recommendations change while also implementing any applicable individual client or firm restriction(s).

You may also be able to obtain the same or similar services or types of investments through other programs and services, both investment advisory and brokerage, offered by Merrill; these may be available at lower or higher fees than charged by the Program. The services that you receive by investing through Merrill Guided Investing or Merrill Guided Investing with Advisor will be different from the services you receive through other programs. You may also be able to obtain some or all of these types of services from other firms, and if they are available, the fees associated with them may be lower or higher than the fees we charge.
Footnote 
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Footnote  4 A periodic investment plan such as dollar-cost averaging does not ensure a profit or protect against a loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating price levels; investors should carefully consider their financial ability to continue their purchases through periods of fluctuating price levels.

Certain information contained herein (the "Information") has been provided by MSCI ESG Research LLC, a Registered Investment Adviser under the Investment Advisers Act of 1940, and may include data from its affiliates (including MSCI Inc. and its subsidiaries ("MSCI")), or third party suppliers (each an "Information Provider"), and it may not be reproduced or redisseminated in whole or in part without prior written permission. The Information has not been submitted to, nor received approval from, the US SEC or any other regulatory body. The Information may not be used to create any derivative works, or in connection with, nor does it constitute, an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Some funds may be based on or linked to MSCI indexes, and MSCI may be compensated based on the fund's assets under management or other measures. MSCI has established an information barrier between equity index research and certain Information. None of the Information in and of itself can be used to determine which securities to buy or sell or when to buy or sell them. The Information is provided "as is" and the user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. Neither MSCI ESG Research nor any Information Party makes any representations or express or implied warranties (which are expressly disclaimed), nor shall they incur liability for any errors or omissions in the Information, or for any damages related thereto. © 2022 MSCI Inc. All rights reserved.

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