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Owners’ Manual Principle 6: Review

Nothing works on autopilot.

If your portfolio is never rebalanced, it can take on more risk than you’re comfortable with. This example demonstrates how a portfolio’s volatility can increase if it is left to drift with market ups and downs.

Rebalancing annually can lower risk.

Portfolio Volatility Risk
Moderate Asset Allocation, 1970–2014

Risk (Standard Deviation)

0.0% 3.0% 6.0% 9.0% 12.0% 15.0% Never Rebalanced 12.5% Rebalanced Annually 11.0%
0.0% 3.0% 6.0% 9.0% 12.0% 15.0% Never Rebalanced 12.5% Rebalanced Annually 11.0%

Annualized Return

0.0% 3.0% 6.0% 9.0% 12.0% 15.0% Never Rebalanced 9.5% Rebalanced Annually 9.7%
0.0% 3.0% 6.0% 9.0% 12.0% 15.0% Never Rebalanced 9.5% Rebalanced Annually 9.7%

More about this chart.

The Moderate allocation is 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% bonds, and 5% cash investments. Historical volatility is based on market indexes representing these asset classes. Fees and expenses would lower returns. See below for more information about the market indexes used. Source: Schwab Center for Financial Research with data provided by Morningstar, Inc.

Indexes Used for Model Asset Allocation Plans

U.S. large-cap stocks: S&P 500® Index; prior to 1957, the S&P 500 was simulated using a well-accepted methodology provided by Ibbotson & Associates.

U.S. small-cap stocks: Russell 2000® Index; the CRSP 6-8 was used prior to 1979.

International stocks: MSCI EAFE® Net of Taxes.

Bonds: Barclays U.S. Aggregate Bond Index; the Ibbotson Intermediate-Term Government Bond Index was used prior to 1976.

Cash equivalents: Citigroup 3-Month U.S. Treasury Bill Index; the Ibbotson U.S. 30-day Treasury Bill Index was used prior to 1978.

Index Definitions

Barclays U.S. Aggregate Bond Index is a market-value-weighted index of taxable investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of one year or more.

Citigroup 3-Month U.S. Treasury Bill Index is an index that measures monthly total return equivalents of yield averages that are not marked to market. The 3-Month Treasury Bill Index consists of the last three three-month Treasury bill issues.

CRSP 6-8 Index is a small-cap index created and maintained by the Center for Research in Security Prices (CRSP) at the University of Chicago’s Graduate School of Business. CRSP capitalization-based indexes include common stocks listed on the NYSE, AMEX, and the Nasdaq National Market. The CRSP 6-8 Index refers to the 6th through the 8th deciles and represents a small-cap index that excludes micro-caps.

Ibbotson Intermediate-Term Government Bond Index is constructed from monthly returns of non-callable bonds with maturities of not less than five years, held for the calendar year.

Ibbotson U.S. 30-day Treasury Bill Index is compiled from The Wall Street Journal prices for 1977 to the present and the CRSP U.S. Government Bond File from 1926 to 1976.

MSCI EAFE Index (Europe, Australasia, Far East) is a free float–adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

Russell 2000 Index is composed of the 2,000 smallest companies in the Russell 3000® Index, which contains the largest 3,000 companies incorporated in the United States and represents approximately 98% of the investable U.S. equity market.

S&P 500 Index is a market-capitalization-weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation.

The indexes are unmanaged, do not incur fees and expenses, and cannot be invested in directly.

Review your portfolio regularly. Here’s why:

  • As you move through life, your asset allocation may become more or less volatile than you like or less suitable to your spending needs.
  • You may need to rebalance your portfolio to prevent it from drifting too far from your target asset allocation.
  • A changing market can create over-concentrations in particular industries, sectors, companies, or equity strategies.
  • Watch for bonds that are maturing or have had a change in credit quality, and look for changes in a fund’s or a stock’s rating.

Let’s review your portfolio together and help you keep it on track.

Let’s talk.

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Note: Rebalancing strategies do not ensure a profit or protect against a loss in a declining market and may involve costs, including, but not limited to, commissions and sales charges. Rebalancing strategies may also potentially create a taxable event.

Important information

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.

Small-cap securities are subject to greater volatility than those in other asset categories.

For general educational purposes. Nothing in this document should be considered a solicitation or a recommendation by Schwab to buy, sell, or continue to hold securities or other investments or to open an account.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab refers to our investment professionals as Financial Consultants. There are certain eligibility requirements if you are interested in working with a dedicated Financial Consultant.

Products with lower fees do not guarantee higher returns or that investors will experience lesser losses during periods of market decline.

The implementation of any recommendations made as a result of advice provided may result in trade commissions or other fees, charges, or expenses.

Investments and investment strategies are not without risk, including the potential loss of principal invested. Past performance is not an indicator or guarantee of future results.

Terms referenced throughout this manual describing our relationship with you, as well as services referenced throughout this brochure, are brokerage services provided by Charles Schwab & Co., Inc. We offer our clients planning assistance, educational content, research, and other services that are without a fee and incidental to Schwab acting as a broker-dealer. When we work with you as a broker-dealer, we do not make investment decisions for you or manage your accounts on a discretionary basis. No part of this manual shall be interpreted by any party as Schwab acting as a registered investment advisor and providing investment advisory services, such as ongoing discretionary portfolio management for a fee.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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