Managing Your Portfolio Q&A: We Answer Your Questions

Market Commentary

Charles Schwab & Co., Inc.

Call us at 866-232-9890

Send us an email

Printer-friendly
Type Size: A A A
Email to a friend

Managing Your Portfolio Q&A: We Answer Your Questions
by the Schwab Center for Financial Research
March 10, 2009

Each month, we receive thousands of questions from Schwab clients. Here, we tackle the top questions on managing your portfolio, with answers and guidance that we believe will address some of your most pressing concerns.

If you have a question that doesn't appear below, we have more Q&As on timely topics in the box at right. If you have a question that we haven't already addressed, you can submit it using the Editor Feedback form at right—we may include it when we add new questions and answers.

To talk to a Schwab investment professional about your particular circumstances, please call 800-435-4000.

On managing your portfolio

What are your asset allocation recommendations?
For someone of retirement age, does it make sense to manage your money as if it's in two pots, one extremely conservative and one more aggressive?
What's the best way to invest money from inheritance and avoid paying taxes on it until retirement?
I recently came into a large sum of money for a child's trust. The child is seven years old and the money needs to provide for a lifetime of daily expenses. It's currently in cash, and I'd like to diversify and introduce it to the market. How should I proceed?
How much cash do you advise investors to hold in their portfolios?

What are your asset allocation recommendations?
Your long-term asset allocation targets—the mix of stocks, bonds and cash in your portfolio—is a key element in your success as an investor. As such, your asset allocation should be based on your return objectives and tolerance for risk, as well as your financial goals, when you need the money, tax implications, personal preferences and more.

Schwab's five model asset allocation plans (spanning risk profiles from conservative to aggressive) are a good starting point for creating an investor's strategic plan. Remember, these are long-term allocations, meaning they shouldn't change just because the market moves up or down—they should only change when your personal circumstances or goals change.

If you're a Schwab client, you can see which asset allocation may be right for you by logging in to Schwab.com and clicking the Guidance tab > Overview > Portfolio Checkup.

For someone of retirement age, does it make sense to manage your money as if it's in two pots, one extremely conservative and one more aggressive?
Not necessarily. Ultimately, the best asset allocation for your retirement portfolio depends on your own circumstances and tolerance for risk. However, if you're like many people, it might make sense to position your portfolio more conservatively as you get closer to retirement.

When you retire, no matter what your starting asset allocation is, the first thing to do is set aside enough cash to cover your spending needs for the next 12 months—minus what you expect from reliable, non-portfolio sources of income such as Social Security, pensions and so on. We suggest putting this money in relatively safe, liquid investments such as money market funds, short-term CDs or interest-bearing checking accounts.

If you can, put an additional two to three years' spending needs in longer-term CDs or high-quality, short-term bonds (or low-cost, no-load bond funds) as part of the fixed-income portion of your retirement portfolio.

If your portfolio performs as expected, you can keep rolling over these shorter-term investments. But in the event of a lengthy bear market, you can cash them out instead of selling stocks from your retirement portfolio at the worst possible time.

For the rest of your portfolio, we suggest no more than 60% stocks, with 40% being a good starting point for most people of retirement age.

For more, see "Write Your Own Retirement Paycheck."

What's the best way to invest money from an inheritance and avoid paying taxes on it until retirement?
Generally, you should receive a step-up in cost basis on inherited assets equal to the fair market value on the date of the original owner's death. So, from an income tax perspective, there should be nothing to prevent you from immediately selling any investments that don't fit your portfolio, if you so choose.

Once you've incorporated the inherited assets into your portfolio (based on the asset allocation and diversification scheme appropriate for your goals, risk tolerance and time horizon), you should position your investments as tax-efficiently as possible.

Broadly speaking, investments that tend to lose less of their return to income taxes are good candidates for taxable accounts. Likewise, investments that lose more of their return to taxes could go in tax-deferred accounts.

For more, see:

I recently came into a large sum of money for a child's trust. The child is seven years old and the money needs to provide for a lifetime of daily expenses. It's currently in cash, and I'd like to diversify and introduce it to the market. How should I proceed?
Assuming you are the trustee, the trust document itself should be your guide. For example, if the trust is meant to provide for a special needs child’s immediate income and maintenance over the remainder of his or her lifetime, then you would likely want to take a moderately conservative approach.

On the other hand, if the trust is intended to fund college expenses 10 or more years into the future, then it might be prudent to start out with a more aggressive allocation for now.

To learn more, see our related resources:

Our Portfolio Planning library
Schwab's Investing Principles article and audio series
"The Portfolio Pyramid: How to Diversify Your Investments"
The first question in this Q&A: "What are your asset allocation recommendations?"

As a trustee, you carry legal fiduciary responsibilities. Don't hesitate to seek out professional advice if you're not sure about how best to proceed.

How much cash do you advise investors to hold in their portfolios?
We approach the question of cash from two perspectives:

Having an emergency fund that's not part of your investment portfolio. You may want to keep this cash in a high-yield checking or savings account.
Holding cash investments as part of your portfolio's long-term asset allocation in order to dampen risk. These cash holdings often take the form of highly liquid and relatively safer investments such as money market funds, Treasury bills and short-term CDs.

In the first instance, we recommend that you set aside at least three month's worth of essential living expenses to tap in case of emergency—unexpected health problems or getting laid off from your job, for example.

With your emergency fund in place, you can decide how much cash to hold in your portfolio. This really comes down to one of the most fundamental decisions you can make about how to invest your money—your target asset allocation.

Even our most aggressive model portfolios keep 5% allocated to cash, and that ratchets up to 10% in our moderately conservative portfolio, and 30% in our conservative portfolio.

For more, see our related resources:

"What About Cash?"
Our Cash article library

Important Disclosures

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

The current and future portfolio holdings contained in a mutual fund is subject to risk you should be aware of prior to making an investment decision. Past performance is no guarantee of future results, and your investment value and return will fluctuate such that shares, when redeemed, may be worth more or less than original cost.

An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. Please note that bank deposits are FDIC insured up to $250,000 while nonbank independent products have no such guarantees.

Certificates of deposit are offered through Charles Schwab & Co., Inc. CDs from Schwab CD OneSource are issued by other FDIC-insured institutions, and are subject to change and system access. Unlike mutual funds, certificates of deposit offer a fixed rate of return and are FDIC-insured. There may be costs associated with early redemption and possible market value adjustment.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

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

(0309-7926)

Return to Top

November Market Snapshot
With Liz Ann Sonders

What's around the corner?

Watch now

Related Resources

Schwab Portfolio Checkup

Schwab answers your questions on ...