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7 Investing Principles

The fundamentals you need for investing success.

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1. Establish a financial plan based on your goals

  • Be realistic about your goals
  • Review your plan at least annually
  • Make changes as your life circumstances change

Successful planning can help propel net worth.

Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.

Horizontal bar chart shows how valuable financial planning can be in propelling net worth. Investors with a written financial plan show better savings habits—maintain emergency funds, automate savings, avoid carrying credit card debt, etc.—than those who do not have a written plan.

Source: Schwab Modern Wealth Survey. The online survey was conducted February 1-16, 2021, in partnership with Logica Research among a national sample of Americans aged 21 to 75. 

 

Investing involves risk, including loss of principal. 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.

 

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

 

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

New house-with room to grow

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"If we were to have a family motto it would be that we're building a plane as we're flying it.  We don't really have the opportunity to sit back and plan and approach things with a whole lot of intention, we just make it work."

"Choosing to buy our house was the biggest thing that my husband and I had ever done. When it came time to sign all of those papers, it was kind of nerve wracking. We were wondering if we were making the right choice."

"When we were trying to get the cash together that we needed to do the down payment for the house, I think we were kind of scrambling at the time to find cash wherever we could because we felt that was what we were supposed to be doing."

"We took a loan against my 401K to help us get into the house and now I have to pay back against that loan, against my own money. So I'm paying interest to have borrowed my own money from retirement and I don’t think that was the smartest."

"I kind of look at that financial decision as like a bad haircut. Fortunately we have time to let it grow out. In retrospect I think that it would have been good for us to have some kind of professional guidance about the decisions that we were making." 

"The advice that I would give to other families like us is that it’s okay to ask for help. It’s okay to ask for advice and it’s probably a better idea to do that before you make the big financial decision than after."

Which goals are most important to you? Schwab can help you create a financial plan to reach those goals. 

Important disclosures: 
The information provided is for general informational purposes only and should not be considered as an individualized recommendation or personalized investment advice. 
The opinions discussed may not be representation of the experience of clients and is not a guarantee of future performance or success. Investing involves risks, including loss of principal.

© 2016 Charles Schwab & Co. (Member SIPC) All rights reserved. (0316-E5ZR)

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New house-with room to grow.

Having a financial plan can help you navigate major life events, like buying a new house. Find out what this young couple learned.

See how every Schwab client can get a complimentary plan focused on retirement.

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2. Start saving and investing today

  • Maximize what you can afford to invest
  • Time in the market is key
  • Don't try to time the markets—it's nearly impossible.

 

It pays to invest early.

Maria and Ana each invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2020 Maria had about $66,000 more because she was in the market longer.

Vertical bar chart showing the growth of $30,000 over 20 years versus its growth over 10 years.

Source: Schwab Center for Financial Research with data from Morningstar. Invested in a hypothetical portfolio that tracks the S&P 500® Index from January 1, 2001–December 31, 2020 for Maria, and from January 1, 2011–December 31, 2020 for Ana. The end amount includes capital appreciation and dividends. Dividends are assumed to be reinvested when received. Fees and expenses would lower returns. Ana's average annual rate of return is 13.9%; Maria's is 7.5%. The actual rate of return will fluctuate with market conditions. Past performance is no indication of future results.

 

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Don't try to predict market highs and lows.

2020 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you’d stayed invested the whole time.

Vertical bar chart showing the growth of $100,000 when fully invested versus missing key 2020 trading days.

Source: Schwab Center for Financial Research with data from Morningstar. The year begins on the first trading day in January and ends on the last trading day of December, and daily total returns were used. Returns assume reinvestment of dividends. Fees and expenses would lower returns. When out of the market, cash is not invested. Market returns are represented by the S&P 500 Index, an index of widely traded stocks. Top days are defined as the best performing days of the S&P 500 during 2009. This chart represents a hypothetical investment and is for illustrative purposes only. Past performance is no indication of future results.

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3. Build a diversified portfolio based on your tolerance for risk

  • Know your comfort level with temporary losses
  • Understand that asset classes behave differently
  • Don't chase past performance

Asset classes perform differently.

$100,000 invested at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.

Line chart showing how asset classes perform differently over time, including large-cap equity, moderate allocation, fixed income, and cash equivalents.

Source: Schwab Center for Financial Research with data from Morningstar. The indexes used are: S&P 500® (large cap equity), Russell 2000® (small cap equity), MSCI EAFE® Net of Taxes (international equity), Bloomberg Barclays U.S. Aggregate Bond Index (fixed income), FTSE U.S. 3-Month Treasury Bill Index (cash equivalents). The Moderate Allocation is 35% large cap equity, 10% small cap equity, 15% international equity, 35% fixed income, and 5% cash, using the indexes noted. Past performance is no indication of future results. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. This chart represents a hypothetical investment and is for illustrative purposes only.

It's been nearly impossible to predict which asset classes will perform best in a given year.

Colorful quilt chart showing why diversification makes long-term sense. The chart shows that it’s nearly impossible to predict which asset classes will perform best in any given year.

Source: Morningstar Direct and the Schwab Center for Financial Research. Data is from January 1, 2011, to December 31, 2020. Asset class performance represented by annual total returns for the following indexes: S&P 500® Index (U.S. Lg Cap), Russell 2000® Index (U.S. Sm Cap), MSCI EAFE® net of taxes (Int'l Dev), MSCI Emerging Markets IndexSM (EM), S&P United States REIT Index and S&P Global Ex-U.S. REIT Index (REITs), S&P GSCI® (Commodities), Bloomberg Barclays U.S. Treasury Inflation-Protection Securities (TIPS) Index, Bloomberg Barclays U.S. Aggregate Bond Index (Core Bonds), Bloomberg Barclays U.S. High-Yield Very Liquid Index (High Yld Bonds), Bloomberg Barclays Global Aggregate Ex-USD TR Index (Int'l Dev Bonds), Bloomberg Barclays Emerging Markets USD Bond TR Index (EM Bonds), FTSE U.S. 3-Month Treasury Bill Index.

 

The diversified portfolio is a hypothetical portfolio consisting of 18% S&P 500, 10% Russell 2000, 3% S&P U.S. REIT, 12% MSCI EAFE, 8%, MSCI EAFE Small Cap, 8% MSCI EM, 2% S&P Global Ex-U.S. REIT, 1% Bloomberg Barclays U.S. Treasury 3-7 Year Index, 1% Bloomberg Barclays Agency, 6% Bloomberg Barclays Securitized, 2% Bloomberg Barclays U.S. Credit, 4% Bloomberg Barclays Global Agg Ex-USD, 9% Bloomberg Barclays VLI High Yield, 6% Bloomberg Barclays EM, 2% S&P GCSI Precious Metals, 1% S&P GSCI Energy, 1% S&P GSCI Industrial Metals, 1% S&P GSCI Agricultural, 5% Bloomberg Barclays Short Treasury 1-3 Month Index. Including fees and expenses in the diversified portfolio would lower returns. The portfolio is rebalanced annually. Returns include reinvestment of dividends, interest, and capital gains. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

For illustrative purposes only. Not representative of any specific investment or account.

 

Annualized returns are calculated using data from 1989 through 2019 and include reinvestment of dividends, interest, and capital gains. Stocks are represented by the S&P 500 Index, bonds by Barclays U.S. Aggregate Bond Index and cash by the Ibbotson 3-Month Treasury Bill Index. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested directly. Past performance is not a guarantee of future results.

 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.


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4. Minimize fees and taxes

  • Markets are uncertain; fees are certain
  • Pay attention to net returns
  • Minimize taxes to maximize returns

Fees can eat away at your returns.

$3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save Maria roughly $13,000 and Ana roughly $3,000.

Vertical bar chart reveals year-end account values that show how fees can eat away at an investor's returns.

Source: Schwab Center for Financial Research with data from Morningstar. The hypothetical investor invests $3,000 on the first day of January of every year for 10 years. Returns are assessed a fee at year-end. The hypothetical portfolio tracks the S&P 500 Index from January 1, 2001, to December 31, 2020, with $3,000 in annual contributions invested for just the first 10 years. In scenarios involving fees, those fees are paid annually for 20 years. Chart does not take into account the effects of any possible taxes.

 

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Charles Schwab on taxes

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"The Federal Government, the State Governments all want you to pay exactly the right tax you owe. Now I'm all for that for sure, abide by the rules. But there are some smart ways to offset some of your gains by realizing losses that you might have picked up in your portfolio and I like to match them off as best I can. I like to match off my gains with my losses and so I minimize the amount of taxes I have to pay in any given year. 

There are various ways to do that, of course, and it’s always good to maybe talk to your tax advisor because sometimes it’s very complicated, you don't know all the material ins and outs and answers and so forth, so I would advise using a tax advisor in creating your own personal strategy. 

People can improve the performance of their portfolio by thoughtful tax planning, and that's what I implore for."

Minimizing fees and taxes is just one of Schwab's seven Investing Principles. Find out how to apply our Investing Principles to help achieve your goals. Call us at 888-279-2756. 

This information does not constitute and 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. 
 
©2017 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0317-VTDR)

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Charles Schwab on taxes.

Schwab founder and chairman explains the importance of tax-efficient investing.

Try to minimize taxes.

$3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Asset allocation matters. Placing investments in a tax-deferred account can result in higher ending wealth after 20 years.

Horizontal bar chart showing the difference in account growth when taxes are deferred.

Source: Schwab Center for Financial Research with data from Morningstar. In the tax-deferred hypothetical scenario, $3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. The account earns capital appreciation and dividends. Dividends are assumed to be reinvested when received. Maria makes a lump-sum withdrawal in year 20, when she is in the 25% marginal tax bracket. In the taxable scenario, Maria is in the 25% marginal tax bracket and after taxes invests $2,250 in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years. She invests nothing for the next 10 years, leaving her money fully invested. The account earns dividends, which are taxed at 15%, and recognizes capital gains every 5 years, which are taxed at 15% with net proceeds reinvested. Performance is based on historical returns of the S&P 500 from 2001–2020. This information does not constitute and 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.


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5. Build in protection against significant losses

  • Modest temporary losses are okay, but recovery from significant losses can take years
  • Use cash investments and bonds for diversification
  • Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses1

Steep declines are hard to bounce back from.

In recent downturns, an all-stock portfolio took longer than a diversified portfolio to return to its prior peak.

Line chart showing that steep declines are difficult for investors to bounce back from. The chart shows how an all-stock portfolio can take much longer than a diversified portfolio to return to prior peaks over time.

Source: Schwab Center for Financial Research with data from Morningstar. Stocks are represented by total annual returns of the S&P 500® Index, and bonds are represented by total annual returns of the Bloomberg Barclays U.S. Aggregate Bond Index. The 60/40 portfolio is a hypothetical portfolio consisting of 60% S&P 500 Index stocks and 40% Bloomberg Barclays U.S. Aggregate Bond Index bonds. The portfolio is rebalanced annually. Returns include reinvestment of dividends, interest, and capital gains. Fees and expenses would lower returns. Diversification does not eliminate the risk of investment losses. Past performance is no indication of future results.

Defensive asset classes have performed better when stocks break down.

During two recent market downturns, defensive assets had positive returns—significantly outperforming U.S. stocks.

Vertical bar chart showing how investing in defensive asset classes can help investors avoid losses during market downturns versus having an all U.S. stock position.

Source: Schwab Center for Financial Research with data provided by Morningstar. The two periods were selected to show how defensive asset classes performed when US stocks decrease by more than 20% annually in the 20-year time period from 1997 to 2016. Indexes representing each asset class are S&P 500 TR Index (US stocks), Citi Treasury Bill 3 Month Index (cash), Bloomberg Barclays US Treasury 3-7 Year TR Index (treasuries), S&P GSCI Precious Metal TR Index (precious metals), Bloomberg Barclays Global Aggregate Ex-US Bond TR Index (international bonds). Returns assume reinvestment of dividends and interest. Fees and expenses would lower returns. International investing may involve greater risk than U.S. investments due to currency fluctuations, unforeseen political and economic events, and legal and regulatory structures in foreign countries. Such circumstances can potentially result in a loss of principal. Past performance is no indication of future results. Indexes are unmanaged, do not incur fees and expenses, and cannot be invested in directly. This chart is for illustrative purposes only.

Diversify to manage risk

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I would make out a budget every month to make sure we didn't have more money going out than what was coming in. Being a mother and a nurse working full time, it was hard, and I knew I didn't want to work forever. By the time I retired, I felt like I was where I wanted to be. That was good. And about that time, my brother had just gotten into high risk tech stocks, they were just going up…great gains, you know? I wasn't a person that took a lot of risks, but it just seemed like, hey this is great, I can do this too and I can have it all too. I took all my money out of my retirement fund and put it into high tech. The market started to go down probably within the year. Not knowing that much myself about the whole market, I just didn’t do anything. I lost a good half of what I had in my retirement account. I should not have invested so aggressively in high risk funds in my retirement. I definitely should not have done that.

First thing I did was talk to my son Jeff, he helped me get the other money out of there and he told me what he thought about what I did. And that was okay, I deserved it. You know it’s not like I lost everything but I learned a big lesson from that.

I think as you get older, you do have to look at your funds differently than when you were younger. As you get closer to retirement, you need to be more conservative. I think it’s very important that people get guidance from someone who they can trust. I made a mistake, and if I could keep someone else from making that same mistake, that makes me feel like I’m doing the right thing.

Is your portfolio right for you?

Schwab can help you select investments based on your time horizon, risk tolerance and goals. 

Important disclosures: 
The information provided is for general informational purposes only and should not be considered as an individualized recommendation or personalized investment advice.

The opinions discussed may not be representation of the experience of clients and is not a guarantee of future performance or success. Investing involves risks, including loss of principal.

©Charles Schwab & Co. (Member SIPC) All rights reserved. (0416-EU1U)

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Diversify to manage risk.

Investing too much in any single sector or asset class can result in major losses when markets are volatile. Listen to one woman's experience.


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6. Rebalance your portfolio regularly

  • Be disciplined about your tolerance for risk
  • Stay engaged with your investments
  • Understand that asset classes behave differently

Regular rebalancing helps keep your portfolio aligned with your risk tolerance.

A portfolio began with a 50/50 allocation to stocks and bonds and was never rebalanced. Over the next 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.

Chart showing how regular rebalancing can help keep portfolios aligned with a stated risk tolerance; a portfolio left unattended can stray over time and become riskier.

Source: Schwab Center for Financial Research with data from Morningstar. The hypothetical portfolio above is composed of 50% stocks and 50% bonds on 12/31/2009 and is not rebalanced through 12/31/2019. Asset class allocations are derived from a weighted average of the total monthly returns of indexes representing each asset class. The indexes representing the asset classes are the S&P 500 Index (stocks) and the Bloomberg Barclays U.S. Aggregate Bond Index (bonds). Returns assume reinvestment of dividends and interest. Indexes are unmanaged, do not incur fees and expenses, and cannot be invested in directly. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may increase your tax liability. Rebalancing a portfolio cannot ensure a profit or protect against a loss in any given market environment.


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7. Ignore the noise

  • Press makes noise to sell advertising
  • Markets fluctuate
  • Stay focused on your plan

Progress toward your goal is more important than short-term performance.

Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.

Growth chart showing that long-term investors who stay invested are often rewarded over time.

Source: Schwab Center for Financial Research with data from Morningstar. The chart illustrates the growth of $100,000 invested in the Schwab Moderate Allocation Model. The asset allocation plan is weighted averages of the performance of the indexes used to represent each asset class in the plans and are rebalanced annually. Returns include reinvestment of dividends and interest. The indexes representing each asset class are S&P 500 Index (large-cap stocks), Russell 2000 Index (small-cap stocks), MSCI EAFE Net of Taxes (international stocks), Bloomberg Barclays U.S. Aggregate Index (bonds), and FTSE U.S. 3-Month Treasury Bill Index (cash investments). The Moderate allocation is 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% bonds, and 5% cash investments. Past performance is no indication of future results. Indexes are unmanaged, do not incur fees and expenses, and cannot be invested in directly.  This chart represents a hypothetical investment and is for illustrative purposes only.

Charles Schwab on market volatility

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Volatility to me has always been an issue, like it is for every single investor. Smart investors learn how to live with it and it’s just the nature of investing. So much of investing has to do with the emotional component of the ups and downs. How do you handle it emotionally? The way I do it is pretty simple, pretty straightforward, and it's called diversification. So I might have…I could either use an ETF or I could use a bond fund to have some bonds in my portfolio, or there are individual bonds, a lot of people use them also. Alongside I’d have a chunk of growth stocks and a chunk of very large blue chips as we call them, but have a variety of things in your portfolio and it moderates the ups and the downs. So when a period where the market is up and robust you're probably not going to do quite as well as one of your neighbors but that’s the price of reducing your risk is diversification and I happen to believe in it quite strongly.

Building a diversified portfolio is just one of the Schwab’s seven Investing Principles. 

Find out how to apply our Investing Principles to help achieve your goals. 

Call us at 888-279-2756. 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Each investor needs to review an investment strategy and their asset allocation 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. 

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
 
 ©2017 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0317-USY2)

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Charles Schwab on market volatility.

Schwab's founder and chairman explains the importance of staying calm when markets are not.

2020 Best Online Brokers accolade

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Schwab can help you take action on these principles.

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