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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.

In a study of Americans over 50, successful planners—those who stuck with their plans—achieved an average total net worth three times higher than those who didn't plan.

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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.

Find out how to create a financial plan with Schwab Intelligent Portfolios Premium.™


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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 2017 Maria had about $30,000 more because she was in the market longer.

It pays to invest early chart It pays to invest early chart It pays to invest early chart

Don't try to predict market highs and lows.

2009 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, 2009 but missed the top 10 trading days, you would have had $43,000 less by the end of the year than if you’d stayed invested the whole time.

Growth of $100,000 fully invested versus missing key 2009 trading days chart Growth of $100,000 fully invested versus missing key 2009 trading days chart Growth of $100,000 fully invested versus missing key 2009 trading days chart

Take action on these principles with Schwab's investment advice solutions.


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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 graph Asset classes graph Asset classes graph

Asset classes perform differently.

$100,000 invested in 1997 would have had a volatile journey to nearly $400,000 in 2017 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.

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

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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
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Fees can eat away at your returns.

$3,000 is invested in 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 $9,000 and Ana roughly $3,000.

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 the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Asset location matters. Placing investments in a tax-deferred account can result in higher ending wealth after 20 years.

Differences in account growth chart Differences in account growth chart Differences in account growth chart

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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.

Chart: Steep declines are hard to bounce back from. Chart: Steep declines are hard to bounce back from. Chart: Steep declines are hard to bounce back from.

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.

Chart: Defensive asset classes have performed better when stocks break down. Chart: Defensive asset classes have performed better when stocks break down. Chart: Defensive asset classes have performed better when stocks break down.

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 five years, the portfolio drifted to a 60/40 allocation — and was positioned for larger losses in 2008 than it would have experienced if it had been rebalanced regularly.

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7. Ignore the noise

  • Press makes noise to sell advertising
  • Markets fluctuate
  • Stay focused on your plan
Chart: Goals progress Chart: Goals progress Chart: Goals progress

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.

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.

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Schwab can help you take action on these principles.

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