Schwab Intelligent Portfolios offers you a choice among three investment strategies: Global, U.S. Focused and Income Focused. Each strategy provides access to a well-diversified portfolio of stocks, bonds and cash based on your investment goal, time horizon and comfort level with risk. And, each strategy can be a suitable way to achieve your financial goals, whether you are early in your career, saving for retirement or ready to enjoy your time in the sun.
Schwab Intelligent Portfolios Investment Strategies
| Global | U.S. Focused | Income Focused |
|---|---|---|
| Our flagship portfolios, designed to offer broad and well-diversified exposure to domestic, international and emerging market economies | For those investors who prefer more familiar U.S.-domiciled investments that contain less exposure to international economies and no exposure to emerging market economies | Designed for clients who prefer underlying investments that make higher and more stable interest and dividend payments |
How does an Income-focused strategy differ from other investment strategies in Schwab Intelligent Portfolios?
In most situations, when you purchase an investment or security, your money can grow in two ways: (1) periodic payments in the form of either dividends (from stocks) or interest (from bonds) and (2) a change in value when you sell the security. The former is typically referred to as "yield" and, together, both are called "total return." If it helps, think of owning a rental property—you might receive monthly rental income (yield) from leasing the property to a tenant and, when you go to sell the property, its market value may have increased since the time that you bought it (price return).
Academic theory tells us that a stock's price reflects all the expected future cash flows to shareholders. Therefore, there is a counterbalance between yield and price return: if cash is paid today in the form of a dividend, you might expect the market price of the stock to fall. Schwab Intelligent Portfolios believes it's less important to focus on the yield of your investments and more important to focus on an investment's total return.
All else equal, we understand why some investors may have a preference for more predictable sources of return, like dividend and interest payments.1 The Income-focused strategies include allocations to underlying securities or companies that pay out a higher percentage of their earnings or total return in the form of interest or dividends. But the Global strategies make interest and dividend payments, too.
The difference is that the composition between yield and price return are different for each strategy, with a higher percentage of the Income-focused strategy's total return coming from yield and a lower percentage of the total return coming from an expected increase in value.
Taking withdrawals to generate cash flow from an investment strategy
If you are nearing or in retirement, you are likely most concerned with the "income" (cash flow) that can be drawn from your portfolio. You might also think that if you need cash flow, you should be invested in an Income-focused strategy. This isn't 100% correct. In fact, any of our investment strategies may be appropriate for someone in retirement. And, depending on your financial situation and preferences, the Income-focused strategy may be appropriate even if you aren't yet in retirement.
Here, it's important to distinguish between an investment strategy, and the cash flow that can be generated from an investment strategy. While dividend and interest payments are one source of cash flow, it can be generated several ways—the most obvious and easiest being from cash reserves held in the account. Proceeds from the sale of securities is another very common way to generate cash flow from retirement savings and can be advantageous from a tax perspective.2
The process to generate cash flow when you need it can be difficult and tedious, especially if your desire is to keep your savings invested and working for you while you are withdrawing (and it should be). The first question to ask yourself is: How much do you need and how much can your savings and investments support? Then it's a question of how and from where? Which accounts and which positions or securities? Drawing down cash will not only deplete your cash reserve but will make your remaining portfolio more aggressive.
Decisions about whether to reinvest interest or dividend payments and which securities or positions to sell have both investment and tax implications. It's easy to get overwhelmed. Schwab Intelligent Income was designed to help and to automate these decisions for you—providing tax-smart withdrawals (across any number of enrolled Schwab Intelligent Portfolios accounts) to support "income" (cash flow) needs while keeping your portfolio well-diversified and invested according to your risk profile.3 Many may be accustomed to what we would call a "dividends and interest only" method of generating cash flow. For most, dividend and interest payments are unlikely to cover income needs on their own. Schwab Intelligent Income is more than just dividends and interest payments and will sell securities and rebalance your investments, as needed, to keep you on track to meet your retirement goals.
Conclusion
Schwab Intelligent Portfolios offers investment strategies that can be tailored to your goals, risk tolerance, time horizon, and investment preferences. While there are some notable differences between the underlying holdings of the strategies and source and the composition of your investment return, each provides similar risk and return characteristics and has the horsepower to help achieve your goals. And, when the time comes to turn those investments into a recurring stream of cash flow, Schwab Intelligent Income is here to help.
1 It's important to note that companies can and do cut dividends, and certain borrowers can default on their interest payments.
2 Generally speaking, interest earned is taxed at higher rates than qualified dividend payments, and proceeds from the sales of securities are taxed differently depending on whether you are realizing a gain or a loss, and the holding period of those realized gains or losses.
3 Not to mention peace of mind to know your retirement savings will last, and alerts to keep you on track to meet your retirement goals.
Please read the Schwab Intelligent Portfolios Solutions disclosure brochures for important information, pricing, and disclosures relating to Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.
Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® are made available through Charles Schwab & Co., Inc. ('Schwab'), a dually registered investment adviser and broker-dealer. Portfolio management services are provided by Charles Schwab Investment Management, Inc. ("CSIM"). Schwab and CSIM are subsidiaries of The Charles Schwab Corporation.
There is no advisory fee or commissions charged for Schwab Intelligent Portfolios. For Schwab Intelligent Portfolios Premium, there is an initial planning fee of $300 upon enrollment and a $30-per-month advisory fee charged on a quarterly basis as detailed in the Schwab Intelligent Portfolios Solutions disclosure brochures. Investors in Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium (collectively, “Schwab Intelligent Portfolios Solutions”) do pay direct and indirect costs. These include ETF operating expenses which are the management and other fees the underlying ETFs charge all shareholders. Schwab does not charge an advisory fee for the SIP Program in part because of the revenue Schwab Bank generates from the cash allocation (an indirect cost of the Program). The portfolios include a cash allocation to FDIC‐insured Deposit Accounts at Charles Schwab Bank, SSB ("Schwab Bank"). Schwab Bank earns income on the deposits, and earns more the larger the cash allocation. The lower the interest rate Schwab Bank pays on the cash, the lower the yield. Some cash alternatives outside of Schwab Intelligent Portfolios Solutions pay a higher yield. Schwab Intelligent Portfolios Solutions invests in Schwab ETFs. A Schwab affiliate, Charles Schwab Investment Management Inc., receives management fees on those ETFs. Schwab Intelligent Portfolios Solutions also invests in third-party ETFs. Schwab receives compensation from some of those ETFs for providing shareholder services, and also from market centers where ETF trade orders are routed for execution. Fees and expenses will lower performance, and investors should consider all program requirements and costs before investing. Expenses and their impact on performance, conflicts of interest, and compensation that Schwab and its affiliates receive are detailed in the Schwab Intelligent Portfolios Solutions disclosure brochures. Certain conditions must be satisfied for FDIC insurance coverage to apply. Charles Schwab & Co., Inc. and Charles Schwab Investment Management Inc. are not FDIC-insured banks and deposit insurance covers the failure of an insured bank.
The cash allocation in Schwab Intelligent Portfolios Solutions will be accomplished through enrollment in the Schwab Intelligent Portfolios® Sweep Program (Sweep Program), a program sponsored by Charles Schwab & Co, Inc. By enrolling in Schwab Intelligent Portfolios Solutions, clients consent to having the free credit balances in their Schwab Intelligent Portfolios Solutions brokerage accounts swept to FDIC-insured Deposit Accounts at Charles Schwab Bank, SSB through the Sweep Program. Funds deposited at Charles Schwab Bank, SSB are insured, in aggregate, up to $250,000 per depositor, for each account ownership category, by the Federal Deposit Insurance Corporation (FDIC). The interest rate on cash balances in the Sweep Program is set on the first business day of each month equal to the seven-day yield (with waivers) for the Schwab Government Money Fund – Sweep Shares (symbol: SWGXX) as determined at the end of the prior month. See Current Interest Rates for more details. Charles Schwab Bank, SSB is affiliated with Charles Schwab & Co., Inc. and Charles Schwab Investment Management, Inc. Certain conditions must be satisfied for FDIC insurance coverage to apply. Charles Schwab & Co., Inc. and Charles Schwab Investment Management Inc. are not FDIC-insured banks and deposit insurance covers the failure of an insured bank.
Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® are designed to monitor portfolios on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client’s selected risk profile. Trading may not take place daily.
Schwab Intelligent Income® is an optional feature for clients to receive recurring automated withdrawals from their accounts. Schwab does not guarantee the amount or duration of withdrawals nor does it guarantee meeting Required Minimum Distributions. You may incur IRS penalties for early withdrawal of funds depending on the account type.
Tax‐loss harvesting is available for clients with invested assets of $50,000 or more in their account. Clients must choose to activate this feature. The tax‐loss harvesting feature available with Schwab Intelligent Portfolios Solutions is subject to limitations which are described on the Schwab Intelligent Portfolios Solutions website and mobile application (collectively, the "Website") as well as in the Schwab Intelligent Portfolios Solutions disclosure brochures (the "Brochures"). You should consider whether to activate the tax‐loss harvesting feature based on your particular circumstances and the potential impact tax‐loss harvesting may have on your tax situation. Please read the tax‐loss harvesting disclosures on the Website and in the Brochures before choosing it. Neither the tax‐loss harvesting strategy, nor any discussion herein is intended as tax advice, and neither Charles Schwab & Co., Inc. nor its affiliates, including but not limited to Charles Schwab Investment Management, Inc., represents that any particular tax consequences will be obtained. For more information please visit the IRS website at www.irs.gov.
Diversification, asset allocation, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.