Remaining Steadfast with Your Longer-Term Plan

Following strong market gains in 2020 and 2021, volatility returned with a vengeance in the first half of 2022. After reaching a new all-time high in early January, U.S. stocks as measured by the S&P 500^® tumbled into bear market territory in June for the first time in two years. Bonds also came under pressure due to the rising interest rate environment and a series of Federal Reserve rate hikes to help tamp down soaring inflation. While defensive asset classes such as cash and gold helped moderate overall portfolio declines, the pressure across asset classes has presented a particularly challenging period for investors.

With this recent bout of volatility, it's important to remember that Schwab Intelligent Portfolios^® is designed to provide broad diversification based on your financial goals and tolerance for risk. While still subject to market loss, automated rebalancing within Schwab Intelligent Portfolios accounts helps investors stay on track with their strategic asset allocation plan, including a "buy low-sell high" discipline as markets fluctuate. This can be challenging during periods of market stress, so an automated rebalancing process can help take emotion out of the decision-making process.

While market pullbacks can be unsettling in the short-term, it's important to remember that they typically occur at some point in most years, even though the S&P 500 has delivered a positive return for the full year most of the time. In fact, the S&P 500 saw market corrections of at least 10% in 10 of the last 20 years through the end of 2021, ending with positive returns in all but three of those years.

Bear markets, commonly defined as a 20% decline from a previous high, are even less common. In fact, they've only occurred three times over that 20-year period before the current bear market. Bear markets have also been shorter than bull markets historically. According to the Schwab Center for Financial Research, the average bear market has lasted about a year and a half on average with a decline of about 38%, while bull markets have lasted an average of about eight years with a gain of more than 200%. Of course, both bull and bear markets can be shorter or longer than those averages. Notably, the bear market in 2020 lasted just over a month, while the 2008-2009 bear market extended over about a year and a half.

Since its inception in March 2015, Schwab Intelligent Portfolios has successfully navigated five market corrections and two bear markets including the current one, helping investors maintain their targeted asset allocation through disciplined rebalancing while delivering competitive longer-term returns.

These types of big short-term market movements often leave investors confused about the performance of their own investment portfolios. During these periods, it's important to take a step back and remember some important investing principles, including the benefits of diversification and staying focused on your longer-term plan.

Here are a few key points to keep in mind:

• Markets are volatile by nature and are expected to encounter bouts of volatility from time to time. Investing in a diversified portfolio consistent with your objective and risk profile is designed to help you reach your longer-term goals while smoothing the ride along the way.
• Diversified portfolios include various investments for specific purposes. Stocks provide potential growth but come with higher volatility. Bonds can provide income as well as diversification to help moderate volatility. While interest rates might move higher, bonds still serve these important purposes in a diversified portfolio.
• Various types of investments move in and out of favor over time. Just because one asset class is doing well or poorly at any given time doesn't mean you should include or exclude that asset class from your portfolio.
• A diversified portfolio might outperform or underperform an index such as the S&P 500, which only measures U.S. large cap stocks, on any given day, quarter or year. But short-term returns are not a long-term investment plan. One mistake investors often make during periods of volatility is to try to time markets by changing their portfolio allocation or even moving to cash, potentially locking in short-term losses and missing the rebound—which can occur quickly and sharply as seen in the rapid rebound in 2020. Ignoring the short-term noise and staying focused on your longer-term goals are among the keys to long-term investment success.

As Figure 1 shows, different asset classes constantly move up and down the performance rankings. Top- and bottom-performing asset classes have tended to shift from month to month and year to year with no discernable pattern. By diversifying across geographies and asset classes, you can help increase your chances of being invested in whichever asset class leads at any given time, while not suffering the effect of only owning the weakest performers.

For example, real-estate investment trusts (REITs) were the top performer in 2021 but the bottom performer in 2020. Conversely, gold was the top performer in 2020 but the bottom performer in 2021. Cash has been among the bottom performers in recent years due to the low interest rate environment, but it was the top performer in 2018 and was again the top performer in the first half of 2022, helping provide its intended ballast as equity markets tumbled.

When markets experience big moves downward or upward it can sometimes be challenging to stay focused on your longer-term strategic asset allocation plan. Overreacting to short-term market movement by panicking in the face of volatility or trying to time markets and chase short-term performance is one of the biggest mistakes that investors often make. Instead, having clearly defined longer-term goals and maintaining a commitment to your plan can be key to long-term investment success.

David Koenig, CFA^®, FRM^®, Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios