Remaining Steadfast with Your Longer-Term Plan

September 29, 2022
Financial markets are volatile by nature. By diversifying across geographies and asset classes, you can help increase your chances of being invested in whichever asset class is leading at any given time.

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 March 2015 inception, Schwab Intelligent Portfolios has helped 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.

Asset class performance varies from year to year

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.

Figure 1: Top-performing asset classes vary from year to year

Table ranking the performance of eight different asset classes and one diversified portfolio for each year from 2010 to 2017.

Source: Morningstar Direct, as of Dec. 31, 2021.

Indexes used are U.S. large cap stocks, S&P 500® Index; U.S. small cap stocks, Russell 2000® Index; international stocks, MSCI EAFE Index; emerging markets stocks, MSCI Emerging Markets Index; real estate investment trusts, S&P U.S. REIT Index; Treasuries, Bloomberg U.S. Treasury 3-7 Year Index; high-yield bonds, Bloomberg U.S. Corporate High Yield Index; gold and other precious metals, S&P GSCI Precious Metals Index. Not representative of any specific investment or account. Past performance is not a guarantee of future results. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. For more information on indexes, please see schwab.com/indexdefinitions.

Don't let short-term volatility distract you from your financial plan

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.

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.

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.

Diversification, asset allocation, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk, including loss of principal.

The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

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