Seven Principles of Investing

Upbeat music plays throughout.

Narrator: Whether you want to enjoy your retirement years, send a child to college, or just be financially independent, investing is a tool that can help you achieve your goals. While it can sound intimidating, investing doesn't have to be complicated. This set of seven investing principles are the fundamentals you need for investing success.

Principle number one: Establish a financial plan based on your goals.

This begins with setting clear, realistic goals, then writing down a plan to get there. Investors who plan are more likely to take the steps necessary to achieve their financial goals and tend to have better saving habits than those who don't have a written plan.

On-screen text: 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.

Narrator: In fact, 65% of investors who have a written financial plan have an emergency fund compared to only 33% of those who don't. Additionally, those with a written plan are three times as likely to feel "very confident" about reaching their financial goal.

Once you've made a financial plan, make sure you review it at least once a year and adjust it as your life circumstances change.

Principle number two: Start saving and investing today.

To grow wealth, you need time. Regularly contribute as much as you can afford, and don't worry about trying to time market highs and lows.

To illustrate, let's say Maria and Ana each invested $3,000 every year on January 1st for 10 years—regardless of whether the market was up or down.

Animation: Chart shows the power of compounding interest over 20 years.

Narrator: Maria started contributing in January 2001 and stopped after 2010, but she kept the money invested through 2020. Ana, on the other hand, didn't start investing until 2011, and continued contributing through 2020.

On-screen text: Source: Schwab Center for Financial Research with data from Morningstar. 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.

On-screen text: Maria ends with $134,544 over 20 years, and Ana ends with $68,503 over 10 years.

Animation: Chart shows the growth of $30,000 over 20 years vs. 10 years.

Narrator: Even though they both invested a total of $30,000 and Maria hadn't added anything new to her account since 2010, she'd have ended 2020 with about $66,000 more because she was in the market longer.

Even if you can't afford to contribute as much as the example, any contribution can help. And the sooner you start, the more time compounding has to work its magic. Think of investing like planting trees: The best time to start was years ago. The second-best time is now.

Principle number three: Build a diversified portfolio based on your tolerance for risk.

Putting all your eggs in one basket is risky. Different types of investments carry different types of risk, so try to invest in a variety of asset classes—like stocks, bonds, and cash—and within those asset classes, further diversify with different kinds of investments.

On-screen text: Source: Schwab Center for Financial Research with data from Morningstar. 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.¹

Animation: Chart shows the performance of $100,000 in different asset classes.

Narrator: Take a look at this chart. If you invested $100,000 at the beginning of 2000 in large company stocks, it would have grown to almost $425,000 by the end of 2020. But look at how volatile the journey was. If you'd invested in just fixed income assets like bonds or cash investments, it would have been a smoother ride, but you'd have earned less. Investing in a mix of stocks, bonds, and cash would've captured some of the growth of stocks with lower overall volatility.

To decide the right mix of assets for you, consider your risk tolerance. How comfortable are you with temporary losses? It may depend in part on your time horizon or how far off your financial goal is. If retirement is 30 plus years away, you may be able to take more risk. If it's more like five to 10 years away, you may want to take on less risk.

Principle number four: Minimize fees and taxes. Markets are uncertain, but fees and taxes are guaranteed.

Even if fees and taxes seem like small amounts, over time, they can eat away your returns.

On-screen text: Source: Schwab Center for Financial Research with data from Morningstar. Returns are assessed a fee at year-end. 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.

Animation: Chart shows $3,000 a year invested in a hypothetical S&P 500^® portfolio from 2001 to 2020.

Narrator: For example, if you had invested $3,000 in a hypothetical portfolio that tracked the S&P 500^® index every year from 2001 through the end of 2020 without fees, you'd have almost $135,000. If you paid just a 1.5% fee each year, over the life of that portfolio, you'd pay more than $28,000 in fees.

One way to limit fees is to choose investment funds with low expense ratios, which is a percentage of your investment that's paid to the fund provider each year.

On-screen text: Schwab does not provide tax advice. 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.

Narrator: Just like fees, taxes can cut into returns as well. To minimize the impact of taxes if your goal is retirement, consider contributing to tax-advantaged accounts like a 401(k) or an IRA before you contribute to taxable investment accounts.

Principle number five: Protect against significant losses.

Narrator: Some losses are inevitable when investing. But you want to protect yourself from bigger losses that can be hard to bounce back from.

This ties in with diversifying your portfolio—having a mix of investments can help reduce big losses from riskier assets like stocks.

On-screen text: 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.

Animation: Chart shows blended portfolio vs. all-stock portfolio during bear markets.

Narrator: You can see that in market downturns in the 2000s and 2020s, an all-stock portfolio got hit harder and took longer to recover than a diversified portfolio.

Consider managing your risk with government bonds, cash, and other common defensive assets like precious metals.

On-screen text: Source: Schwab Center for Financial Research with data provided by Morningstar. The two periods were selected to show how defensive asset classes performed when U.S. stocks decrease by more than 20% annually in the 20-year time period from 1997 to 2016. Returns assume reinvestment of dividends and interest. Fees and expenses would lower returns. 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.²

Animation: Chart shows defensive asset classes vs. stocks.

Narrator: During market downturns in 2002 and 2008, defensive assets had positive returns while overall U.S. stocks contracted.

Principle number six: Rebalance your portfolio regularly.

Rebalancing means buying and selling assets to keep your portfolio in line with your risk tolerance. As assets grow, an allocation you set years ago can shift if left unattended.

On-screen text: Source: Schwab Center for Financial Research with data from Morningstar. Asset class allocations are derived from a weighted average of the total monthly returns of indexes representing each asset class.³

Narrator: For example, if you invested 50/50 in stocks and bonds in 2009 and left it alone for 10 years, the stocks would've grown to be more than 70% of the portfolio, leaving the portfolio open to more potential risk.

Discipline is important here; rebalancing is one of those things you should do at regular intervals like checking your credit report or changing your oil.

Finally, principle number seven: Ignore the noise.

Animation: Chart shows the growth of $100,000 in a diversified portfolio.

On-screen text: 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. 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.⁴

Narrator: Markets fluctuate day to day, but it's often best to tune out the headlines and focus on your long-term goals.

Historically, markets have increased over the long term. You'll go through some ups and some downs—even some big ones, but long-term investors who stuck to their plans have typically been rewarded.

Whew, that was a lot, so let's sum up.

Establish a financial plan. Start saving and investing today. Build a diversified portfolio. Minimize fees and taxes. Protect against significant losses. Rebalance your portfolio regularly. And ignore the noise.

These seven principles can guide you toward investing success.

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