Volatility is a normal part of investing and potential long-term success requires withstanding these inevitable periods of turbulence. This is why having a long-term plan is so critical. So that when a correction or bear market does occur, you're prepared and can avoid falling into the trap of letting emotion drive decision-making.
Keep a steady hand on the tiller to help navigate market pullbacks.
There are a few important points to keep in mind to help you stay focused on your longer-term plan:
- Bear markets have historically been far shorter than bull markets. Since 1966, the average bear market has lasted approximately 15 months and resulted in a 38% decline, according to the Schwab Center for Financial Research. By contrast, the average bull market has lasted nearly six years, with a gain of approximately 210%. The last bull market brought gains of more than 400% over 11 years, while the current bull market saw an advance of more than 120% in less than two years following the shortest bear market (one month) in recorded history and was still up 80% from the March 2020 low despite the pullback in 2022.
- Diversification is designed to help moderate declines. Investing in a diversified portfolio that includes a mix of stocks, bonds, commodities and cash based on your goal, time horizon and risk profile can help moderate overall portfolio volatility. Schwab Intelligent Portfolios includes defensive asset classes such as Treasuries and cash specifically for these periods of volatility. Those investments might not seem important when stocks are going up, but they sure prove their value when stocks are falling.
- Staying the course can help shorten your recovery period. While seeing your portfolio decline never feels good, investing in a diversified portfolio and sticking with your targeted allocation can help speed recovery. Figure 1 shows how the hypothetical moderate risk portfolio would have recovered to break even in less than half the time the U.S. stock market took to reach its previous high. Moderating portfolio declines means you have less ground that you have to make up when markets recover.
Figure 1: Diversification can help shorten recovery periods
Source: Morningstar Direct.
The moderate risk portfolio consists of 60% S&P 500 Index and 40% Bloomberg Barclays Aggregate Bond Index and was rebalanced semi-annually. The 60/40 portfolio recovered from the March 2009 low to reach its previous peak in November 2010, while the S&P 500 did not reach its previous peak until March 2013.
- Market timers risk missing the rebound. Selling in a panic amid a market decline typically means locking in short-term losses and getting off track from your longer-term plan. Staying the course and rebalancing to keep your targeted allocation consistent is generally a wiser strategy. The biggest gains often come in the early stages of a recovery, and missing even just the first month of gains can have a big effect on future performance. As shown in Figure 2, missing just the top 10 days in the market over the past 20 years would have cut annualized returns by nearly half, according to the Schwab Center for Financial Research.
Figure 2: Time in the market is more important than timing the market
Index annualized total return (2002-2021)
Source: Schwab Center for Financial Research with data provided by Standard & Poor's.
Return data is annualized based on an average of 252 trading days within a calendar year. The year begins on the first trading day in January and ends on the last trading day of December, and daily total returns were used. Returns assume reinvestment of dividends. When out of the market, cash is not invested. Market returns are represented by the S&P 500® Index. Top days are defined as the best-performing days of the S&P 500 during the 20-year period. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no guarantee of future results.
Having a longer-term plan and sticking to it is key to investment success
We know that markets can be volatile in the short term. But we also understand that having a long-term strategic asset allocation plan and sticking to that plan through periods of market volatility are among the keys to long-term investment success.
Schwab Intelligent Portfolios is designed to provide broad diversification across up to 20 asset classes in any portfolio, including defensive asset classes such as cash and gold that can help you withstand these inevitable periods of volatility. This broad diversification along with an automated rebalancing process can help provide the discipline to remain calm during short-term volatility while staying focused on longer-term objectives.
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.
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.
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.
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.