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Understanding the Schwab Asset Class Quilt®

The Schwab Asset Class Quilt is a valuable tool in understanding market patterns over time. It illustrates how widely the performance of asset classes can vary—ranking them, from best to worst, on a year-over-year basis. As the data shows, there is no discernable pattern, and the Schwab Asset Class Quilt chart should not be used to forecast future results.

Source: Morningstar Direct and the Schwab Center for Financial Research. Data is from January 1, 2008, to December 31, 2017. Asset class performance represented by annual total returns for the following indexes: S&P 500® Index (U.S. Lg Cap), Russell 2000® Index (U.S. Sm Cap), MSCI EAFE® net of taxes (Int’l Dev), MSCI Emerging Markets IndexSM (EM), S&P United States REIT Index and S&P Global Ex-U.S. REIT Index (REITs), S&P GSCI® (Commodities), Bloomberg Barclays U.S. Treasury Inflation-Protection Securities (TIPS) Index, Bloomberg Barclays U.S. Aggregate Bond Index (Core Bonds), Bloomberg Barclays U.S. VLI High Yield TR Index (High Yld Bonds), Bloomberg Barclays Global Aggregate Ex-USD TR Index (Int’l Dev Bonds), Bloomberg Barclays Emerging Markets USD Bond TR Index (EM Bonds), Bloomberg Barclays Short Treasury 1–3 Month Index (T-Bills).

The diversified portfolio is a hypothetical portfolio consisting of 18% S&P 500, 10% Russell 2000, 3% S&P U.S. REIT, 12% MSCI EAFE, 8%, MSCI EAFE Small Cap, 8% MSCI EM, 2% S&P Global Ex-U.S. REIT, 1% Bloomberg Barclays U.S. Treasury, 1% Bloomberg Barclays Agency, 6% Bloomberg Barclays Securitized, 2% Bloomberg Barclays U.S. Credit, 4% Bloomberg Barclays Global Agg Ex-USD, 9% Bloomberg Barclays VLI High Yield, 6% Bloomberg Barclays EM, 2% S&P GCSI Precious Metals, 1% S&P GSCI Energy, 1% S&P GSCI Industrial Metals, 1% S&P GSCI Agricultural, 5% Bloomberg Barclays U.S. Treasury 3-7 Yr. Including fees and expenses in the diversified portfolio would lower returns. The portfolio is rebalanced annually. Returns include reinvestment of dividends, interest and capital gains. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

The Schwab Asset Class Quilt also shows the annualized returns and risk—measured as the standard deviation1 of yearly returns—of the various asset classes. Note that some of them are more volatile than others. For example, emerging markets (EM) has often been one of the very best or worst performing asset classes. It ranked first in 2017 but was second-to-last just two years before in 2015.

You shouldn’t try to pick the best performing asset class—but rather understand that the value of diversification is owning each of the asset classes in the optimal weight for you and your goals. The hypothetical diversified portfolio above (represented by the white squares) owns each of the asset classes. And as you can see, it generally stayed near the middle, mitigating the up-and-down swings of the individual asset classes that it comprises. Of course, the appropriate weighting of each asset class in a portfolio is dependent upon each individual’s risk tolerance, cash flow needs, time horizon and experience in the markets, among other factors.

1 Standard deviation measures the variability of return from one investment to another.

What you can do next

For information on the appropriate asset allocation strategy for you, talk to a Schwab Financial Consultant.

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Important Disclosures:

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Past performance is not guarantee of future results.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax-exempt status (federal and in-state) is obtained from third-parties and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

High yield bonds and lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Treasury Inflation Protected Securities (TIPS) are inflation-linked securities issued by the US Government whose principal value is adjusted periodically in accordance with the rise and fall in the inflation rate. Thus, the interest amount payable is also impacted by variations in the inflation rate as it is based upon the principal value of the bond. It may fluctuate up or down. Repayment at maturity is guaranteed by the US Government and may be adjusted for inflation to become the greater of either the original face amount at issuance or that face amount plus an adjustment for inflation.

Risks of REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer.

Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Index Definitions

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Barclays Emerging Markets USD Bond TR Index tracks the total return for debt instruments of the emerging markets.

Barclays Global Aggregate Ex-USD TR Index is designed to be a broad-based measure of global investment-grade fixed income markets outside of the U.S.

Barclays U.S. Agency Index includes native currency agency debentures from issuers such as Fannie Mae, Freddie Mac, and Federal Home Loan Bank. It is a subcomponent of the Government-Related Index (which also includes non-native currency agency bonds, sovereigns, supranationals, and local authority debt) and the U.S. Government Index (which also includes callable and non-callable agency securities that are publicly issued by U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government (such as USAID securities). The U.S. Agency Index is a component of the U.S. Aggregate Index and the U.S. Universal Index.

Barclays U.S. Aggregate Bond Index is a market-value-weighted index of taxable investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of one year or more.

Barclays U.S. Credit Index tracks all investment-grade corporate and U.S. government issues over $200 million with remaining maturities of between one and ten years.

Barclays US Securitized Bonds Index is a composite of asset-backed securities, collateralized mortgage-backed securities (ERISA-eligible) and fixed-rate mortgage-backed securities.

Barclays U.S. VLI High-Yield TR Index includes publicly issued USD-denominated, non-investment-grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year and have $600 million or more outstanding face value.

Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index is a market-value-weighted index that tracks inflation-protected securities issued by the U.S. Treasury. To prevent the erosion of purchasing power, TIPS are indexed to the non-seasonally adjusted Consumer Price Index for All Urban Consumers, or the CPI-U (CPI).

Barclays Short Treasury 1-3 Month Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of more than one month and less than 3 months. Included securities are investment-grade, have $250 million or more of outstanding face value, denominated in U.S. dollars, fixed rate, and non-convertible.

MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. & and Canada. It consists of 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI EAFE Small Cap Index is an equity index which captures small-cap representation across developed market countries around the world, excluding the U.S. and Canada.

MSCI EM (Emerging Markets)—Total Return Index is a free floatadjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey* and United Arab Emirates.

Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

S&P 500® Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares.

S&P Global REIT ex-U.S. Index measures the investable global real estate investment trust market and maintains a constituency that reflects the market’s overall composition.

S&P United States REIT Index measures the investable U.S. real estate investment trust market and maintains a constituency that reflects the market’s overall composition.

S&P GSCI®(Goldman Sachs Commodity Index) is a world production-weighted index comprised of the principal physical commodities that are the subject of active, liquid futures markets.


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