Market Commentary July 31, 2015

    U.S. stocks have rallied for six years without a significant correction, but eventually—if history is any guide—there will be a downturn. If you're using an automated investment platform, like Schwab Intelligent Portfolios®, you may wonder how it will handle a correction, or even an extended bear market. Automated investment platforms can't prevent losses, but they can help in these four ways:

    Diversification is the first step to manage risks: A key to weathering a rough patch in the market is making sure your portfolio is well-diversified at all times. A variety of assets such as stocks, fixed-income securities, cash, and commodities—in weightings based on your investment goals, time-horizon and risk tolerance—can help minimize risk while maximizing potential return. Not all asset classes will behave the same way in any given market environment, and gains in one area of the market can help balance out losses in another.

    It's important to stay invested, even in a declining market: One of the advantages of using an automated platform is that it takes the emotion out of investing. It can be tough to ignore your natural impulse to get out before things get worse during a bear market. But selling otherwise promising investments during a downturn could mean missing out on the rebound—essentially, buying high and selling low.

    Rebalancing can help you "buy low, sell high": When there's a downturn in the stock market, the stock allocation in your portfolio may shrink relative to more conservative asset classes like bonds and cash. This may cause your portfolio to drift from its target allocation and become more conservative than necessary.  In this case, an automated investment platform may sell other investments in order to buy more stocks (while their prices are relatively low) and keep your portfolio's asset allocation consistent with your risk profile—a process known as rebalancing.

    Tax-loss harvesting can soften the blow: Market losses are painful, but there is a potential silver lining: tax-loss harvesting. Using this strategy, an automated investment platform can sell a security that has lost value and use the loss to offset taxable capital gains and up to $3,000 in ordinary income per year. In 2015, if the net loss is more than $3,000, you can claim the remaining loss on next year's taxes. Automated investment platforms can help prevent you from violating the IRS "wash sale" rule, which requires investors to wait at least 30 days before and after the sale before buying a "substantially identical" security.

    Market volatility may be unsettling, but staying invested over the long haul may be smarter than getting in and out of stocks, or not investing at all.

    How Schwab Intelligent Portfolios Can Help

    Bear markets can be scary, but with Schwab Intelligent Portfolios, you can take the emotions out of investing. The algorithm behind Schwab Intelligent Portfolios checks daily for tax-loss harvesting1 and rebalancing2 opportunities, making it easier to stay the course during tough times.

    1. Tax-loss harvesting is available for clients with invested assets of $50,000 or more in their Schwab Intelligent Portfolios account. Clients must enroll to receive this service.
    2. Schwab Intelligent Portfolios is designed to monitor a client's portfolio on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client's selected risk profile unless such rebalancing may not be in the best interest of the client. Trading may not take place daily.

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

    Investing involves risks including possible loss of principal.

    This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Charles Schwab & Co., Inc. (“Schwab”) recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.


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