Portfolio Management November 1, 2016

    At Charles Schwab & Co., our disciplined investment approach is based on a set of investing principles developed over more than 40 years. These proven principles form a foundation for our managed investment programs and advice, and have helped thousands of clients navigate complex financial markets in working toward reaching a wide variety of investment goals.

    Schwab Investing Principles
    1. Establish a financial plan based on your goals
    2. Start saving and investing today
    3. Build a diversified portfolio based on your tolerance for risk
    4. Minimize fees and taxes
    5. Build in protection against catastrophic losses
    6. Rebalance your portfolio regularly
    7. Ignore the noise

    Schwab Intelligent Portfolios® is built on Schwab's investing principles

    Schwab Intelligent Portfolios is managed with these principles in mind. Building on Schwab's heritage of innovation, our automated investment advisory program uses the power of technology to simplify investing and reduce costs for individual investors. Each of these investing principles is an important element in building and monitoring your portfolio to help keep you on track toward reaching your financial goals.

    1. Establish a financial plan based on your goals

    With Schwab Intelligent Portfolios, your investment goal is our starting point. Whether you have a savings goal or an income goal, a short investment horizon or a long horizon, your portfolio is designed based on that goal, your time horizon and your risk tolerance. If you have several individual goals, you can open multiple Schwab Intelligent Portfolios accounts. Our Goal Tracker feature allows you to set up your goal at the time you first open each account and then monitor your progress toward that goal on a daily basis to help ensure that you stay on track.

    2. Start saving and investing today

    Schwab Intelligent Portfolios is available at your fingertips. A paperless, online enrollment process allows you to open an account, build a portfolio and fund your account directly online in a matter of minutes. Keep in mind that time in the market is more important than trying to time the market. The sooner you start saving and investing, the longer your account has to potentially grow over time due to the power of compounding. Get started now.

    3. Build a diversified portfolio based on your tolerance for risk

    Whether you're a more conservative investor or a more aggressive investor, Schwab Intelligent Portfolios is designed to recommend a diversified portfolio consistent with your risk profile. A simple online Investor Profile Questionnaire consisting of 12 questions gathers the information that we need to know about your objective, time horizon and risk tolerance. Your answers to these questions allow us to recommend what our rigorous research has determined is an appropriate portfolio for you.

    Portfolios are broadly diversified globally across stocks, bonds, commodities and cash, with up to 20 asset classes in any single portfolio. That's important, because some asset classes, like stocks, are more volatile than other asset classes, such as bonds or cash. And not all asset classes rise and fall together. Different investments tend to lead in performance at different times, and the leaders and laggards can trade places rapidly. Rather than chasing past performance, a diversified strategic asset allocation helps your portfolio benefit from whichever asset classes are leading, while not being overly concentrated in those that are lagging at any given time. For more information on asset allocation, read our white paper.

    4. Minimize fees and taxes

    Schwab Intelligent Portfolios helps reduce the costs of investing, and potentially lower your tax bill in several ways:

    • Indexing: Portfolios are constructed using exchange-traded funds (ETFs) as their building blocks. Each ETF included in the program is selected to ensure accurate asset class representation and low operating expense ratios, which are what the ETF provider charges to manage the ETF. This index-based, or "passive," portfolio is designed to track the market returns of each asset class rather than trying to "beat the market" using higher-cost actively managed funds or by trying to time the market. For more information on ETF selection, read our white paper.
    • No advisory fees: Schwab Intelligent Portfolios doesn't charge advisory fees, trading commissions, or account service fees. These types of fees add up over time and represent a drag on returns, so eliminating them helps keep more money in your pocket.
    • Tax-loss harvesting: For taxable accounts, selling investments that have declined in value to capture the loss while reinvesting in an alternate ETF in the asset class can help reduce your tax bill while at the same time keeping your portfolio's allocation consistent. For more information on tax-loss harvesting, read our white paper.

    5. Build in protection against potential losses

    Schwab Intelligent Portfolios takes a sophisticated approach to asset allocation to help ensure your portfolio is broadly diversified. Different asset classes perform differently in different market environments, so allocating across up to 20 asset classes in any single portfolio helps manage risk by moderating volatility and potential portfolio drawdowns. Along with risk and return considerations, we also take into account behavioral finance and a common investor bias toward loss aversion as part of the asset allocation process.

    Allocations to defensive asset classes such as cash, gold, Treasury bonds and international bonds help to provide diversification and ballast in volatile markets because they tend not to move in lockstep with stocks. For example, during the first weeks of 2016, the S&P 500® Index declined more than 10% in its second market "correction" in less than a year. At the same time, cash was stable and gold advanced more than 15%, helping to offset declines among stocks.

    6. Rebalance your portfolio regularly

    Market prices fluctuate constantly, so you need to rebalance your portfolio periodically to keep its asset allocation stable over time. Rebalancing imposes a disciplined process of buying low and selling high as market prices rise and fall. Over the long term, this can help to reduce risk and potentially improve risk-adjusted returns.

    Rebalancing is one area where technology significantly increases efficiency. With Schwab Intelligent Portfolios, the algorithm is able to automatically check every individual portfolio on a daily basis to compare the current weightings for each asset class with the targeted weightings. Based on a drift tolerance, when any single investment drifts too far from its targeted weight, a rebalancing trade is made to bring its weight back to target. This ensures that trades are made as needed rather than on an arbitrary time-period basis.

    7. Ignore the noise

    Markets are volatile by nature, so when turbulence shakes things up it's important to avoid letting emotions dominate your investment decisions. Succumbing to panic and selling investments when markets drop can make temporary losses permanent. Research has shown that having a financial plan and sticking with that plan through periods of short-term volatility can be key to achieving your investment goals over time.

    Rather than trying to time the markets, we take a longer-term view to deliver a diversified portfolio consistent with your goals and risk tolerance. Schwab Intelligent Portfolios is designed to help take emotion out of the decision-making process by implementing a disciplined process of automated rebalancing and tax-loss harvesting to take advantage of the market's natural volatility and keep you on track toward your financial goals.

    David Koenig CFA®, FRM®, Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios®

    The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Past performance does not guarantee future results.

    Investing involves risks including possible loss of principal.

    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.

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

    There is no guarantee the intended goal, or the duration of future withdrawals associated with those goals, will be reached.

    Schwab Intelligent Portfolios charges no advisory fee. Schwab affiliates do earn revenue from the underlying assets in Schwab Intelligent Portfolios accounts. This revenue comes from managing Schwab ETFs™ and providing services relating to certain third party ETFs that can be selected for the portfolio, and from the cash feature on the accounts. Revenue may also be received from the market centers where ETF trade orders are routed for execution.


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