Asset allocation is the foundation of every well-constructed investment portfolio and is at the heart of the advice we at Schwab give when advising clients on their total portfolio. Because it is so important, we have dedicated an entire team of Charles Schwab Investment Advisory (CSIA) experienced analysts to continually use state-of-the-art research and evolve our approach to creating asset allocations designed to improve outcomes for individual investors.

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Schwab Intelligent Portfolios™ Asset Allocation White Paper

High-Yield Bonds: Why "Risky" Asset Classes Can Help Diversify Risk
We developed our approach to address some of the weaknesses of traditional approaches to asset allocation. First, we've incorporated human behavioral considerations because research has shown that investors often feel more strongly about avoiding losses than acquiring gains. As a result, a preference for loss aversion is factored into the portfolio construction process.

Second, asset allocation has evolved from the simple stocks, bonds and cash blend popular in the past. Modern asset allocation now encompasses non-traditional asset classes, like gold or other commodities. In addition, it is now common to divide stocks and bonds into a variety of sub-asset classes. Stocks can be broken up into large and small, domestic and international, and developed and emerging markets. Bond allocations can include Treasuries, agencies, investment-grade corporate bonds and high-yield bonds.

After evaluating the asset allocation approaches used in the market today, our perspective is that our clients will primarily be individual investors who embrace aspects of three different asset allocation philosophies:

  • Traditional diversification – Asset class weights are chosen to maximize the expected return for a given level of risk.
  • Risk budgeting – Weights are assigned to asset classes with the goal of diversifying the sources of risk across multiple asset classes.
  • Goal driven – Asset allocation is designed to achieve a specific goal, such as absolute return, inflation hedge or income, to meet the needs of a variety of investors based on their individual risk profiles and objectives. 
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Schwab Intelligent Portfolios™ Asset Allocation White Paper

High-Yield Bonds: Why "Risky" Asset Classes Can Help Diversify Risk
Cash investments play an important role within a well-diversified portfolio and serve several purposes, including:
  • Greater stability
  • Liquidity
  • Diversification
  • Potential inflation protection
A cash allocation provides stability to help mitigate downside risk. Lower portfolio risk can help moderate downturns and keep investors focused on their longer-term goals. Cash allocations are determined according to an investor's risk profile, with the most risk-averse or short-term portfolios holding the highest levels of cash and the least risk-averse or longer term ones holding the lowest levels of cash.

Cash in Schwab Intelligent Portfolios provides an additional layer of stability in the form of FDIC insurance of up to $250,000 per depositor as it is "swept" into deposit accounts at Schwab Bank, where it also earns a market rate of interest for highly liquid cash investments. Learn More
The appropriate asset allocation differs from person to person depending on their unique situation, risk tolerances, and time frame for their investing goals. The table below shows a sample asset allocation for three individual investors ranging from aggressive to conservative.

Investor 1. A 30-year old who sees herself as aggressive and is saving for retirement. This investor clearly has a long investment horizon (both for starting to withdraw from this portfolio and the period over which the investor would need to withdraw). The primary goal is capital appreciation (growth). Thus, a relatively high allocation to a globally diversified set of riskier asset classes such as US large company stocks, US small company stocks, and international stocks is appropriate. Growth can come from more than just equities and therefore the portfolio also includes US high yield bonds and bonds from emerging markets. While high inflation doesn't appear to be a high risk right now, a time horizon this long means that the investor needs to be prepared for anything. In that spirit the portfolio also includes a small allocation to US and international exchanged-traded REITs, and Gold. Finally, despite the long-term horizon the fact remains that equity markets can be choppy over the short-term. To counteract that some ballast has been added to the portfolio in the form of cash as it's the most reliable and safest of the so-called defensive asset classes.
Investor 2. A 40-year old father whose tolerance for fluctuations in his portfolio value is above average and who is using this account to save for the college expenses of his 3-year-old twins. The twins have about 15 years before they start college and begin withdrawing from the portfolio, but a shorter 4-year horizon over which those withdrawals will occur. The goal is a combination of capital appreciation, income, and being somewhat defensive. The suggested target portfolio contains not only growth-oriented asset classes such as US and international stocks cutting across both market-cap and fundamental strategies, but also income-earning high yield bonds, US and international exchange-traded REITs. This portfolio features a higher percentage in defensive assets (e.g., US bonds, gold, and cash).
Investor 3. A tax-sensitive 65-year old retired investor who is living off his portfolio who wants to reduce portfolio volatility. The primary goal for this investor is to generate adequate income starting now, with some potential for capital appreciation to sustain the portfolio over a long-term. The secondary goal is to protect from inflation. The relatively high allocation to investment-grade municipal bonds and preferred stocks provides sources of income. A significant allocation to the high dividend stocks provides both income and an opportunity for capital appreciation. Allocations to US and international exchanged-traded REITs and Treasury-inflation protected securities provide some inflation protection. Given that lowering portfolio volatility is an explicit goal of this investor, the cash allocation is significantly higher to act as a defense in times of market stress.
  Investor 1 Investor 2 Investor 3
Stocks 85% 61% 28%
US Large Company Stocks 11.0% 8.0% 0.0%
US High Dividend Stocks 0.0% 0.0% 15.0%
US Large Fundamental 16.0% 11.0% 0.0%
US Small Company Stocks 6.0% 4.0% 0.0%
US Small Fundamental 10.0% 7.0% 0.0%
International Developed Large Company Stocks 8.0% 5.0% 0.0%
International Developed Large Fundamental 12.0% 7.0% 0.0%
International Developed Small Company Stocks 4.0% 3.0% 0.0%
International Developed Small Fundamental 5.0% 4.0% 0.0%
International High Dividend Stocks 0.0% 0.0% 10.0%
International Emerging Market Stocks 3.0% 3.0% 0.0%
International Emerging Market Fundamental 5.0% 4.0% 0.0%
US Exchange Traded REITs 3.0% 3.0% 1.0%
International Exchange Traded REITs 2.0% 2.0% 0.0%
Master Limited Partnerships 0.0% 0.0% 2.0%
  Investor 1 Investor 2 Investor 3
Fixed Income 5.0% 23.5% 57.0%
US Treasuries 0.0% 2.0% 0.0%
US Investment Grade Corporate Bonds 0.0% 1.0% 0.0%
US Securitized Bonds 0.0% 4.5% 0.0%
US Inflation Protected Bonds 0.0% 0.0% 8.0%
International Developed Country Bonds 0.0% 3.0% 5.0%
US Corporate High Yield Bonds 2.0% 8.0% 6.0%
International Emerging Market Bonds 3.0% 5.0% 4.0%
Investment Grade Muni Bonds 0.0% 0.0% 27.0%
Preferred Stocks 0.0% 0.0% 2.0%
Bank Loan and other Floating Rate Notes 0.0% 0.0% 5.0%
  Investor 1 Investor 2 Investor 3
Commodities 3.1% 5.0%  
Gold & Other Precious Metals 3.1% 5.0% 0.0%
  Investor 1 Investor 2 Investor 3
Cash 6.90% 10.50% 15.0%