Portfolio Management May 27, 2016

    The NBA playoffs are in full swing, and some of the game’s biggest stars have led their teams to memorable wins. It’s easy to appreciate the impact of top performers—especially in a year when Stephen Curry of the Golden State Warriors became the league’s first-ever unanimous MVP. But it takes more than a high-scoring superstar to propel a team to a championship. Many games turn on whether role players step up to provide crucial points, play solid defense and exploit mismatches.

    In short, it takes a deep bench to deliver consistent results.

    Investing is similar—which is why diversification across asset classes is a core component of Schwab Intelligent Portfolios®. Different asset classes tend to do better, relative to one another, under different conditions. So having a “deep bench” of investments means that you don’t have to rely on the sustained outperformance of a single one year after year.

    Change of pace

    Many basketball teams have a key “sixth man,” a player who’s inserted into the game to provide instant offense. Maybe he’s a long-range shooter or a speedy playmaker, but his specialized skill set often adds a different element to the lineup on the floor.

    Fundamentally weighted ETFs provide a similar change of pace in the equity portion of a portfolio. These ETFs track fundamentally weighted indexes—which are based on company fundamentals like sales and cash flow—instead of traditional market-cap indexes based on stock price. We believe that fundamental indexing and market-cap indexing complement each other and help enhance portfolio diversification. And Schwab Intelligent Portfolios is unique among automated investment advisors in including fundamentally weighted ETFs.

    Crunch-time defense

    For all the scoring brilliance of a Stephen Curry, Kevin Durant or LeBron James, less-heralded players are often called upon to defend the opposing team’s greatest offensive threat.

    Defensive specialists are equally important in your asset allocation. Defensive assets typically have low or negative correlation with equity securities—providing stability, downside protection or a hedge against inflation. Cash and precious metal commodities are two asset classes that can play key defensive roles.

    Cash is the most consistently reliable of defensive assets, with lower volatility and greater diversification properties than other asset classes. And cash in a bank account is FDIC insured up to regulated limits. Compared to other investments, cash offers very low yield—especially in a low-interest rate environment—but it can help lower overall risk and volatility within a portfolio.

    Precious metals such as gold tend to perform well during periods of inflation or financial turmoil or when the value of the U.S. dollar is falling. Investing in gold does come with a high level of potential volatility, but it can add diversification to your portfolio because gold tends not to move in lockstep with stocks. Depending on your goals and risk tolerance, a modest gold allocation could make sense for you.

    The hot hand

    If one investment has performed particularly well in your portfolio, should you overweight its allocation? If a basketball player is on a hot streak, should he just keep shooting—regardless of whether others are in a better position to score?

    Much has been written about the so-called hot-hand fallacy in sports like basketball. The question is whether a player who has hit a few shots in a row is more likely to hit his next shot than his overall average would suggest. For years, the conclusion of scholars was a surprising no—that the perception of a hot streak (and the expectation that it will continue) is a cognitive bias. More recent research contradicts these findings. Whatever the case, hot streaks always come to an end.

    When it comes to investing, chasing prior returns is a strategy that often backfires. The performance of asset classes varies from year to year, demonstrating the value of diversification and sticking to a long-term plan.

    How Schwab Intelligent Portfolios can help

    Schwab Intelligent Portfolios offers a “deep bench” of asset classes, with up to 20 in any single portfolio. By recommending a diversified portfolio of ETFs based on your risk profile—and continually rebalancing—it automates many of the coaching decisions for you.

    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.

    Investing involves risks including loss of principal.

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

    The cash allocation in Schwab Intelligent Portfolios is accomplished through enrollment in the Schwab Intelligent Portfolios Sweep Program (Sweep Program), a program sponsored by Charles Schwab & Co., Inc. (“Schwab”). By enrolling in Schwab Intelligent Portfolios, clients consent to having the free credit balances in their Schwab Intelligent Portfolios brokerage accounts swept to deposit accounts at Charles Schwab Bank through the Sweep Program. Schwab Bank is an FDIC-insured depository institution affiliated with both Schwab and Charles Schwab Investment Advisory, Inc. Cash balances held in the Sweep Program at Schwab Bank are eligible for FDIC insurance up to allowable limits.

    Commodity-related products, including gold, carry a high level of risk and are not suitable for all investors. 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.


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