Rebalancing April 2, 2018

    Markets do fall sometimes. Most investors understand that. But that doesn't necessarily make it any easier to stomach the drops when they come.

    So what can you do about them?

    Consider the following:

    Think before you sell. This isn't easy, especially when other investors seem to be piling toward the exits. But selling assets when the market is dropping can mean turning paper losses into real, permanent ones. After all, dumping investments in a falling market essentially reverses the old line about buying low and selling high.

    This isn't to say you should hold on blindly. If you really can't afford to lose money that you have in the market or will need to spend it soon, then you might not feel like you have a choice. (In which case, you might also need to reconsider your risk tolerance, as we'll see below.)

    However, staying the course could be healthier for your portfolio over time, assuming your portfolio is in tune with your goals and risk tolerance—and you're in it for the long term. The volatile patch won't last forever, and it's incredibly difficult to pick the perfect moment to jump back into the market once you leave. Waiting on the sidelines can mean missing out on the next growth spurt.

    So before you sell, we suggest taking into account an investment's future prospects and the role it plays in your portfolio, rather than being guided by noise and fear.

    Ensure your portfolio is working as intended. There are a lot of steps you can take to manage your risk. The good news here is that Schwab Intelligent Portfolios® automatically performs many of them.

    • Automatic rebalancing. Changes in the market can push your portfolio away from its target allocation. Some assets rise, while others fall. Over time, the risers will likely start to account for too much of your portfolio, while the assets that fall will account for too little. That can be risky because it's nearly impossible to say which assets which will perform best in a given year. Today's riser may be tomorrow's faller.

      To bring your portfolio back into alignment with your goals, Schwab Intelligent Portfolios automatically sells assets that have grown beyond your target allocation and uses the money to buy assets that have shrunk—pursuing a buy low-sell high discipline as markets fluctuate. This can be challenging during periods of market stress, so an automated rebalancing process can help take emotion out of investing decisions. Your portfolio won't necessarily trade every day, but Schwab Intelligent Portfolios does perform daily check-ins and is designed to rebalance as needed—typically resulting in a modest number of trades per year.

    • Diversification. As noted, not all asset classes rise and fall together. The three traditional primary asset classes—stocks, bonds and cash—tend to fare differently in various market environments. Having some exposure to a variety of assets helps your portfolio benefit from the risers, while avoiding being overly concentrated in the laggards.

      Schwab Intelligent Portfolios diversifies globally across stocks, bonds, commodities and cash, with up to 20 asset classes in any single portfolio. This kind of diversification can help manage risk by moderating volatility.
    • Defensive assets. Schwab Intelligent Portfolios includes allocations to defensive asset classes such as cash, gold, and Treasury bonds to help provide diversification and ballast in volatile markets. Such assets tend not to move in lockstep with stocks. 

    • Tax loss harvesting. Eligible investors can also take advantage of tax-loss harvesting in volatile markets. This refers to selling a security at a loss in order to offset recognized capital gains and up to $3,000 of ordinary income a year.

    Revisit your risk tolerance and investment plans. If you're still not feeling reassured, then maybe it's time to think again about your risk tolerance. There's no shame in changing your mind, especially if it means you sleep better at night. If a turbulent market makes you long for a more conservative allocation, then it could be time for a change. It is possible to adjust, while still working toward your goals.

    Similarly, risk you took on years ago may no longer make sense given your current situation and life stage. So if a downturn feels like a wake-up call, then it could be time to consider revisiting your Investor Profile Questionnaire.

    If you're interested in a more in-depth investing plan that combines our automated portfolio technology with professional guidance from a Certified Financial Planner™ professional, you might also consider Schwab Intelligent Portfolios Premium™.

    To learn more, please visit

    Tax-loss harvesting is available for clients with invested assets of $50,000 or more in their account. Clients must choose to activate this feature.

    Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are designed to monitor portfolios on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client's selected risk profile. Trading may not take place daily.

    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.


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