Risk November 3, 2020

    At Schwab, we believe investing in a diversified portfolio in line with the risk and return suited to your needs, staying the course and ignoring short-term market noise will help you achieve long-term investment success.

    When you opened your account, you answered a series of questions about your goals and risk tolerance to place you into a portfolio best suited to your needs. Schwab Intelligent Portfolios® then provided a tailored portfolio from more than 80 variations (Figure 1).

    Figure 1: 81 Total portfolios with portfolio features

    Within your portfolio, there are many potential combinations of stocks, fixed income, commodities and cash. Each combination entails different levels of risk. For example, an investor saving for retirement 30 years down the road might consider a portfolio that has higher volatility in the short-term in exchange for higher long-term returns. This type of portfolio would be more aggressive, meaning it has a greater allocation to stocks over fixed income and cash. By contrast, an investor nearing retirement or uncomfortable with volatility in returns would invest in a more conservative portfolio with a greater allocation to fixed income and cash instead of stocks.

    Your recommended balance of risk and return, or "risk profile," informs which portfolio is recommended for you. Figure 2 provides a guide to the different risk profiles based on stock allocation, as well as descriptions of each risk profile.

    Figure 2: Risk profiles across the spectrum for Schwab Intelligent Portfolios

    Risk Profile Stock Allocations Description
    Conservative 21 - 22% These portfolios emphasize defensive asset classes such as treasury bonds and cash while holding moderate amounts of volatile investments such as stocks.

    Moderately
    Conservative
    27 - 38% These portfolios have slightly more stocks than the most conservative portfolios but emphasize less volatile asset classes such as bonds and cash.

    Moderate 42 - 53% These portfolios hold more stocks than more conservative offerings but also include more stable bonds and cash to help moderate volatility.

    Moderate Growth 57 - 68% These portfolios have a sizable stock allocation, as they are designed for moderate growth. The bond allocation includes more stable asset classes such as treasuries but also includes high yield bonds and emerging markets bonds, which can be more volatile but provide diversification and upside potential.

    Growth 73 - 83% These portfolios have a large allocation to volatile asset classes such as stocks, emerging markets bonds and high yield bonds. cash and precious metals help provide some stability and diversification, respectively.

    Aggressive Growth 88 - 94% These portfolios emphasize volatile assets such as stocks and have minimal defensive asset classes such as cash.

    Source: Charles Schwab Investment Advisory, as of 9/30/2020

    To determine your risk profile, login to your dashboard and check the Portfolio tab. Use your stock allocation percentage to identify your risk profile using the table in Figure 2.

    Figure 3: Example of a client's portfolio page

    This client has 27.39% of their portfolio in stock, which is considered a Moderately Conservative portfolio.

    Client Portfolio Page

    For illustrative purposes only. Individual situations will vary.

    Each risk profile has different risk and return characteristics

    These different portfolios will have different risk and return characteristics based on the balance of stocks, fixed income, commodities and cash. Figure 4 shows the hypothetical 1-year returns for three portfolio types across the risk spectrum. At the conservative end, hypothetical returns are lower, but the volatility of potential returns in different market environments is also lower. For example, Global Taxable shows only 14% (10.5% to -3.5%). As you move up the risk spectrum, the hypothetical returns increase, but so does the volatility of potential returns – up to 40% (36.1% to -14.6%).

    Figure 4: Risk profiles across the spectrum for Schwab Intelligent Portfolios
    Risk profiles for global Taxable
    Risk profiles for U.S. focused taxable
    Risk profiles for Income Focused Taxable

    Source: Charles Schwab Investment Advisory, as of 9/30/2020. Hypothetical portfolio returns shown are for the Schwab Intelligent Portfolios Global, U.S-focused and Income-focused Total Return Portfolios w/ Taxable Bonds. Potential portfolio returns in different market environments are hypothetical and do not represent actual portfolio performance. The hypothetical 1-year total return for each portfolio is based on the results of a Monte Carlo simulation at the 5th percentile (Weak Market), 50th percentile (Average Market) and 95th percentile (Strong Market). The inputs for the Monte Carlo simulations are the Charles Schwab Investment Advisory, Inc. (CSIA) 2020 capital markets expectations (CMEs) for the expected annualized risk and return for each asset class in each portfolio across the risk spectrum. Schwab Intelligent Portfolios charges no Advisory fees; therefore, performance shown can be considered both Gross and Net of Fees. Portfolio returns for Schwab Intelligent Portfolios Premium would be lower to reflect the program fee of $90 per quarter.

    Note that the returns shown in Figure 4 are hypothetical returns over a 1-year period. Observed returns could be higher or lower than the weak or strong market returns shown, particularly in short-term periods of less than a year. However, over the long term, the range of returns for different risk profiles can help give you an idea of the potential risk and return characteristics from different portfolios across the spectrum.

    Don't just look at return, consider the downside of risk as well

    Knowing your portfolio's anticipated risk and return is critical to ensuring you have the highest potential return possible without taking on more risk than you can stomach. That requires understanding both the anticipated upside return of a portfolio as well as the anticipated volatility or downside of your portfolio. Looking only at the upside can result in taking on more risk than necessary.

    Additionally, basing investment decisions solely on historical returns isn't the best choice either. If the markets become volatile, investors who invested based on high historical return may find themselves facing bigger losses than they'd anticipated. That's why it’s important to invest in a portfolio that’s suited to both your ability to take risk as well as the need for a certain return to reach your goals.

    Understanding your risk profile is key to helping you stay focused on your longer-term goals


    Schwab Intelligent Portfolios recommends a diversified portfolio based on your goals, time horizon, and risk profile and keeps your allocation consistent through automated rebalancing as markets fluctuate to help you stay focused on your longer-term financial goals. Understanding where your portfolio is positioned across the risk spectrum from Conservative to Aggressive Growth is key to understanding how it would be expected to perform over time and in different market environments.

    Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

    Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.

    Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. ("Schwab"), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

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

    ©2020 Charles Schwab Investment Advisory, Inc. All Rights Reserved.  (1020-0CFJ)


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