Portfolio Management January 29, 2016

    When people think about investing for the long run, they often look to average market returns. For example, the broad U.S. stock market has delivered a 10.4% average annual return over the past 30 years, while the average annual return for bonds was 6.8%. However, stocks rarely deliver the average return in any given year—in fact, they have done so only twice since 1986. Instead, as shown in the chart below, returns have swung widely, from up nearly 40% to down nearly 40%.

    Annual stock and bond returns were rarely average over the past 30 years

    By contrast, bonds generated close to their average return about five times over the 30-year period, and showed much less variance from year to year—returns ranged from a gain of approximately 18% to a decline of about 3%. Additionally, bonds were occasionally up when stocks were down, and vice versa.

    Given their different characteristics, including bonds along with stocks can help to diversify a portfolio and potentially generate a smoother pattern of returns over time.

    The right mix may include many asset classes

    U.S. stocks and bonds aren’t the only potential ingredients in the recipe. Other asset classes, such as international stocks, real estate investment trusts (REITs), gold and other precious metals, and cash each have their own unique characteristics that can help diversify a portfolio. Of course, they each come with different investing risks, as well.

    As shown in the chart below, a hypothetical portfolio that held a mix of U.S. and international stocks, bonds, commodities and cash delivered strong growth over time, but with less volatility than stocks alone.

    Diversified portfolios delivered smoother performance that stocks, more growth than bonds

    Stay diversified: Don't try to chase short-term performance

    Short-term performance across asset classes can vary significantly from year to year. It can be tempting to look at the best-performing asset class in any given year and question why you're invested in asset classes that haven't performed as well recently. But leadership across asset classes tends to vary from year to year, so generally a better strategy is to diversify across a mix of stocks, bonds, commodities and cash to benefit from exposure to whichever asset classes are performing well at any given time, while also helping to dampen the volatility of your overall portfolio.

    How Schwab Intelligent Portfolios™ Can Help

    Given the broad range of asset classes to choose from, it can be a challenge to understand which ones and how much of each to invest in based on your goals, time-horizon and risk tolerance. Schwab Intelligent Portfolios is designed to automate this process for you. It builds a diversified portfolio of exchange-traded funds (ETFs) for you based on your current risk profile and automatically monitors your portfolio going forward, rebalancing as needed to help you stay on track toward reaching your goals.

    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 possible loss of principal.

    Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

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


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