Investing Principles
Investing Principles

Schwab's 7 Investing Principles

The fundamentals you need for investing success.

All currency on this page refers to the U.S. dollar (US$).

Grayscale road

1. Establish a financial plan based on your goals.

  • Be realistic about your goals.
  • Review your plan at least annually.
  • Make changes as your life circumstances change.

Successful planning can help propel net worth.

In a study of Americans over 50, successful planners—those who stuck with their plans—achieved an average total net worth three times higher than those who didn't plan.

People Who Planned Chart

Original data was based on 1,269 observations and came from a special retirement planning module for the 2004 Health and Retirement Study targeting Americans over the age of 50. Source: Lusardi, Annamaria, and Mitchell, Olivia S., "Financial Literacy and Planning: Implications for Retirement Wellbeing," May 2011, page 29. ©2011 by Annamaria Lusardi and Olivia S. Mitchell. All rights reserved.

Runners

2. Start saving and investing today.

  • Maximize what you can afford to invest.
  • Time in the market is key.
  • Don't try to time the markets—it's nearly impossible.

It pays to invest early.

Maria and Ana invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2017 Maria had about $30,000 more because she was in the market longer.

It Pays to Invest Early chart

Source: Schwab Center for Financial Research with data from Morningstar. The hypothetical portfolio is invested entirely in the S&P 500® Index from January 1, 1998–December 31, 2017 for Maria, and from January 1, 2008–December 31, 2017 for Ana. The end amount includes capital appreciation and dividends. Dividends are assumed to be reinvested when received. Fees and expenses would lower returns. Ana's average annual rate of return is 6.9%; Maria's is 7.7%. The actual rate of return will fluctuate with market conditions. Past performance is no indication of future results.

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

Don't try to predict market highs and lows.

2009 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2009 but missed the top 10 trading days, you would have had $43,000 less by the end of the year than if you’d stayed invested the whole time.

Don't try to predict market highs and lows chart

Source: Schwab Center for Financial Research with data from Morningstar. The year begins on the first trading day in January and ends on the last trading day of December, and daily total returns were used. Returns assume reinvestment of dividends. Fees and expenses would lower returns. When out of the market, cash is not invested. Market returns are represented by the S&P 500 Index, an index of widely traded stocks. Top days are defined as the best performing days of the S&P 500 during 2009. This chart represents a hypothetical investment and is for illustrative purposes only. Past performance is no indication of future results.

Roadsign image

3. Build a diversified portfolio based on your tolerance for risk.

  • Know your comfort level with temporary losses.
  • Understand that asset classes behave differently.
  • Don't chase past performance. 

Assets classes perform differently.

$100,000 invested in 1997 would have had a volatile journey to nearly $400,000 in 2017 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.

Asset Class performace chart

Source: Schwab Center for Financial Research with data from Morningstar. The indexes used are: S&P 500 (large cap equity), Russell 2000 (small cap equity), MSCI EAFE Net of Taxes (international equity), Bloomberg Barclays U.S. Aggregate Bond Index (fixed income), Citigroup 3-Month U.S. T-Bills (cash equivalents). The Moderate Allocation is 35% large cap equity, 10% small cap equity, 15% international equity, 35% fixed income, and 5% cash, using the indexes noted. Past performance is no indication of future results.

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

It's nearly impossible to predict which asset classes will perform best in a given year.

Asset class chart

Source: Charles Schwab &Co., Inc. with data from FactSet, MSCI as of 12/31/2017. Geographical performance is represented by annual total returns of the following: MSCI AC WORLD, MSCI USA, MSCI Japan, MSCI UNITED KINGDOM, MSCI Switzerland, MSCI Germany, MSCI France, MSCI Canada, MSCI Australia , MSCI Nordic Countries, MSCI Spain, MSCI EM( Emerging Markets). Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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4. Minimize fees.

  • Markets are uncertain; fees are certain.
  • Pay attention to net returns.

Fees can eat away at your returns.

$3,000 is invested in the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save Maria roughly $9,000 and Ana roughly $3,000.

Mobile Fees chart

Source: Schwab Center for Financial Research with data from Morningstar. The hypothetical investor invests $3,000 on the first day of January of every year for 10 years. Returns are assessed a fee at year-end. The hypothetical portfolio is invested entirely in the S&P 500 Index from January 1, 1998 to December 31, 2017 with $3,000 in annual contributions for the first 10 years. In scenarios involving fees, those fees are paid annually for 20 years. Chart does not take into account the effects of any possible taxes.

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

Grayscale chart

5. Build in protection against significant losses.

  • Modest temporary losses are okay, but recovery from significant losses can take years.
  • Use cash investments and bonds for diversification.
  • Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses.1

Steep declines are hard to bounce back from.

In recent downturns, an all-stock portfolio took longer than a diversified portfolio to return to its prior peak.

 

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Source: Schwab Center for Financial Research with data from Morningstar. Stocks are represented by total annual returns of the S&P 500® Index, and bonds are represented by total annual returns of the Bloomberg Barclays U.S. Aggregate Bond Index. The 60/40 portfolio is a hypothetical portfolio consisting of 60% S&P 500 Index stocks and 40% Bloomberg Barclays U.S. Aggregate Bond Index bonds. The portfolio is rebalanced annually. Returns include reinvestment of dividends, interest, and capital gains. Fees and expenses would lower returns. Diversification does not eliminate the risk of investment losses. Past performance is no indication of future results.

Defensive asset classes have performed better when stocks break down.

During two recent market downturns, defensive assets had positive returns—significantly outperforming U.S. stocks.

Defensive Assets Chart

Source: Schwab Center for Financial Research with data provided by Morningstar. The two periods were selected to show how defensive asset classes performed when US stocks decrease by more than 20% annually within the last 20 years (1997-2016). Indexes representing each asset class are S&P 500® TR Index (US stocks), Citi Treasury Bill 3 Month Index (cash), Bloomberg Barclays US Treasury 3-7 Year TR Index (treasuries), S&P GSCI Precious Metal TR Index (precious metals), Bloomberg Barclays Global Aggregate Ex-US Bond TR Index (international bonds). Returns assume reinvestment of dividends and interest. Fees and expenses would lower returns. International investing may involve greater risk than U.S. investments due to currency fluctuations, unforeseen political and economic events, and legal and regulatory structures in foreign countries. Such circumstances can potentially result in a loss of principal. Past performance is no indication of future results.

Grayscale boat

6. Rebalance your portfolio regularly.

  • Be disciplined about your tolerance for risk.
  • Stay engaged with your investments.
  • Understand that asset classes behave differently.

Regular rebalancing helps keep your portfolio aligned with your risk tolerance.

A portfolio began with a 50/50 allocation to stocks and bonds, and was never rebalanced. Over the next five years, the portfolio drifted to a 60/40 allocation—and was positioned for larger losses in 2008 than it would have experienced if it had been rebalanced regularly.

Rebalance portfolio chart

Source: Schwab Center for Financial Research with data from Morningstar. The portfolio above is composed of 50% stocks and 50% bonds on 12/31/2002, and is not rebalanced through 12/31/2007. Asset class allocations are derived from a weighted average of the total monthly returns of indexes representing each asset class. The indexes representing the asset classes are the S&P 500 Index (stocks) and the Bloomberg Barclays U.S. Aggregate Bond Index (bonds). Returns assume reinvestment of dividends and interest. Indexes are unmanaged, do not incur fees and expenses, and cannot be invested in directly. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may increase your tax liability. Rebalancing a portfolio cannot ensure a profit or protect against a loss in any given market environment.

Grayscale mountains

7. Ignore the noise.

  • Press makes noise to sell advertising.
  • Markets fluctuate.
  • Stay focused on your plan.

Progress toward your goal is more important than short term performance.

Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.

Progress Goals chart

Source: Schwab Center for Financial Research with data from Morningstar. The chart illustrates the growth of US$100,000 invested in the Schwab Moderate Allocation Model. The asset allocation plan is weighted averages of the performance of the indexes used to represent each asset class in the plans and are rebalanced annually. Returns include reinvestment of dividends and interest. The indexes representing each asset class are S&P 500® Index (large-cap stocks), Russell 2000® Index (small-cap stocks), MSCI EAFE® Net of Taxes (international stocks), Bloomberg Barclays U.S. Aggregate Index (bonds), and Citigroup U.S. 3-month Treasury bills (cash investments). The Moderate allocation is 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% bonds, and 5% cash investments. Past performance is no indication of future results.

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