Schwab's 7 Investing Principles
The fundamentals you need for investing success.
All currency on this page refers to the U.S. dollar (US$).
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.
Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.
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Source: Schwab Modern Wealth Survey. The online survey was conducted February 1-16, 2021, in partnership with Logica Research among a national sample of Americans aged 21 to 75.
Investing involves risk, including loss of principal. 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.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
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 each 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 2020 Maria had about $66,000 more because she was in the market longer.
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Source: Schwab Center for Financial Research with data from Morningstar. Invested in a hypothetical portfolio that tracks the S&P 500® Index from January 1, 2001–December 31, 2020 for Maria, and from January 1, 2011–December 31, 2020 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 13.9%; Maria's is 7.5%. 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.
2020 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, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you'd stayed invested the whole time.
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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.
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 at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 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.
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Replace with: 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), FTSE U.S. 3-Month Treasury Bill Index (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. This chart represents a hypothetical investment and is for illustrative purposes only.
It's nearly impossible to predict which asset classes will perform best in a given year.
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Source: Morningstar Direct and the Schwab Center for Financial Research. Data is from January 1, 2011, to December 31, 2020. Asset class performance represented by annual total returns for the following indexes: S&P 500® Index (U.S. Lg Cap), Russell 2000® Index (U.S. Sm Cap), MSCI EAFE® net of taxes (Int'l Dev), MSCI Emerging Markets IndexSM (EM), S&P United States REIT Index and S&P Global Ex-U.S. REIT Index (REITs), S&P GSCI® (Commodities), Bloomberg Barclays U.S. Treasury Inflation-Protection Securities (TIPS) Index, Bloomberg Barclays U.S. Aggregate Bond Index (Core Bonds), Bloomberg Barclays U.S. High-Yield Very Liquid Index (High Yld Bonds), Bloomberg Barclays Global Aggregate Ex-USD TR Index (Int'l Dev Bonds), Bloomberg Barclays Emerging Markets USD Bond TR Index (EM Bonds), FTSE U.S. 3-Month Treasury Bill Index.
The diversified portfolio is a hypothetical portfolio consisting of 18% S&P 500, 10% Russell 2000, 3% S&P U.S. REIT, 12% MSCI EAFE, 8%, MSCI EAFE Small Cap, 8% MSCI EM, 2% S&P Global Ex-U.S. REIT, 1% Bloomberg Barclays U.S. Treasury 3-7 Year Index, 1% Bloomberg Barclays Agency, 6% Bloomberg Barclays Securitized, 2% Bloomberg Barclays U.S. Credit, 4% Bloomberg Barclays Global Agg Ex-USD, 9% Bloomberg Barclays VLI High Yield, 6% Bloomberg Barclays EM, 2% S&P GCSI Precious Metals, 1% S&P GSCI Energy, 1% S&P GSCI Industrial Metals, 1% S&P GSCI Agricultural, 5% Bloomberg Barclays Short Treasury 1-3 Month Index. Including fees and expenses in the diversified portfolio would lower returns. The portfolio is rebalanced annually. Returns include reinvestment of dividends, interest, and capital gains. Indexes 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 a hypothetical portfolio that tracks 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 $13,000 and Ana roughly $3,000.
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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 tracks the S&P 500 Index from January 1, 2001, to December 31, 2020, with $3,000 in annual contributions invested for just 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.
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.
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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.
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 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.
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Source: Schwab Center for Financial Research with data from Morningstar. The hypothetical portfolio above is composed of 50% stocks and 50% bonds on 12/31/2009 and is not rebalanced through 12/31/2019. 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.
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.
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Source: Schwab Center for Financial Research with data from Morningstar. The chart illustrates the growth of $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 FTSE U.S. 3-Month Treasury Bill Index (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. Indexes are unmanaged, do not incur fees and expenses, and cannot be invested in directly. This chart represents a hypothetical investment and is for illustrative purposes only.
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