Our time-tested approach to investing is very straightforward. And we re ready to make it work for you.

Transcription

1 What Works Our time-tested approach to investing is very straightforward. And we re ready to make it work for you. Three important steps. Ten effective principles.

2 Three important steps. Ten effective investing principles. Create a plan 2 Having an investment plan that is realistic and actionable is crucial to meeting goals. Understand your plan, follow it and adjust it when things change in your life. Put it into action Saving and spending rates have the greatest impact on success. Diversification is the second most important factor in reaching goals. Select the asset allocation that s right for you and stick with it. Choosing professionally managed investments can be a better way to invest. Acting now generally beats waiting. Stay on track Periodic checkups keep a portfolio healthy. Progress toward goals is more important than short-term performance. Use the right benchmarks to evaluate performance. Whether you invest on your own, need an occasional sounding board or want us to manage your investments for you, we are committed to helping you understand and do what works.

3 Having an investment plan that is realistic and actionable is crucial to meeting goals. Our investing approach starts with a simple truth: It s hard to get somewhere if you don t know where you re going. Happier with retirement Those who thought ahead a lot 57% Those who thought ahead hardly at all 8% Source: Lusardi, Annamaria, Saving for Retirement: The Importance of Planning, Research Dialogue, TIAA-CREF Institute, December What makes for a good plan? It doesn t have to be complex. In fact, simpler and more straightforward may be better. A good plan: States your goals in terms of how much money you ll need and when. Includes an assessment of how much you ve already saved and how it s invested. Considers all your relevant assets not just those at Schwab. Specifies a suggested saving and/or withdrawal rate. Identifies your risk tolerance. Estimates your potential future investment returns. 4Do a retirement assessment online to see if you re on track. Go to schwab.com/retirementassessment. 4Ready to put these principles to work for you? So are we. Call us to talk or schedule a complimentary consultation at

4 2 Understand your plan, follow it and adjust it when things change in your life. On average, people who stick with a plan tend to have two to three times more wealth than non-planners. So what can you do to give yourself the best chance of sticking with yours? Key factors in your plan s success: You agree with the underlying assumptions of your plan and aren t tempted to bail out when the market goes south. You know that the average return specified by your plan allows for both up years and down years. Planners vs. Non-planners Average total net worth three times higher The amount you plan to save or spend each year is really doable. If it s not, you may fall behind or overspend and get discouraged. You adjust your plan when significant life changes occur. A marriage, job change, birth, loss of a spouse or retirement can significantly affect your assets or savings goals. 4Find helpful checklists for managing major life changes at schwab.com/lifeevents. Non-planners Successful Planners When people were asked if they had a savings plan, those who did and stuck with it had the highest average net worth. Source: Lusardi, Annamaria and Olivia S. Mitchell, Financial Literacy and Planning: Implications for Retirement Wellbeing, October 2006, page 26. Successful planners are defined as those who stuck to their savings plans. The total number of observations is,269. The original data came from a special retirement planning module for the 2004 Health and Retirement Study targeting Americans over the age of 50. 4Ready to put these principles to work for you? So are we.

5 3 Saving and spending rates have the greatest impact on success. At the end of the day, the amount you save and/or spend is the most important factor in achieving goals. The power of increased savings Investing can t do it all. Taking on more investment risk is unlikely to make up for saving too little or spending too much. Even with a well-constructed portfolio, your return is ultimately determined by the markets. While you can t control the markets, you can control how much you save and spend. What are your chances of making $ million last 25 years? 90%, if you spend $47,000 a year Only 50%, if you spend $68,000 a year $600,000 $400,000 $200,000 $0 Saving = $250 per paycheck Saving = $25 per paycheck Time Horizon (Years) To match the effect of saving and investing an extra $25 per paycheck for 25 years, you d need to earn an extra 4.29% per year on your investments without increasing risk. 2 4Explore different saving and spending scenarios with the Retirement Assessment tool at schwab.com/retirementassessment. Simulation assumes average 7.4% rate of return and 2.6% inflation. Spending adjusts for inflation each year. 2 Source: Schwab Center for Financial Research. Savings example assumes that the total savings from the paycheck was invested into the Schwab Aggressive Model Portfolio, whose anticipated annual rate of return over 25 years is estimated at 9.%. The Aggressive Model Portfolio may not be suitable for all clients. This chart represents a hypothetical investment and is for illustrative purposes only. The actual annual rate of return will fluctuate with market conditions. Call us to talk or schedule a complimentary consultation at

6 4 Diversification is the second most important factor in reaching goals. How you diversify your portfolio is key to moderating your risk and driving your portfolio s performance. In fact, it s even more important than the individual securities you choose. Diversifying helps lower portfolio risk Range of annual returns Best Year Average Worst Year 37.4%.2% 26.5% 00% Stocks 26.0% 9.7% 7.2% 40% Stocks 60% Bonds Bonds generally help temper the volatility of stocks. Combining stocks and bonds in different proportions provides varying levels of risk and return. Manage your risk three ways: Diversify across asset classes with a longterm asset allocation (see next page) that combines small-/mid-cap and large-cap U.S. securities, international securities, bonds and cash. Diversify within asset classes to reduce the risk of concentrations in any one market sector, individual company or country. Diversify equity styles by holding both value and growth equity securities to reduce the risks associated with strategies that perform better or worse in certain markets. Avoid this costly mistake. A review of over 2 million investors portfolios found that nearly one-third held more than 20% of their assets in just one stock. 2 What if it s another Enron? 4Check your portfolio s diversification at schwab.com/portfoliocheckup. Diversification strategies do not assure a profit and do not protect against losses in declining markets. 2 Source: Data from more than 2 million Schwab client portfolios as of February 28, 2007, excluding those in Schwab Private Client. 3 Source: Schwab Center for Financial Research with data provided by Ibbotson Associates, Inc. Stocks are represented by total annual returns of the S&P 500 Index, and bonds are represented by total annual returns of the Ibbotson U.S. Intermediate-Term Government Bond Index. The return figures are the average, the maximum and the minimum annual total returns for the portfolios represented in the chart, and are rebalanced annually. Returns include reinvestment of dividends, interest and capital gains. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no guarantee of future results. 4Ready to put these principles to work for you? So are we.

7 5 Select the asset allocation that s right for you and stick with it. We believe it s your asset allocation plan the percentage of stocks, bonds and cash in your portfolio that will ultimately reap the greatest rewards. What s right for you? Your plan should reflect your goals, time frame and feelings about risk. You must be able to stick with it during years when there s a loss instead of a gain. Historic returns for asset allocations by risk profile ( ) 34.4% 30.9% 27.0% 22.8% 8.6% +0.% 9.8% 0.6%.% 6.6% 2.9% 9.% 39.9%.4% 23.8% Best Year Average Worst Year 4Determine your risk profile and target asset allocation with the Schwab Portfolio Checkup tool at schwab.com/portfoliocheckup. Conservative Stocks Large-cap 5% Int l 5% Bonds 50% Cash 30% Moderately Conservative Stocks Large-cap 25% Small-cap 5% Int l 0% Bonds 50% Cash 0% Moderate Stocks Large-cap 35% Small-cap 0% Int l 5% Bonds 35% Cash 5% Moderately Aggressive Stocks Large-cap 45% Small-cap 5% Int l 20% Bonds 5% Cash 5% Aggressive Stocks Large-cap 50% Small-cap 20% Int l 25% Cash 5% Achieving the.4% average yearly return shown above for the Aggressive asset allocation was possible only if you didn t bail out the year the return was 23.8%. Source: Schwab Center for Financial Research with data provided by Ibbotson Associates, Inc. The return figures represented are the average, minimum and maximum annual total returns of hypothetical asset allocation plans. The asset allocation plans are weighted averages of the performance of the indices used to represent each asset class in the plans and are rebalanced annually. Returns include reinvestment of dividends and interest. The indices representing each asset class are S&P 500 Index (large-cap stocks), Russell 2000 Index (small-cap stocks), MSCI EAFE Index Net of Taxes (international stocks), Lehman Brothers U.S. Aggregate Index (bonds) and Citigroup U.S. 3-Month Treasury Bills (cash). CRSP 6-8 was used for small-cap stocks prior to 979, Ibbotson Intermediate-Term Government Bond Index was used for bonds prior to 976, and Ibbotson U.S. 30-day Treasury Bill Index was used for cash prior to 978. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no guarantee of future results. Call us to talk or schedule a complimentary consultation at

8 7 Acting now generally beats waiting. All too often, people take the right steps to create a sound investment strategy and then fail to put it in motion. But if you think you ll do better by waiting until the next perfect time to buy or sell, you re probably wrong. Market timing a big risk. In 2004, three-quarters of the year s return came in just 4 trading days. If you missed those days, your return was dramatically lower. 4Invest regularly the easy way. Set up your Automatic Investment Plan to make regular contributions to selected mutual funds (and avoid temptation to time the market) at schwab.com/aip. 2 The costs of waiting Average ending wealth for four types of investors over all 20-year periods ( ) 3 $200,000 $00,000 $50,000 0 $89,789 INVESTOR A Perfect Timing $76,83 INVESTOR B Invest Immediately $54,292 INVESTOR C Bad Timing $66,890 INVESTOR D Stay in Cash When we compared four hypothetical clients who invested $2,000 a year for 20 years (going back to 926), we found that investing immediately over all 20-year periods on the same day each year regardless of market conditions almost always led to better outcomes. Only an investor with impossibly perfect timing investing on the best day of each year for 20 years did slightly better. And waiting keeping money in cash had the worst results. Source: Schwab Center for Financial Research, The Biggest Mistake You Can Make by Bryan Olson at schwab.com/marketinsight. 2 Schwab s Automatic Investment Plan ( AIP ) does not assure a profit and does not protect against loss in declining markets. 3 Source: Schwab Center for Financial Research, What Is the Right Time to Invest? by Mark W. Riepe at schwab.com/marketinsight. Average results remained unchanged when the study was extended to 2-month periods that begin with a month other than January. In the case of the 2-month period that goes from February to January, Investor B invested immediately on the first day of February in each 2-month period for 20 years. Past performance is no guarantee of future results. Call us to talk or schedule a complimentary consultation at

9 8 Periodic checkups keep a portfolio healthy. Even the best-planned portfolio needs regular evaluation to make sure it continues to reflect your comfort with risk and your strategy for achieving goals. We recommend regular checkups at least annually. What to check for: An asset allocation that no longer matches your risk profile and needs rebalancing. Overconcentrations in particular industries, sectors, companies or equity strategies. Ratings changes on funds and stocks (on average, 0% of A-rated stocks fall to D or F within a year). Life changes that require adjustments to your portfolio. Portfolios go out of balance over time 2002 Balanced Portfolio Moderate Risk 4 years later 2006 Unbalanced Portfolio Increased Risk 60% Stocks 40% Bonds 68% Stocks 32% Bonds This chart shows how your portfolio s composition and risk level can shift on its own as different asset classes in the portfolio increase in value. In this case, the percentage of stocks increased, creating a higher risk potential than the client originally intended. 2 4Sign up for your free Schwab Quarterly Portfolio Profile. Take action based on this detailed quarterly portfolio report at schwab.com/qpp. Schwab Equity Ratings is our proprietary methodology for identifying and rating stocks that we believe will outperform or underperform the market over the next 2 months. 2 Source: Schwab Center for Financial Research with data provided by Ibbotson Associates, Inc. The portfolio above was composed of 60% stocks and 40% bonds on October 3, 2002, and was not rebalanced through October 3, Without rebalancing during that time, on October 3, 2006, stock allocation represented 68% of the portfolio, and bonds represented 32%. Asset class allocations are derived from a weighted average of the total monthly returns of indices representing each asset class. The indices representing the asset classes are the S&P 500 Index (stocks) and the Lehman Brothers U.S. Aggregate Index (bonds). Results assume reinvestment of dividends and interest. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. 4Ready to put these principles to work for you? So are we.

10 9 Progress toward goals is more important than short-term performance. Even star performers have bad years. 99% of equity funds in the top quartile of 0-year performance records had at least one year where poor performance put them in the bottom half of their peer group. You may enjoy tracking the day-to-day fluctuations in the value of your investments, but the truth is, what happens in the short term has little impact on your overall investment outcome. Ask the right questions. Am I saving (or spending) at the rate specified in my investment plan? Is my portfolio still allocated according to my asset allocation plan? Are my decisions driven by recent performance? Or long-term goals? Do I need to adjust my plan for things that have changed in my life? 0 Use the right benchmarks to evaluate performance. No single benchmark is appropriate for all investors. To measure success, you need to use benchmarks that reflect the way you invest. One benchmark is rarely enough. If your portfolio contains a combination of stocks, bonds and cash, you should compare its performance to benchmark indices for each asset category. The performance of your individual investments should be measured against the index that tracks its asset category and against similar investments in its category. Source: Schwab Center for Financial Research. Asset Category Large-Cap U.S. Stocks Small-Cap U.S. Stocks International Stocks Bonds Cash Benchmarks S&P 500 Index Russell 2000 Index MSCI EAFE Index Lehman Brothers U.S. Aggregate Index Citigroup U.S. 3-Month Treasury Bills Call us to talk or schedule a complimentary consultation at

11 Does your future depend on a single stock? Nearly a third of the 2 million portfolios we recently reviewed have 20% or more of assets invested in just one stock. What if it s another Enron? That s a risky situation we d like to help you avoid. Inside: 4Read what makes a good investing plan and how to give yourself the best chance of making it work. 4See why we believe it pays to stick with investing principles that have weathered the test of time in all kinds of markets. 4Learn how to stay on track and remain focused on the things that really matter. Let s discuss what works for you. Call us to talk or schedule a complimentary consultation at See more ways we can help with your investments at schwab.com/financialguidance. Source: Data from more than 2 million Schwab client portfolios as of February 28, 2007, excluding those in Schwab Private Client Charles Schwab & Co., Inc. All rights reserved. Member SIPC. CSA ( ) MKT3999C (02/08)