![]() ![]() See Full Disclosure of chart and indices in the back of the document under Important Information.Īsset classes included in Schwab Intelligent Portfolios Past performance is no indication of future results. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. This chart represents a hypothetical investment and is for illustrative purposes only. ![]() Data is from January 1, 2009- December 31, 2019. For example, a portfolio that falls in value by 50% must grow by 100% to recover from its loss a portfolio that declines by 10% only needs to grow by 11% to recover.Įxhibit 1: Historical performance of $100,000 investment: 1999-2019 It’s not immediately obvious, but the reason lower portfolio risk can lead to higher wealth in the long run is that a portfolio with lower risk generally does not decline as much in a market downturn, so it has less ground to recover to get back to breakeven compared to a portfolio that saw a larger decline. This can be advantageous when growing wealth over time. This example demonstrates the benefit that asset allocation and diversification can offer: better risk-adjusted returns. Interestingly, a 60/40 portfolio slightly outperformed an all stock portfolio and did so with meaningfully less volatility as seen by the reduced drawdown during the so-called “tech bubble” in 2002, the great recession in 2009, and the COVID-19 global pandemic in March 2020. The example below looks at the historical performance of $100,000 invested in a 100% stock portfolio compared to a 60% stock, 40% bond portfolio over the 20 year period from December 1999 to March 2020. In other words, if asset values do not move up and down in perfect harmony, then a diversified portfolio will have less risk than the weighted average risk of its constituent parts. Mathematically, diversification is made possible by the fact that individual assets typically aren't perfectly correlated. Diversification makes intuitive sense-when one asset class suffers, it pays to not have all your eggs in one basket. Nobel Prize-winning economist Harry Markowitz once called diversification "the only free lunch in finance," and this well-known concept forms the basis of our investment strategy. This paper provides a brief overview of diversification and explains the asset classes and investment strategies offered in Schwab Intelligent Portfolios.ĭiversification: "the only free lunch in finance" The goal of asset allocation is to reduce risk through diversification by combining exposures to a variety of investments that have historically performed differently during various market conditions. Asset allocation-dividing an investment portfolio into different asset classes, such as stocks, bonds, commodities, and cash investments -has been the cornerstone of portfolio construction for decades.
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