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OnInvesting
Investing
STRATEGIES & IDEAS FOR THE CHARLES SCHWAB COMMUNITY • FALL 2013
Examine What’s
In Your Index
PAGE 14
Are Fees Eroding
Your Returns?
PAGE 28
Commodities:
A How-To Guide
PAGE 20
INFLATION:
Should You Be Worried? PAGE 10
dSW_FA13_C1_cover.indd 1
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T:8”
From Schwab Bank Call 1-877-416-7138
to apply for a purchase
loan by 10/31/13.1
The right place. schwab.com/homepurchaseoffer
The right mortgage.
Right now,
save up to $1,000
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getting the home you want easier.
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A dedicated Quicken Loans team Our average closing time is 40 Get a $1,000 discount on closing
will assist you through the entire days or less, and the process costs for a jumbo loan or $500
process and even help you get is made even simpler with off conforming or high-balance
pre-approved the same day—free documents you can sign and loans when you apply by 10/31/13.1
of charge. upload electronically.2 S
Quicken Loans was ranked “Highest in Customer
Satisfaction for Primary Mortgage Origination” in the
U.S.—three years in a row by J.D. Power and Associates.3 I
r
1. In order to participate, you must agree that the lender, Quicken Loans, may share your information with Charles Schwab Bank. Offer available for purchase mortgages only and includes all first mortgage loans offered through t
Schwab Bank’s home lending program provided by Quicken Loans. Purchase loan applications must be registered between 5/1/13 and 10/31/13 to receive the closing cost offer. A registered loan is one that has an assigned
loan number and a purchase sales agreement. Your application date is printed on the Good Faith Estimate (GFE). You will receive a $500 closing cost credit for conforming and high-balance loans or a $1,000 closing cost credit *
for jumbo loans. High-balance loan limits can differ among high-cost areas but currently cannot exceed $625,500. Larger loan limits are available in the states of Alaska and Hawaii. The closing cost credit will appear on the a
borrower’s final HUD-1 statement at closing. Offer is good only for mortgages that close. Additional details may apply. Nothing herein is or should be interpreted as an obligation to lend. Loans are subject to credit and property
approval. This offer is subject to change or withdrawal at any time and without notice. p
2. Average monthly closing time for purchase loans between October 2012 and May 2013 is 40 days or fewer from the date the interest rate is locked. t
3. Quicken Loans received the highest numerical score in the proprietary J.D. Power and Associates 2010–2012 U.S. Primary Mortgage Origination Satisfaction Studies.SM 2012 study based on 3,552 total responses measuring S
19 lenders and measures opinions of consumers who originated a new mortgage. Proprietary study results are based on experiences and perceptions of consumers surveyed in July–August 2012. Your experiences may vary. Visit f
jdpower.com.
Charles Schwab Bank and Charles Schwab & Co., Inc., are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Investment products are offered by Charles Schwab & Co., Inc. (member SIPC). C
Charles Schwab & Co., Inc., does not solicit, offer, endorse, negotiate, or originate any mortgage loan products and is neither a licensed mortgage broker nor a licensed mortgage lender. Home lending is offered and provided by Quicken s
Loans Inc., Equal Housing Lender. Quicken Loans Inc. is not affiliated with The Charles Schwab Corporation, Charles Schwab & Co., Inc., or Charles Schwab Bank. Deposit and other lending products are offered by Charles Schwab
Bank, Member FDIC and an Equal Housing Lender. 6
Quicken Loans is an Equal Housing Lender. Quicken Loans Inc. is a licensed mortgage lender. Arizona: Quicken Loans Inc., 16425 North Pima, Suite 200, Scottsdale, AZ 85260, Mortgage Banker License #BK-0902939; D
Arkansas: Quicken Loans Inc., 1050 Woodward Avenue, Detroit, MI 48226-1906, 1-888-474-0404; California: Licensed by the Department of Corporations, CA Residential Mortgage Lending Act; Colorado: Quicken Loans Inc.,
NMLS #3030, 1-888-474-0404, Regulated by the Division of Real Estate; Georgia: Residential Mortgage Licensee #11704, 1050 Woodward Avenue, Detroit, MI 48226-1906; Illinois: Residential Mortgage Licensee #4127, I
Department of Financial and Professional Regulation, 1050 Woodward Avenue, Detroit, MI 48226-1906; Maine: Quicken Loans Inc., Supervised Lender License NMLS #3030; Massachusetts: Quicken Loans Inc., Mortgage t
Lender License #ML-3030; Minnesota: Not an offer for a rate lock agreement; Mississippi: Licensed by the Mississippi Department of Banking and Consumer Finance; New Hampshire: Licensed by the NH Banking Department,
#6743MB; New Jersey: Licensed Mortgage Banker—NJ Department of Banking, first (and/or second) mortgages only; New York: Licensed Mortgage Banker—NYS Banking Department; Oregon: Quicken Loans Inc., License &
#ML-1387; Pennsylvania: Licensed as a first Mortgage Banker by the Department of Banking and licensed pursuant to the Pennsylvania Secondary Mortgage Loan Act; Rhode Island: Licensed Lender; Texas: Quicken Loans Inc., “
1050 Woodward Avenue, Detroit, MI 48226-1906; Virginia: Quicken Loans Inc., NMLS ID #3030 (www.nmlsconsumeraccess.org); Washington: Licensed by Consumer Loan Company License CL-3030. Quicken Loans Nationwide
Mortgage Licensing System #3030. Rates are subject to change. Restrictions may apply. &
Lending services provided by Quicken Loans Inc., a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license. i
Charles Schwab Bank, 211 Main Street, San Francisco, CA 94105
D
©2013 Charles Schwab Bank. All rights reserved.
t
Member FDIC. Equal Housing Lender. CLB (0913-5135) ADP75809-00 (09/13) ©
044312_Mortgage_Promo_Update_Ad_R2.indd 1 7/24/13 4:26 PM ADP74651
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07/25/13
Contents
Investors should
consider carefully
information contained
in the prospectus,
including investment
objectives, risks, charges
and expenses. You can 24
request a prospectus
by calling 800-435-
4000. Please read the 4
prospectus carefully
before investing.
Investment value will
fluctuate, and shares,
when redeemed, may be
worth more or less than 20 8
the original cost.
The information provided
f e At u r e s d e PA r t m e n t s
here is for general purposes
only and should not be 20 CommodItIes: 2 Ceo’s note 17 Active trader
considered an individualized A how-to guIde Staying true to our roots. A Schwab Active Trader
recommendation or What you should know about By Walt Bettinger Market Manager answers
personalized investment investing in commodities. top technical analysis
advice. The types of 3 Community questions.
securities and strategies Women and investing.
mentioned may not be 24 don’t gIve uP 32 spotlight
suitable for everyone. on bonds 4 bottom Line The latest products and
Each investor needs Despite today’s low interest Frontier markets, services from Schwab.
to review a security rates, bonds still make sense consumer confidence
transaction and investment
strategy for his or her
for many investors. surveys and more. 35 research
own particular situation. schwab mutual fund
Data herein are obtained 28 Are fees erodIng 8 Ask Carrie onesource select
Life insurance for life. List ®
from what are considered Your returns? By Carrie Schwab-
reliable sources; however, Understanding the true costs of
accuracy, completeness your investments.
Pomerantz 44 schwab Income
and reliability cannot be mutual fund
guaranteed. 10 Perspectives select List ®
economy
No part of this material go PAPerLess Should you be worried 46 schwab etf
may be reproduced or about inflation? select Listtm
distributed to others by Log in to schwab.com/ By Liz Ann Sonders
any means without the oIpaperless to receive 50 Argus research
prior written permission
of Schwab (or its affiliates).
email alerts when new 12 stocks Can small caps continue
issues of On Investing Q&A with Greg Thomas, to outperform?
Photocopying, including
are available online. Chief Investment By John M. Eade
transmission by facsimile,
You can also Strategist at
is prohibited and subject
ThomasPartners, Inc.
to liability. Copyright ©2013 scan here to 52 on Your side
Charles Schwab & Co., Inc. download the Investors like you.
All rights reserved. Member 14 Indexing By Charles R. Schwab
SIPC. (0913-4793) On Investing What’s in your index?
app for iPad®. By Anthony B. Davidow
On Investing (ISSN 1523-5327) is published quarterly. This publication is mailed at Standard A postal rates.
Cover Illustration: Eiko Ojala
If you prefer not to receive On Investing, please call 877-908-0065.
POSTMASTER: Send address changes to On Investing, Charles Schwab & Co., Inc., P.O. Box 52114, Phoenix, AZ 85072–2114. On Investing does not assume any liability resulting
from actions taken based on the information included in this magazine. Mention of a company or security does not constitute endorsement. Some contributors to On Investing
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FALL 2013 • on InvestI ng
1
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ceo’s note
Staying True to
our Roots
After four decades, we still strive to
offer innovative products designed
with our clients’ interests in mind.
W
hen Chuck Schwab started the traditional market-capitalization
this company back in 1973, he strategy, which selects and weights based
set out with a singular goal: on the total market value of a company’s
Advocate and innovate on behalf of Main shares. We believe fundamental indexing
Street investors. Today, that premise still can serve as a complement to a portfolio
defines who we are and what we do. of traditional capitalization-weighted
We believe investors deserve to have
access to products and services that have
investments or as a standalone strategy.
Either way, fundamental indexing W
“on top of expanding
clear goals and transparent fees—and
that are offered at a great value. In recent
can add to the diversification of your
investment portfolio. You can learn In
our offering of months, our clients have seen that all more about fundamental indexing
commission-free come together with the launch of Schwab from Anthony Davidow’s article,
S
etFs, we’re also doing ETF OneSource™, a marketplace that “What’s in Your Index?” on page 14. a
our part in offering offers investors commission-free online These are just two of the ways we fe
you more options in trading of more than 100 exchange- are continuing to innovate on your
traded funds from leading providers.1 behalf. We’re always striving to offer you
B
the etF space.” ETF OneSource offers clients real choice products and services that allow you to
and real value—a Schwab specialty. invest the way you want to—with choice,
On top of expanding our offering of clarity and great value.
commission-free ETFs, we’re also doing de
our part in offering you more options Sincerely, to
in the ETF space. Recently, we launched fa
six new ETFs based on fundamental
indexing—an indexing strategy that m
selects and weights securities based on Walt Bettinger lif
fundamental factors rather than using President & CEO U
at
1
Conditions apply: Trades in ETFs available through Schwab ETF OneSource™ (including Schwab ETFs™) are available without commissions when placed online in a Schwab account. A
Service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange processing fee applies to sell transactions. Certain types of Schwab ETF
OneSource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including Schwab ETFs). Schwab reserves the right to change the ETFs we
make available without commissions. All ETFs are subject to management fees and expenses. Please see Charles Schwab Pricing Guide for additional information.
1
“W
Th
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and pe
expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.
Sc
Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Ch
Shares are bought and sold at market price, which may be higher or lower than the net asset value.
©
Diversification strategies do not assure a profit and do not protect against losses in declining markets.
Charles Schwab & Co., Inc., receives remuneration from third-party ETF companies participating in Schwab ETF OneSource for record keeping, shareholder services and
other administrative services, including program development and maintenance.
Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO). SIDCO is not affiliated with Charles Schwab & Co., Inc. Learn more at schwab.com/schwabETFs. c
Charles Schwab Investment Management, Inc., is the investment advisor for Schwab ETFs and an affiliate of The Charles Schwab Corporation.
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3346)
2 cHaR leS ScHWaB • FALL 2013
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community
oninvesting
g BoaRd of adviSoRS
Jonathan Craig
Executive vice President
Women and
Chief Marketing Officer
is to be burdened by the task of managing
their finances alone.”
Mark W. Riepe, CFA
investing Schwab offers several workshops
and events to help women get started
Senior vice President
Schwab center for financial Research
with investing, develop a financial plan
Schwab offers education and much more. “Most women leave Helen Loh
and resources for feeling empowered,” Lindsey says. “They
vice President
content & client marketing
female clients. really connect with the content and find
themselves learning from others.” Larry Hanback
Pam Johnson, a Schwab client, agrees vice President
B
marketing Strategy & operations
y 2020, women will control and finds value in the workshops she
, $22 trillion in investable assets, regularly attends at her branch. “I like
EditoR in chiEf
an 83% increase in less than a hearing questions and comments from Tamar Dorsey
decade.1 Therefore, it’s crucial for women other workshop attendees,” says Pam.
to take an active role in managing overall “The workshops keep me up to date on managing EditoR
family finances, including investments. the market and motivate me to actively Jennifer Newton
“I’ve had many female clients come to manage my portfolio.” -
me for help after experiencing a major aSSociatE managing EditoR
life change, such as divorce,” says Lindsey Caitlin White
nExt StEPS
Underwood, CFP®, a Portfolio Consultant Find in-branch and
tRading EditoR
at Schwab Private Client Investment online workshops at
Stephanie May
nt. Advisory, Inc. “The last thing they want schwab.com/oIworkshops.
F
we contRiButoRS
1
“Women and Wealth: The Invisible Opportunity,” First Clearing, November 2012. Walt Bettinger
The testimonial may not be representative of the experience of other clients and is not a guarantee of future Anthony B. Davidow
performance or success. John M. Eade
Schwab Private Client Investment Advisory, Inc., is a registered investment advisor and an affiliate of Charles R. Schwab
Charles Schwab & Co., Inc. Carrie Schwab-Pomerantz
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3596) Liz Ann Sonders
connEct
With uS 800-435-4000 schwab.com facebook.com/ twitter.com/ oninvestingeditor@
charlesschwab charlesschwab schwab.com
FALL 2013 • on invESting
3
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the bottom line
Searching for the next Frontier
Frontier markets may make sense as part of a diversified portfolio.
e
merging markets— population and are poised for
nations in the process rapid growth.2
of rapid growth and But she cautions that these
industrialization—are a economies come with unique
common part of many investors’ risks—such as political instability,
international investing murky regulatory regimes and,
strategies. Lesser known are often, higher trade-processing
frontier markets, a subset of fees that can drive up investing
the emerging-market category costs. Therefore, they may be more
that includes countries with volatile than established markets.
lower market capitalization To help mitigate these risks,
and liquidity, such as Vietnam, Michelle recommends taking a
Nigeria and Qatar. diversified approach by investing
Michelle Gibley, Director of through mutual funds or exchange-
International Research at the traded funds, limiting exposure
Schwab Center for Financial to frontier markets to a very small
Research, says frontier markets allocation of your total portfolio
are worth considering as part of and taking a long-term view.
a diversified portfolio strategy. “Don’t be scared off by short-term
For one, frontier-market stocks fluctuations,” she says. “Frontier
outperformed global stocks overall markets have the potential for
by 11% in the first quarter of 2013.1 promising long-term trends, making
On top of that, frontier countries them an important component of a
house nearly 30% of the world’s diversified portfolio.” -
MSCI, Index Performance, Frontier Markets.
1
Roben Farzad, “Are Frontier Markets Ready for Prime Time?” Bloomberg Businessweek, March 6, 2013.
2
Call US For funds, investors should carefully consider information contained in the prospectus, including investment
Discuss your objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000.
international Please read the prospectus carefully before investing.
investing strategy Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less
than their original cost. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the net asset value.
with a Schwab
Global Investing Past performance is no guarantee of future results.
Specialist by calling 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
800-992-4685. an investment strategy for his or her own particular situation before making any investment decision.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical
risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging or frontier markets may accentuate these risks.
Diversification strategies do not assure a profit and do not protect against losses in declining markets.
The MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance
of frontier markets. The MSCI Frontier Markets Index consists of the following 25 frontier market country indexes: Argentina, Bahrain,
Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya, Kuwait, Lebanon, Lithuania, Kazakhstan, Mauritius, Nigeria, Oman, Pakistan, Qatar,
Romania, Serbia, Slovenia, Sri Lanka, Tunisia, Ukraine, United Arab Emirates and Vietnam.
© James Steinberg
Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3029)
4 Char leS SChwab • FALL 2013
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Younger workers are more likely to cash out of What’s in Your
their retirement plans when changing jobs.
Bond Fund?
Some short-term bond funds are
adding more risk to potentially
53%
of plan owners
32%
of plan owners
generate yield.
S
in their 20s in their 50s hort-term bond funds—which usually
cash out.1 cash out.2
invest in investment-grade government
y, and corporate securities that mature in
five years or less—are often considered lower-risk
investments. But with short-term interest rates near
zero, some bond funds have been adding riskier
re Roll It Cashing out retirement savings when
you leave a job can significantly reduce securities to their portfolios in hopes of generating
oveR lifetime savings, missing out on decades’
worth of tax-deferred growth and
yield. During the past four years, short-term bond
funds tracked by Morningstar have almost doubled
compound interest. It’s wiser to roll their average exposure to high-yield securities,
over into another retirement plan. from 3.7% in 2008 to 6.4% in late 2012.1
- While more high-yield holdings may help boost
performance, they also raise the overall risk of the
You’re changing jobs and have $10,000 in a retirement bond fund. It’s important to understand what’s in
fund. Should you cash out or roll it over? your bond fund in order to properly assess your
portfolio’s exposure to risk. Before purchasing a
$10,000
3
bond fund, take a look at the fund’s holdings, which
Spending 10% FedeRal penalty
the money — $1,000 FoR eaRly dIStRIbutIonS
FRom a RetIRement plan4
should be included in the fund’s prospectus. -
may offer NEXT STEPS
ng immediate — $2,500 25% FedeRal maRgInal
InCome tax Rate For help researching bond funds, call
a gratification ... a Schwab Fixed Income Specialist at
= $6,500 youR net 5 877-563-7818.
... but rolling over your funds puts the power of 1
Kirsten Grind, “Bond Funds: The Downside,” The Wall Street
tax-deferred growth to work for your retirement. Journal, December 28, 2012.
$120,000 Investors should carefully consider information
$100,000 contained in the prospectus, including investment
$80,000
objectives, risks, charges and expenses. You can
$60,000
request a prospectus by visiting schwab.com or
$40,000
s calling Schwab at 800-435-4000. Please read the
. $20,000
0
prospectus carefully before investing.
Fixed income securities are subject to increased loss of
0
35
40
5
10
15
20
25
30
ar
ar
ar
ar
ar
ar
ar
ar
ar
principal during periods of rising interest rates. Fixed income
YE
YE
YE
YE
YE
YE
YE
YE
YE
investments are subject to various other risks, including changes
Hypothetical account balance in future dollars—not subject to income tax until withdrawn. in credit quality, market valuations, liquidity, prepayments, early
Assumes constant annual investment return of 6%. Actual investment returns will fluctuate redemption, corporate events, tax ramifications and other factors.
and, when redeemed, may be worth more or less than the original investment.
Lower-rated securities are subject to greater credit risk, default risk
1
“Leakage of Participants’ DC Assets: How Loans, Withdrawals and Cashouts Are Eroding and liquidity risk.
Retirement Income,” Aon Hewitt, 2011. The information here is for general informational purposes only
2
Ibid. and should not be considered an individualized recommendation
3
The $10,000 comes from pre-tax contributions, so the entire amount is taxable. or personalized investment advice. The type of securities
4
The 10% penalty only applies if the individual is under 55 when they leave their job mentioned may not be suitable for everyone. Each investor
(assuming it’s a qualified retirement plan and is not a hardship withdrawal). needs to review a security transaction for his or her own
© James Steinberg
5
Additional state income taxes and penalties may also apply. particular situation.
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-4837) ©2013 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC. (0913-3028)
FALL 2013 • oN iNvESTiNg
5
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the bottom line
Price affect discretionary spending,
consumers seem to have
Check shrugged off the increase thus
far, their spending bolstered by
lower costs for food and energy.3
Can retail stocks “The resilience of US consumers
avoid a markdown? and their willingness to spend
has been surprising,” says Brad
e
arly this year, investors bought Sorensen, Director of Market and
retail stocks like they were Sector Analysis at the Schwab
going out of style. Retail sales Center for Financial Research.
beat most analysts’ expectations, Retail shares may be able to
lifting retail and consumer maintain their momentum,
discretionary shares to a 21% year- Brad says, so long as commodity
over-year gain by mid-May.1 prices stay low and government 1
Consumer Discretionary Sector, Standard &
After paying down debts in budget talks don’t lead to higher Poor’s, May 21, 2013.
the wake of the credit crisis, taxes. While the improving
2
Federal Reserve, May 7, 2013.
Next StePS 3
Tim Mullaney, “Consumers Beat Expectations
consumers are reaching for the jobs picture is likely buoying Read about Despite Higher Payroll Tax,” USA Today,
plastic once again. In the first three consumers’ spirits, investors Schwab’s February 24, 2013.
months of the year, total consumer in retail stocks should watch viewpoint on each All expressions of opinion are subject to change
installment credit recorded its for future rate increases from without notice in reaction to shifting market
market sector at conditions.
fourth consecutive quarterly gain, the Federal Reserve. “Higher schwab.com/
The Schwab Center for Financial Research is a
according to Federal Reserve data.2 borrowing costs could certainly oI sectorviews. division of Charles Schwab & Co., Inc.
Although some retailers worried dull the recent enthusiasm,” ©2013 Charles Schwab & Co., Inc. All rights
that the payroll tax increase would Brad cautions. - reserved. Member SIPC. (0913-3030)
Consumer Confidence Surveys methodologies, but both indexes ask
consumers how they feel about the current
Why they matter to investors. and future state of the economy, what they
think about inflation and whether they have
W
hy do economists, including plans for big-ticket purchases like homes.
CONSumer iNdexeS those at the Federal Reserve, The confidence measures moved in
Consumer Consumer pay so much attention to opposite directions earlier this year,
Confidence index Sentiment index consumer confidence readings? Confident supporting the view that the economy was in
(2013 Ratings) (2013 Ratings)
consumers tend to spend more, and with their the midst of a mixed recovery. Investors may
spending accounting for more than two-thirds want to take notice if both indexes start rising
Jan
58.4 73.8 of gross domestic product,1 buyers’ level of on a consistent basis. This could mean changes
confidence can mean the difference between in a variety of measures that can potentially
Feb
an economy that is just recovering and one affect investors, including interest rates. -
68 77.6 that is about to take off.
The nation’s two best-known consumer learn more
MaR confidence barometers—the Conference Get additional stock market
61.9 78.6
Board’s Consumer Confidence Index® and analysis, perspectives and ideas
the Thomson-Reuters/University of Michigan from our team of experts by visiting
apR
69 76.4
Consumer Sentiment Index—use different schwab.com/OImarketinsight.
1
“Gross Domestic Product: First Quarter 2013 (Advance Estimate),” Bureau of Economic Analysis, US Department of Commerce,
May April 26, 2013.
76.2 84.5
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Schwab and/or affiliates
© James Steinberg
may publish or otherwise express other viewpoints or opinions that also may be different from certain of the viewpoints or
Source: The Conference Board,
January 2013–May 2013. opinions expressed in these materials.
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3027)
6 Char leS SChwab • FALL 2013
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BargaiN altHougH tHey’re usually price-coNscious,
HuNtiNg maNy iNvestors doN’t sHop arouNd for BoNds
for investors look for the best deal
when shopping in general:
these savvy
shoppers are:
BoNds?
61% 3X
of respondents more likely to shop
consider themselves around for barbecue
“bargain hunters.” grills than for bonds.
a survey asked people WHat tHey sHop arouNd for:
airliNe BBq gas
coNsumer cars tickets grills
80% 77% 51%
goods
credit
fiNaNcial mortgages cards BoNds
55% 48% 17%
goods
BuyiNg iN tHe dark BoNd sHoppiNg comparisoN
Nearly a quarter of those lower market price and transaction fees
surveyed believe they should for bonds can potentially increase your unsure how
compare prices for bonds, but return. let’s look at the same hypothetical to compare
are unlikely to do so. Why? $50,000 bond from two different dealers. bond prices?
A Schwab
53% don’t know how to get
the best price on bonds.
market
price
yield to
maturity
total
paid
Fixed Income
Specialist
dealer 1 $100.00 4.00% $50,000 can help.
43% say it’s too complicated
to price shop for bonds. dealer 2 $101.25 3.85% $50,625
Call us at
877-908-1075.
BuyiNg from dealer 2 results iN you speNdiNg aN extra $625
Source: Charles Schwab with research provided by Koski Research. The study surveyed 514 US investors ranging in age from 25 to 75. All data is self-reported by
study participants and is not verified or validated. Investors participated in the study between May 16, 2013, and June 1, 2013.
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.
Schwab reserves the right to act as principal on any bond transaction. In secondary-market principal transactions, the price will be subject to our standard
mark-up (in the case of purchases) and a mark-down (in the case of sales), and also may include a profit or loss to Schwab. When trading as principal, Schwab
may hold the security in its own account prior to selling it to you, or may resell it after buying from you and, therefore, may make (or lose) money separately from
the mark-up on the transaction.
The information provided here is for general purposes only and should not be considered an individualized recommendation or personalized investment advice.
The types of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.
The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product.
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-5334)
FALL 2013 • oN iNvestiNg
7
fdSW_FA13_7_infographic.indd 7
OIM-FA13-Qrt3-7 8/14/13 9:23 AM
ask CarrIe
Life 2
o
Insurance If
th
for Life
to
yo
ru
ha
Who needs it? si
By CarrIe SChwaB-Pomerantz sa
co
ci
si
si
m
Dear Carrie, the child-rearing years, you may - are estate taxes a
no longer need life insurance at concern? A life insurance
My kids are grown. Do I all depending on your overall policy can be a good safety
still need life insurance? financial situation. net, especially if your estate is
—a reader primarily illiquid. For example,
1 assess your needs
Whether or not life insurance
still makes sense once the kids
if the majority of your assets
are tied up in something like a
family business, real estate or
Dear reader, are grown requires a close look at farm, a life insurance policy
your circumstances. For instance: could help cover the estate tax
w
ith all the bells and bill. In addition, life insurance
whistles attached - Do you have an ongoing can provide necessary cash
to different types of financial obligation? You flow until the time such assets
life insurance policies, it’s easy may not be supporting your are able to be liquidated.
to forget that, at its core, life kids financially, but you don’t
insurance serves one purpose: want to leave your family in - Do you own a business?
to compensate for an economic a bind, either. If you still have Life insurance can also play an
loss. You may have heard that life responsibility for a large debt— important part in providing
insurance is a great investment, and you don’t have other assets cash flow in the event of the
a way to save for retirement or to cover it—life insurance can death of a business owner. If
college, or even a good way to help fill the gap. you have your own business or
build up cash. But to me, if you a business partner, talk to your
want to invest for your long-term - Do you have a spouse financial advisor about how
goals, there are far better choices. or other dependent with life insurance factors into your
That’s not to say that life ongoing needs? If you want long-term plans.
insurance isn’t important. For to provide for your spouse, or if
many people, it’s critical even you have family members who - Do you want to leave Th
after their kids are grown. If will never be able to provide for a large portion of your sp
there’s someone who depends themselves, you probably still estate to charity? Iss
on you financially, life insurance need life insurance. For example, If you want to bequeath Ch
can be key. Or if your estate gets if your pension pays only during a sizable portion of your life
pa
hit with a big tax bill, it can help your lifetime, a cash-value policy assets to charity, you can fin
©Ed Caldwell
lessen the impact. But it’s also could provide your spouse with still provide for your heirs pr
true that as you move beyond retirement funds. through life insurance. ©
8 Char LeS SChwaB • FALL 2013
fdSW_FA13_8-9_Carrie.indd 8
OIM-FA13-Qrt3-8 8/6/13 1:27 PM2 Determine the
appropriate level
of coverage Term vs. Permanent Insurance
If you answered yes to any of
-- Term insurance provides coverage for a set period of
these questions, the next step is time and usually makes the most sense if you don’t
to decide how much coverage need coverage indefinitely.
you need. Although an industry
rule of thumb says you should -- Permanent (or cash-value) insurance stays in effect
have life insurance equal to for the life of the insured, assuming the premiums are
six to eight times your annual paid, and may be appropriate if you have an ongoing
salary, I think it’s smarter to base commitment like caring for a person with special needs.
coverage on your individual
circumstances. While every
situation is unique, here’s a
simple way to figure out how
much you need: 3 Figure out
your next move
Depending on your situation,
account. And if you’re
canceling a cash-value
policy, realize that you
you have a few choices: will have to pay ordinary
Calculate projected
income taxes on the balance
financial need. This
- Need a new policy? Even that exceeds your cost basis. NexT STePS
could be a fixed amount,
e, like a mortgage, or the if you’re 50 or 60, as long as Also, some policies have a Visit schwab.com/
amount needed to fund you’re healthy, you’ll likely surrender charge. OIinsurance
a living expenses for a qualify. First decide whether for helpful
specific timeframe.
Subtract
you want term or permanent
coverage, and then do your
homework comparing costs
4 Talk to an expert
Many online calculators
can help you determine if you
insurance tools.
value of
e and features. need insurance and how much.
accumulated
However, because life insurance
assets.
- No longer need your term can be both complicated and
Subtract or cash-value policy? costly, I highly recommend
employer Before you make a final that you consult with both your
coverage, decision, talk to an objective financial advisor as well as an
if provided. third party such as a objective insurance expert before
financial advisor to be you make any decisions. -
sure you haven’t missed
The remainder
is roughly any important considerations. Carrie Schwab-Pomerantz,
the minimum If you determine that you CFP®, is President of Charles
amount of life no longer need a term policy, Schwab Foundation and
insurance you redirect the amount you’ve Senior Vice President of
should consider. been putting toward premiums Schwab Community Services
to a savings or investment at Charles Schwab & Co., Inc.
The information provided here is for informational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where
specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
Issuer guarantees are subject to the claims-paying ability of the insurance company.
Charles Schwab & Co., Inc. (Schwab), in association with Small Business Insurance Agency (SBIA), provides customers with access to life insurance issued by participating
life insurance companies. Schwab and SBIA are not affiliated. Both are licensed insurance agencies. The term life products available are underwritten and issued by the
participating life insurance companies listed on the website. Any obligations under the policies are the exclusive obligations of the insurance company and are subject to the
financial condition of the insurance company. Not all products and product features are available in all states. This is not an offer or solicitation in any jurisdiction where the
©Ed Caldwell
products are not approved for sale.
©2013 Charles Schwab & Co., Inc. All rights reserved. (0913-3072)
FALL 2013 • ON INveSTINg
9
fdSW_FA13_8-9_Carrie.indd 9
OIM-FA13-Qrt3-9 8/8/13 3:07 PMPersPectives: economy
Inflation: Should
degree, it’s not necessarily adequate in terms “w
of how the Federal Reserve attempts to control in
inflation. There is no question that there is th
You Be Worried? often a big difference between how the Fed
views inflation and how we think about it as
consumers. We certainly hear that when we’re
hi
w
to
Despite the Federal Reserve’s loose out talking to investors. an
monetary policy, we don’t believe The “core” inflation rate—which excludes tw
food and energy prices—is frequently quoted in
inflation is a near-term threat. in the press, which may leave the public hi
by liz ann sonders wondering why so much attention is paid to is
a rate that doesn’t factor in many prices that
are critical in our lives. However, the core pe
e
ver since the Federal Reserve inflation rate is simply one component of the 20
embarked on its extraordinary policy overall inflation rate. The core rate is used by ga
of quantitative easing (QE), concerns economists and monitored by the Fed because gr
about inflation are everywhere. After all, factors unique to energy and food prices, G
as Milton Friedman’s famous quote tells such as weather conditions and geopolitics, th
us, “Inflation is always and everywhere a can often skew the overall inflation rate. The m
monetary phenomenon.”1 So, given the rationale for using “core” is to eliminate the po
Fed’s loose monetary policy, many people volatility associated with these factors. en
assume that higher inflation is an inevitable on
consequence. Rising inflation has a major Why inflation isn’t an w
“Inflation impact on the economy, consumers and immediate concern in
investors, so the worry is understandable— The Federal Reserve may be increasing the yo
indicators but it’s also inappropriate, at least for the amount of money coursing through the ou
aren’t pointing near-term. financial system via several rounds of QE,
higher, at least Inflation, as traditionally measured, has but there hasn’t been enough demand for In
not for the remained relatively flat in recent years—at borrowing, or supply of lending, to promote D
next year around 2%, which is not a level of major inflation. Historically, inflation hasn’t been so
or two.” concern. And, looking ahead, inflation much of an issue without money changing in
indicators aren’t pointing higher, at least hands at a rapid pace—this is referred to as the a
not for the next year or two. “velocity of money,” which is extremely low at In
present. History shows that serious inflation es
What is inflation, really? has never erupted with such weak velocity. no
Just because something is familiar does not Wage increases are another factor that sa
mean it’s easily or generally understood. Most often leads to higher inflation, but growth in al
people think of inflation as a condition of pay has been fairly negligible in recent years. se
rising prices, and while that’s correct to some As such, there is little risk of the kind of ha
in
What is quantitative easing? 1
Fr
Sometimes referred to as “loose money,” quantitative easing is a policy used
Inv
by the Federal Reserve (and other nations’ central banks) to influence interest
rates and stimulate the economy. Specifically, the Fed may purchase assets All
from commercial banks and private institutions in order to increase available Th
of
bank reserves (the “monetary base”) and promote lending. fro
©
10 c h a r l e s s c h wa b • F A L L 2 0 13
fdSW_FA13_10-11_PER_Sonders.indd 10
OIM-FA13-Qrt3-10 8/14/13 9:26 AM“wage-price spiral” the US economy suffered Us economy performing below its potential
l in the late 1970s and early 1980s. Based on 8
the experience and trigger points of that Economy Above Potential—Inflationary
high-inflation era, we suspect income growth 6
would need to increase by at least 5% in order 4
to spark inflation. Also, residential investment
and consumer spending on durable goods— 2
two factors that usually play a significant role 0
in rising wages and inflation—are both at
-2
historically low levels, although the former
is now staging a healthy recovery. -4
Furthermore, the US economy has been Output Gap
-6
performing far below its potential ever since Economy Below Potential—Disinflationary
2008—a phenomenon known as the “output -8
gap,” which is the difference between potential 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
e gross domestic product (GDP) and actual
GDP. When the output gap is more than 2.2,
the Consumer Price Index (or CPI, a common how oUtpUt gap coincides with inflation
measure of inflation) tends to increase by 1.1
points per annum, indicating an inflationary cpi points pace of frequency
output gap per annum inflation of occurrence
environment. An output gap of less than –1.9,
on the other hand, has historically coincided more than 2.2 +1.1 Inflationary 20.0%
with a CPI change of –1.5 points per annum—
-1.9 to +2.2 +0.3 Neutral 54.5%
indicating a disinflationary environment. As
you can see in the chart at right, the current less than -1.9 -1.5 Disinflationary 25.5%
output gap is –5.8.
Sources: FactSet, Federal Reserve, Ned Davis Research, Inc., as of March 31, 2013.
investment implications Further distribution prohibited without prior permission. ©2013 Ned Davis Research,
Inc. All rights reserved.
Despite the lack of these inflationary signs,
some investors have been flocking to
investments that have historically provided some time for inflation to become embedded
e a hedge against inflation, such as Treasury- in the economy and historically inflation
Inflation Protected Securities (TIPS) and real pressures have been associated with rising
estate investment trusts (REITs). However, wages. We advise investors to watch for the next steps
Want more timely
not all potential inflation hedges provide the aforementioned early signs of a sharp rise in
commentary from
same type of protection, and investors should the inflation rate and to be prepared to revise
Liz Ann? Log in
also consider whether the investment makes their investing strategies accordingly. - to schwab.com/
sense for their portfolios irrespective of what is oIinsightalerts
happening with inflation. Liz Ann Sonders is Senior Vice President to sign up to receive
We don’t anticipate a sharp rise in inflation and Chief Investment Strategist at Charles email alerts as new
in the next year or two. Typically, it takes Schwab & Co., Inc. content is published.
1
Friedman, Milton. Inflation: Causes and Consequences. ProQuest CSA Journal Division, 1963.
Investing involves risk, including loss of principal.
All expressions of opinion are subject to change without notice in reaction to shifting market and economic conditions.
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type
of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data herein are obtained
from what are considered reliable sources; however, accuracy, completeness or reliability cannot be guaranteed.
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3875)
F A L L 2 0 13 • o n i n v e s t i n g
11
fdSW_FA13_10-11_PER_Sonders.indd 11
OIM-FA13-Qrt3-11 8/6/13 1:36 PMPersPectives: stocks
Consistency G
reg Thomas, Chief Investment Strategist
at ThomasPartners, Inc., often turns to
by
gr
Matters
baseball to help explain why he began at
investing in dividend-paying stocks 20 years ago. tim
A longtime Boston Red Sox fan, Greg points out w
that a baseball team can win the game without po
ThomasPartners’ dividend-focused winning all nine innings, so long as it scores to
strategy helps clients generate more runs in the innings it wins than it gives up al
steady income in volatile markets. in the innings it loses. He reasons that dividend-
paying stocks offer a similar experience for O
investors because, historically, they have gained in
more relative performance in declining markets
than they have lost in rising markets. G
Today, his firm’s investment strategy remains w
focused on dividends as a means to generate di
predictable streams of income, which can th
add to portfolios’ total returns and help offset di
the impact of market volatility. Following ac
Schwab’s recent acquisition of ThomasPartners, di
On Investing spoke with Greg about the merits pe
of investing in dividend-paying and dividend- ou
growing stocks. va
te
On Investing: We’ve heard it said that aw
dividend-paying stocks tend to inhibit off
performance. Is that true? a
Greg Thomas: That’s a long-standing myth, O
and I have a favorite phrase that applies here: ar
“When the facts are in conflict with common
wisdom, too many people challenge the facts G
and not the wisdom.” Yes, some stockbrokers co
warn investors that buying dividend-paying th
stocks will limit their potential for capital gains. se
But the facts do not support that “wisdom.” pr
Dividend-paying stocks have delivered better lo
total returns than non-dividend-paying stocks
over time.1 And it’s not just because of the
dividends. Our research shows that, since 1972,
1
Fa
2
D
dividend-paying stocks have enjoyed more
Pa
capital gains performance than non-dividend-
Iss
paying stocks, on average.2
All
Th
OI: How do you construct portfolios? Th
pa
Gt: We have two parallel, consistent Ind
disciplines. First of all, we manage our Th
© iStockPhoto
portfolios with the goal of generating dividend Ple
income streams greater than those created ©
12 char les schWab • FALL 2013
fdSW_FA13_12-13_PER_Thomb.indd 12
OIM-FA13-Qrt3-12 8/8/13 3:09 PMst by the general market indexes, and we try to think there’s something larger at work here.
grow those income streams every year and The popularity of dividend-paying stocks is
at rates higher than inflation. At the same likely to last a lot longer than most would
o. time, we employ a “value pricing discipline,” expect because it’s as much a result of Baby
ut which means all the stocks that populate our Boomers aging as it is a function of the low-
portfolios are bought at prices discounted yield environment. And that’s a demographic
to their intrinsic values, as measured by our shift that we have 20 years to run with. So
p algorithms for free cash-flow yield. it doesn’t mean that dividend-paying stocks
d- are necessarily overpriced. It just means that “We seek to
OI: What do you make of the recent they’ve done better than other stocks, on provide dividend
d influx into dividend-paying stocks? average, over recent history. income every
s month, dividend
GT: Dividend-paying strategies don’t OI: Are dividend-paying stocks a good
ns work unless you’re actually collecting the fit for retirement planning?
income growth
dividends. What’s important isn’t the fact every year
that these companies pay dividends, it’s the GT: I think they’re a good fit for many and capital
dividends themselves—the cash collected and investors, not just retirees. However, the appreciation over
accumulated over time. People who rush into regular payouts dividend-paying stocks the years.”
s, dividend-paying stocks simply because they’ve can offer could make them particularly —GreG ThOmas,
s performed well recently may just as soon rush attractive for investors in search of a steady Chief invesTmenT
- out and, therefore, never realize the potential income stream. On top of that, many of the sTraTeGisT,
value of owning such stocks over the long firms that pay dividends are often reluctant ThOmasParTners, inC.
term. Next year’s stock market cannot take to reduce or eliminate them, meaning that
away dividends paid last year—a benefit that many dividends tend to remain consistent
offers no value to investors who do not collect regardless of market conditions.
a lot of dividends.
At ThomasPartners, we seek to provide
OI: Do you feel dividend-paying stocks dividend income every month, dividend
are generally overpriced now? income growth every year and capital
appreciation over the years. That focus
GT: I find it difficult to arrive at that resonates with our clients because they Call Us
conclusion because, unlike tech stocks in can have a certain level of confidence in To learn more about
the 1990s, dividend-paying stocks have a where their portfolio income is coming ThomasPartners and its
. self-correcting mechanism—if the stock from—mostly from the dividends—and dividend-focused managed
price gets too high, then the yield gets too they don’t have to rely on the irregularity portfolios, visit schwab.com/
low and they lose their appeal. But I also of capital gains. - OI ThomasPartners.
s
,
1
Fayez Sarofim & Co., Reasons to Consider Dividend-Paying Stocks, October 2011.
2
Data are from March 31, 1972, to March 31, 2012, and are based on all publicly traded stocks with a minimum capitalization of $1 billion in 2012 dollars.
Past performance is no guarantee of future results.
-
Issuers can stop paying dividends or reduce dividends at any time, and tax treatment of dividends can change.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions.
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.
The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own
particular situation. Data here are obtained from what are considered reliable sources; however, accuracy, completeness or reliability cannot be guaranteed.
Indexes are unmanaged, do not incur management fees, costs or expenses, and cannot be invested in directly.
ThomasPartners, Inc., is a registered investment advisor and an affiliate of Charles Schwab & Co., Inc.
© iStockPhoto
d Please read the ThomasPartners, Inc., Disclosure Brochure for information and disclosures about this service.
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (0913-3075)
FALL 2013 • O n invesTinG
13
fdSW_FA13_12-13_PER_Thomb.indd 13
OIM-FA13-Qrt3-13 8/9/13 11:15 AMPERSPECTIVES: INDEXING
What’s In Same initial pool of stocks
When creating an index, the first step is to
determine which group of stocks to use. Index
Your Index? providers, such as Russell Investments and
S&P Dow Jones, create a representative basket of
stocks. Russell, for example, screens thousands
A look at the differences of US-based stocks for attributes such as
between market-cap and liquidity, share size and shares outstanding.
fundamental indexing. The resulting 3,000 stocks make up the Russell
3000® Index, the parent index for all of the
BY ANTHONY B. DAVIDOW
company’s US stock indexes. This parent index
is then broken up into sub-indexes based on
capitalization size (stocks ranked 1–1,000 are
large and mid caps; 1,001–3,000 are small caps).
The eligible universe of stocks is the same for
both market-cap and fundamental indexing.
S
ince the mid-1970s, investors have However, fundamental indexing selects and
flocked to index funds—investments weights stocks by fundamental factors rather
that track indexes—because they than by market cap. This can have a big impact
provide access to a diversified group of on the stocks the index holds.
securities without having to purchase the Take Apple, Inc., for example. Looking at the
individual securities that comprise the index. table [at right], you’ll see the top 10 holdings
Investors can, for example, gain exposure to the in the Russell 1000 Index and the Russell
S&P 500® Index by buying shares of a single Fundamental US Large Cap Index. Apple has
Fundamental index fund rather than initiating 500 distinct the second-largest weight in the Russell 1000
indexing is transactions. Seems simple enough, except for Index, due to its large market cap, but the
often referred one problem: Not all indexes are alike. 70th-largest weight in the Russell Fundamental
Traditionally, most indexes are weighted by US Large Company Index.
to as “smart market capitalization, meaning the company
beta” because with the largest total value of issued shares How stocks are selected
it uses specific holds the largest weight in the index. This is How do you measure a company’s economic
factors—such the methodology used by popular indexes contribution to an index? With market-cap
as a company’s like the S&P 500, Russell 1000® Index and indexes, the stocks of the companies that are So
Ju
earnings, MSCI EAFE Index. most valued by market participants hold the Fo
In recent years, however, we’ve seen some most weight. This assumes that the “biggest” to
book value or innovation in the way indexes are constructed. companies are the “best” companies.
dividends—to It’s no longer just about market cap. For instance,
select and weight we’ve seen the growth of indexes that assign the is
stocks. same weight to all the stocks in an index, known Market-cap Fundamental it
as “equal” weighting. ea
Portfolio
Another idea that’s rapidly gaining traction is weighting Cap-weighting Factor-based an
fundamental indexing. Here, stocks are selected Portfolio Larger-cap tilt Value-tilt
and weighted by fundamental factors—financial construction se
metrics that assess some aspect of a company’s Portfolio
Reconstitution Reconstitution in
turn-over and rebalancing
business or payout to shareholders—such as th
Tax-
sales, cash flow and dividends. efficiency Yes Yes -
Intrigued? Here’s a look at how fundamental
© Curtis Parker
Cost
indexing works and how it differs from structure Lowest cost Low cost
market-cap indexing.
14 CHAR LES SCHWAB • FALL 2013
fdSW_FA13_14-15_PER_Davidow.indd 14
OIM-FA13-Qrt3-14 8/8/13 3:33 PMYou can also read
