STRATEGIES & IDEAS FOR THE CHARLES SCHWAB COMMUNITY | SPRING 2021 The case for bonds Page 16

Trading momentum stocks Page 20

Picking dividend payers Page 26

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Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures at schwab.com/intelligentdisclosurebrochure for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® programs. Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment advisor and broker-dealer. Diversification, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. ©2021 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. CC4737545 (0221-0GUL) ADP110682OI-00 (12/20) 00255131

ADP110682OI-00.indd 1 12/8/20 1:19 PM Spring 2021 CONTENTS

5 11 22 26

DEPARTMENTS FEATURES

2 SCHWAB ORIGINALS PERSPECTIVES 22 Sweeten Your Tax Strategy Learn, listen, and watch. 13 Combating home bias. Five tax planning missteps— By Jeffrey Kleintop and how to avoid them.

3 CEO’s NOTE 16 The case for bonds. A clear path toward your goals. By Kathy Jones 26 Rx for What Ails You By Walt Bettinger Dividend-paying stocks could be just what the doctor 20 TRADING ordered. THE BOTTOM LINE Three popular indicators for 5 When employers pause their trading momentum. 401(k) plan contributions. By Kevin Horner 30 Seventh Heaven A data-driven look at what 6 Do stock splits still matter? makes seven financial habits 34 SPOTLIGHT so effective. 7 Financial bingo: How many CD & Treasury Ladder Builder milestones can you cross off? tool; Schwab Plan™; and 1099 Dashboard. 8 In case of emergency ...

On Investing (ISSN 1523-5327) is published 9 A smarter way to sell. 39 ON YOUR SIDE quarterly. This publication is mailed at Standard A What Tesla can teach us postal rates. ◆ If you prefer not to receive about the market. On Investing, please call 888-484-5340. ◆ POSTMASTER: Send address changes to On 11 ASK CARRIE By Charles R. Schwab Investing, Charles Schwab & Co., Inc., P.O. Box Long-term care insurance. 982600, El Paso, TX, 79998-2600. On Investing By Carrie Schwab-Pomerantz 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 may have active positions in securities or companies discussed in this issue. MAG105672Q121-00

ON THE COVER: ARTWORK BY CHERYL TEO SPRING 2021 | ON INVESTING | 1

SCHWAB ORIGINALS

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Tax Day may be approaching, but managing Mark Riepe and Financial Decoder™ return for your taxes should be a year-round affair. Find tips Season 6 with new episodes about the for lowering your tax bill, maximizing deductions, emotional biases that can cloud your financial and making tax-smart investment decisions at judgment and cost you money. Listen and subscribe schwab.com/taxes. at schwab.com/financialdecoder.

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Like any good road map, a financial plan can help Fixed income @kathyjones you chart a course to your destination. See how International @jeffreykleintop planning can help to define your goals and focus Markets and economy @lizannsonders your savings at schwab.com/whyplan. Personal finance @carrieschwab Research @schwabresearch Trading @randyafrederick Washington @miketownsendcs

(0321-0PZZ)

Joe Carberry Mark W. Riepe, CFA® Sara Smith Senior Vice President, Senior Vice President, Editor in Chief Communications & Schwab Center for Owned-Channel Marketing Financial Research Jeremy Hartley and Community Managing Editor Tamar Dorsey Helen Loh Vice President, Stacia Miller Senior Vice President, Brand Journalism Associate Managing Retail Client & Editor

Owned-Channel Marketing GUPTA SHREYA BY ILLUSTRATIONS

2 | CHARLES SCHWAB | SPRING 2021 CEO’s NOTE

I n times of struggle, investing and When confronted with instability, On Firm planning for the future can feel there can be great comfort in focusing like abstractions compared with the on what you can control, and in having Footing realities of everyday living. tried-and-true principles in place that That’s particularly true today, when can help light the way. That’s one Schwab’s Investing Principles so many are concerned about business reason we distilled our experience can help you create a clear and job uncertainty, balancing work in the markets down to what we call path toward your goals. and home schooling, and the health of our Investing Principles—seven best themselves and their families. All of us practices that can help you reach your at Schwab know that nothing is more goals. important than the well-being of you These principles start with the and your loved ones. importance of creating a realistic plan you can stick to, in good times and bad. When confronted They address ways to invest according with instability, to your goals and tolerance for risk, there can be great so you can sleep easier. And they end with a reminder to ignore as much of comfort in focusing the noise out there as possible, because on what you can steady progress toward your goals control. is more important than short-term performance. Taken together, Schwab’s Investing Principles are a foundation upon which you can build your future— whatever may come. To learn more, visit schwab.com/principles or call us at 888-484-5340 to discuss how to implement these timeless principles in your own plan.

Sincerely,

Walt Bettinger See page 38 President & CEO for important information. ◆ Investing involves risk, including loss of principal. (0321-0S2M)

SPRING 2021 | ON INVESTING | 3 ISO 12647-7 Digital Control Strip 2009 3% A 100 60 100 70 30 100 60 100 70 30 100 60 100 70 30 100 40 40 100 40 100 40 70 40 70 40 40 40 70 40 40 70 40 70 40 40 3 10 25 50 75 90 100

B 100 100 60 100 100 70 70 30 30 100 100 60 100 100 70 70 30 30 100 100 60 100 100 70 70 30 30 100 40 100 40 40 100 10 40 40 20 70 70 70 70 40 70 40 40 0 0 0 0 3.1 2.2 2.2 10.2 7.4 7.4 25 19 19 50 40 40 75 66 66 100 100 100 80 70 70 100

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Schwab A24504_7b_Lens Schwab.indd Bleed: 8.1875"w x 10.5"h 12.18.2020 Trim: 7.9375"w x 10.25"h EPSON jn Live: 7.4375"w x 9.75"h Issue: TBD ILLUSTRATION BY ADRIANA BELLET CONTENTS contributions. retirement plansuspends its What to doifyour employer Match Missing the

RETIREMENT |STOCKRETIREMENT SPLITS | BINGOFINANCIAL | EMERGENCY PREPAREDNESS |MORE AND a tollonyourretirement savings. every dollarcounts, theycanstilltake are oftentemporary.However, when of America.Fortunately,such cuts according tothePlanSponsorCouncil pandemic-triggered recession. and most recently during last year’s during thefinancialcrisisof2008–2009, dot-com bubble burst in 2000, again ment accounts. It happenedwhen the contributions toemployees’ retire pare expenses—including matching result oftheCOVID-19pandemic, matching 401(k)contributions as a of largecompanieshadsuspended W As ofJune2020,morethan11% the worse, somecompanies may hen theeconomy takes aturnfor - SPRING 2021 a taxable brokerage account. out, consider saving moreinanIRAor and over). Ifyou’re already maxing $19,500 in2021($26,000forthose 50 employer—up toamaximumof plan tomake up for the loss from your your contributions toyour workplace other expenses, consider boosting extra cashthat normally goestoward muting and dining out. If you’ve got spending alot less on costs like com of thepandemicisthat savers are options: retirement account? You have afew scales backitscontributions toyour 1

So, what canyou doifyour employer Raise the stakes: Oneconsequence | ON INVESTIN G |5 - THE BOTTOM LINE

2 Keep it up: If you don’t have any reducing your own contributions current style of investing is still suited surplus cash, at least try to maintain would only compound the issue.” to your needs,” Rob says. your current contributions. “Money is tight for a lot of people right now, but 3 Review your plan: Sometimes we Whether your company has cut back continuing to make regular retirement let our retirement plans run on auto- on matching contributions or not, one contributions is the best way to com- pilot, and that’s never a great idea. thing’s for sure: “Sticking to your plan, bat a reduced or suspended employer “Perhaps the loss of your employer even when times are tough, gives you match,” says Rob Williams, vice match—even temporarily—can serve the best shot at reaching your goal,” president of financial planning at the as a catalyst to review your goals and Rob says. “Your future self will thank Schwab Center for Financial Research. savings strategy, and determine if your you for it.” NEXT “Following your employer’s lead by STEPS See page 38 for important information. ◆ 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 You can still contribute to your IRA for 2020. for everyone. Each investor needs to review an investment strategy for his or her own particular Log in to schwab.com/contribute today. situation before making any investment decision. (0321-0VKJ)

A re stock splits a boon for inves- your money can buy more shares,” says A Cut Above? tors—or just a numbers game? Steve Greiner, senior vice president of That’s the question many investors Schwab Equity Ratings®. “However, Why stock splits may soon may be pondering in the wake of 2020’s a split doesn’t change a company’s be a thing of the past. high-profile Apple and Tesla splits. underlying health—nor does it tell A stock split allows a company you anything about its long-term to increase the number of shares in prospects.” circulation with no change to its Instead, you should focus on a com- market value, thereby making shares pany’s fundamentals when considering more affordable to individual inves- a prospective stock investment. “We tors. In a 2-for-1 split, for example, suggest looking for companies with every share of a stock trading at $400 low debt balances, lower valuations, would be divided into two shares and strong earnings growth, which tell trading at $200. you more about a stock’s value than the Such splits often provide a short- price tag does,” Steve says. term price boost as investors rush to That said, if your research points snap up lower-priced shares. Between you toward particularly pricey stocks, 2012 and 2018, for instance, large-cap you’ve still got options—namely, stocks that split outperformed the S&P fractional shares. With Schwab Stock 500® Index by an average of nearly 5% Slices™, for example, you can buy a after one year, according to Nasdaq. fractional share of some of America’s Despite the potential for short-term leading companies for as little as $5. outperformance, however, investors “The emergence of fractional shares shouldn’t scramble to purchase shares all but removes the barrier of lofty of a stock just because they’re cheaper. share prices—and ultimately might “When a stock splits, it can feel like undercut the power of stock splits you’re getting a better value because going forward,” Steve says.

See page 38 for important information. ◆ Schwab Stock Slices is not intended to be investment LEARN advice or a recommendation of any stock. Investing in stocks can be volatile and involves MORE risk, including loss of principal. Consider your individual circumstances prior to investing. ◆ All corporate names are for illustrative purposes only and are not a recommendation, an offer to sell, or a solicitation of an offer to buy any security. ◆ Past performance is no guarantee Find out more about Schwab Stock Slices™ of future results and the opinions presented cannot be viewed as an indicator of future at schwab.com/stockslices. performance. (0321-0UC3) BELLET ADRIANA BY ILLUSTRATIONS

6 | CHARLES SCHWAB | SPRING 2021 BINGO! Are you taking the right steps toward a healthy financial future? See how many milestones you can cross off in each category—and which await your attention.

THE GETTING BUILDING OPTIMIZING EXTRA BASICS AHEAD WEALTH RETIREMENT CREDIT

Research investment Capture the full Pay a little extra Max out Pay off your options for your employer match on your mortgage your 401(k) mortgage before health savings on your 401(k) each month contributions retirement account, if eligible

Improve your Contribute to Create a budget Save even more Name or update investing knowledge a health savings based on your ideal toward your goals beneficiaries on all through an account, retirement, including with a taxable accounts online workshop if eligible location and lifestyle brokerage account

Review your Diversify your Pay off your Social Security Educate the young portfolio to match FREE credit cards in full statement for people in your your goals and risk SPACE each month missing income life about investing tolerance information

Gift any individual up to $15,000 Create an Contribute to Contribute to Make a plan for annually without emergency fund a 529 plan an IRA long-term care triggering the federal gift tax

Track your spending Create a tax-smart Make a tax-smart and cut back Create a Prepare a will income-withdrawal charitable gift of where possible to financial plan strategy appreciated assets boost your savings

How’d you do? Got a horizontal or diagonal bingo? Excellent Got a vertical bingo? Great job! You’ve gone deep work—you’ve completed at least one task across all in a key area of financial planning. Now try to add five categories. Now drill down into each individual some breadth with a horizontal or diagonal bingo— category to add some depth to your plan. or go big and complete the whole card.

Need help getting started or putting your plan into action? Work one-on-one with a Certified NEXT Financial Planner™ professional when you enroll in Schwab Intelligent Portfolios Premium™. STEPS Learn more at schwab.com/portfoliospremium.

See page 38 for important information. ◆ Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. ◆ Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker-dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation. ◆ 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. (0321-0UX3)

SPRING 2021 | ON INVESTING | 7 THE BOTTOM LINE

Sock away an emergency fund: Try to An Ounce of Prevention have enough cash on hand to cover three to six months’ worth of essential expenses, Having a plan in place can help you recover faster from saved in an account you can access imme- the unexpected. diately. If you suffer a significant loss, this money can help bridge the gap until W ith all the bad news over the past year, few of us want to entertain you receive an insurance payout or any the prospect of future disasters. Yet even a little preparation can government assistance for which you may make a big difference in the face of an emergency—and may even help be eligible. you sleep a little easier in today’s uncertain world. Here are some practical tips to get you started. Shore up your cash reserves: If you’re retired, try to avoid tapping invest- ments in the midst of a downturn by having a year’s worth of expenses in relatively liquid investments (a high-yield checking account or a money market fund, for example), plus another two years’ worth of funds in bonds or short-term certificates of deposit. Likewise, if you’ll need money in the coming few years to fund other goals—such as paying for college or purchasing a home—consider investing those funds in a relatively con- servative portfolio of bonds and cash, with few, if any, stocks.

Check your insurance: Review your homeowner’s or renter’s policy to see if you’re adequately covered. You also may want to talk to your agent about whether you should consider additional coverage, such as earthquake, fire, or flood—or umbrella insurance for losses not covered by the other policies.

Protect important documents: If the unthinkable happens and your home is destroyed, you’ll need certain documents right away to start the recovery process. Put copies of birth certificates, driver’s licenses, insurance policies, passports, trust documents, wills, and other key financial records in a fire- and waterproof box. Better yet, keep digital copies of important doc- uments in a secure online location so you can recover them from anywhere. LET’S Need help thinking through your emergency plan? Call 888-484-5340 TALK to speak with a Schwab investment professional. Inventory your valuables: Take exten- sive photos or video of your home and valuables, then save them securely online See page 38 for important information. ◆ The information provided here is for general informational or on a thumb drive in a fire- and water- purposes only and should not be considered an individualized recommendation or personalized proof box. This will make insurance claims 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 much easier in case of fire, flood, theft, or ◆ any investment decision. Investing involves risk, including loss of principal. (1120-0068) other damage. BELLET ADRIANA BY ILLUSTRATION

8 | CHARLES SCHWAB | SPRING 2021 profit or loss but also any taxes you So, which method is right for you? The Basics of might owe. “Unless you specify otherwise, at When instructing your brokerage Schwab the default method for every- Cost Basis firm which shares to sell, you can thing except mutual funds is FIFO,” choose from one of several methods says Hayden Adams, CPA, CFP®, direc- How you sell an investment for calculating your cost basis: tor of tax and financial planning at the can seriously affect your Schwab Center for Financial Research. tax bill. n First in, first out(FIFO) means your (For more on mutual funds at Schwab, shares will be sold from oldest to see “What about mutual funds?” A nytime you’re looking to sell an newest. below.) “However, in many cases investment, your gain or loss n Last in, first out (LIFO) means your you’d be better served using specific will be determined by calculating the shares will be sold from newest to identification, which allows you to sell difference between the cost basis— oldest. particular shares and therefore gives your purchase price plus trading n High cost means your shares will be you the greatest control over your tax costs and/or commissions—and the sold from highest cost basis to lowest bill” (see “Case in point,” below left). current market price. But when you’ve cost basis. “It’s really just a matter of ensuring purchased the same investment several n Low cost means your shares will be that whatever method you go with is times over the years, you’re likely to sold from lowest cost basis to highest in line with your specific goals for the have a different cost basis for each cost basis. sale,” Hayden says. When in doubt, transaction—and which shares you n Specific identification means your discuss your options with a qualified decide to sell can affect not only your shares will be sold however you see fit. tax advisor before taking action.

Case in point Let’s say you own 200 shares of XYZ stock, which currently have an overall net loss. You decide to sell 100 shares to lock in some losses, which will allow you to offset part of your taxable income for the year. Because you purchased the stock What about mutual in lots of 50 shares, however, each purchase has its own cost basis—and not all of funds? them are underwater. For example: At Schwab, the default cost If you sell your shares using the default method—first in, first out—Lots 1 and 2 basis method for mutual funds is will be sold, resulting in potential gains. “average cost,” which is calculated by dividing the total dollar amount Potential Cost basis: $11,375 invested in a fund by the number Lot 1 gain: of shares held. You can elect to Market value: $12,500 $1,125 change your cost basis method to Potential specific identification, which allows Cost basis: $10,425 you to choose which shares to sell. Lot 2 gain: CostMarket Basis: value: $11,375 $12,500 $2,075 Be aware, however, that if you’ve previously sold the fund using the On the other hand, if you were to choose last in, first out (or specific average cost method, the new identification), you could sell Lots 3 and 4, potentially resulting in your method will apply only to those desired losses. shares you purchase going forward.

Cost basis: $15,940 Potential Lot 3 loss: Market value: $12,500 –$3,440

See page 38 for important information. Potential Cost basis: $15,995 ◆ This information does not constitute Lot 4 loss: and is not intended to be a substitute Market value: $12,500 –$3,495 for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab NEXT $0 $4,000 $8,000 $12,000 $16,000 recommends consultation with a qualified STEPS tax advisor, CPA, financial planner, or investment manager. ◆ Examples provided are for illustrative purposes only and not To review or update your default cost basis methods for your intended to be reflective of results you can Schwab accounts, log in to schwab.com/accountsettings. expect to achieve. (0321-066L)

SPRING 2021 | ON INVESTING | 9 THE RICHARDS GROUP TRG JOB #: SCH20_057918_ Charitable Print CLIENT: Schwab Charitable Fund JOB NAME: The Modern Way PUB: OnInvesting/ ONWARD TRIM: 7.9375" x 10.25" LIVE: 7.4375 x 9.75 BLEED: 8.1875 x 10.5 INSERTION DATE: 2021 COLOR 4/C SWOP FOR QUESTIONS CALL: Pam Zmud 214.891.5205

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Schwab Charitable Fund is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Contributions made to Schwab Charitable Fund are considered an irrevocable gift and are not refundable. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed.

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SCH20_057918_OnInvest_Onward_7_9375x10_25_1_7.indd 1 1/7/21 2:28 PM BY CARRIE SCHWAB-POMERANTZ

Q A

Long-Term Dear Carrie, Dear Reader, I’m 50 years old and starting This is a great question because it Care Insurance applies to millions of Americans who to plan for retirement. One of are approaching their retirement years. my biggest stumbling blocks is At the heart of the issue is the fact that whether to purchase long-term long-term care (LTC) costs can be quite Is it right for you? expensive but so can LTC insurance. care insurance. Do you think it’s Add to that the uncertainty of whether worth the cost? you’ll actually need it, when to buy it, ILLUSTRATION BY MARIA HERGUETA MARIA BY ILLUSTRATION

SPRING 2021 | ON INVESTING | 11 ASK CARRIE

how much coverage you might need, about the emotional and financial toll most cost-effective time to buy. The and what type of policy to purchase, such caregiving could take on your younger you are, the lower the cost— and you’ve got some tough decisions loved ones—even if they’re willing to but if you purchase too early, you’ll be to make. help. In fact, that’s why many people paying premiums for a longer period Here are a few important questions choose to purchase insurance. of time. On the flip side, premiums go to ask yourself as you evaluate whether up the older and less healthy you are, LTC insurance is right for you. How much does LTC and there’s a chance you’ll be denied insurance cost? coverage if your health deteriorates or Will I need long-term care? As with most types of insurance, the you develop a certain illness. It’s hard to know for certain whether cost of an LTC policy will vary depend- you’ll need long-term care—assistance ing on the type, amount, and length of Explore your options with daily activities such as bathing, coverage you choose, as well as your There’s really no way around it—the dressing, and eating for people experi- age, gender, and overall health. That decision to purchase LTC insurance is encing physical or cognitive decline— said, if you’re considering purchasing complicated. Hopefully the answers but statistics suggest most of us will. a policy, make sure the premiums to these questions can get you started. According to LongTermCare.gov, fit your budget. Generally speaking, Talk to an insurance agent as you about 70% of people ages 65 and older payments shouldn’t exceed 7% of your explore options, features, and poten- will need long-term care at some time monthly expenses. tial costs among different policies in their lives—women more so than The American Association for Long- and carriers. If LTC insurance isn’t an men (79% vs. 58%, respectively). For Term Care Insurance (AALTCI) offers option, a financial planner can help some, this care might be required only resources to help you research and you strategize alternatives and assess for a few months, but others may need compare LTC insurance at aaltci.org/ the potential impact to your finances it for several years or longer. long-term-care-insurance-rates. and estate plan if you are counting on covering LTC costs out of pocket. n How much does long-term Will I qualify for LTC care cost? insurance? Stats from the Genworth Financial Even if you can afford an LTC pol- 2020 Cost of Care Survey are pretty icy, you may not qualify. Unlike sobering. For instance, the current health insurance, preexisting health What about Medicaid median annual cost for assisted living conditions—such as a progressive and Medicare? is $51,600; an in-home health aide is neurological condition or a recent Households that qualify for Medicaid $54,912; and a private room in a nurs- stroke—can affect your eligibility may have access to LTC support. ing home is $105,850. for LTC insurance. According to the That said, Medicaid was designed to However, costs where you live could AALTCI, roughly half of applicants assist people who are at or very near be much higher or lower than those ages 75 or older were denied coverage poverty levels, meaning most middle- averages. In California, for example, in 2019, compared with about a third income and affluent individuals the average cost of a private room in of those ages 65 to 69. won’t qualify. a nursing home is $137,240; in Texas, As for Medicare, it will pay only for it’s $76,650. And these figures are esti- At what age should I consider medically necessary skilled nursing mated to increase 2% to 3% annually LTC insurance? and home care, such as giving shots, on top of inflation, so the cost you may The need for long-term care may arise physical therapy, and changing pay if you do eventually need care is suddenly, such as after a heart attack, dressings—not custodial care like likely to be much higher. hip fracture, or stroke. Most often, bathing and eating. however, it develops gradually, as How much can I rely on people get older and frailer or as an family support? illness or disability gets worse. Most The vast majority—80%—of long-term LTC claims begin when people are in Carrie Schwab-Pomerantz care is provided at home by unpaid their 80s. (@carrieschwab), CFP®, is president of Charles Schwab Foundation and senior vice family members and friends. But Because of that, somewhere bet­ president of Schwab Community Services before you rely on this option, think ween ages 50 and 65 is generally the at Charles Schwab & Co., Inc.

NEXT STEPS See page 38 for important information. ◆ The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Where specific advice is necessary or appropriate, Schwab Read more insights about real-world money recommends that you consult with a qualified tax advisor, CPA, financial planner, insurance matters at schwab.com/askcarrie. professional, or investment manager. (0321-0VLJ)

12 | CHARLES SCHWAB | SPRING 2021 CONTENTS INTERNATIONAL EQUITIES | BONDS

It may be time to revisit your Here’s what to consider when look- That’s not to say financial companies international allocation. ing for opportunities abroad. dominate Japan’s stock market, but the By Jeffrey Kleintop influence of global financial conditions Sector diversification on all types of Japanese companies is I n what’s known as home bias, First off, no one country offers full evident in their performance. investors around the world tend global stock market exposure. In fact, n The Canadian stock market to hold mostly their own country’s it’s surprising how much some major performs much like the energy sector. stocks—often at the expense of com- countries’ stock markets perform like a The Canadian economy is more reli- peting opportunities abroad. single sector of the global stock market. ant than most on natural resources. Having little or no foreign exposure Even the banks are tied to the sector’s may not seem like a negative when your n In the United States, the largest performance. portfolio’s doing well, but an absence of sector—technology—seems to drive international equities could mean miss- overall performance. Indeed, the U.S. Accordingly, over the past decade ing out on potentially greater returns, stock market acts a lot like one big the U.S. stock market performed best true diversification across sectors, and tech fund. among the three as the world’s tech- a hedge against those years in which n In Japan, the stock market closely nology sector hit new heights. Japan U.S. stocks struggle. tracks the global financial sector. posted relatively modest gains—in line

SPRING 2021 | ON INVESTING | 13 PERSPECTIVES | INTERNATIONAL EQUITIES

with the global financial sector—and And the winner is … Canada proved the weakest of the trio, U.S. and international stocks keep trading the title of greatest held back by the world energy sector, annualized total returns. which posted a net loss over the past 10 years. U.S. International These examples illustrate the poten- 25% tially dangerous lack of diversification 20% inherent in having a portfolio with a 21.1% large home bias—even if your home 15% 14.9% country happens to be among the 13.6% 10% 11.1% world’s largest economies. 5% 7.6% 4.8% 4.8% 1.1% Dollar direction 0% If you hold a stock that is denomi- 07/81–07/90 07/90–03/01 03/01–12/07 12/07–02/20 nated in a currency other than the U.S. dollar, you can either benefit or suffer Source: Charles Schwab and Bloomberg, as of 10/27/2020. Annualized total return between cycle from changes in exchange rates. For peaks measured by MSCI USA Index and MSCI EAFE Index. Past performance is no guarantee of future results. example, in July 2020 European stocks fell 1.5% when measured in euros; however, because the dollar fell against fundamentals, such as unsustainably the euro by 4.8% that same month, high stock valuations and dwindling Jeffrey Kleintop (@jeffreykleintop), European stocks actually posted a 3.3% earnings expectations. We’re currently CFA®, is senior vice gain when measured in dollars.1 seeing signs of fundamental deterio- president and chief global investment Thus, if the dollar is embarking on ration in U.S. stocks—and as a result, strategist at Charles a long-term slide propelled by wide international stocks may again take Schwab & Co., Inc. budget deficits and zero-interest-rate the lead. policy, it could act as a consistent boost to the performance of international Going global See page 38 for important information. u Investors should consider carefully stocks, as measured in dollars. If the U.S. stock market’s past decade information contained in the prospectus of outperformance caused your or, if available, the summary prospectus, Change in leadership portfolio to drift from its long-term including investment objectives, risks, charges, and expenses. Please read it Market leadership usually switches allocation targets, now may be a good carefully before investing. u Please read between U.S. and international stocks time to consider rebalancing your the Schwab Intelligent Portfolios Solutions™ at the start of a new economic cycle: portfolio back toward international disclosure brochures for important information, pricing, and disclosures related to the Schwab stocks. Fortunately, achieving global Intelligent Portfolios and Schwab Intelligent n In the 1980s, international stocks— diversification has never been easier Portfolios Premium programs. Schwab ® led by Japan—outperformed the or less expensive; a broad international Intelligent Portfolios and Schwab Intelligent Portfolios Premium™ are made available United States for most of the decade. mutual fund or exchange-traded fund through Charles Schwab & Co., Inc. (“Schwab”), n In the 1990s, the dot-com economy can give you exposure to a lot of sectors a dually registered investment advisor and broker dealer. u Portfolio management paved the way for U.S. stock market and stocks. services are provided by Charles Schwab leadership. How much exposure you should Investment Advisory, Inc. (“CSIA”). Schwab and n In the 2000s, international markets have to international investments is CSIA are subsidiaries of The Charles Schwab Corporation. u The information provided here again took the lead—until the 2008– another matter—one that depends on is for general informational purposes only and 2009 global financial crisis restored your risk tolerance and time horizon. should not be considered an individualized the reign of U.S. stocks (see “And the If your global allocation is out of recommendation or personalized investment advice. The investment strategies mentioned winner is …,” above). line with your target, start making here may not be suitable for everyone. Each small shifts as part of your regular investor needs to review an investment These changes in leadership typi- rebalancing routine. This gradual strategy for his or her own particular situation NEXT before making any investment decision. u cally are triggered by a breakdown in approach will allow you to adjust the International investments involve additional STEPS balance of your portfolio over time risks, which include differences in financial rather than in one dramatic move that accounting standards, currency fluctuations, ® geopolitical risk, foreign taxes and regulations, Schwab Intelligent Portfolios can build and could result in a big tax bill or, worse, and the potential for illiquid markets. Investing manage a globally diversified portfolio turn out to be poorly timed. n in emerging markets may accentuate these of exchange-traded funds along with a cash risks. u Past performance is no guarantee of future results and the opinions presented allocation on your behalf. Learn more at 1Bloomberg, MSCI Europe Index, as of cannot be viewed as an indicator of future schwab.com/intelligent. 10/27/2020. performance. (0321-04CT)

14 | CHARLES SCHWAB | SPRING 2021 Helping investors reach their retirement goals for over 80 years.

T. Rowe Price’s strategic investing approach has helped inform confident investment decisions since 1937. By asking the right questions at the right time, we seek to uncover opportunities and manage risk to continue guiding our clients through a variety of market conditions. Explore 37 funds on the Q4 2020 Mutual Fund OneSource Select List®. Visit Schwab.com/troweprice

Request a prospectus or summary prospectus at Schwab.com/OneSource; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. All funds are subject to market risk, including possible loss of principal, and are subject to management fees and expenses. Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies in the Mutual Fund OneSource® service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services. The amount of fees Schwab or its affiliates receive from funds participating in the Mutual Fund OneSource® service is not considered in the Select List selection, nor does any fund pay Schwab to be included in the Select List. Schwab, Mutual Fund OneSource® and Mutual Fund OneSource Select List® are trademarks of Charles Schwab & Co., Inc. and used with permission. T. Rowe Price and Charles Schwab & Co., Inc. are not affiliated. T. Rowe Price Investment Services, Inc., Distributor. PERSPECTIVES | BONDS

generally have held their value or negative correlation with stocks Why Bonds appreciated during significant stock over the short and medium terms, market declines—a trend that was helping cement their status as a safe Still Matter borne out amid last year’s turmoil. haven during times of market stress— On the other hand, short-term and there’s no clear alternative to fill Despite yields at near- Treasuries—which are considered a that role. historic lows, bonds can still cash equivalent—have failed to pro- be a bulwark against stock vide a similar hedge (see “A port in the 3 The 60/40 split was never right for market declines. storm,” below). everyone, since the right mix of asset By Kathy Jones classes for your particular portfolio has 2 Despite the blip last spring, more to do with your specific goals and D o bonds still provide adequate Treasuries continue to demonstrate capacity for risk. diversification? That was the question many investors were asking Beyond diversification in March 2020 when bonds and stocks Diversification benefits aside, the sold off at the same time—before the high returns seen from intermediate Federal Reserve stepped in to calm Treasuries last year aren’t likely to markets. Even when offering low be repeated over the next few years. In fact, some have gone so far as to yields, intermediate- Starting yields for fixed income invest- proclaim that the “traditional” portfo- term U.S. Treasuries ments are a reliable barometer of lio of 60% stocks and 40% bonds is no future returns over the long run, and longer optimal. We believe such con- generally have bond yields are currently near or at cerns are overblown for three reasons: held their value or historic lows. However, we do see the potential for 1 Even when offering very low yields, appreciated during 10-year Treasury yields to rise to the 1% intermediate-term U.S. Treasuries stock market declines. level in the coming months—even as

A port in the storm Over the past 30 years, intermediate-term Treasuries have provided Intermediate-term Treasuries a better hedge against market declines than short-term Treasuries. T-bills

12%

10% 10.3%

8%

7.2% 6% 6.6% 6.2% 6.2%

4% 3.8% 2.9% Trailing 6-month total returns 6-month total Trailing 2.6% 2% 2.3% 1.5% 1.1% 0.3% 0% 09/87 07/90 03/00 10/07 09/18 02/20

Bear market start dates

Source: Schwab Center for Financial Research, with data from Morningstar. Intermediate-term Treasuries are represented by the Ibbotson U.S. Intermediate-Term Government Bond Index and T-bills are represented by the Ibbotson U.S. 30-day Treasury Bill Index. Dates represent the start of commonly accepted bear markets (periods during which the S&P 500® Index declined at least 20%), plus September 2018 (when the S&P 500 fell 19%). Past performance is no guarantee of future results.

16 | CHARLES SCHWAB | SPRING 2021 What’s your emerging market strategy missing?

The full power of an Asia expert.

Introducing the Matthews Emerging Markets Equity Fund on Schwab Mutual Fund OneSource® With Asia representing 80% of the emerging market investment universe, having a deep understanding of this complex region is critical. The Matthews Emerging Markets Equity Fund applies our 29 years of investment expertise in Asia to other emerging markets around the world, so that you don’t miss out on some of the most attractive investment opportunities today. Uncover new investment opportunities at MatthewsAsia.com/Emerging-Markets or view the Matthews Asia Funds available on the Schwab Mutual Fund OneSource Select List ® at www.schwab.com/matthewsasia.

Investors should consider the investment objectives, risks, charges and expense of the Matthews Asia Funds carefully before making an investment decision. This and other information about the Funds is contained at matthewsasia.com. Read the prospectus carefully. Investing involves risk including the possible loss of income. Funds that invest in emerging market foreign securities may involve certain additional risks, exchange rate uctuations, less liquidity, greater volatility and less regulation. Distributor: Foreside Funds Distributors LLC

Schwab, Mutual Fund OneSource ® and Mutual Fund OneSource Select List ® are trademarks of Charles Schwab & Co., Inc. and used with permission. Matthews Asia and Charles Schwab & Co., Inc. are not af liated. Charles Schwab & Co., Inc. (member SIPC) receives remuneration from fund companies in the Mutual Fund OneSource ® service for recordkeeping and shareholder services, and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services. The amount of fees Schwab or its af liates receive from funds participating in the Mutual Fund OneSource service is not considered in the Select List selection, nor does any fund pay Schwab to be included in the Select List. © 2021 Matthews International Capital Management, LLC

2021_Q1_OO_Mathews Asia.indd 1 1/14/2021 4:24:32 PM PERSPECTIVES | BONDS

the Fed keeps short-term interest rates Lower your expectations near zero—assuming the economy Returns for all asset classes are expected to be lower over the next decade. continues to recover. Consequently, we suggest reducing the overall dura- Annualized historical total returns (1970–2020) tion in your portfolio to mitigate the risk of rising long-term interest rates, Forecast total returns (04/2020–03/2030) while maintaining an allocation to 10% 10.1% intermediate-term bonds for their 9.8% diversification benefits. (Duration is a measure of the sensitivity of bond 8% 8.1% prices to changes in interest rates.) 7.7% 7.4% 7.3% Indeed, you might consider holding 7.1% a mix of short- and intermediate-term 6% bonds to manage the effects of rising interest rates. Short-term bonds pro- 4.7% vide the flexibility to reinvest if rates 4% rise, while longer-term bonds provide stable yields that can help offset the 2% effects of another round of market 1.9% 2.0% turmoil. Alternatively, you could use a bond 0% ladder—a portfolio of individual bonds U.S. large-cap International U.S. invest- Cash or certificates of deposit that mature at U.S. small-cap stocks stocks large-cap ment-grade investments regular intervals—which also allows stocks bonds you to reinvest the proceeds from maturing bonds in higher-yielding Source: Charles Schwab Investment Advisory and Morningstar Direct. Data as of 03/31/2020. Indexes bonds once interest rates move up. representing the investment types are: S&P 500® Index (U.S. large-cap stocks); Russell 2000® Index (U.S. small-cap stocks); MSCI EAFE Index (international large-cap stocks); Bloomberg Barclays U.S. Aggregate Bond Index (U.S. investment-grade bonds); and Bloomberg Barclays 1–3 Month U.S. Beyond 60/40 Treasury Bill Index (cash investments). Past performance is no guarantee of future results. If the traditional 60/40 stocks-to- bonds allocation isn’t optimal, what’s an investor to do? For one, make sure Within fixed income, we still next few years, we believe holding your portfolio allocation matches your believe most investors should some inflation-linked bonds, such as risk tolerance and goals rather than a allocate the bulk of their portfolios Treasury Inflation-Protected Securities supposedly one-size-fits-all target to what we consider “core” bonds (TIPS), makes sense, to mitigate the risk allocation. (think Treasuries and highly rated of an unexpected spike in inflation.n Beyond that, we suggest broader corporate and municipal bonds) diversification across all asset classes, for stability and capital preserva- not just bonds. Our anticipated returns tion—but also include exposure to for both bonds and stocks are lower for riskier investments like emerging- the next 10 years than over the past 50 market bonds, high-yield corporates, Kathy Jones years, due in part to high starting valua- and preferred securities, assuming you (@kathyjones) is senior vice president tions and low inflation projections (see can tolerate the higher volatility that and chief fixed “Lower your expectations,” above). As typically accompanies them. income strategist at the Schwab a result, we suggest exposure to a wide And while we don’t expect inflation Center for Financial array of global asset classes to help to be a significant problem over the Research. manage risk and provide a broader set of investment opportunities.

NEXT See page 38 for important information. u The information provided here is for general informational STEPS 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 Need help selecting bond investments for your any investment decision. u Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets. u Past performance is no guarantee of future portfolio? Call 866-893-6699 to speak with a results and the opinions presented cannot be viewed as an indicator of future performance. u Schwab fixed income specialist. Investing involves risk, including loss of principal. (0321-0S7T)

18 | CHARLES SCHWAB | SPRING 2021 Exclusive Schwab benefi ts with premium service from American Express.

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*The Platinum Card® from American Express exclusively for Charles Schwab and the Charles Schwab Investor Credit Card® from American Express are only available to you if you maintain an eligible account at Schwab (an “eligible account”). An eligible account means (1) a Schwab One® or Schwab General Brokerage Account held in your name or in the name of a revocable living trust where you are the grantor and trustee or (2) a Schwab Traditional, Roth, or Rollover IRA that is not managed by an independent investment advisor pursuant to a direct contractual relationship between you and such independent advisor. Eligibility is subject to change. American Express may cancel your Card Account and participation in this program if you do not maintain an eligible account.

Charles Schwab & Co., Inc., 211 Main Street, San Francisco, CA 94105 ©2021 Charles Schwab & Co., Inc., All rights reserved. Member SIPC. ADP94411Q420-00 (1020-0DC9) (01/21) 00249845 When a stock breaks above its five- or 10-day moving average, for example, DIFFERENT STROKES it may be a terrific opportunity for When Tesla (TSLA) was outperforming last year, you could have: short-term gains. If you enter such a position, be sure to set a stop order for • Used the five-day moving average as a trigger to buy Tesla last April (see➀ in the chart just below the moving average to help below) and then sold a portion once it broke below the line more than a week later (see ➁). • Sold more—but not all—after the stock broke through its 20-day moving average in minimize your loss in the event the August (see ➂). This would have still enabled you to profit once the stock regained its momentum doesn’t hold. Momentum momentum later that month (see ➃). can be fleeting, so such positions ➃ must be managed actively as they can Go With TIME FRAME MATTERS quickly unwind. ➂ FedEx (FDX) broke above its 10-day moving average in late April 2020 Those inclined to hold on to a the Flow before pulling back (see ➀ in the chart below). In May, it followed up with a stock longer—or who don’t want to longer run after breaking through its 10-day and 50-day moving averages manage a trade too closely—will want Three popular indicators (see ➁). However, it wasn’t until July that it broke above its 200-day average to see the price break through the ➀ ➁ (see )—a strong indicator that positive momentum had unleashed a new for trading momentum. ➂ longer-term averages. For instance, a uptrend, which is indeed what followed. Also note how the volume spiked By Kevin Horner the day it gapped higher and through its 200-day moving average (see ➃). stock that breaks through a 50- or 200- 5-day SMA day moving average is more likely to 20-day SMA 10-day SMA M omentum traders operate convert momentum into a longer-term 50-day SMA under the assumption that an 50-day SMA trend (see “Time frame matters,” left). asset price moving strongly in a given 200-day SMA direction will continue to move in that 3 News and commentary May June July Aug direction. A price trend can reverse at ➂ Qualitative inputs may also be useful any time, of course, but it’s less likely when trading momentum. When I’m Examples provided are for illustrative purposes only and not intended to be reflective of results you can to do so when momentum is strong or thinking of entering or exiting a stock expect to achieve. Screenshots are historical in nature. Past performance is no guarantee of future results. accelerating. with strong momentum, I always look But what clues might suggest that ➀ to see if there’s any upcoming news that a surge of momentum is sustainable? ➁ could knock it off its recent trajectory. selling far below your target price. If Here are a few indicators I like to ➃ For example, a pending earnings Kevin Horner is a you’re using a stop-limit order—which use—along with strategies for how to announcement could easily derail the senior manager of will execute only at the price you set— trading services deploy them. stock if the numbers disappoint. education at Charles you could end up not selling at all if no I also check Twitter as a crowdsourc­ Schwab & Co., Inc. buyer is willing to meet your price. 1 Trading volume Volume: 4,245,776 ing function, looking to see what traders Even with these risks, trading As a friend of mine likes to say, I respect are saying about a stock. This momentum can be a profitable strat­ “Volume is the rocket fuel for further can provide some timely clues about egy for both short- and long-term price appreciation.” That’s because whether enthusiasm for a stock may be No matter how long you’re in a gains. Using a combination of volume, when a stock’s trading volume is above overblown or justified based on these momentum trade, you should build moving averages, and other inputs May June July Aug average or increasing, it can be an collective sentiments, and I’ll take par­ in protection against unexpected price should give you some good ideas on important signal of traders’ comm­ ticular note of traders advising to take declines. Setting a stop order below where to start—and when to hop off Examples provided are for illustrative purposes only and not intended to be reflective of results you can ■ itment to the current direction (see expect to achieve. Screenshots are historical in nature. Past performance is no guarantee of future results. some profits at certain price points. one of the moving averages is a good before the engine sputters. “Time is of the essence,” lower right). way to do this—just be aware that it Alternatively, when volume is below Protect yourself won’t protect you against after-market average or falling, momentum may Often, a stock retreats after a strong run or pre-open moves, and stocks with be waning, and a reversal could be in because traders are waiting to see if the negative news often gap down. If you’re Want more breakdowns of popular the offing. Time is of the essence price breaks below its moving averages using a standard sell-stop order—which trading strategies? Watch new episodes WATCH When checking a stock’s trading volume, time of day matters. and volume declines. There’s nothing becomes a market order once your sell of Schwab’s Trading Up-Close at 2 Moving averages wrong with reducing or closing out price is triggered—you could end up schwab.com/trading-up-close. Traders can use moving averages—a Volume tends to be heavier across trading volume compares with the some positions during these times of calculation of a stock’s average price the board during the market’s open average trading volume for a given consolidation. See page 38 for important information. u The information provided here is for general informational purposes over a set number of days—to de­ and close, and lighter during the time of day—down to the last Another strategy is to reduce the size only and should not be considered an individualized recommendation or personalized investment advice. The termine if a stock is trending higher or middle hours of the session—both minute—over the past five trading of your position in a trade as the price investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an lower, or remaining relatively steady. of which can make it difficult to days. A stock that doesn’t look like breaks below certain moving averages investment strategy for his or her own particular situation before making any investment decision. u Investing assess a stock’s true volume. To it’s trading heavily at noon might involves risks, including loss of principal. u There is no guarantee that execution of a stop order will be at or When a stock breaks above or below (see “Different strokes,” above right). mitigate this, you can look to actually be trading more heavily near the stop price. u All corporate names and market data shown are for illustrative purposes only and are a moving average, it could signal the When the price breaks below all the not a recommendation, offer to sell, or a solicitation of an offer to buy any security. u Schwab Trading Services average volume over time, available than in the previous five days. ® start of a rising or falling trend. For moving averages, however, it’s a pretty includes access to StreetSmart trading platforms and priority access to Schwab trading specialists. Call 888- through Schwab’s StreetSmart Finding little advantages like this 245-6864 to request access (a Schwab brokerage account is required). Schwab reserves the right to restrict or momentum traders, the question is Edge® trading platform. This can be the difference between a good sign that the positive trend is modify access at any time. Access to electronic services may be limited or unavailable during periods of peak which moving average to use. indicator shows how intraday losing and a winning trade. broken at that point. demand, market volatility, systems upgrades or maintenance, or for other reasons. (0321-004L)

20 | CHARLES SCHWAB | SPRING 2021 SPRING 2021 | ON INVESTING | 21 Sweeten Your Tax Strategy

Five tax planning missteps­—and how to avoid them.

22 | CHARLES SCHWAB | SPRING 2021 ARTWORK BY CHERYL TEO SWEETEN YOUR TAX STRATEGY

want tax flexibility in retirement Another thing to keep in mind is growth rather than letting them sit “You could end up paying quite a bit year. Rather than carrying forward the unused losses, The nonpartisan may want to consider a Roth, since that gains on stock-based investments stagnant in government coffers.” more in taxes over the course of your you could realize the equivalent amount in gains this it’s a hedge against potentially higher held in taxable brokerage accounts are In a perfect world, your with- retirement if you don’t draw down year, which would effectively zero out the taxes you Tax Foundation puts future tax rates.” taxed differently depending on how holding amounts would equal your your savings in the most tax-efficient would otherwise owe on those gains. long you held the asset before selling tax liability for the year, resulting manner,” Hayden says. “If you don’t need the proceeds from the sale, you the number of words n Read more about how to determine it. If you’ve owned an investment for in neither a tax bill nor a refund. could even repurchase the exact same investment if a Roth 401(k) is right for you at at least a year and a day, any gains will It’s hard to get it exactly right, but n Schwab Intelligent Income™, a fea- at today’s market value,” Hayden says. “Just be sure in today’s tax code schwab.com/roth401k. be taxed at long-term capital gains the IRS Tax Withholding Estimator ture available with Schwab Intelligent each and every share sold was for a gain.” (Any shares rates of 0%, 15%, or 20% (depending (irs.gov/w4app) can help calculate Portfolios®, can help you create a tax- that are sold at a loss are subject to the wash-sale at some 7.7 million. on your income). Conversely, gains whether you should adjust your smart withdrawal strategy. Learn more rule, which disallows losses for tax purposes if you Misstep #2 on investments held for a year or withholding. “In general, it’s a good at schwab.com/intelligentincome. purchase the same or a substantially identical security No wonder it’s such a Letting taxes eat into less are taxed at ordinary income tax idea to review your withholding at within 30 days before or after the sale.) your returns rates—which are as high as 37% for the start of the year and then again those in the top tax bracket—plus about halfway through,” Hayden Misstep #5 n Learn more about tax-efficient investing at hard recipe to follow. Every dollar lost to taxes is one you a 3.8% surtax for individuals whose says, “particularly when there are Delaying taxes schwab.com/taxes. can’t spend or reinvest for potential modified adjusted gross income is changes to tax law or your personal “Taxes affect nearly every part of our financial growth, so it’s worth investing in the more than $200,000 ($250,000 for circumstances.” When it comes to paying taxes on lives,” says Hayden Adams, CPA, CFP®, director of most tax-efficient way possible. “You married couples). investment gains, common wisdom is Let experts be your guide tax and financial planning at the Schwab Center for have to be especially careful with n Learn more about tax withholding to delay as long as possible. But with Financial Research. “It’s no surprise, then, that even investments held in taxable brokerage n Learn more about tax-efficient at schwab.com/taxwithholding. today’s tax rates near historic lows, Taxes can befuddle even the sharpest minds. “You seemingly small slip-ups can have a major impact on and savings accounts, because over investing at schwab.com/taxes. realizing gains sooner might actually be may be capable of learning all of this on your own, but how much tax you owe, and consequently how much time taxes can have a huge effect on the better way to go in some situations. do you really want to?” Hayden says. “After all, there’s of your income you get to keep.” your after-tax returns,” Hayden says. Misstep #4 “The Tax Cuts and Jobs Act of 2017 a world full of experts out there who can help guide Here, Hayden shares five common tax planning One rule of thumb is to hold Misstep #3 Mishandling your retirement reduced taxes for many people,” you through this process.” n missteps—and how to avoid them. investments that pay a lot of interest Having too much distributions Hayden says. “But with those provisions or nonqualified dividends—which are tax withheld from your set to expire after 2025, you may want 1Earnings on Roth 401(k) contributions are eligible for tax-free taxed at ordinary income rates—in paycheck Failing to take the IRS-mandated to consider some tax strategies that treatment so long as the distribution occurs at least five years after Misstep #1 tax-deferred accounts like 401(k)s and required minimum distributions allow you to capitalize on the lower tax the first Roth 401(k) contribution and the account holder has reached age 59½, has become disabled, or has died. | 2Provided Sticking with default 401(k) options individual retirement accounts (IRAs), According to IRS data, nearly (RMDs) from your tax-deferred 401(k)s rates while they’re still around.” you’ve held the account at least five years. where you won’t pay taxes until you three-quarters of Americans received and IRAs starting at age 72 will result For example, converting some or all If you participate in your employer’s workplace start making withdrawals. tax refunds in 2019, with the average in a 50% penalty on the difference of your traditional IRA assets to a Roth retirement plan, you’re most likely enrolled in a Assets that tend to lose less of refund totaling just over $3,000. between what you should have taken IRA this year—and paying income taxes See page 38 for important information. u Please read the traditional 401(k) or similar account, which allows their returns to taxes make sense Many taxpayers appreciate receiv- and what you did take. on the converted amount, including Schwab Intelligent Portfolios Solutions™disclosure brochures for important information, pricing, and disclosures related to the you to make pretax contributions that reduce your for taxable accounts such as your ing a windfall each spring, but having However, a lesser-known hazard earnings—allows you to lock in today’s Schwab Intelligent Portfolios and Schwab Intelligent Portfolios taxable income dollar for dollar. The immediate regular brokerage account. These too much tax withheld from your lies in withdrawing assets from tax rates, which may be lower than they Premium programs. u Schwab Intelligent Portfolios® and Schwab tax benefit of such contributions is appealing, to investments include exchange-traded paychecks is like giving the U.S. gov- your taxable, tax-deferred, and Roth are in the future. And once you reach Intelligent Portfolios Premium™ are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered be sure, but it might not be the best option for your funds and tax-managed mutual funds, ernment an interest-free loan until accounts at the wrong times or in the age 59½, withdrawals are entirely investment advisor and broker dealer. Portfolio management particular tax situation. which trigger relatively few taxable you receive your refund. “There’s an wrong order. For example, because tax-free.2 “Assets in a traditional IRA services are provided by Charles Schwab Investment Advisory, Enter the Roth 401(k), which you fund with distributions to shareholders, and opportunity cost that comes from you’ve already paid taxes on any Roth are subject to the unknowns of future Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation. u Schwab Intelligent Income™ is an after-tax dollars—meaning there’s no immediate municipal bonds, whose income is withholding too much in taxes,” contributions, the longer you wait to tax law,” Hayden says. “Assets in a Roth, optional feature for clients to receive recurring automated tax benefit when you contribute—but which offers generally tax-free at the federal level Hayden says. “You could have been withdraw those funds, the longer those on the other hand, are not—because withdrawals from their accounts. Schwab does not guarantee the tax-free growth and tax-free withdrawals in retire- and for in-state residents. investing those dollars for potential securities have to earn back that tax hit. you’ve already paid taxes on them.” amount or duration of Schwab Intelligent Income withdrawals nor does it guarantee any specific tax results such as meeting ment.1 According to Plan Sponsor Council of America, Hayden recommends the following Likewise, today’s long-term capital required minimum distributions. u The information provided roughly 70% of employers offer Roth 401(k) options, withdrawal order as a good start gains rates are near historic lows. If you here is for general informational purposes only and should not be considered an individualized recommendation or personalized yet just 18% of workers contribute to them—a trend toward maximizing tax efficiency: have sizable unrealized gains in your investment advice. The investment strategies mentioned here Hayden attributes to a behavioral tendency known as portfolio, you might want to consider may not be suitable for everyone. Each investor needs to review status-quo bias. “When a traditional 401(k) or similar With today’s tax rates near 1st: RMDs strategically selling some of them to an investment strategy for his or her own particular situation before making any investment decision. u Investing involves risk, 2nd: account is the default option, it’s hard to overcome historic lows, realizing gains sooner Interest and dividends from take advantage of today’s rates—a including loss of principal. u This information does not constitute inertia and make a change,” he says. taxable accounts strategy known as tax-gain harvesting. and is not intended to be a substitute for specific individualized Roth accounts tend to be best for those who 3rd: Maturing bonds and “With tax-gain harvesting, you sell tax, legal, or investment planning advice. Where specific advice might actually be the better way to is necessary or appropriate, Schwab recommends consultation believe their current income tax rate is lower than certificates of deposit from some winning investments and rec- with a qualified tax advisor, CPA, financial planner, or investment it will be when they’re ready to take withdrawals. go in some situations. taxable accounts ognize the gains today, potentially at a manager. u Roth IRA conversions require a five-year holding “Younger workers who still have relatively low 4th: Assets from taxable and lower tax rate or no tax at all,” Hayden period before earnings can be withdrawn tax free and subsequent conversions will require their own five-year holding income often fall into this group,” Hayden says. tax-deferred accounts says. For example, say you currently period. In addition, earnings distributions prior to age 59½ are “However, even higher-earning individuals who 5th: Roth 401(k)s and Roth IRAs have more losses than gains for the subject to an early withdrawal penalty. (0321-0DWX)

24 | CHARLES SCHWAB | SPRING 2021 SPRING 2021 | ON INVESTING | 25 With attractive yields and potentially competitive returns, dividend-paying stocks could be just what the doctor ordered.

oday’s low interest rates—plus the prospect of below-average stock returns over the coming T decade—are a one-two punch for both income- focused investors and savers struggling to regain for lost ground in the wake of an uneven recovery. However, whether you’re looking to generate extra income or to potentially pump up total returns from your stock portfolio, dividend-paying stocks are uniquely suited to help soften the blow. Here’s what to know about dividend stocks, and how to pick the best ones for you.

The perks (and pitfalls) of dividend payers

Dividend payers tend to be big, well-established companies that have an abundance of cash. “They often can’t compete with the rapid appreciation of fledgling, fast-growing companies, so they use dividend payouts as an enticement,” says Steve Greiner, vice president of Schwab Equity Ratings®. Dividends, when reinvested, can significantly boost total returns over time, making dividend-paying stocks an attractive option for older and younger investors alike. For example, if you invested $1,000 in a hypothetical investment that tracked the S&P 500® Index on January 1, 1990, but didn’t rein- vest the dividends, your investment would have been worth $8,982

ILLUSTRATION BY BEX GLENDINING SPRING 2021 | ON INVESTING | 27 RX FOR WHAT AILS YOU at the end of 2019. If you had reinvested the dividends, More bang for your buck shareholders—by funding payouts of dividends and growth than oth- When not to reinvest you would have ended up with $16,971—nearly twice with borrowed funds or dwindling ers—but they also offer different Reinvesting dividends could significantly boost total returns over time. as much (see “More bang for your buck,” right). cash reserves,” Steve says. “It’s rare that risk characteristics that you should Three situations in which you might want to deploy With the S&P 500 yielding 1.52% as of December 31, such measures turn things around, consider when researching dividend dividend payouts elsewhere. S&P 500 (price returns) S&P 500 (total returns) 2020, dividends could also prove an attractive alterna- though. They’re usually just delaying payers for your portfolio. Stocks tive to Treasuries and other fixed income investments the inevitable.” from the banking, consumer staples, n You’re in or near retirement: When you’re living in the coming years. “Of course, dividend-paying $20,000 and utilities sectors, for example, off your savings, taking income from your dividends stocks are generally much riskier than bonds, some- 3. Check the balance sheet: High levels are known for steady dividends and allows you to let more of your portfolio stay invested thing income investors in particular should consider of debt represent a competing use of lower volatility, but they also tend to for growth. If you’re nearing retirement, on the other when weighing their options,” Steve says. cash. “If push comes to shove,” Steve offer less growth potential. Dividend- hand, you can use the payouts to build up your cash and short-term reserves as you prepare for the tran- What’s more, dividends aren’t guaranteed, says, “the company is going to pay its paying tech companies, on the other $15,000 sition to life after work. unlike, say, the interest payments from Treasuries. creditors before it pays its dividends.” hand, could offer attractive dividends Companies can trim or slash their dividends at any A good rule of thumb is to favor along with the opportunity for larger n Your portfolio is out of balance: Reinvesting the time, a risk that was realized in 2020 after 68 of the companies with a “current ratio”—a price gains, but they also tend to be dividends of a well-performing investment back into roughly 380 dividend-paying companies in the S&P $10,000 measure of the company’s current much more volatile. that investment can throw your portfolio off balance 500 suspended or reduced their payouts. assets versus its current liabilities—of “If you’re a long-term investor, you over time. In such cases, you might want to take the “Fortunately, companies generally only cut 2 or higher, which is a good indicator might be willing to accept tech’s higher cash and reinvest it elsewhere. dividends when they’re in distress,” Steve says, “so of its ability to cover its short-term volatility in exchange for its growth n The investment is underperforming: If you’re wor- favoring those with sound financial metrics can help $5,000 obligations. and income prospects,” Steve says. ried about an investment’s future prospects but aren’t mitigate this risk.” “But if you’re nearing or in retirement, quite ready to let it go, you may not want to reinvest 4. Look at dividend growth: Generally you might want to stick with dividend the payouts back into that investment. Instead, you How to pick dividend stocks speaking, you want to find companies payers from less-volatile industries.” might use the dividends to dip your toe into prospec- $ that not only pay steady dividends but tive investments that could ultimately replace the underperforming investment. These six tips can help you identify dividend-paying 1990 1995 2000 2005 2010 2015 2020 also increase them at regular inter- 6. Consider a fund: If you’re wor- stocks with strong financial health: vals—say, once per year over the past ried about the potential for price three, five, or even 10 years. Indeed, declines eroding the value of your 1. Don’t chase high dividend yields: “There’s a rea- Source: Charles Schwab. Data from 01/01/1990 through 12/31/2020. Calculations assume a starting companies that grow their dividends dividend stocks, consider instead a portfolio value of $1,000. Indexes are unmanaged, do not incur management fees, costs, and son—and not always a good one—that a security is expenses, and cannot be invested in directly. Past performance is no guarantee of future results. tend to outperform their peers over dividend-focused exchange-traded offering payouts that are well above its peers or the time (see “Supersize me,” bottom left). fund (ETF) or mutual fund. Such Research can pay dividends broader market,” Steve says. “Before jumping at a big Not only that, but “a strong history funds typically hold stocks that have yield, try to determine why it’s so high.” of regular dividend growth also helps a history of distributing dividends to How to research dividend payers on schwab.com. Dividend yield is calculated by dividing a stock’s Supersize me keep pace with inflation—which their shareholders, and they provide total annual dividend payouts by its current share Over the past 40 years, stocks that maintained or grew their dividends is particularly valuable to income- a greater level of diversification than Log in to schwab.com/stockscreener to research price. If a high or rising yield is due to a shrinking outperformed those that cut their payouts or offered none at all. seeking investors,” Steve says. you can achieve by buying a handful dividend stocks by: share price, that’s a bad sign and could indicate that a Nevertheless, you probably should of dividend-paying stocks. dividend cut is on the horizon. Historical total returns, 1981–2020 give companies a break if they didn’t n Current ratio: Select Financial Strength under If a rising dividend yield is due to rising profits, on increase dividends in 2020, or if they Do your homework the Choose Criteria menu, then select Current Ratio and choose a value. the other hand, that’s a much more auspicious sign. 15% don’t in 2021. “Most have been hoard- “When net profits rise, dividends tend to follow suit, ing cash to help weather the economic No matter what stage of life you’re n Payout ratio: Select Dividends under the Choose so just be sure you know what’s causing the increase 13.74% uncertainty, so it’s not unreasonable in, dividend-paying stocks can be a Criteria menu, then select Payout Ratio - TTM and before buying the stock,” he says. 12% for them to keep dividends flat until great way to supplement your income choose a range. the economy bounces back,” Steve says. and improve your portfolio’s growth n Sector: Select Basic under the Choose Criteria 10.39% 10.31% menu, then select Sectors and Industries and 2. Assess the payout ratio: This metric—which is cal- 9% 9.60% potential. Just be sure you research choose a sector. culated by dividing dividends per share by earnings 5. Understand sector risk: Some sectors their overall financial health, not just n per share—tells you how much of a company’s earn- 6% offer a more attractive combination their dividend rates, before investing. To review a stock’s dividend growth, log in to ings are going toward the dividend. “A ratio higher schwab.com/research-tools, search for the com- than 100% means the company is paying out more pany name or ticker symbol, and select the Dividends u 3% See page 38 for important information. Investors should consider carefully information contained tab on the stock’s research page. to its shareholders than it’s earning,” Steve says. “In in the prospectus or, if available, the summary prospectus, including investment objectives, risks, such cases, it may be able to cover its dividends from charges, and expenses. Please read it carefully before investing. u Portfolio Management for the To research dividend-paying stock funds, log available cash, but that can last only so long.” 0% ThomasPartners Strategies is provided by Charles Schwab Investment Management, Inc. (“CSIM”). Stocks that Stocks with Stocks that Stocks that CSIM is a registered investment adviser and an affiliate of Charles Schwab & Co, Inc. (“Schwab”). Both in to schwab.com/ETFscreener (for ETFs) or If a company whose stock you own is losing u grew or initiated no change in cut or eliminated did not pay CSIM and Schwab are separate entities and subsidiaries of The Charles Schwab Corporation. The schwab.com/fundscreener (for mutual funds), select money but still paying a dividend, it may be time dividends dividends dividends dividends information provided here is for general informational purposes only and should not be considered Distributions under the Choose Criteria menu, then an individualized recommendation or personalized investment advice. The investment strategies to sell. “Dividend payers in financial straits may try select Distribution Yield and choose a range. mentioned here may not be suitable for everyone. Each investor needs to review an investment to stave off a dividend cut—which can drive away strategy for his or her own particular situation before making any investment decision. u Dividend- Source: Compustat, Ned Davis Research, S&P Capital IQ, and S&P Dow Jones Indices. ©2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. focused funds may underperform funds that do not limit their investment to dividend-paying stocks. See additional explanatory notes and disclosures at ndr.com/copyright.html. For data vendor dis- Stocks held by the fund may reduce or stop paying dividends, affecting the fund’s ability to generate 28 | CHARLES SCHWAB | SPRING 2021 claimers, refer to ndr.com/vendorinfo. Past performance is no guarantee of future results. income. u Investing involves risk, including loss of principal. (0321-026Y) SPRING 2021 | ON INVESTING | 29 HABIT Diversify, Market crash Blended portfolio All-stock portfolio diversify, Tech Wreck Great Recession COVID-19 diversify $400K 2 $348,250 $342,288 Investing across and within asset classes can not only help protect against large drops but $300K –11% drop also potentially boost your portfolio’s value. –20% drop For example, over the past 20 years a diver- Seventh sified portfolio of stocks and bonds would have had an ending value nearly 9% greater $200K than an all-stock portfolio—and been less

volatile in the bargain. value Portfolio “A diversified portfolio won’t always outperform an all-stock portfolio, but it will generally lose less of its value during $100K –31% drop –21% drop a downturn,” Mark says. “And when your –45% drop portfolio is less volatile, you’re less likely to –51% drop Heaven make rash decisions that could undercut your savings.” $0

n Learn more about creating a 2000 2002 2004 2006 2008 2010 2012 20142016 2018 2020 diversified portfolio of exchange-traded HABIT Total contributions Total earnings funds, along with a cash allocation, Source: Schwab Center for Financial Research and Morningstar. Data from 09/30/2000 through 09/30/2020. The There are many roads Start example is hypothetical and provided for illustrative purposes only. Portfolio performance during market crashes Rosa Jin tailored to your goals and risk tolerance is based on monthly data, not peak-to-trough declines. The blended portfolio is composed of 60% stocks and ® at schwab.com/intelligent. 40% bonds. Stocks are represented by the S&P 500 Index and bonds are represented by the Bloomberg Barclays to financial well- investing now U.S. Aggregate Index. The blended portfolio is rebalanced annually. Returns include reinvestment of dividends, $766,197 $655,149 interest, and capital gains. being, but research 1 The earlier you start, the less you suggests those who may have to save to reach your goal, thanks HABIT $400K Portfolio value after fees to the potential for long-term compound Minimize fees enjoy uncommon 0.5% fee growth. Consider two investors who each wanted to save $1 million by age 65: $378,638 success share $350K Management fees—from expense 1% fee common behaviors. Rosa started investing at age 25 and so 3 ratios charged by index funds to $333,831 needed to save just $5,720 a year to achieve the annual fees charged by an advisor—are $300K Here’s a data-driven her goal. often a necessary part of investing. That said, look at what makes even seemingly small differences can erode Jin didn’t start investing until he was 35 your returns over time. 2% fee $250K seven such habits so and so needed to save $11,125 a year to “Make sure you’re getting what you $258,999 achieve the same goal. pay for—whether that’s strong returns, Portfolio value Portfolio effective—and how $344,875 exceptional service, emotional support that $200K “Age 35 is still quite young, but Jin keeps you on track, or practical, trustworthy to start incorporating nevertheless had to save nearly 50% more $234,520 advice,” Mark says. “In any case, it’s wise than Rosa to achieve the same goal,” says to scrutinize your investment expenses them into your own $150K Mark Riepe, head of the Schwab Center for regularly, perhaps as part of your annual financial life. Financial Research. “Not everyone will be portfolio review.” able to do that, which is why it’s so import- $100K ant to invest as much as you can as early as n Research low-cost exchange-traded you can.” Source: Schwab Center for Financial Research. The funds and mutual funds at schwab.com/ 0 5 10 15 20 25 example is hypothetical and provided for illustrative research-tools. Time horizon purposes only. It is not intended to represent a n Set up automatic contributions to specific investment product. Calculations assume a your Schwab accounts at schwab.com/ lump-sum investment on January 1 of each year and Source: Schwab Center for Financial Research. The example is hypothetical and provided for illustrative purposes a 6% average annual return, and do not reflect the only. Ending portfolio balances assume a starting balance of $100,000, a 6% average annual return, no additional contribute. effects of investment fees or taxes. contributions or withdrawals, and do not reflect the effects of taxes.

30 | CHARLES SCHWAB | SPRING 2021 SPRING 2021 | ON INVESTING | 31 SEVENTH HEAVEN

HABIT Stay invested HABIT Make To reduce your tax bill, you could take HABIT Increase approach is pretty painless,” Mark says. HABIT Create and one of three common approaches: “It doesn’t eat into your take-home pay tax-smart savings because it’s being skimmed off your raise. follow a When the market’s in free fall, decisions Approach 1: Hang on to the investment at every It’s harder to miss what you never had to financial plan 4 it’s tempting to flee to the safety 5 for at least a year and a day, at which point 6 begin with.” 7 of cash. However, pulling out of any gains would be taxed at your long- opportunity Better yet, increase that percentage by the market for even a month during a down- term capital gains rate of 15%, resulting at least a point anytime you get a raise, turn could seriously stunt your returns, as Taxes may be a certainty, but there’s in a $7,500 tax bill ($50,000 × .15).1 which can have an even greater impact Last but not least, Schwab’s 2019 Modern the examples below show. still plenty you can do to try to mini- Instead of saving a flat dollar amount on your portfolio value (see “Scenario 3”). Wealth Survey found that individuals who “The problem with selling during a mize them. For example, how you sell Approach 2: Sell another investment at each year (see “Scenario 1,” below), con- have a written financial plan are more likely market drop is that by the time you act, the appreciated investments can have a big a loss in order to offset some or all of your sider contributing a percentage of your n If your 401(k) plan offers the option to to exhibit other healthy habits, as well. “It’s worst may already be behind you,” Mark impact on how much of your gains you short-term $50,000 gain. For example, if income so your contributions increase automatically step up your percentage not surprising that people who put in the says. “Thus, not only are you locking in get to keep. you realize $35,000 in losses, your gains anytime your income does (see “Scenario contribution on a regular basis, consider effort to plan for the future are more likely your losses, but you’re likely to miss some “You never want to think about taxes would be reduced to just $15,000, result- 2”). “Of all the ways to save more, this taking advantage of it. to take the steps necessary to make that of the best days of the recovery, which often after the fact, because by then it’s too ing in a $3,600 tax bill ($15,000 × .24). vision a reality,” Mark says. n happen within the first few months.” late,” Mark says. “Instead, taxes should Scenario 1: Contribute a flat dollar amount ($2,000) every year be an integral part of your investment Approach 3: Combine approaches 1 Planners Nonplanners Scenario 2: Contribute 5% of income every year Cumulative returns choices—because seemingly small and 2—holding on to your investment Portfolio Scenario 3: Increase contributions 1 percentage point with every raise Feel very 56% following market bottom decisions can have big implications on for at least another month and a day and value at confident retirement your tax bill.” (See “Sweeten Your Tax realizing $35,000 in losses to offset your about 1 year later 2 years later 3 years later $800K 13% reaching goals Strategy,” page 22.) $50,000 gain, resulting in a $2,250 tax bill 17% $765,547 Stayed fully invested through bear market Let’s say you’re looking to realize a ($15,000 × .15). 46% $50,000 gain on an investment you’ve 68% Have an 70% n Find more ways to make tax-smart held 11 months. Because you’ve held the 12% emergency 83% investment less than a year, your gains decisions and potentially lower your tax $600K fund 26% will be taxed at your marginal federal bill at schwab.com/taxstrategies.

Moved investments into cash for 1 month tax rate—24% for a single filer making 5% $495,189 74% 29% $100,000—resulting in a $12,000 tax bill Automate $400K 46% ($50,000 × .24). 11% their savings 57% $349,901 25% Capital gains tax owed 10% Make loan 45% Moved investments into cash for 3 months $12,000 payments on $200K 20% time or have no Annual contribution rate 9% 41% debt balances 27% 8% 50% 7% 5% 6% $7,500 n If you don’t have a plan yet, retirement is Moved investments into cash for 6 months $0 5% a great place to start. With Schwab Plan™, 13% clients can see what it takes to retire the 32% $3,600 25 30 35 40 45 50 55 60 65 way they want. Get a complimentary plan 42% $2,250 Age at schwab.com/schwabplan. Source: Schwab Center for Financial Research. Scenarios assume a starting salary of $40,000, annual cost- of-living increases of 2%, and a 5% raise every five years. The example is hypothetical and provided for n Financial Decoder, a Schwab original illustrative purposes only. It is not intended to represent a specific investment product. Ending portfolio Source: Schwab Modern Wealth Survey. The online balances assume a 6% average annual return and do not reflect the effects of investment fees or taxes. In survey was conducted from 02/08/2019 through podcast, reveals the biases that might Original tax bill Approach 1 Approach 2 Approach 3 Scenario 1, the investor contributes 5% of her pretax income in the first year and then contributes that 02/17/2019 in partnership with Logica Research cloud your judgment and cost you same dollar figure in subsequent years. In Scenario 2, the investor contributes 5% annually at the start of among a national sample of Americans ages 21 every year from age 25 through age 65. In Scenario 3, the investor contributes 5% annually at the start of to 75. Quotas were set so that the sample is as money. Listen and subscribe for free at The example is hypothetical and provided for illustrative purposes only. every year beginning at 25 and then increases her contribution rate by 1 percentage point with each raise. demographically representative as possible. schwab.com/financialdecoder.

Source: Schwab Center for Financial Research and 1 ® Morningstar. Data from 01/1970 through 12/2019. Long-term capital gains rates are 0%, 15%, or 20%, depending on income, plus a 3.8% surtax for certain Intelligent Portfolios and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co., Inc. (“Schwab”), a dually registered investment Market returns are represented by the S&P 500® Total high-income earners. If you decide to hold on to the investment for at least a year and a day, be aware that advisor and broker dealer. u Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries Return Index, and cash returns are represented by your investment could decrease in value during that time. of The Charles Schwab Corporation. u The information provided here is for general informational purposes only and should not be considered an individualized the total returns of the Ibbotson U.S. 30-day Treasury recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an Bill Index. Examples assume investors who switched investment strategy for his or her own particular situation before making any investment decision. u This information does not constitute and is not intended to be a to cash investments did so in the month that the See page 38 for important information. u Investors should consider carefully information contained substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with market reached its lowest point and remained in in the prospectus or, if available, the summary prospectus, including investment objectives, risks, a qualified tax advisor, CPA, financial planner, or investment manager.u While Schwab Plan is available to clients at no cost, any investments you ultimately make may cash for either one, three, or six months. Cumulative u u returns are calculated using the simple average of charges, and expenses. Please read it carefully before investing. Please read the Schwab Intelligent incur costs such as fund operating expenses and advisory fees. Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect returns from each period and scenario. Past perfor- Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when a nonretirement account is rebalanced, taxable events may mance is no guarantee of future results. to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. Schwab be created that may affect your tax liability. u Investing involves risk, including loss of principal. (0321-04DZ)

32 | CHARLES SCHWAB | SPRING 2021 SPRING 2021 | ON INVESTING | 33 SPOTLIGHT Schwab’s New CD & Treasury TOOLS Ladder Builder

Looking for predictable income and the flexibility to reinvest if rates go up? Step Schwab’s CD & Treasury Ladder Builder can help. Choose your 2 investments

What is a bond ladder? A ladder works like this: You purchase another rung to the end of your ladder. a collection of individual CDs or bonds If interest rates rise, your new Once you’ve designed your (the rungs on the ladder) that mature investment could pay a higher rate, ladder, the CD & Treasury A bond ladder is a fixed income on staggered dates in the future (the boosting your overall yield from the Ladder Builder will provide strategy designed to provide distance between the rungs represents ladder. If rates fall, you’ve still got the predictable income while helping you time). As CDs or bonds mature, you can other rungs in the ladder making steady a list of investments you can manage interest rate risk. either pocket the principal or reinvest it payments. Either way, you’re not locked choose to be your rungs. If in new CDs or bonds, thereby adding into a single yield. your ladder has five rungs, you will receive five lists of investments that meet the criteria you’ve set for your Here’s how you can build a CD or Treasury ladder using Schwab’s new online tool: ladder.

Step Design your 1 ladder Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

First, choose whether you’d Step like your ladder to be made 3 Review and place of certificates of deposit your orders (CDs) or Treasuries. Then, decide how many rungs you’d Once your ladder is complete, like in your ladder. The CD & you’ll have a chance to Treasury Ladder Builder offers prebuilt ladders of one, two, review your orders and then or five years, or you can opt buy each of the investments for a custom ladder of up to you’ve selected as rungs. 10 years. In addition, with some CD ladders, you can choose to Next, choose how far in use our rollover feature to the future you’d like to automatically reinvest the receive your first principal principal from maturing CDs payment, as well as the Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. in new investments. frequency of your coupon Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. payments: monthly (CDs only), semiannually, or at maturity. See page 38 for important information. u The information provided here is for general informational purposes only and including changes in interest rates and credit quality, market valuations, liquidity, prepayments, early Finally, identify which account should not be considered an individualized recommendation or personalized investment advice. The investment strategies redemption, corporate events, tax ramifications, and other factors.u Certificates of deposit available ® you’d like to use and enter mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her through Schwab CD OneSource typically offer a fixed rate of return, although some offer variable NEXT STEPS own particular situation before making any investment decision. u A bond ladder, depending on the types and amount rates. They are FDIC-insured, offered through Charles Schwab & Co., Inc., and in most cases subject your initial investment of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack to an early withdrawal penalty. u CDs from an FDIC-insured institution are insured, in aggregate, up Get started using Schwab’s amount. of diversification may result in heightened volatility of the value of your portfolio. As compared to other fixed income to $250,000 (including principal and interest) per depositor, per insured institution. CDs you purchase CD & Treasury Ladder Builder at products and strategies, engaging in a bond ladder strategy may potentially result in future reinvestment at lower interest from a particular bank are aggregated with any other deposits you may have with the issuing bank for schwab.com/ladderbuilder. Note: The minimum investment for rates, and may necessitate higher minimum investments to maintain cost effectiveness. u Fixed income securities are determining FDIC insurance coverage. You are responsible for monitoring the total amount of deposits each rung is $1,000, and each ladder subject to increased loss of principal during periods of rising interest rates. Investment value will fluctuate, and bonds, (including principal and interest) that you hold with any one issuer and determining the extent of your must have at least two rungs. when sold, may be worth more or less than original cost. Fixed income securities are subject to various other risks, deposit insurance coverage. (0221-0JDL)

34 | CHARLES SCHWAB | SPRING 2021 SPRING 2021 | ON INVESTING | 35 SPOTLIGHT Introducing a complimentary SERVICES financial plan for every client

Get your complimentary A financial plan is a fundamental GET STARTED IN first step to investing, especially THREE EASY STEPS: plan and see if you’re for retirement. That’s why, as a on track for retirement Schwab client, you can now get a complimentary digital financial Fill out a short plan that can help you see what it 1 questionnaire. will take to retire the way you Start by entering your goals, like want. No account fees or when you plan to retire and how minimum deposit required. much you’ll need for expenses to support your lifestyle. Then input your financial information, like your income, investments, and assets.

See the probability of 2 reaching your goals. Advanced technology runs 1,000 simulated market projections with your input to generate the probability you will reach your goals. Stress test your plan with an interactive tool that lets you see the impact of adjusting your retirement age, expenses, and more.

Review your plan and 3 take action. See what steps you could take next to put your plan into action, and update it to stay on track as your circumstances change. Every time you view or update your plan, you’ll receive an updated probability of success score for reaching your retirement goals.

NEXT STEPS Create your complimentary See page 38 for important information. u IMPORTANT: The projections or other information generated by Schwab Plan™ financial plan today at regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment schwab.com/schwabplan. results, and are not guarantees of future results. Investing involves risk, including loss of principal. u Schwab Plan is avail- able to clients at no cost, but any investments you ultimately make may incur costs such as advisory fees. (0121-009U)

36 | CHARLES SCHWAB | SPRING 2021 SPOTLIGHT Schwab’s 1099 Dashboard SCHWAB.COM Helps Simplify Tax Season

See page 38 for important information. Looking for your Schwab tax forms? See them all on your u The information provided here is for general informational purposes only and 1099 Dashboard. should not be considered an individualized recommendation or personalized invest- ment 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. u The expected availability date for your account(s) applies to the original Form 1099 Composite and may change if all necessary information to complete your Form 1099 Composite has not been received from the issuers of securities in your account. u Schwab sends all necessary tax forms by the regulatory filing due date. We provide Form 1099 Composite information during the month of February. In early February 2021, 1099s will be sent out for accounts that hold investments for which we have all necessary tax information, including stocks, options, and money market funds/ cash deposit interest. We expect these 1099s to be available on schwab.com by Friday, February 5. In mid-February 2021, 1099s will be sent out for accounts that contain at least one investment for which the issuer can’t provide information on time for the earlier mailing. Examples include ETFs and mutual funds, fixed income, REITs, UITs, WHFITs, and U.S. and On the 1099 Dashboard, you’ll find: foreign stocks that have been reclassified in the past. We expect these 1099s to be available on schwab.com by Friday, Febru- ary 19. Mailing of paper 1099 Composites typically takes place after tax forms are Tax season can be fraught enough on > Expected availability dates for 1099 its own, without the added stress of made available online. Please allow several Composite forms for brokerage accounts days for postal delivery. u Requires a wire- having to track down tax documents for that had taxable activity. less signal or mobile connection. System your various accounts or wondering availability and response times are subject when they’ll become available. to market conditions and your mobile connection limitations. Functionality may > That’s why we’ve eliminated some Other tax forms as they become available: vary by operating system and/or device. u of the guesswork. • Form 1099-B* • Form 1099-MISC Independent investment advisors are not Log in to schwab.com/1099dashboard owned by, affiliated with, or supervised by • Form 1099-DIV* • Form 1099-NEC u to view your 1099 Dashboard (above). Schwab. This general information is not • Form 1099-INT • Form 1099-R intended to be a substitute for specific There, you can access tax forms for all individualized tax, legal, or investment of your Schwab accounts and see when *For employer-sponsored accounts. planning advice and is not intended to be new forms become available. construed as tax advice. This information cannot be used for the purpose of avoiding You can also access the 1099 > Educational resources, including filing penalties that may be imposed under Dashboard on the Schwab Mobile dates and other tax-related information. the Internal Revenue Code or applicable app. Just tap More at the bottom of the foreign tax authority provisions. Where screen, then tap Client Service, and specific advice is necessary or appropriate, > Quick links to easily manage paperless Schwab recommends consultation with a then select the special 1099 Tax qualified tax advisor, CPA, financial planner, Forms menu. and security preferences. or investment manager. (0221-0LYL)

SPRING 2021 | ON INVESTING | 37 IMPORTANT DISCLOSURES

The information provided here is for general informational purposes This information does not constitute and is not intended to be a only and should not be considered an individualized recommendation or substitute for specific individualized tax, legal, or investment planning personalized investment advice. The investment strategies mentioned advice. Where specific advice is necessary or appropriate, Schwab here may not be suitable for everyone. Each investor needs to review an recommends consultation with a qualified tax advisor, CPA, financial investment strategy for his or her own particular situation before making planner, or investment manager. any investment decision. Fixed income securities are subject to increased loss of principal All expressions of opinion are subject to change without notice in during periods of rising interest rates. Fixed income investments are reaction to shifting market conditions. Data contained herein from third– subject to various other risks including changes in credit quality, market party providers is obtained from what are considered reliable sources. valuations, liquidity, prepayments, early redemption, corporate events, However, its accuracy, completeness, or reliability cannot be guaranteed. tax ramifications, and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, Investing involves risk, including loss of principal. geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these Diversification, asset allocation, and rebalancing strategies cannot risks. ensure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction Indexes are unmanaged, do not incur management fees, costs, and costs and, when a nonretirement account is rebalanced, taxable events expenses, and cannot be invested in directly. For more information on may be created that may affect your tax liability. indexes please see schwab.com/indexdefinitions.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Pg. 16, 18: Treasury Inflation Protected Securities (TIPS) are inflation- linked securities issued by the U.S. government whose principal value is adjusted periodically in accordance with the rise and fall in the inflation rate. Thus, the dividend amount payable is also impacted by variations in the inflation rate, as it is based upon the principal value of the bond. Find this issue and archives It may fluctuate up or down. Repayment at maturity is guaranteed by ONLINE of On Investing at the U.S. government and may be adjusted for inflation to become the schwab.com/oninvesting. greater of the original face amount at issuance or that face amount plus an adjustment for inflation. ◆ Correlation is a statistical measure of how two investments have historically moved in relation to each other, and ranges from –1 to +1. A correlation of 1 indicates a perfect positive correlation, while a correlation of –1 indicates a perfect negative correlation. A correlation of zero means the assets are not correlated. ◆ A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio. You must perform your own evaluation of whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance, and financial circumstances.

Pg. 20–21: Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Pg. 22–25: Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security’s tax-exempt status (federal and in-state) is obtained from third parties and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

Pg. 26–29: Performance may be affected by risks associated with non- diversification, including investments in specific countries or sectors. Each individual investor should consider these risks carefully before investing in a particular sector or strategy.

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38 | CHARLES SCHWAB | SPRING 2021 ON YOUR SIDE

The Secret Tesla Reveals About Index Investing

How you buy the market matters.

A s I think most investors know by reveals something every investor available about companies’ growth now, Tesla joined the S&P 500® should know about an investment potential. Because of that, many inves- Index in late December. What’s less strategy that in many ways is the exact tors—myself included—have come to known is that Tesla became one of the opposite of individual stock-picking— believe that one of the simplest and country’s top 500 stocks by market cap index investing. most effective ways to manage money back in 2013. is to just “buy the market.” That is a roughly seven-year gap and The wisdom of the market At its heart, an index uses the pooled about a 3,100% increase in Tesla’s stock The stock market is actively picking wisdom of the market as its manager. price during that time. It’s an extraor- winning and losing stocks every min- Harnessing that process is what index dinary story, and ironic in a way. The ute of every day in a rational, unemo- investing is all about: using objective meteoric rise of a single company tional way based on all the information criteria to win the day over human

SPRING 2021 | ON INVESTING | 39 ON YOUR SIDE

Stock Date added to Market cap Date added to Schwab 1000 Index (in billions USD, as of 12/31/2020) S&P 500 Index

Tesla 02/04/2011 $668.91 12/2020

Square 02/08/2018 $98.14 N/A

Lululemon 02/06/2014 $45.36 N/A

DocuSign 02/07/2019 $41.47 N/A

Moderna 02/06/2020 $41.34 N/A

Source: FactSet. Market cap subject to change based on current market conditions.

emotions and feelings. It’s why so few rules-based. The Schwab 1000 Index®, the U.S. But there are many others. actively managed investments beat for example, is made up of the top Companies like Lululemon, Moderna, indexes over time. 1,000 U.S. common stocks as defined Square, and DocuSign—none of But indexes come in many different by market cap. In other words, it lets which is in the S&P 500 Index yet. shapes and sizes. Understanding those the market determine which compa- nuances is important. nies get included. The S&P 500 Index My intent is not to beat up on any Which brings us back to Tesla, which uses a more subjective approach—via one index. But as index investing con- didn’t enter the S&P 500 Index back in a committee—to decide which com- tinues to take hold, I believe investors 2013 because a committee of people panies should enter the index, looking have something to learn from the Tesla chose not to include it despite the fact at factors like profitability, sector rep- story. I believe the ideal selection crite- it was one of the largest U.S. stocks resentation, or other considerations ria for what goes into an index belongs even back then. Many investors find investors may not be aware of. in the hands of the dispassionate mar- this surprising, and Tesla is far from ket. Market wisdom versus subjective the only one of America’s largest 500 n Indexes that are large enough to cap- choice. companies by market capitalization ture the fast-growing up-and-comers It’s not enough to decide you want not represented in the S&P 500 Index. earlier in their success. The Schwab to buy the market. How you buy the 1000 Index, for example, combines market matters. Markets pick winners and large-cap and mid-cap stocks in a losers very efficiently—but single index. And it’s in those second n Learn more about the Schwab 1000 how you buy the market 500 stocks—the smaller end of the Index at schwab.com/1000. matters companies in the index—where you In my view, the smart way to buy the can find the innovative “highflyers” market is through: before they possibly become part of the S&P 500 Index. Tesla became n Indexes that rely on objective part of the Schwab 1000 Index in criteria like market cap. I believe the February of 2011, and then contin- very spirit of index investing is that it ued to grow rapidly for two years to Charles R. Schwab should be objective, transparent, and become one of the largest stocks in Founder & Chairman

See page 38 for important information. ◆ Investments that track each of these indexes may have different performance as a result of fees, expenses, and tracking error, among other variables. Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. ◆ Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. ◆ All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. (0321-0L70)

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1 The Schwab Bank High Yield Investor Checking® account is available only as a linked account with a Schwab One® brokerage account. The Schwab One brokerage account has no minimum balance requirements, minimum balance charges, minimum trade requirements, and there is no requirement to fund this account, when opened with a linked High Yield Investor Checking account. 2 Unlimited ATM surcharge rebates apply to cash withdrawals using the Schwab Bank Visa® Platinum Debit Card wherever it is accepted. ATM surcharge rebates do not apply to any fees other than surcharges assessed for using an ATM to withdraw cash in local currency from your Schwab Bank account. Schwab Bank makes its best effort to identify those ATM surcharges eligible for rebate, based on information it receives from Visa and ATM operators. In the event that you have not received a rebate for an eligible surcharge, please call a Schwab Bank Client Service Specialist for assistance at 888-403-9000 (or for clients of independent investment advisors, a Schwab Alliance Service team member at 800-515-2157). Schwab Bank reserves the right to modify or discontinue the ATM surcharge rebate at any time. 3 Use of your card through a mobile wallet is also subject to the terms and conditions of your Schwab Bank Deposit Account Agreement (which contains information on any potential liability for unauthorized transactions), your Visa Debit Card Agreement, the terms and conditions of the mobile wallet you use, the privacy policy set forth at Schwab.com, and the privacy policy of the mobile wallet you use. Charles Schwab Bank, SSB and Charles Schwab & Co., Inc. are separate but affi liated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products, including the Schwab One® brokerage account, offered by Charles Schwab & Co., Inc. (Member SIPC) are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, SSB and are subject to investment risk, including the possible loss of principal invested. Deposit and other lending products, including the High Yield Investor Checking account, are offered by Charles Schwab Bank, SSB, Member FDIC and Equal Housing Lender.

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In order to participate, the borrower must agree that the lender, Quicken Loans, may share their information with Charles Schwab Bank, and Charles Schwab Bank will share their information with the lender Quicken Loans. Nothing herein is or should be interpreted as an obligation to lend. Loans are subject to credit and collateral approval. Other conditions and restrictions may apply. This offer is subject to change or withdrawal at any time and without notice. Interest rate discounts cannot be combined with any other offers or rate discounts. Hazard insurance may be required. 1. Investor Advantage Pricing (IAP): Loans are eligible for only one IAP discount per loan. Select mortgage loans are eligible for an interest rate discount of 0.250% - 0.750% based on qualifying assets of $250,000 or greater. Discount for ARMs applies to initial fi xed-rate period only. Qualifying assets are based on Schwab and Schwab Bank combined account balances, including select brokerage, bank, and retirement accounts. For more information, please visit Schwab.com/IAP. Quicken Loans, LLC; NMLS #3030; www.nmlsconsumeraccess.org. Equal Housing Lender. Licensed in 50 states. AL: License No. MC 20979, Control No. 100152352; AR, TX: 1050 Woodward Ave., Detroit, MI 48226-1906, (888) 474-0404; AZ: 1 N. Central Ave., Ste. 2000, Phoenix, AZ 85004, Mortgage Banker License #BK-0902939; CA: Licensed by Dept. of Business Oversight, under the CA Residential Mortgage Lending Act and Finance Lenders Law; CO: Regulated by the Division of Real Estate; GA: Residential Mortgage Licensee #11704; IL: Residential Mortgage Licensee #4127 – Dept. of Financial and Professional Regulation; KS: Licensed Mortgage Company MC.0025309; MA: Mortgage Lender License #ML 3030; ME: Supervised Lender License; MN: Not an offer for a rate lock agreement; MS: Licensed by the MS Dept. of Banking and Consumer Finance; NH: Licensed by the NH Banking Dept., #6743MB; NV: License #626; NJ: New Jersey – Quicken Loans, LLC, 1050 Woodward Ave., Detroit, MI 48226, (888) 474-0404, Licensed by the NJ Department of Banking and Insurance; NY: Licensed Mortgage Banker – NYS Banking Dept.; OH: MB 850076; OR: License #ML-1387; PA: Licensed by the Dept. of Banking – License #21430; RI: Licensed Lender; WA: Consumer Loan Company License CL-3030. Conditions may apply. Lending services provided by ©2000 – 2020 Quicken Loans, LLC, a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license. Charles Schwab Bank, SSB and Charles Schwab & Co., Inc. are separate but affi liated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products offered by Charles Schwab & Co., Inc. (Member SIPC) are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, SSB, and are subject to investment risk, including the possible loss of principal invested. 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 Loans, LLC. Quicken Loans, LLC is not affi liated with The Charles Schwab Corporation, Charles Schwab & Co., Inc., or Charles Schwab Bank, SSB. Deposit and other lending products are offered by Charles Schwab Bank, SSB, Member FDIC and Equal Housing Lender. Charles Schwab Bank, PO Box 982605, El Paso, TX 79998-2605 ©2021 Charles Schwab Bank, SSB. All rights reserved. Member FDIC. (0321-068K) ADP112973OI-00 (11/20) 00252892