The Long View - Ask a Seasoned Investor (from Portfolio magazine)

Talking to Chuck
by Portfolio Staff October 2008 Issue

Charles Schwab says investing is boring. That's why the practice has become a lost art—and a national emergency.


At age 71, Charles Schwab has seen his share of stock market slumps. In 2003, he stepped down as C.E.O. of the Charles Schwab Corp., the San Francisco-based brokerage house he’d founded in 1973, but returned to his role in 2004, when the company was getting pounded during a down cycle. Since then, not only has the company gotten back on track but its bottom line seems to be benefiting from the current turmoil as well. Schwab himself is almost evangelical about the importance of investing—despite an economic slump he says will still take months to run its course.


Where are we in this down cycle?The market probably hasn’t reached the bottom yet. I would expect that to happen between now and just past the election. The overall economic slowdown probably won’t subside until sometime in 2009. But that’s okay. Markets move in anticipation of economic moves. You can see the market beginning to reach its bottom—it’s going past the threshold. There’s still more ugly news coming out, I’m sure.

How will we know when we’ve hit the bottom?
That’s the challenge. You don’t know until you see it in the rearview mirror. There’s no way to know even when it’s arrived. That’s all the more reason successful investors have the confidence to stick to their plan and ride through the ups and downs—and even to invest when there is the possibility of a drop in the short term. It’s the long-term trend they’re after.

What do you expect will be the lag time between when the market turns and when the economy responds?
I expect it’s probably about six months. That would be consistent with other periods in the past.

Your company talks to thousands of investors every day. How scared are they?
They sound scared every time we have a market that’s going nowhere. It’s not pretty. Most people you meet live for today. Thinking and planning for tomorrow is almost impossible. Investing is such an abstract notion that most people really have a tough time grasping it until they’re way
far gone: “My God, I’ve got to save for my future—what in the world am I going to do?”

So you advise people to invest in a market like this one?
This is a fantastic time, frankly, for people who are just starting to invest. Prices are low.
In investing, you’ve got to have some confidence that stock market cycles will be no different in the future than they have been in the past. The market will recover.

Yet investors are reluctant.
We want to enjoy everything we see advertised, and there’s nothing about saving or investing that gets our juices going. Investing is a very abstruse, intangible concept. It’s what economists talk about. How many people have taken a class in economics? The literacy around this concept is woefully low, but it’s amazing how essential this boring concept is. We say the same thing about good health: You don’t really become aware of it until you’re sick. Then you realize there really is some limitation on the strength of your body. Being a saver always means the same thing: spending less than you earn. That never changes.

How did we end up here—with saving and investing being such a low national priority?When I was a kid, we were coming out of the Great Depression and World War II. All you talked about in families was the lack of money and the desire to save and make life better. The past 20 years have been bountiful, but we’re moving through a big crack now, from the subprime thing to everything else. I’d be willing to bet in five years’ time, maybe 10 years, the pendulum will swing back to a much more conscientious rate of personal savings. What we’re going through now is cathartic, but it’s very painful. One of the key things to understand in a free society, which I wish we didn’t have to face, is that there are cycles. It never goes in a straight line. It’s a fundamental fact that market systems go up and down. Life goes up and down. And that’s okay.
I’ve heard you call for a national effort to boost the savings and investment rate. Why is that?
We have a huge national problem. Our savings rate is zero or below zero. It’s a disgrace.

We have to have a national program to launch the savings rate to 10 percent. It almost has to be as important as going to the moon.

You’ve contributed money to John McCain. Does he support such an effort?
This isn’t a political thing. We’ve just got to get some shock component to this. I haven’t found a good way to awaken people at an earlier age to the fact that they have to save and invest.

What percentage of the ­population does what you suggest?
Between 2 and 5 percent of the population invests as it should. It’s shocking to meet people who simply haven’t put aside anything for the future, and they’re now approaching 50. You tell them it’s never too late to start, but, man, deep in your soul, you say, “What has this person been doing?”

Where should people begin if they’ve never invested before?
New investors should be assembling a diversified portfolio. An investor with a smartly diversified portfolio of stocks should expect something like a 10 to 11 percent return per annum. Your money should double every seven years.

All of a new investor’s money should go into stocks?
If you’re younger, it should all be stocks. If you’re over, say, 55, your portfolio should be more diversified—some international stocks, small-cap stocks, low-cost mutual funds, fixed-income investments, some money-market funds—and you should expect an annual return of 8 percent.

What’s an easy rule of thumb for how much to invest, as a percentage of income?
It depends on your age, how much you’ve already invested, and other factors. But a good rule of thumb, if you’re just starting out working, is to put aside 10 percent of your income each year and stick with that over your working life. If you wait until later in life, you’ll need to increase that considerably. At age 62, your life expectancy might be 30 more years.

How much should most investors be actively trading? How often should they rebalance their portfolios?
Certainly some investors trade very actively. There’s no formula for the right number of trades
in their case. But our average client trades only a few times a year. For most of us, the rebalancing is
the important part, and that should be looked at on an annual basis—but also if major changes
in the market occur or if your objectives change. With a portfolio of mutual funds, which is the best way to get diversification, the process is much simpler.

And you don’t advise going it alone.
No, you’ve got to get some professional help. No matter how much I have looked at this issue, I have to say with a great amount of discouragement that not more than 2 to 3 percent of our population wants to think about any of this. The rest of us need good, ethical, cost-effective assistance.
Why does your company do well when the market is down?
We’re a well-established, well-regarded company. People gravitate to us. At a time when people are very worried about the news on the front page and various economic crises, that tends to make them more fearful.

What’s the biggest miscon­ception about investing?
Many people confuse investing with big short-term hits, “the next great thing.” That’s not investing; it’s gambling. Bad advice feeds on that, by trying to sell us the next great thing. It’s okay if investing is a little dull, as long as it’s doing what it’s supposed to be doing, which is to help you build financial independence.

What should people be investing in?
I don’t believe that sector investing—picking investments by industry—is a wise move for the average person. If you were smart enough to move into oil, will you be smart enough to move out? Nobody’s really that smart.

Look, I’m the biggest advocate of entrepreneurial people making speculative moves. But you don’t want to be making those moves with your investment.

So if I call one of your advisers and ask which companies to invest in, they won’t give me names?
They’d better not. They’ll encourage you to have five to 10 sectors in your portfolio. When you buy a great index fund, that happens anyway.

You’ve been consistent about the need to stay the course, even in down cycles. In a market like this, should investors do anything different at all?
There’s no harm in taking the opportunity to think about whether your portfolio is structured the right way. If it is, and it doesn’t need rebalancing, it’s not a time to be making big changes. But again, down markets are an opportunity to invest at a discount. That’s hard for most of us to do, because the chances are good that we could go further downward. And that’s a tough emotional ride.

What’s the best piece of investing advice you ever got?
Start saving today and start investing tomorrow.

And the worst?
You should get out of the markets now.