The 2018 Winter Olympics made possible by – everything!

Sometimes it feels that way at big events.  If we’re watching, everybody (and their ad agencies) want to take credit for – well, everything.

So when we say that pretty much every sport in the Winter Olympics would look a lot different without what we make possible (petrochemicals) — you’re entitled to say, “oh yeah?”

But here’s why we say, “yeah.” And get ready, because this list is a long one:

Skis for downhill skiing. Skis for cross-country skiing. Skis for the biathlon. Skis for all the other ski events.

Made from polymers (the science nerd word for plastics.  And those plastics are made with petrochemicals).

Snowboards. Bobsleighs. Luges. 

Polymers.

Skates for ice hockey. Skates for speed skating. Skates for figure skating.

There are petrochemicals in the glues.  And for some skates, the boot is made with polymers.

Helmets, for all the sports that use them. Jackets, pants and other gear for the outdoor sports. Pads for hockey. The ski jump jumps.

Most of those made from the modern polymers that petrochemicals make possible.  And those ceramic (yes, ceramic) ski jumps?  There are petrochemicals that go into the making there too.

The skeleton.

No, not the human skeleton (well, not yet – but between the newest polymers and 3D printing – stay tuned). The race. Specifically, the sled. Polymers, again.

And sometimes, even the snow and the ice get some help from petrochemicals.

Some artificial snowmaking uses petrochemicals.  And helping to keep the ice chill?  There’s petrochemicals in that cooling fluid.

Which is to say – just about everything happening at the Winter Olympics, really would be a lot different without petrochemicals.

Even curling. The broom, not the stone. (The handle and the bristles.)

What makes polymers the material of choice?  Because when manufacturing with polymers, equipment can be lighter, stronger, more flexible and often less expensive to make – compared to materials like metal, glass and wood.  And modern polymers – just can’t be made with the use of petrochemicals.

So enjoy the Olympics.  And if you’re not a Winter Olympics fan, well, sorry about that.

You can keep up on all the news (and follow your favorite polymer products) from PyeongChang here, at the official website of the Olympics.

 

Recycled bottles make good ski wear

Hitting the slopes this month?  Don’t forget your water bottles.

Not just because you need to stay super hydrated out there, but because you could be out there schussing in your slick new jacket – made FROM water bottles.

This gear by Naikoon isn’t made up only of recycled water bottles.  Mostly, in fact, it’s cotton.  But it’s recycled plastic (R-PET) that gives these jackets and pants their distinctive feel — and also helps keep skiers warm and dry on the slopes

And for that, we’ll turn the story over to Powder, the ski magazine – since they know more about life on the slopes than we do, and their review of Picture (the maker)’s Naikoon ski wear:

“At first glance, I would have never guessed the jacket and pants in front of me were, at one point in their lives, just a pile of plastic bottles.  Wearing them, the very first thing I noticed about the Naikoon jacket and pants was how soft the fabric was. …I was expecting a stiff, hard shell exterior.  Instead, I [got] a soft malleable kit that boasts a 20k/15k/waterproof/breathability rating. An on-mountain water bottle mishap demonstrated the jacket’s ability to easily bead and shed off water (I spilled easily half a Nalgene across the front of my jacket) and even in a field of new, wet powder, the pants kept my legs warm and dry.”

Translation:  good news for skiers – but good news for all the rest of us as well.

Even if we’ve never carved anything more challenging than a turkey at Thanksgiving, it IS good to know that the plastic bottles that serve most of us well every day – around the house, at the office, in the gym – can keep working hard in a second, recycled life – like on the ski slopes.

(You can read the full review here:  https://www.powder.com/gear-locker/next-jacket-made-recycled-plastic-bottles/)

Self-healing smartphone screen could mend shattered hearts

For the countless poor souls who have suffered cracked smartphone screens, a solution is in the works: the self-healing phone screen.

From a lab in Japan comes word of technology that may be the first self-healing glass, period.

Now don’t go looking for the new phone just yet.  This is still in the lab stage, but if the early results carry through – when you buy your first self-healing phone, don’t forget a tip o’ the hat to petrochemicals.

That’s because the magic ingredient is a polymer (polyether-thioureas, if you’re inclined to hit the books for a look at the molecular level) *.  And this is the magic:  if you crack a glass surface (like a smartphone screen) made with this polymer, you can close up those cracks by pressing them back together with your hand.  Then, you let your phone rest for a few hours, and the screen returns to its original look and strength.

This isn’t the first self-healing material.  It has been done in rubber and plastic before.  But this would be the first time to make something hard, like glass, that can fix itself, and at room temperature.

A couple of years ago, Motorola estimated that half of all smartphone users had a broken phone screen at some point.  So when we thought about a photo of a shattered screen to go with this story, we figured that’s a picture we’ve all seen.  More than enough.  But maybe in a few years, the only place we’ll see a picture of a cracked screen, is in a picture.

*(And the “magic” in polymers, generally speaking, starts with the chemical building blocks produced from petrochemicals.  Years of hard thinking, lab work and precision manufacturing later, and – voila.)

Find out how some musicians – even Grammy winners – stay in tune

Maybe you watched the Grammys over the weekend.  That wouldn’t be surprising.

What WOULD be surprising would be if you’d been thinking, “tonight would be totally different without petroleum”.  But you wouldn’t be crazy if that had crossed your mind.

Why?  Two words:  Auto-Tune.

Love it, hate it – whatever you think of Auto-Tune, it’s all over the Grammys, and pop music generally.  And Auto-Tune, came right out of the oil business.  Really.

What Auto-Tune does with music, is fix sound waves, aka singing.  You hit an off-key note, Auto-Tune puts you back on key.

Andy Hildebrand invented it.  But before he did that, he worked in – the oil business.  His work then also involved sound waves.  In this case, it was making sense of waves bounced off rock formations under the surface of the Earth, to look for oil.  But as Hildebrand told CNN, Auto-Tune “uses the same science of digital signal processing”.  And some years later, he brought that science to the sound waves of song.

In the beginning, Auto-Tune was used for pitch correction.  No need to retake an entire song just to fix one off-key note.

Then came 1998, and Cher’s “Belief”.  Her producers used Auto Tune to distort her voice…

https://www.youtube.com/watch?v=ZOm0BruEVT0

…and the rest is, well, the history of pop music ever since.

As in, Kanye West and Beyoncé, Tim McGraw and Frank Ocean, Black Eyed Peas and Daft Punk, Madonna and Lady Gaga, Chance the Rapper and Faith Hill and Celine Dion and on and on and on.  In fact, the short list, would be the musicians who DON’T use Auto-Tune.

We wrote this story before they announced the Grammy winners Sunday night, but odds are, more than one of them, was an Auto-Tune winner.

And if you’re feeling a little Grammy withdrawal, we’ve got you.  Here’s one more time, Auto-Tune-style…

https://www.youtube.com/watch?v=FGBhQbmPwH8 

Run on Less Crosses the Finish Line

If you could improve your gas mileage by more than 50 percent – you’d probably think that was a pretty good deal.

So imagine you could do that for every big rig in North America – that would be a huge “pretty good deal.”

And that’s the deal “Run on Less” has put us on the road toward.

Run on Less is a nationwide truck driving experiment which consists of 17 days of 7 trucks driving around the country – different roads, different loads, different trucks – all of them with different combinations of gear and tech to test out different ways trucks could get better miles per gallon.

Now you can’t change over every truck on our highways overnight, but all 7 trucks only used off-the-shelf tech and parts, so this wasn’t a laboratory experiment, it’s change we can get started on in the real world.

Run on Less is a collaboration of the North American Council for Freight Efficiency, the Carbon War Room, Shell and Pepsi.

If you’d like to see tomorrow’s big rigs in action, you can watch them here:  Run on Less.

What’s in Your “Total” Bond Fund?

By KATHY A JONES

FEBRUARY 16, 2018

Achieving diversity in a bond portfolio used to be as simple as investing in an aggregate bond-index fund. However, recent changes to the bond market have made that strategy less effective. Government-related bonds with longer durations now comprise a larger share of the market,and the overall credit quality of corporate bonds has declined, leaving the bond market with more credit risk and interest-rate risk than in the past.

The Bloomberg Barclays U.S. Aggregate Bond Index, for example, the benchmark for many bond funds, is not what it was before the Great Recession—for three reasons.

1. Overexposure to Treasuries

The Bloomberg Barclays U.S. Aggregate Bond Index has a significantly higher allocation to Treasuries than it did a decade ago, largely because of the flood of federal bonds in the wake of the financial crisis (see “Treasuries take over,” below).

Treasuries take over

In 2007, U.S. Treasuries represented less than one-quarter of the Bloomberg Barclays U.S. Aggregate Bond Index; by 2017, their share had jumped to more than one-third.

Source: Bloomberg Barclays U.S. Aggregate Bond Index. Data as of 12/14/2007 and 12/15/2017.

All things being equal, Treasuries tend to offer lower yields than other investment-grade bonds; consequently, the index’s yield prospects fall as its allocation of such bonds increases.

Further complicating matters is the fact that many of those Treasuries were issued during the recent period of historically low interest rates, meaning they—and, by extension, the bond funds that track them—will decrease in value as rates rise. That’s especially true of the longer-term bonds in the index, which will be locked into those rock-bottom rates for many years to come.

2. Increased sensitivity to rising interest rates

The U.S. Treasury isn’t the only entity that issued a raft of long-term bonds during the past decade. Many companies and governments did the same to lock in low rates for an extended period—and the Bloomberg Barclays U.S. Aggregate Bond Index has become more sensitive to rising interest rates as a result. The index’s average duration, a measure of such sensitivity, rose to 6 years in June 2017, versus 4.7 during the preceding two decades.2

3. Heightened credit risk

Over the past decade, the credit quality of the corporate bonds in the Bloomberg Barclays U.S. Aggregate Bond Index has deteriorated markedly: In 2007, 63.9% were rated A or higher; by 2017, that number had fallen to 50.6% (see “Slipping grades,” below).

Of course, lower-rated bonds tend to have higher coupons, which may help counteract the overexposure to Treasuries. However, such bonds also carry a higher degree of risk.

Are Stock Splits a Thing of the Past?

FEBRUARY 16, 2018

Not long ago, public companies with high-flying stock prices would sometimes split their shares as a means of attracting new investors. The typical split was two for one, in which companies doubled the number of outstanding shares but cut the price per share in half, believing the lower price would rouse investors’ interest.

But stock splits are a lot less common these days. In 1997, 102 companies in the S&P 500® Index split their stocks;1 in 2016, only seven companies did so2—a decline of more than 93%.

What gives? Perhaps most important, investors are increasingly turning to mutual funds and exchange-traded funds (ETFs) instead of buying discrete stocks, so companies have less incentive to court individual investors with low prices.

Investors’ perception of such stratospheric stocks has also changed, says Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research. “Many of today’s leading technology companies, in particular, boast share prices well into the triple digits—a trait some investors have come to equate with successful business models and attractive growth opportunities,” he says.

If cost prohibits you from buying a certain stock, “many mutual funds and ETFs offer large allocations for a fraction of the price,” Randy says, “while also providing exposure to other companies and industries you otherwise might not have considered.”

The bottom line: Splits aren’t the only way to gain access to high-priced stocks.

1Lu Wang, “Stock Split Is All but Dead and a New Study Says Save Your Tears,” Bloomberg Markets, 08/23/2017.

2Reinhardt Krause, “Comcast Joins Apple, Netflix as Stock Splits Rarer,” Investors.com, 01/27/2017.

Important Disclosures

Schwab Intelligent Portfolios® is made available through Charles Schwab and Co., Inc. (“Schwab”) a dually registered investment adviser and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are affiliates and subsidiaries of The Charles Schwab Corporation.

Please read the Schwab Intelligent Portfolios disclosure brochure for important information.

Investing involves risks, including loss of principal.

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.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry-group representation.

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How to Prioritize Multiple Savings Goals

FEBRUARY 16, 2018

Despite our best intentions, we’re too often tempted to pull back on our long-term savings goals in order to satisfy more pressing financial matters—be it a surprise repair bill, an emergency medical procedure or some other unexpected expense.

Beyond immediate needs is the challenge of prioritizing competing medium- and long-term goals, like eliminating credit card debt versus the desire for a new car, or capturing the company match on a 401(k) versus adequately funding a 529 college savings plan.

“There’s no doubt about it: Our brains often focus on what’s right in front of us,” says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research. “So sometimes we need to remind ourselves to focus on the short and long terms.”

The good news, Rob says, is that investors needn’t starve one investment objective in order to fully fund another. Here are his top tips for heading down several savings paths at once.

1. Prioritize your goals

Start by not only articulating your goals but also listing them in order of importance. That said, everyone should make retirement of paramount concern. “You can borrow for or do without a lot of things,” Rob says, “but retirement isn’t one of them.”

Here’s what a sound hierarchy of some of the most common financial goals might look like:

  • Capture 401(k) match: If your employer offers a 401(k) plan with a matching contribution, this should probably be your No. 1 priority. “Failing to contribute enough to capture your company’s maximum match means leaving free funds on the table,” Rob says.
  • Create a rainy-day fund: Having cash on hand in case of an emergency can help you avoid having to borrow at unattractive rates—or, worse, dip into long-term investments. Aim to save enough to cover three to six months’ worth of essential expenses.
  • Sock away even more for retirement: In 2018, you can contribute up to $18,500 ($24,500 if you’re 50 or older) to a 401(k) plan and up to $5,500 ($6,500 if you’re 50 or older) to an Individual Retirement Account. “Even if you can’t afford to max out one or both accounts, every little bit helps,” Rob says.
  • Save for a down payment: Rob says that, depending on your situation, most people should plan to pony up at least 20% of the purchase price—and possibly more if the home will be a rental or vacation property. Even if the lender will accept a smaller down payment, saving more can help reduce private mortgage insurance premiums.
  • Contribute to college savings: Given the ever-escalating cost of higher education, the sooner you start saving, the better. This is the one priority for which there’s an established loan program, though, so don’t let it trump your other to-dos.

Other goals, such as saving for a big trip, a new car or a wedding, might need to take a back seat to more pressing objectives—which is where a financial planner fits in. “Defining and prioritizing your goals can be the toughest part of the financial-planning process,” Rob says, “and the right advisor can help you make smart choices within the realm of what’s possible.”

2. Invest by time frame

Once you’ve made a list, it’s time to sort your goals by time horizon and then invest the funds accordingly:

  • Goals for the next two years: Given the tight time horizon, these objectives would benefit from relatively liquid cash investments, such as certificates of deposit, money market funds or short-term Treasury bills.
  • Goals for the next three to 10 years: With an investment horizon that is neither short nor long, these objectives would benefit from assets that focus on not just growth but also capital preservation, such as a relatively conservative mix of bonds and stocks.
  • Goals more than 10 years out: With enough time to ride out the inevitable market vagaries, these objectives can benefit from a more aggressive allocation to stocks, which can rise and fall more dramatically in value in any single year but offer the greatest potential return over the long haul.

3. Consider the type of account required for each goal

For example, you could put your emergency funds in a standard savings account, your college savings in a 529 plan, and your nest egg in a 401(k) or other qualified retirement account. This approach can also reduce the temptation to use money earmarked for one goal to satisfy another—particularly because tapping a 529 plan for noneducational expenses or taking premature withdrawals from a retirement account can result in stiff penalties.

4. Put savings first

If you tend to save only what’s left over after paying your monthly expenses—rather than committing a specific amount or percentage to each objective in advance—your long-term goals are likely to suffer. Instead, pay yourself first (that is, put yourself ahead of other creditors) whenever possible, Rob says.

If you don’t already know how much you’ll need to set aside each month to reach your investment objectives, a savings calculator can help. Here, too, a financial planner will weigh your ongoing costs against your investment objectives. “It’s all a balancing act,” Rob says. “You want to find a solution that allows you to live comfortably today while making meaningful progress toward tomorrow.”

5. Stay on track

Finally, consider automatic deductions from your checking account or paycheck to ensure you’re consistently saving toward each of your established goals. These deductions can take the form of either a lump sum or, better yet, a percentage of pay that increases as your income does.

And be sure to track how your investments are performing relative to your goals—though not so often that you’re responding in real time to normal market fluctuations.

Rob also suggests periodic check-ins with a financial planner, particularly if you’re tempted to make any sudden moves that could upend your long-term plans. “Their role isn’t just to put you on a path toward your financial future,” he says, “it’s also to help you stay on that path—every step of the way.”

Important Disclosures

Schwab Intelligent Advisory is made available through Charles Schwab & Co., Inc., a dually registered investment advisor and broker-dealer.

Investing involves risk, including loss of principal.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed‐income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

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

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Why Invest in Actively Managed Mutual Funds?

FEBRUARY 16, 2018

During the past decade, investors in U.S. equities piled $1.4 trillion into index mutual funds and exchange-traded funds (ETFs)—while pulling $1.1 trillion out of their actively managed counterparts.1 To conclude from those numbers that actively managed funds may soon go the way of the dinosaur, however, would be a mistake, says Jim Peterson, chief investment officer of Charles Schwab Investment Advisory.

Although index funds represent almost a third of the U.S. equities market, up from a fifth just a decade ago,2 Jim believes that active management still has an important role to play—in three key areas.

1. Downside risk

Aiming to protect your downside is perhaps the single biggest reason to invest at least a portion of your portfolio in an actively managed fund. “Many active managers select stocks based on fundamentals—such as earnings per share—that at least theoretically reflect a company’s intrinsic value, whatever the market may be doing,” Jim says. Most index funds, on the other hand, are designed to mimic the performance of market-capitalization-weighted indexes like the S&P 500®, whose momentum is often dictated by just a few big stocks (see Can the Advance-Decline Line Predict a Market Top?).

This focus on fundamentals can hurt active managers in a bull market, when rapidly appreciating stocks rack up exponentially greater gains. However, it can help when the tide turns and stocks that once lifted the market now drag it down. Indeed, a majority of actively managed U.S. large-cap mutual funds outperformed the S&P 500 in 2007, when the stock market began to slide amid the first signs of the financial crisis, and again in 2009, in the midst of the Great Recession (see “When the going gets tough …” below).

When the going gets tough …

… active managers may shine. In the beginning and ending years of the Great Recession, for example, a majority of actively managed U.S. large-cap mutual funds outperformed the S&P 500.

Source: SPIVA® U.S. Scorecard, S&P Dow Jones Indices. Data from 2007 through 2016.
Past performance is no guarantee of future results.

2. Bonds

Perhaps the strongest statistical case for active management comes from the world of fixed income, where a majority of actively managed short- and intermediate-term investment-grade bond funds and global-income funds have beaten their indexes over the past five years.3 The reason for this outperformance lies in active managers’ ability to maneuver in an environment of rising rates.

Index funds must mirror their benchmarks’ holdings, regardless of what interest rates are doing. Funds that track the Bloomberg Barclays U.S. Aggregate Bond Index, for instance, have roughly 60% of their holdings in bonds with maturities of five years or longer4—a recipe for underperformance should interest rates continue to rise (see What’s in Your “Total” Bond Fund?). Active managers, on the other hand, “can swap out longer-duration bonds with shorter-duration ones in order to take advantage of higher rates sooner,” Jim says.

3. International

Nowadays, there’s almost no corner of the globe that international investors can’t access; however, knowing which corners hold the most promise and which the most peril is not for the uninitiated.

“Assessing potential investments across the planet is a lot to ask of an individual investor,” Jim says. What’s more, when it comes to investing overseas, complicating factors like currency fluctuations can test the limits of even the most talented individual.

In other words, there are more areas in which the average investor might want a professional’s opinion. And that’s precisely what active management has to offer.

1Investment Company Institute. Data from 01/2007 through 12/2016.

2Morningstar, as of 01/31/2017.

3S&P Global. Data from 01/01/2012 through 12/31/2016.

4Bloomberg L.P., as of 12/20/2017.

How to pick a stock picker

Past performance alone won’t help you identify the right fund manager.

Active management is only as good as its managers. So how do you separate the winners from the also-rans? “If you can identify managers who are likely to perform in the top quartile of their category, there’s a pretty good chance you’re going to beat the benchmark,” says Jim Peterson, chief investment officer of Charles Schwab Investment Advisory (CSIA).

Doing so is far easier said than done, however. While most investors rely on a fund manager’s recent track record, “the reality is more complex than just anchoring your expectations to past performance,” Jim says.

Rather, in screening funds for its Schwab Mutual Fund OneSource Select List®, for example, CSIA tries to weed out active managers unwilling to meaningfully deviate from their benchmark indexes. These “closet indexers” have little to offer over actual index funds, Jim says.

What’s more, CSIA also keeps a careful eye on modestly sized funds experiencing significant inflows, even if they’re tied to recent gains. “In our experience,” Jim says, “the managers of such funds can find it difficult to replicate their success on a substantially larger scale.”

Important Disclosures

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.

Past performance is no guarantee of future results.

Investing involves risks, including loss of principal.

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.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

Charles Schwab Investment Advisory, Inc., is a registered investment advisor and an affiliate of Charles Schwab & Co., Inc.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

International investments involve additional risks, including differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry-group representation.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.

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The Unexpected Ways Europe Can Diversify Your Portfolio

FEBRUARY 16, 2018

European equities are often essential to a diversified portfolio—but which Europe are we talking about? The Europe of France, Germany, the U.K. and a dozen other industrialized nations that together constitute one-fifth of the world economy? The Europe of emerging markets such as Czechia and Hungary? Or the Europe of former Eastern bloc countries such as Estonia and Romania, now dubbed frontier markets because of their heightened risk to investors? (See “A tale of three Europes,” below.)

“The region can definitely diversify your portfolio,” says Jeff Kleintop, Schwab’s chief global investment strategist, “but in ways you might not expect.”

A tale of three Europes

Far from monolithic, Europe is made up of developed, emerging and frontier markets.

Source: MSCI Inc.

Surprising diversification

Rather than looking at Europe as a collection of macro economies, consider the continent’s countries through the lens of sector diversification.

“Germany, for example, has an export-oriented economy driven by the auto industry—so much so that the country’s main stock index, the DAX, tracks the MSCI World Automobiles Index almost perfectly,” Jeff says. And what’s true of Europe proves to be true of the U.S. as well—which is one reason international diversification by sector is so compatible with a broad portfolio of U.S. stocks. “Although we have a lot of sectors in the U.S., the S&P 500® Index moves pretty much in lockstep with the technology sector,” Jeff explains. “That’s worked out well in recent years but nevertheless needs offsetting. In the aftermath of 2000’s dot-com crash, for example, outperforming European stocks helped counter the domestic contagion of the tech sector.”

By the same token, investors should resist second guessing a specific stock based on the outlook for the country’s overall economy. “Individual economies don’t matter nearly as much as the sectors that drive their markets,” Jeff says.

How to invest

Investing in Europe gets you more diversification today than at any time in the past 20 years. Indeed, Jeff’s most recent analysis reveals that the degree to which the world’s biggest stock markets are moving in sync has fallen to its lowest levels since 1997 (see “Less in lockstep,” below).

Less in lockstep

The so-called G20 nations—which along with Spain make up 80% of the world’s gross domestic product—have seen their stock-market correlations fall precipitously since peaking in 2009.

*Daily one-year rolling correlation of one-month percent change in MSCI indexes for G20 and Spain.

Source: Charles Schwab, with data from FactSet as of 07/11/2017.

For investors with a long-term focus, Jeff suggests starting with a broad-based, European developed-markets index fund—with one important caveat: “Not all funds are created equal, so make sure you know what you’re getting,” he says.

Specifically, some European developed-market indexes, such as the MSCI Europe Index, include U.K. stocks, while others, such as the MSCI EMU Index, do not. The distinction matters because of Britain’s vote to exit the European Union (EU). Will distributors and manufacturers continue to enjoy unfettered access to approximately half a billion consumers on the continent? Will Brexit affect investment flows, the labor supply and perhaps even property values?

Although U.K. stocks have suffered little thus far, there are signs that business spending is softening, Jeff says. And as the government races to finalize the details of its EU divorce by March 2019, the path ahead remains uncertain.

While broad exposure to European markets can be achieved without U.K. stocks, Jeff believes it’s too early to count out Britain just yet. “The key isn’t to abandon the country altogether,” he counsels, “but to adjust your allocation as the impact of Brexit gradually comes into focus.”

If you’re interested in European emerging markets, on the other hand, Jeff says it’s probably better to avoid Europe-only funds and instead consider a global emerging-markets index fund. Such funds are often geared toward Asia but usually contain some Czech, Polish and Hungarian equities as well. “This exposure to Asian companies can help balance out the more limited diversification provided by Europe’s emerging-market stocks,” he says.

Meanwhile, frontier markets are best left to institutional investors. “Because their exchanges are so miniscule, frontier markets often become the functional equivalent of investing in just one or two stocks,” Jeff says. “You end up with less diversification, which defeats your reason for turning to Europe in the first place.”

Important Disclosures

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Investing involves risk, including loss of principal.

International investments involve additional risks, including differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

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.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

The Deutscher Aktienindex (DAX) Index consists of the 30 major German companies trading on the Frankfurt Stock Exchange.

The MSCI World Automobiles Index is composed of large- and mid-cap stocks across 23 developed-market countries. All securities in the index are classified in the Automobiles industry (within the Consumer Discretionary sector) according to the Global Industry Classification Standard (GICS®).

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The MSCI Europe Index captures large- and mid-cap representation across 15 developed-market countries in Europe. With 444 constituents, the index covers approximately 85% of the free-float-adjusted market capitalization across the European developed markets equity universe.

The MSCI European Economic and Monetary Union (EMU) Index captures large- and mid-cap representation across the 10 developed-market countries in the EMU. With 241 constituents, the index covers approximately 85% of the free-float-adjusted market capitalization of the EMU.

(0218-7GZ3)

Tips for Maximizing Your Next Bonus

FEBRUARY 16, 2016

According to human resources association WorldatWork, 85% of U.S. companies plan to offer their employees bonuses or similar compensation awards this year.1 Here are four ways to make the most of your next windfall—before you splurge on something special.

  1. Have a plan: Prioritize your goals by assigning a percentage of your bonus to each. For example, you might decide to put 50% toward savings, 30% toward debt reduction and 20% toward your next vacation. Make sure to factor in taxes, too, since your regular withholding may not be sufficient.
  2. Pay down credit card debt: The average U.S. household carries nearly $16,000 in revolving credit card debt and pays roughly $900 in interest each year.2 That money is better put to use elsewhere, so pay off any balances as soon as possible, starting with the card that charges the highest interest rate.
  3. Save for emergencies: Even the healthiest and most financially secure among us need to plan for the unexpected. Set aside enough cash to cover three to six months’ worth of essential expenses. Put it somewhere relatively liquid—but not so accessible that you’ll be tempted to spend it.
  4. Boost your retirement savings: If you participate in a workplace retirement plan, your employer might automatically deduct from your bonus whatever percentage you regularly contribute. If you don’t have an employer-sponsored retirement plan or are looking to save even more, you can contribute up to $5,500 ($6,500 if you’re age 50 or older) to an Individual Retirement Account this year.
  5. Splurge: After meeting the above goals, reward all that responsible behavior with something just for you.

The bottom line: With a little planning, you can bolster your finances—and celebrate your achievements.

12017–2018 Salary Budget Survey.

22017 American Household Credit Card Debt Study, NerdWallet.

Important Disclosures

Schwab Intelligent Advisory is made available through Charles Schwab & Co., Inc., a dually registered investment advisor and broker-dealer.

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.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

(0218-7GTF)

Plastic can save your life

Modern medicine is making more and more use of modern plastic.  Almost every day, in fact, there seems to be something new.

Take the recent report about the MasSpec Pen, a handheld device that can identify cancerous tissue during surgery in 10 seconds, more than 150 times as fast as existing tech. Developed by the scientists and engineers at University of Texas at Austin, the tool gives surgeons “precise diagnostic information about what tissue to cut or preserve, helping improve treatment and reduce the chances of cancer recurrence.”

That’s the science.  Here’s what the science means: “’If you talk to cancer patients after surgery, one of the first things many will say is ‘I hope the surgeon got all the cancer out,’” says Livia Schiavinato Eberlin, an assistant professor of chemistry, University of Texas at Austin, who led the team. ‘It’s just heartbreaking when that’s not the case. But our technology could vastly improve the odds that surgeons really do remove every last trace of cancer during surgery.’”

And in that work, plastics now plays a part.

More miles per gallon

This just in from Motorsport:

“Mercedes’ Formula 1 engine has hit a landmark achievement on the dyno…breaking the 50 percent thermal efficiency barrier for the first time.”

Now, if you’re Lewis Hamilton, that’s exciting news.

But for the rest of us, you might be thinking “what?”

Here’s the “what:” in a car, “thermal efficiency” tells how well the engine turns fuel into power/energy.  And 50 percent is well above what our cars get. Higher thermal efficiency means better mileage – which means we spend less on gas, because we need to fill up less often.

And while today that new engine sits in a Mercedes lab – we know that what Lewis Hamilton and his rivals drive today, often ends up in our cars – maybe not tomorrow, but soon.

That list already includes steel disc brakes and tires that hold the road better, active suspension, more aerodynamic design and (not surprisingly) better engines (your dual overhead cam valves, if you want to be specific).

And maybe one day, 50 percent thermal efficiency will be on that list as well.

Fuels and our Furry Friends, a life-saving combination

Sometimes the stories are high flying…

“A private plane crowded with kennels touched down at Oakland International Airport Sunday night.  The flight was filled with 69 dogs and cats rescued from the rising floodwaters in Texas.

“…animal rescue groups packed the plane with much-needed medications, collars, leashes and blankets and flew to Austin Sunday morning.  They returned with a plane filled to the brim with 15 cats and 54 dogs 8 p.m. Sunday night.

(Photo from Muttville Senior Dog Rescue)

“Many of the dogs were evacuated from a shelter in Beaumont, Texas that was affected by flooding caused by Hurricane Harvey. … Before Sunday’s rescue mission, the animals were at risk of being euthanized.”

Sometimes the story is quite down-to-earth…

“Best Friends Animal Society set up an impromptu shelter at the NRG Arena in Houston…where lost pets from Hurricane Harvey were kept safe in hopes their families would find them and take them home.

Luna (the dog) was one of the hundreds of pets at the shelter waiting for her family. … Luna’s history hasn’t been very easy … She was initially an abandoned dog roaming the streets of Laredo, Texas.  She was brought to Houston and had been passed around many, many times.”

And when Luna finally did find a loving home, along came Hurricane Harvey.  But this time, the story had a different ending, thanks to Best Friends, Doobert.com and Laura and Jeff’s 100-mile road trip.

“On Saturday, September 30, Laura and Jeff drove to the NRG Arena to pick up Luna and start her journey home.  Luna enjoyed the drive even though they were stuck behind a 10-car pileup on the way to College Station … Luna had a warm welcome home with endless hugs and love.  She is now safe at home with her family.”

Sometimes, the work is done one person, one dog, one propeller at a time:

(Photo from Flying Fur Animal Rescue)

Over the last two years, Flying Fur Animal Rescue has saved more than 900 animals, up and down the East Coast:

“Through a network of animal rescue organizations and ground transport, we help to move animals from kill shelters to areas where they will be adopted, and given a second chance at life.  Many times air transport is the safest and most efficient way to transport these animals.  Usually we can help move animals from shelter to rescue within the same day.

“Every day, healthy, loving animals throughout this country are condemned to euthanization, simply because they cannot get to other areas where they would otherwise be adopted – we help to change those odds.”

That’s the big picture.  This is Flying Fur’s story of Peter.

“Peter was a senior, found during the search of an abandoned building by NYC Police, tied up and left to die alone.

“…Imagine Pet Rescue stepped in and pulled Peter from the shelter. … Through a network of volunteers, we were alerted to Peter’s urgency” … he was driven from New York, to an airport in New Jersey, and flown …”to his new forever mom, Amber, just outside of Pittsburgh, Pa.”

And sometimes, the work of saving animals takes a 737 – and a village, of people, and of pets:

(Photo by Shelley Castle Photography, from Southwestaircommunity.com)

More than 60 cats and dogs, in fact, who flew on that 737, from Puerto Rico, to Baltimore.  Pets who’d been without a home since Hurricane Maria, or pets whose families were not able to care for them in the aftermath of the storm.

That’s when Lucky Dog Animal Rescue stepped in.  Working with PR Animals in Puerto Rico, and Southwest Airlines – the planning took months, and it took dozens of volunteers (including the crew of the plane.  The use of the plane was a donation from Southwest.), on both ends to carry out that plan.  But when it was done, that plane brought in 14,000 pounds of supplies in to Puerto Rico, and brought out all those cats and dogs to loving, safe homes.

Oh, and if you’re wondering about their fellow passengers, those cats and dogs WERE the passengers.  They didn’t fly down in the cargo hold.  They (and their travel crates) were strapped into seats in the main cabin.  Well, except for one dog.  (Co-pilot, we’re thinking.)


(Photo by Shelley Castle Photography, from luckydoganimalrescue.org)

Big and small, every day or extraordinary event, all of these rescues are made possible by people who love animals, and by the petroleum which fuels their rescue flights and drives.  The workings of an internal combustion engine might be as mysterious to a cat or a dog as they are to many humans – but the life-saving work of a petroleum-fueled engine – there’s no mystery at all about that. The ASPCA estimates that there are 78 million dogs and almost 86 million cats in the U.S., not to mention a wide variety of other animal pets.  Many of them are pets in loving homes, but as Peter’s story reminds us, not all.  And in times of disaster, even a loving home can be broken up and put at risk.

But as long as there are men and women willing to rescue animals in danger, they’ll be able to count on the fuels produced from petroleum to get them where they are needed, when they are needed – and back again.

Chevron hosting Bay Area’s largest publicly-owned solar farm

MCE Clean Energy’s Solar One Project — the Bay Area’s largest publicly-owned solar farm at a 49-acre site provided by Chevron Richmond — went online late last year, project managers announced.

A project video was posted on social media by MCE, a nonprofit providing renewable energy to customers in partnership with Pacific Gas & Electric Co., Northern California’s largest utility.

The 10MW solar project includes 35,856 panels that have the ability to power about 3,400 homes. It supported 341 jobs, with a 50 percent local hire requirement.

Chevron leased the former, underutilized brownfield site to MCE for 25 years at an extremely low rate, with a five-year extension option.

The solar farm agreement is part of the community benefits agreement reached between the city of Richmond and Chevron in connection with an ongoing, $1 billion modernization of the Refinery.

The project is producing 22,000 megawatt-hours per year of electricity — pollution-free energy that eliminates 3,234 metric tons of carbon dioxide in one year and takes more than 680 fossil fuel cars off the road annually, according to project officials.

Project partners include site owner Chevron Richmond, the city of Richmond, sPower (lead developer and financier), Cenergy Power (general contractor) and RichmondBUILD (workforce training).

Don’t KISS those old CDs goodbye, recycle them!

Most of us have a skeleton or two on our music shelf.  Maybe you got rid of that Gene Simmons poster, but the KISS CD is still there, at the bottom of a pile.  Or there might be a Backstreet Boys or ‘N Sync CD lurking somewhere.  Maroon 5 or Miley Cyrus?  Now it’s true, one person’s Celine Dion is another person’s Taylor Swift – but we’ve probably all got some bit of our music history we’d rather no one ever saw.

Today, once the garage sale is over, and there’s Limp Bizkit or T-Pain or Enya still staring up at you – the only place for those CDs is the trash bin (after dark, of course).  So here is a piece of good news, for your reputation and your conscience.  Coming soon, you can part with your Captain and Tennille, your Jonas Brothers, your Jerry Vale (you youngsters will have to Google him) with dignity – by recycling your CDs.

This good news comes from the labs at IBM.  And this particular project involved finding a way to recycle and reuse polycarbonates – the main component of CDs, but also used to make DVDs (ready to give up “Snakes on a Plane”?), football helmets, cellphone cases (ok, maybe you want to try to resell that old phone) and a lot more.

The recycling part entails breaking down the old polycarbonates, physically and chemically – then reusing them to make new plastics.  (Don’t worry though, your water bottle won’t suddenly start singing, “Who Let the Dogs Out”.)

That’s good news by itself.  But there’s a bigger story.  Plastics make our modern lives better in a thousand ways – from storing our leftovers (plastic wrap) to saving us money on gas (plastic parts in our cars) to keeping us warm (plastic insulation).  So it’s good to know that when we’re done with those plastics, more and more of them can be turned right around and made into something else useful – a wise use of our natural resources (those plastics are made from petrochemicals, which come from the petroleum and natural gas that we take out of the ground), and an important step to reducing what we once just threw away.

3rd generation rock band playing

(Ok, actually, if you’ve got THEIR CD, you might want to hang onto that.)

Are HSAs the New IRAs?

FEBRUARY 16, 2018

Like Flexible Spending Accounts (FSAs), HSAs allow you to set aside funds to pay out-of-pocket medical expenses. Unlike FSAs, HSAs can help those in high-deductible health plans1 sock away triple-tax-free money for retirement. Here’s how:

  • Contributions to HSAs are tax-deductible.2
  • Capital gains, dividends and interest accumulate tax-free.3
  • You pay no tax on withdrawals for approved medical expenses.
  • And whereas an FSA is attached to your employer and you forfeit any unspent money at the end of the year, an HSA is yours even if you change jobs and you can keep the money all the way into retirement (though you can no longer contribute once you’ve enrolled in Medicare).

“It’s really a unique opportunity to use a highly tax-advantaged strategy for retirement,” says Robert G. Aruldoss, a senior financial planning analyst at the Schwab Center for Financial Research.

A recent report from HealthView Services estimates that the average lifetime out-of-pocket health care costs for a 65-year-old healthy couple that retired in 2015 will be $394,954.4 Fortunately, HSA-qualified expenses include co-insurance, deductibles, dental and vision care, prescriptions and many other items not covered by Medicare.

And here’s the clincher: If you use HSA funds on nonmedical expenses before age 65, you pay not only ordinary income tax but also a 20% penalty; however, if you use HSA funds for nonmedical expenses after age 65, you pay only ordinary income tax. In other words, you’d take no worse a tax hit than you would with an Individual Retirement Account.

The bottom line: HSAs can help boost your retirement savings for health-related expenses triple-tax-free.

1Defined as those with a minimum annual deductible of $1,300 for individuals and $2,600 for families. Enrollees can’t be enrolled in Medicare, claimed as a dependent on someone else’s tax return or covered by another health plan without a high deductible.

2While HSA contributions are exempt from federal income tax, they are not exempt from state taxes in Alabama, California, New Jersey and Wisconsin.

3State taxes may vary.

42015 Retirement Health Care Costs Data Report.

Important Disclosures

This information is not intended to be a substitute for specific individualized tax, legal or investment-planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

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.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed.

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

(0817-XGJF)

Which IRA Is Right for You?

FEBRUARY 16, 2018

Important Disclosures

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.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed.

This information is not intended to be a substitute for specific individualized tax, legal, estate-planning or investment-planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, attorney or investment manager.

Investing involves risk, including loss of principal.

(0218-7249)

A Big Game made super, thanks to oil

You might be a Hawkeye or a Jayhawk, a Badger or a Nittany Lion, a Bulldog or a Gator.  You might even be a fan of those teams that play on Sundays.

But whatever kind of football fan you might be, we’ve got a little quiz for you.

Here’s a list of six items.  Which is the one you wouldn’t find at a football game? (No scrolling down to the answer!):

  • Bleachers.
  • Cleats.
  • Mouthpieces.
  • Petrochemical Derivatives.
  • Pom-poms.
  • Whistles.

Ok.  If you guessed that was a trick question, you’re right.  You’ll find all those things, at pretty much every game, every weekend.  The trick is – that petrochemicals are used in making all the others.  Bleachers and cleats and mouthpieces and pom-poms and whistles are all made using petrochemicals.

In fact, athletic tape and clipboards (gotta have clipboards) and helmets and uniforms and kicking tees and shoulder pads and yes, footballs – they are also all made using petrochemicals.  Which is to say, today’s game wouldn’t be played without products made from oil and natural gas.

Now if you’re thinking, “THAT’S why he fumbled last week on the 5.”  No.  The part that comes from oil is on the inside of the football.  But if you’d like to see how an NFL football is put together, SB NATION tours the Wilson factory here:  The Making of a Football.

If you’d like to see how cleats or a mouthpiece are made though, well, we can’t help you with that.

A Housewarming Gift to Consider

Next time you’re thinking about a housewarming present, you might think…petrochemicals.

That’s because petrochemicals have a lot to do with keeping a house warm when it’s cold outside (and cool when the weather is hot) – which means more efficient use of energy, and means lower energy bills for you.

In your house, those petrochemicals have been turned into plastics and other synthetic materials that make up the insulation on the inside, the coating for the outside, or the brains of the whole operation.

So let’s start with the brains when it comes to energy efficiency, which would be a smart thermostat.

Since your thermostat is “in charge” of about half your energy bill, a smart thermostat can make a big difference in how efficiently you use energy, and how much you pay in your energy bills.

Want to be warm when you wake up in the winter?  Your smart thermostat has you covered.  Ever forget to turn off the AC when you go out in the summer?  It has you there too, keeping you and your family comfortable, efficiently and effortlessly.

That’s because smart thermostats learn your patterns: when you get up, when you go to sleep, when you leave and when you come home. They give you heating or cooling as you like it, when you want it.  They also let you adjust the thermostat remotely, in case the day’s plans change.

That adds up to significant savings.  According to some companies, a smart thermostat can save ten percent on your heating bills, and 15 percent on your cooling bills, every year.*

But there’s a lot more plastics and petrochemicals do for energy efficiency around the house.  Inside your walls, for instance:  There, you might find insulation made from polystyrene (lightweight, easy to install and an excellent insulator).  That comes in sheets or “boards.”  Another possibility – polyurethane foam, which is “blown in” to the space between walls. (Both of those “polys” are made from petrochemicals.)

Your front door?  In a well-insulated place, that might well have a foam core inside, just like the walls.

Outside?  If it’s a house, and you’ve got vinyl siding on those walls, that’s plastics (derived from the petrochemical ethylene) at work again.

If you live in a part of the country that gets real winters, odds are your water pipes are wrapped in foam insulation.  That’s good for keeping hot water hot – and also to make sure your pipes don’t freeze.  (Though if you’ve got your smart thermostat hooked up, it can alert you if something goes wrong and the temperature in your place is dropping, dropping, dropping.)

And no matter where you live, if you’ve ever walked by a house under construction, you’ve probably seen an open frame wrapped in a sort of paper, with “Tyvek®” stamped all over.  That’s a petrochemical-derived product too, to provide a little extra insulation, and to keep moisture out.

That’s today.  But there’s more to come.  How about roof panels that turn dark in the winter, so they soak up sunlight and warm the house — while in the summer, your roof turns white, to reflect all that hot sun and keep you cool?

That smart roof is being developed now, and what makes it work is?  Yes, plastic.  In this case, a 3D-printed hollow plastic panel that is made to reflect sunlight.  Then fill that hollow panel with liquid (methyl salicylate, if you’ve got that chemistry textbook handy, and yes, that’s a petrochemical derivative too) and now it absorbs sunlight.**

Odds are, when that’s ready for your roof, the next generation of smart thermostats will be ready to do switching back and forth for you.  That’s because petrochemicals, and the plastics made from and with them, also keep developing, improving, evolving – just as the way we live does.

Saving for Retirement: IRA vs. 401(k)

By ROB WILLIAMS

FEBRUARY 15, 2018

Not too long ago, retirement probably seemed simpler—if your employer offered a pension as part of your retirement plan, when you retired in good standing, you’d start to collect a pension check.

The world today for retirees has changed. Most workers are being asked to participate in and contribute to their own retirement plans, and traditional defined-benefit pension plans are on the decline. While Social Security is a valuable resource, if you’re a saver and investor, you likely don’t expect that Social Security alone will provide the majority of what you hope to spend in retirement.

As a result, your ability to save and invest while you’re working will likely play a significant role in your financial life in retirement.

Getting started

The first step is recognizing the need to save for retirement. Follow this with a disciplined, prudent retirement plan, starting with monthly savings, if possible. To get into the numbers, you can use a retirement calculator or, even better, a financial plan. But either way, start saving now.

Retirement workhorses: IRAs and 401(k)s

Your main workhorses for retirement savings may be a 401(k), 403(b), 457 or other qualified employer plan along with an IRA or other non-employer account, depending on your employment status and what your workplace offers. Which should you choose?

You can always start by putting money in a traditional IRA or Roth IRA, if your employer doesn’t offer a retirement plan. But if you have access to a 401(k) or other employer plan, and your employer offers a matching contribution, that’s usually the best place to start.

For example: Let’s say you make $100,000 per year. Your employer matches your 401(k) contributions dollar-for-dollar up to 6% of your salary. In this case, the first $6,000 of savings you earmark to retirement should go into your 401(k) plan. Your employer will add money, up to the employer match, if they offer it. Why give up free money?

After you fund your 401(k) to the match, you can still set aside more money using tax advantaged accounts—including additional contributions into your 401(k) or other employer-sponsored account, or into a traditional or Roth IRA—up to annual limits (as shown in the table below). For most people, if you have a 401(k) through your employer, you should continue to contribute, as much as you can afford or calculate you need to save, up to the annual limit.

One of the convenient features of a 401(k) or other employer-sponsored plan is you commit to a savings rate, then the amount is deducted automatically from each paycheck. This can help keep you from “missing” the money or changing your savings plan.

2018 contribution limits for selected tax-deferred accounts

IRA vs. Roth IRA

If you don’t have access to an employer sponsored plan like a 401(k), or if you max out contributions up to the annual limit in your 401(k) and want to save more, here are possible next steps:

  • If you’re under age 50 and eligible to make a deductible contribution to a traditional IRA, consider putting your first $5,500 there—especially if you expect to be in the same or lower income tax bracket in retirement when you take withdrawals.¹
  • If you’re under age 50 and not eligible to make a deductible contribution to a traditional IRA but you’re eligible for a Roth IRA, consider putting your $5,500 into a Roth.2 Contributions come from after-tax dollars and qualified withdrawals are income tax-free as long as you’ve held the account for at least five years. If you’re in a higher tax bracket when you make your withdrawals, the Roth would be especially attractive. Ending up in the same bracket would mean a wash for income tax purposes—but a Roth IRA has other advantages. Individuals 50 and over are eligible to make a $1,000 catch up.

    A Roth IRA doesn’t force you to take required minimum distributions at age 70½, as you’d have to do with a qualified employer plan or traditional IRA. That’s an advantage in terms of letting your Roth IRA continue to grow tax-deferred in your later years. It could also benefit your heirs, who’d be able take money out income tax-free after you’re gone.

The Roth 401(k)

More and more employers are making a Roth option available to 401(k) plans. A Roth 401(k) account works much like a Roth IRA, but there is no income limit to participate, and you are required to take the minimum distributions that would be required from a traditional IRA beginning at age 70½. There are also Roth versions of the 403(b) and 457 plans.

Eligible employees can contribute up to the 2018 contribution limit of $18,500 per individual, plus an additional $6,000 catch-up contribution for those 50 or older. Also, the balance from a Roth 401(k) can be rolled over directly into a regular Roth IRA when you leave the employer.

Assuming your employer offers the option, the choice of a Roth 401(k) could make sense if you think your tax bracket will be the same or higher in retirement, or if you want flexibility and diversification in the way distributions from your retirement accounts will be taxed when you reach retirement.

If you’re in a lower bracket when you retire, then a traditional 401(k) may end up being the better choice, depending on your situation.

One way to hedge against uncertainty about future tax rates or your tax situation may be to split your contributions between the traditional option and the Roth option, assuming your employer makes both available.

What if I’ve maxed out my 401(k) and IRA limits?

If you’ve maxed out your 401(k) and whatever IRA option makes the most sense, congratulations. You’re making significant steps to save for retirement.

Here’s where to go with those extra retirement dollars:

  • Regular brokerage account. Additional savings can go directly into brokerage account. While traditional brokerage accounts don’t offer the advantage of “tax-deferral” on investment earnings, remember, many types of investment earnings – such as long- term capital gains on stocks held for more than one year, qualified dividends, and municipal bonds – can also be relatively tax-efficient. Consider tax-efficient investing in “taxable” brokerage accounts if possible.
  • Nondeductible contribution to a traditional IRA. Even if you’re covered by an employer plan and you’re above the income limit for a Roth IRA3 or a deductible contribution to a traditional IRA,4 you can make a nondeductible (i.e. post-tax) contribution to a traditional IRA. Whether you should or not is a tough call. You receive no up-front deduction. And any earnings will be taxed as ordinary income when you withdraw them. So, in the end, a regular brokerage account, holding tax-efficient investments such as stocks held for the long-term, may be more advantageous in the end. The advantage of tax-deferral rests primarily on the potential for tax-deferred compounding.

The bottom line

If you haven’t begun to save for retirement—or you’re saving less than you should—what are you waiting for? Now that you know more about which retirement accounts may make the most sense, put your savings plan into action.

1 $6,500 if you’re 50 or older at any time in 2018.

2 $6,500 if you’re 50 or older at any time in 2018.

3 For 2018, you can contribute the maximum to a Roth IRA if your adjusted gross income (AGI) is at or below $120,000 for single filers and $189,000 for married couples filing jointly. You can contribute a reduced amount if your income is more than $120,000 but less than $135,000 for single files and more than $189,000 but less than $199,000 for married couples filing jointly.

4 A traditional IRA contribution for 2018 is fully deductible for single filers who are covered by a retirement plan at work with a modified AGI of $62,000 or below. For married couples filing jointly, the phase-out range for deductibility is between $99,000–$119,000.

Important Disclosures

Withdrawals prior to age 59 ½ from a qualified plan, IRA may be subject to a 10% federal tax penalty. Withdrawals of earning within the first five years of the initial contribution creating a Roth IRA may also be subject to a 10% federal tax penalty.

The information provided here, as of tax year 2018, is for general informational purposes only, and should not be considered an individualized recommendation or personalized investment, legal, or tax 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. Where specific legal, tax, or investment advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, accuracy, completeness or reliability cannot be guaranteed.

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

Investing involves risk including loss of principal.

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.

A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options which may include but not be limited to keeping your assets in your former employer’s plan; rolling over assets to a new employer’s plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply). Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.

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Margin: How Does It Work?

By RANDY FREDRICK

FEBRUARY 08, 2018

In the same way that a bank can lend you money if you have equity in your house, your brokerage firm can lend you money against the value of certain stocks, bonds and mutual funds in your portfolio. That borrowed money is called a margin loan, and can be used to purchase additional securities or to meet short-term financial needs.

Each brokerage firm can define, within certain guidelines, which stocks, bonds and mutual funds are marginable. The list usually includes securities traded on the major U.S. stock exchanges that sell for at least $5 per share. Also, keep in mind that you can’t  borrow funds in retirement accounts or custodial accounts.

How does margin work?

Generally speaking, brokerage customers who sign a margin agreement can borrow up to 50% of the purchase price of marginable investments (the exact amount varies depending on the investment). Said another way, investors can use margin to purchase potentially double the amount of marginable stocks than they could using cash.

Few investors borrow to that extreme—the more you borrow, the more risk you take on—but using the 50% figure as an example makes it easier to see how margin works.

For instance, if you have $5,000 cash in a margin-approved brokerage account, you could buy up to $10,000 worth of marginable stock—you would pay 50% of the purchase price and your brokerage firm would loan you the other 50%. Another way of saying this is that you have $10,000 in buying power. (Schwab clients may check their buying power by referring to the “Margin Details” module on the right side of Trade pages and selecting the “Marginable Securities” option in the drop-down menu

Similarly, you can often borrow against the marginable stocks, bonds and mutual funds already in your account. For example, if you have $5,000 worth of marginable stocks in your account and you haven’t yet borrowed against them, you can purchase another $5,000—the stock you already own provides the collateral for the first $2,500, and the newly purchased marginable stock provides the collateral for the second $2,500. You now have $10,000 worth of stock in your account at a 50% loan value, with no additional cash outlay.

Because margin uses the value of your marginable securities as collateral, the amount you can borrow fluctuates day to day along with the value of the marginable securities in your portfolio. If your portfolio goes up, your buying power increases. If your portfolio falls in value, your buying power decreases.

Margin interest

As with any loan, when you buy securities on margin you have to pay back the money you borrow plus interest, which varies by brokerage firm and the amount of the loan.

Margin interest rates are typically lower than credit cards and unsecured personal loans. And there’s no set repayment schedule with a margin loan—monthly interest charges accrue to your account, and you can repay the principal at your convenience. Also, margin interest may be tax deductible if you use the margin to purchase taxable investments (subject to certain limitations, consult a tax professional about your individual situation).

The benefits of margin

A margin loan can be used to meet short-term lending needs not related to investing.  Margin can also be used for investing purposes to magnify your profits as well as your losses. Here’s a hypothetical example that demonstrates the upside; for simplicity, we’ll ignore trading fees and taxes.

Assume you spend $5,000 cash to buy 100 shares of a $50 stock. A year passes, and that stock rises to $70. Your shares are now worth $7,000. You sell and realize a profit of $2,000.

What happens when you add margin into the mix? This time you use your buying power of $10,000 to buy 200 shares of that $50 stock—you use your $5,000 in cash and borrow the other $5,000 on margin from your brokerage firm.

A year later, when the stock hits $70, your shares are worth $14,000. You sell and pay back $5,000 plus $400 interest1 which leaves you with $8,600. Of that, $3,600 is profit.

So, in the first case you profited $2,000 on an investment of $5,000 for a gain of 40%. In the second case, using margin, you profited $3,600 on that same $5,000 for a gain of 72%.

The risks of margin

Margin can be profitable when your stocks are going up. However, the magnifying effect works the other way as well.

Jumping back into our example, what if you use your $5,000 cash to buy 100 shares of a $50 stock, and it goes down to $30 a year later? Your shares are now worth $3,000, and you’ve lost $2,000.

But what if you had borrowed an additional $5,000 on margin and purchased 200 shares of that $50 stock for $10,000? A year later when it hit $30, your shares would be worth $6,000.

In this example, if you sell your shares for $6,000, you still have to pay back the $5,000 loan along with $400 interest1, which leaves you with only $600 of your original $5,000—a total loss of $4,400. If the stock had fallen even further, trading on margin could result in a scenario where you lose all of your initial investment and still owe the money you borrowed plus interest.

Margin call

Remember, the marginable investments in your portfolio provide the collateral for your margin loan. Remember, too, that while the value of that collateral fluctuates according to the market, the amount you borrowed stays the same. If your stocks decline to the point where they no longer meet the minimum equity requirements for your margin loan—usually 30% to 35% depending on the particular securities you own and the brokerage firm2—you will receive a margin call (also known as a maintenance call). When this happens, your brokerage firm will ask that you immediately deposit more cash or marginable securities into your account to meet the minimum equity requirement.

An example: Assume you own $5,000 in stock and buy an additional $5,000 on margin, resulting in 50% margin equity ($10,000 in stock less $5,000 margin debt). If your stock falls to $6,000, your equity would drop to $1,000 ($6,000 in stock less $5,000 margin debt).

If your brokerage firm’s maintenance requirement is 30% (30% of $6,000 = $1,800) you would receive a margin call for $800 in cash or $1,143 of fully paid marginable securities ($800 divided by (1-.30) = $1143)—or some combination of the two—to make up the difference between your equity of $1,000 and the required equity of $1,800.

Important details about margin loans

  • Margin loans increase your level of market risk.
  • Your downside is not limited to the collateral value in your margin account.
  • Your brokerage firm may initiate the sale of any securities in your account without contacting you to meet the margin call.
  • Your brokerage firm may increase its “house” maintenance margin requirements at any time and is not required to provide you with advance written notice.
  • You are not entitled to an extension of time on a margin call.

Triggering a margin call

What happens if you don’t meet a margin call? Your brokerage firm may sell assets in your portfolio and isn’t required to consult you first. In fact, in a worst-case scenario it’s possible that your brokerage firm will sell all of your shares, leaving you with no shares yet still owing money.

Again, most investors choose not to purchase as much as 50% on margin as presented in the examples above—the lower your level of margin debt, the less risk you take on, and the lower your chances of receiving a margin call. A well-diversified portfolio may help reduce the likelihood of a margin call.

If you decide to use margin, here are some additional ideas to help you manage your account:

  • Pay margin loan interest regularly.
  • Carefully monitor your investments and margin loan.
  • Set up your own “trigger point” somewhere above the official margin maintenance requirement.
  • Be prepared for the possibility of a margin call—have other financial resources in place or predetermine which portion of your portfolio you would sell.
  • NEVER ignore a margin call.

The bottom line

Buying stock on margin is only profitable if your stocks go up enough to pay back the loan with interest—and you could lose your principal and then some if your stocks go down too much. However, used wisely and prudently, a margin loan can be a valuable tool in the right circumstances.

If you decide margin is right for your investing strategy, consider starting slow and learning by experience. Be sure to consult your investment advisor and tax professional about your particular situation.

¹ Example uses a hypothetical, simple interest rate calculation at a rate of 8%. Actual interest charge would be higher due to compounding. Contact Schwab for the latest margin interest rates.

² At Schwab, margin accounts generally receive a maintenance call when equity falls below the minimum “house” maintenance requirement. For more details, see Schwab’s Margin Overview and Disclosure Statement.

Important Disclosures

Schwab Intelligent Portfolios® is made available through Charles Schwab and Co., Inc. (“Schwab”) a dually registered investment adviser and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are affiliates and subsidiaries of The Charles Schwab Corporation.

Please read the Schwab Intelligent Portfolios disclosure brochure 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 for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

When considering a margin loan, you should determine how the use of margin fits your own investment philosophy. Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading securities on margin.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

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

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