Summary

• Schwab offers a set of diversified mutual funds which can be successfully used for construction of investment portfolios with good withdrawal rates.
• A set of just three mutual funds, a bond, a large cap dividend equity growth, plus a small cap fund generates good returns with relatively low risk.
• From January 2005 to January 2015, a Schwab portfolio with fixed allocation could produce a safe 5% annual without any substantial decrease of the capital.
• Same portfolio with rebalancing at 25% deviation from the target allowed a safe 5% annual withdrawal rate with a smaller decrease of the capital.
• Same portfolio with momentum-based adaptive allocation could have produced a safe 10% annual withdrawal rate and 0.52% annual increase of the capital.

This article belongs to a series of articles dedicated for investing in various mutual fund families. In previous articles we reported our research on Fidelity, Vanguard, T Rowe Price, and American Century mutual fund families. The current article does the same for Schwab family of mutual funds. The series of these articles is aimed at a broad spectrum of investors. They may be useful to small individual investors as well as to any large institution managing retirement accounts.

The general methodology we use in selecting the funds for the portfolio was presented in a previous article. The portfolio includes three funds: one bond fund and two equity funds. The equity funds are complementary: one covers large capitalization stocks paying high dividends, the other fund contains small capitalization growth stocks. Historically, the selected funds have performed better than most other funds in their category.

The mutual funds been selected for investment are the following:

• Schwab total bond market fund (MUTF:SWLBX )
• Schwab Dividend Equity fund (MUTF:SWSCX )
• Schwab Small Cap Equity fund (MUTF:SWDSX )

As in the previous articles, three different strategies are considered:

(1) Fixed asset allocation. The portfolio is initially invested 50% in the bond fund and 50% equally divided between the two stock funds, without rebalancing.

(2) Target asset allocation with rebalancing. The portfolio is initially invested 50% in the bond fund and 50% equally divided between the two stock funds and is rebalanced when the allocation to any fund deviates by 25% from its target.

(3) Momentum-based adaptive asset allocation. The portfolio is at all times invested 100% in only one fund. The switching, if necessary, is done monthly at closing of the last trading day of the month. All money is invested in the fund with the highest return over the previous 3 months.

The data for the study were downloaded from Yahoo Finance on the Historical Prices menu for three tickers: SWLBX, SWSCX, and SWDSX. We use the monthly price data from January 2005 to January 2015, adjusted for dividend payments.

The paper is made up of two parts. In part I, we examine the performance of portfolios without any income withdrawal. In part II, we examine the performance of portfolios when income is extracted periodically from the accounts.

Part I: Portfolios without withdrawals

We report the performance of the portfolios under two scenarios: (1) no withdrawals are made during the time interval of the study, and (2) withdrawals at a fixed rate of the initial investment are made periodically.

In table 1 we show the results of the portfolios managed for 10 years, from January 2005 to January 2015.

Table 1. Portfolios without withdrawals 2005 — 2015.