Schwab Vs. Simplicity Debate Rages On

January 31, 2018

I recently wrote a piece comparing my Schwab Robo Intelligent Portfolio to what I call simplicity—a simple three-fund second-grader portfolio with Vanguard’s simple four-fund Target Date 2050 (VFIFX). Since purchasing shortly after the launch nearly three years ago, my Schwab Intelligent Portfolio earned 7.7% annually, while the Second Grader produced a 9.4% return and the target-date fund earned 9.1%.

Schwab thought the comparison was wrong for three reasons, which I share here following conversations with the firm and with David Koenig, vice president and chief investment strategist for Schwab Intelligent Portfolios.

Apples To Oranges

Schwab says: “The asset allocations you’re trying to compare are not really comparable. It looks to us as though you’re in a Schwab allocation with roughly 80% in equities and around 20% fixed income and cash, while the second grader portfolio and Vanguard target fund are 90/10. In a period of very strong equity markets, it’s not surprising that an allocation with a larger equity allocation would have a moderately higher return.”

According to Schwab, I should have used a more aggressive Schwab Intelligent Portfolio to make it more comparable. But we’re going to have to agree to disagree.

As I said in my original piece, all of the bonds in the Intelligent Portfolio were junk or local-currency emerging market debt, and neither behaved like a high-quality bond fund in down markets. None of the bond portfolio in my Schwab Intelligent Portfolio is in investment-grade dollar-denominated bonds—zero!

The now-defunct Schwab Ultra-Short bond fund, once billed as a safe alternative to a money market fund, had a tiny standard deviation right until it lost more than half its value in the last financial meltdown.

Morningstar shows the average junk bond fund lost 26.4% in 2008, much closer to the 37% loss of the S&P 500 total return than the 7.7% gain of the Vanguard Total Bond Market ETF (BND). Local currency bonds also declined, though good data is scarce.

I also agree with criticisms that Schwab has far too much cash, and there are better ways of investing cash than the 0.15% annual percentage yield (APY) in this Schwab portfolio. Earning so much less than inflation is risky.

Finally, even if I had used the Intelligent Portfolio the firm thought more appropriate, it still underperformed the simple second-grader portfolio by 0.80% annually, according to data from Schwab.

Different Risk Levels

Schwab says: “The risk levels of these allocations aren’t the same. Of note, it looks like the second grader portfolio has greater concentration of risk toward U.S. large cap equities due to much less diversification than the Schwab allocation. The risk concentration in the second grader portfolio means that it will tend to outperform globally diversified Schwab portfolios in periods when U.S. large cap stocks do well, but that won’t always be the case. Over time, most investors want reasonable returns and a smooth path to those returns. Portfolio risk matters, especially when it comes to keeping the typical investor invested over the long term.”

Koenig argued the Intelligent Portfolio was more diversified than the second-grader portfolio, as the top 10 U.S. stocks represented about 9.6% of the entire portfolio.

Again, let’s agree to disagree. It’s not the second-grader portfolio that has more exposure to large-cap than the market; rather, it was the Schwab Portfolio that chose to concentrate on parts of the market that have underperformed—mainly small-cap, midcap and value.

According to Morningstar, my Intelligent Portfolio has 60% more small-cap and 20% more midcap than the market, as well as significantly less growth and more value than the market. Factor tilting is taking on more risk for greater expected return, though the boring cap-weighted funds have done better over the past several years.

Factor tilting may or may not work out better over the next three years. But Koenig pointed out that the Intelligent Portfolio is more representative of market-cap weightings of international versus U.S. equities than the simple Second-Grader Portfolio, which overweights the U.S.

Apples To Apples

Schwab says: “A third party report called The Robo Report tries to make a more apples to apples comparison with roughly 60/40 portfolios, and among other firms, it includes both Schwab Intelligent Portfolios and Vanguard Personal Advisor Services. The Schwab portfolio has higher returns, lower volatility, and better up/down capture ratios, as shown in the Q3 2017 report.”


  1-Yr Return Std. Dev. Sharpe Ratio Up Capture Down Capture
SIP 11.93% 3.28% 3.29 105.04% 76.92%
VPAS 11.41% 3.52% 2.94 102.83% 89.36%


Koenig told me the Intelligent Portfolio had outperformed the equivalent of Vanguard’s robo-type portfolio known as Vanguard’s Personal Advisory Services on a risk-adjusted basis.

No argument here, but then, I never set out to review a portfolio built by Vanguard Personal Advisory Services. I did, however, caution that any downside measurement would have to include periods longer than a stable up stock market.


The Schwab Intelligent Portfolio is a low-cost active investing strategy that I think is better than most active. I also applaud Schwab in general for bringing low-cost solutions to investors.

But I stand by my original piece that this Schwab Portfolio is at least as risky in a down market and over longer periods of time as the Second-Grader Portfolio. And it was Schwab that chose to outsmart the market and concentrate allocations to small-cap and value, a strategy that hasn’t worked out in the past, and may or may not in the future.

I think emerging market local currency, junk and gold don’t belong in the portfolio. And if one does believe cash belongs in a portfolio, there are other FDIC insurance accounts yielding 1.45% APY, or nearly 10 times what the Schwab account is paying.

Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter

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