CHARLES Schwab redefined Wall Street more than a quarter century ago when he launched his self-named brokerage company. Taking advantage of a law that changed how much brokers could charge in commissions, Schwab decided to lower his while almost every other major brokerage raised theirs.
Today, Charles Schwab Corp. offers full brokerage services at discounted prices — and more than 7 million Americans have accounts there.
To this day, Chuck Schwab continues to be a maverick on Wall Street. He openly criticizes Alan Greenspan for failing to move quickly enough to counter the effects of slowing growth in the U.S. economy. He blasts the high-fee products sold by his counterparts at traditional firms like Merrill Lynch or Morgan Stanley Dean Witter. And he continues to champion the rights of the individual investor.
The Post’s Beth Piskora chatted with Schwab late last week.
Post: What’s your take on what’s been happening in the U.S. economy, and your outlook for economic growth for the rest of 2001?
Schwab: I would agree with the economists who say that we are already in a recession. I believe we’ve been in a recession for a number of months. Of course, it depends on which part of the U.S. we are talking about, but on the West Coast, where Schwab is, there is clearly a technology recession.
Post: Is Alan Greenspan, chairman of the Federal Reserve, appropriately reacting to the slowdown?
Schwab: I think the Fed was a little late in the recognition of it. But it took them six quarters to raise the rates six times, so I think it will take a year to lower the rates. I think they are way too high now.
Post: So what does this mean for the stock market?
Schwab: The wonderful thing about the stock market is it anticipated it. The Dow peaked out a year ago, Nasdaq peaked out nine months ago. That’s usually what happens, the market will begin anticipating the economy.
The economy will turn around by next summer or fall, I think. The good news is that stock prices should move up ahead of that economic recovery.
Post: What’s your recommendation to investors right now?
Schwab: I’ve never found anyone that’s smart enough to say that this is the day to invest, and tomorrow isn’t. You have to be a long-term. So I, personally, tend to ride the markets down, then ride them up. By doing that, I paid fewer taxes.
I know that the smartest investors are the ones that hang on for a long periods of time. You point to characters like Warren Buffett for being a lot of people’s heroes for being such a long-term investor.
Post: You’ve just published a new book, “You’re Fifty — Now What?” that discusses investment strategies for retirement. It seems to me that the book contains rather valuable lessons for the under-50 demographic as well. For example, you are one of the first people ever to set a clear goal of how much money you’ll need in retirement. Tell me about that.
Schwab: It’s called the guideline of 230K, and it goes like this: For every $1,000 you’ll need each month in retirement, you should have at least $230,000 invested when you stop working. That $230,000, if you achieve it by the time you reach age 50 or 60, is enough to guarantee that you will have at least $1,000 a month income for the rest of your life.
Post: Here in New York, having only $1,000 per month may not be enough. So if you need, say, $2,000 for every month of your retired life, are you saying that you would need $460,000 saved up before you retire?
Schwab: Yes.
Post: Accomplishing a goal like that could be a daunting task for many people. What specific steps do you recommend to get there?
Schwab: In my view, using index funds is the most predictable way to achieve growth in your account.
Post: Investors with index fund portfolios lost money last year. Do you really think investing in index funds is the best way to go?
Schwab: Index funds in the year 2000 probably lost 7 or 8 percent. If you look back, ask yourself how did they do in the last 5 years? The average was probably about 20 percent [per year]. How did they average in the last 10 years? That number is something like 15 to 18 percent.
You go back 50 years, it’s something closer to 11 or 12 percent. Over long periods of time, index funds make money — as opposed to putting money in a savings account.
So it’s a long-term approach, it’s not about going to the moon overnight. It’s more methodical, certainly more boring, but it’s a hell of a lot more predictable.
Post: I’m not sure savings accounts are the only alternative to index funds. After all, some 52 percent of Americans are investors in the stock market, either through direct holdings of stocks or through mutual funds. In your book, you advise a “core and explore” approach. Could you explain that strategy?
Schwab: The ‘explore’ part of the thing is really addressing human nature. We all like to do better than the average. So you take 70 percent and put it in an index fund, and then you take the other 30 percent and sprinkle it around in other areas that you think will do well, or that you have a personal interest in.
Post: What is the best way to go about doing the research to determine which funds or stocks are the best bets for that 30 percent of the portfolio that’s not going into index funds?
Schwab: It depends on the investor’s level of knowledge and sophistication. Certainly they can go into any Schwab office and we’ll help them. We have select lists of funds. Another good source is Morningstar, which gives a five-star rating to the best funds. There’s a lot of information available on different Web sites like Morningstar’s [www.morningstar.com]. I use a lot of mutual funds myself but I also like a lot of individual securities.
Post: Which stocks or sectors look good to you right now?
Schwab: We’re just not focused in technology. The year just past, I know, was a terrible year for technology, but it wasn’t so terrible for other sectors. It wasn’t terrible for gas, it wasn’t terrible for utilities, it wasn’t terrible for home building, it wasn’t terrible for savings and loans. They all went up.
Post: Currently trading in the high $20s, Charles Schwab Corp. is down significantly from its 52-week high of $44.75 — hit last March. You recently chopped your own pay in half, and cut the salaries of other top managers as well. Meanwhile, there have been a slew of downgrades on your company from Wall Street analysts. What is the outlook for your brokerage?
Schwab: Particularty bright. We had a record increase in our account base in the year 2000, both in terms of numbers of customers as well as dollars and assets coming in. I think in the year 2001, we’ll continue seeing customers coming to Schwab for help and advice. We took some steps to reduce costs because transaction levels are a little bit down. About half our business is transaction. I think the transaction levels will go back up again in a matter of a month or two as the market recovers.