Mar
11
2025
hands on laptop with plants

How to Build an Investment Portfolio for Beginners

By | Growing Wealth, invest, Investing | No Comments

These days it’s fairly straightforward to set up an investment portfolio, even if you’re a beginner. By understanding a few fundamentals, it’s possible to learn how to create an investment portfolio that can help build your savings over time, and support your progress toward certain goals, like retirement.

Identifying your goals is the first step in the investing process. Then, it’s important to determine a time frame you’ll need to reach your goal — e.g., one year, five years, 30 years — and understand your personal tolerance for risk.

These three fundamentals will help you make subsequent decisions about your investment portfolio, like which investments to choose.

Key Points

•   It’s relatively easy to build a basic investment portfolio, using only a few key fundamentals.

•   An investment portfolio is usually tied to a goal like retirement or wealth building, or sometimes a savings goal (e.g., a down payment).

•   Most investment portfolios consist of securities like stocks, bonds, mutual funds, or other types of assets.

•   By identifying your goal, time horizon, and risk tolerance, it’s possible to create a well-balanced portfolio that’s also diversified.

•   A beginning investor can select their own investments, work with a financial professional, or choose a robo advisor (which offers pre-set portfolios).

The Basics: What Is an Investment Portfolio?

An investment portfolio is a collection of investments, such as different types of stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and other assets.

Types of Investment Portfolios

An investment portfolio aims to achieve specific investment goals, such as generating income, building wealth, or preserving capital, while managing market risk and volatility.

You might have an investment portfolio in your retirement account, and another portfolio in a taxable account.

While it’s possible to select your own investments, a financial advisor can also help select investment for a portfolio. It’s also possible to invest in a pre-set portfolio known as a robo advisor, or automated portfolio.

These days, investing online is a common route, whether you use an online brokerage or a brick-and-mortar one.

Recommended: How to Start Investing: A Beginner’s Guide

Why Building a Balanced Portfolio Matters

Building a balanced investment portfolio matters for several reasons. As noted above, a balanced, diversified portfolio can help manage the risk and volatility of the financial markets.

What Is a Balanced Portfolio?

While it’s possible to invest all your money in one mutual fund or ETF (or stock or bond), decades of investing research shows that putting all your money into a single investment can be risky. If that single asset drops in value, it would impact your entire nest egg.

Building a balanced portfolio, where you invest in a range of different types of assets — a strategy known as diversification — may help mitigate some risk factors, and over the long term may even improve performance (although there are no guarantees).

The Value of Diversification

Many people avoid building an investment portfolio because they fear the swings of the market and the potential to lose money. But by diversifying investments across different asset classes and sectors, the impact of any one investment on the overall portfolio is reduced.

This beginner investment strategy can help protect the portfolio from significant losses due to the poor performance of any single investment.

Additionally, by including a mix of different types of investments, investors can benefit from the potential returns of different asset classes while minimizing risk. For example, building a portfolio made up of relatively risky, high-growth stocks balanced with stable, low-risk government bonds may allow you to benefit from long-term price growth from the stocks while also generating stable returns from the bonds.

Creating a balanced portfolio and using diversification are strategies to mitigate risk, not a guarantee of returns.

Assessing Risk Tolerance and Setting Investment Goals

In the financial world, risk refers specifically to the risk of losing money. Each investor’s tolerance for risk is an essential component of their personal investing strategy, because it guides their investment choices. Below are two general strategies many investors follow, depending on their risk tolerance.

Conservative vs. Aggressive Investing

•   An aggressive investment strategy is for investors who are willing to take risks to grow their money. Aggressive refers to the willingness to take on risk.

   Stocks, which are shares in a company, tend to be more risky than bonds, which are debt instruments and generally offer a fixed yield or return over time. When you buy stocks, the value can fluctuate. While the price of bonds also goes up and down, owning a bond can provide a stream of income payments that, in some cases (i.e., government bonds rather than corporate), are guaranteed.

   One rule you often hear in finance: High risk, high reward. Which means: Stocks tend to be higher risk investments, with the potential for higher rewards. Bonds tend to be lower risk, with the likelihood of lower returns.

•   Conservative investing is for investors who are leery of losing any of their money. Conservative strategies may be better suited for older investors because the closer you get to your ultimate goal, the less room you will have for big dips in your portfolio should the market sell off. But a conservative mindset can apply to any age group.

You can prioritize lower-risk investments as you get closer to retirement. Lower-risk investments can include fixed-income (bonds) and money-market accounts, as well as dividend-paying stocks.

These investments may not have the same return-generating potential as high-risk stocks, but for conservative investors typically the most important goal is to not lose money.

Choosing a Goal for Your Portfolio

Long- and short-term goals depend on where you are in life. Your relationship with money and investing may change as you get older and your circumstances evolve. As this happens, it’s best to understand your goals and figure out how to meet them ahead of time.

If you’re still a beginner investing in your 20s, you’re in luck because time is on your side. That means, when building an investment portfolio you have a longer time horizon in which to make mistakes (and correct them).

You can also potentially afford to take more risks because even if there is a period of market volatility, you’ll likely have time to recover from any losses.

If you’re older and closer to retirement age, you can reconfigure your investments so that your risks are lower and your investments become more conservative, predictable, and less prone to significant drops in value.

As you go through life, consider creating short- and long-term goal timelines. If you keep them flexible, you can always change them as needed. But of course, you’d want to check on them regularly and the big financial picture they’re helping you create.

Short Term: Starting an Emergency Fund

Before you think about an investing portfolio, it’s wise to make sure you have enough money stashed away for emergencies. Whether you experience a job loss, an unplanned move, health problems, auto or home repairs — these, and plenty of other surprises can strike at the worst possible time.

That’s when your emergency fund comes in.

Generally, it makes sense to keep your emergency money in low-risk, liquid assets. Liquidity helps ensure you can get your money if and when you need it. Also, you don’t want to take risks with emergency money because you may not have time to recover if the market experiences a severe downturn.

Medium Term: Saving for a Major Event

It’s also possible to start an investment portfolio for a goal that’s a few years down the road: e.g., graduate school, a wedding, adoption, a big trip, a down payment on a home.

For more ambitious goals like these, you may need more growth than a savings account or certificate of deposit (CD). Learning how to build a portfolio of stocks and other assets could help you reach your goal — as long as you don’t take on too much risk.

In this case, an automated portfolio might make sense, because with a few personal inputs, it’s possible to use these so-called robo advisors to achieve a range of goals using a pre-set portfolio tailored to your goal, time horizon, and risk tolerance.

Recommended: What Is Automated Investing?

Long Term: Starting a Retirement Portfolio

One of the most common types of longer-term investing portfolios is your retirement portfolio.

How to build an investment portfolio for this crucial goal? First, think about your desired retirement age, and how much money you would need to live on yearly in retirement. You can use a retirement calculator to get a better idea of these expenses.

One of the most frequently recommended strategies for long-term retirement savings is starting a 401(k), opening an IRA, or doing both. The benefit of this type of investment account is that they have tax advantages.

Another benefit of 401(k)s and IRAs is that they help you build an investment portfolio over the long term.

Prioritizing Diversification

As mentioned above, portfolio diversification means keeping your money in a range of assets in order to manage risk. All investments are risky, but in different ways and to varying degrees. For example, by investing in lower-risk bonds as well as equities (stocks), you may help offset some of the risk of investing in stocks.

The idea is to find a balance of potential risk and reward by investing in different asset classes, geographies, industries, risk profiles.

Types of Diversification

•   While diversification sounds straightforward, it can be quite complex. There are a multitude of diversification strategies. Some examples:

•   Simple diversification. This refers to distributing your assets among a variety of different asset classes (e.g. stocks, bonds, real estate, etc.).

•   Geographic diversification. You can target different global regions with your investments, to achieve a balance of risk and return.

Market capitalization. Investing in large-cap versus small-cap funds is another way to create a balance of equities within your portfolio.

Understanding Types of Risk

Diversification can help manage certain types of risk, but not all types of risk.

Systematic Risk

Systematic risk is considered ‘undiversifiable’ because it’s inherent to the entire market. It’s due to forces that are essentially unpredictable.

In other words: Big things happen, like economic peaks and troughs, geopolitical conflicts, and pandemics. These events will affect almost all businesses, industries, and economies. There are not many places to hide during these events, so they’ll likely affect your investments too.

One smart way to manage systematic risk: You may want to calculate your portfolio’s beta, another term for the systematic risk that can’t be diversified away. This can be done by measuring your portfolio’s sensitivity to broader market swings.

Understanding Idiosyncratic Risk

Idiosyncratic risk is different in that this type of risk pertains to a certain industry or sector. For instance, a scandal could rock a business, or a tech disruption could make a particular business suddenly obsolete.

As a result, a stock’s value could fall, along with the strength of your investment portfolio. This is where portfolio diversification can have an impact. If you only invest in three companies and one goes under, that’s a big risk. If you invest in 20 companies and one goes under, not so much.

Owning many different assets that behave differently in various environments can help smooth your investment journey, reduce your risk, and hopefully allow you to stick with your strategy and reach your goals.

4 Steps Towards Building an Investment Portfolio

Here are four steps toward building an investment portfolio:

1. Set Your Goals

The first step to building an investment portfolio is determining your investment goals. Are you investing to build wealth for retirement, to save for a down payment on a home, or another reason? Your investment goals will determine your investment strategy.

2. What Sort of Account Do You Want?

Investors can choose several kinds of investment accounts to build wealth. The type of investment accounts that investors should open depends on their investment goals and the investments they plan to make. Here are some common investment accounts that investors may consider:

Taxable vs. Tax-Deferred Accounts

•   Individual brokerage account: This is a taxable brokerage account that allows investors to buy and sell stocks, bonds, mutual funds, ETFs, and other securities. This account is ideal for investors who want to manage their own investments and have the flexibility to buy and sell securities as they wish.

   Gains are taxable, either as ordinary income or according to capital gains tax rules.

•   Retirement accounts: These different retirement plans, such as 401(k)s, traditional, SEP and SIMPLE IRAs are all considered tax-deferred accounts. The money you contribute (or save) reduces your taxable income for that year, but you pay taxes later in retirement. These accounts have contribution limits and may restrict when and how withdrawals can be made.

   Note that Roth IRAs are not tax-deferred, but they are tax advantaged accounts as well. The money you contribute is after-tax (it won’t reduce your current-year taxable income), and qualified withdrawals in retirement are tax free.

•   Automated investing accounts: These accounts, also known as robo advisors, use algorithms to manage investments based on an investor’s goals and risk tolerance.

3. Choosing Investments Based on Risk Tolerance

Once you’ve set your investment goals, the next step is to determine your investments based on your risk tolerance. As discussed above, risk tolerance refers to the amount of risk you are willing to take with your investments.

Balancing Risk and Return

If you’re comfortable with higher levels of risk, you may be able to invest in more aggressive assets, such as stocks or commodities. Higher risk investments may provide bigger gains — but there are no guarantees.

If you’re risk-averse, you may prefer more conservative investments, such as bonds or certificates of deposit (CDs). Lower-risk investments are less volatile, but they generally offer a lower return.

Recommended: How to Invest in Stocks: A Beginner’s Guide

4. Allocating Your Assets

The next step in building an investment portfolio is to choose your asset allocation. This involves deciding what percentage of your portfolio you want to allocate to different investments, such as stocks, bonds, and real estate.

Once you have built your investment portfolio, it is important to monitor it regularly and make necessary adjustments. This may include rebalancing your portfolio to ensure it remains diversified and aligned with your investment goals and risk tolerance.

The Takeaway

Building an investment portfolio is a process that depends on where a person is in their life as well as their financial goals, and their risk tolerance. Every individual should consider long-term and short-term investments and the importance of portfolio diversification when building an investment portfolio and investing in the stock market.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How much money do you need to start building an investment portfolio?

The amount needed to start building an investment portfolio can vary depending on your goal, but it’s possible to start with a small amount, such as a few hundred or thousand dollars. Some online brokers and investment platforms have no minimum requirement, making it possible for investors to start with very little money.

Can beginners create their own stock portfolios?

Beginners can create their own stock portfolios. Access to online brokers and trading platforms makes it easier for beginners to buy and sell stocks and build their own portfolios.

What should be included in investment portfolios?

Generally, an investment portfolio should include a mix of investments, such as stocks, bonds, mutual funds, ETFs, and cash, depending on the investor’s goals, risk tolerance, and time horizon. Regular monitoring and rebalancing are important to keep the portfolio aligned with the investor’s objectives.

What is the 60/40 portfolio rule?

The 60-40 rule refers to 60% equities (or stock) and 40% bonds. It’s a basic portfolio allocation, and as such may not be right for everyone.

What is a balanced portfolio?

A balanced portfolio ideally includes a range of asset classes in order to manage risk and potential market volatility.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-037

Read more
Mar
11
2025
Are Mutual Funds Good for Retirement?

Are Mutual Funds Good for Retirement?

By | invest, Investing, Preparing for Retirement | Comments Off on Are Mutual Funds Good for Retirement?

Mutual funds are one option investors may consider when building a retirement portfolio. A mutual fund represents a pooled investment that can hold a variety of different securities, including stocks and bonds. There are different types of mutual funds investors may choose from, including index funds, target date funds, and income funds.

But how do mutual funds work? Are mutual funds good for retirement or are there drawbacks to investing in them? What should be considered when choosing retirement mutual funds?

Those are important questions to ask when determining the best ways to build wealth for the long term. Here’s what you need to know about mutual funds and retirement.

Key Points

•   Mutual funds offer exposure to a wide range of asset classes, and thus may fit well in a retirement portfolio.

•   Approximately 53.7% of U.S. households owned mutual funds in 2024, according to industry research.

•   Target-date funds adjust their asset allocation as retirement approaches, offering a tailored solution.

•   Income funds focus on generating steady income, and may be suitable for retirement needs.

•   Potential drawbacks of mutual funds include high fees, portfolio overweighting, and tax inefficiency.

Understanding Mutual Funds

A mutual fund pools money from multiple investors, then uses those funds to invest in a number of different securities. Mutual funds can hold stocks, bonds, and other types of securities.

How a mutual fund is categorized depends largely on what the fund invests in and what type of investment strategy it follows. For example, index funds follow a passive investment strategy, as these funds mirror the performance of a stock market benchmark. So a fund that tracks the S&P 500 index would attempt to replicate the returns of the companies included in that index.

Target-date funds utilize a different strategy. These funds automatically adjust their asset allocation based on a target retirement date. So a 2050 target-date fund, for example, is designed to shift more of its asset allocation toward bonds or fixed-income and away from stocks as the year 2050 approaches.

How Mutual Funds Work

Mutual funds allow investors to purchase shares in the fund. Buying shares makes them part-owner of the fund and its underlying assets. As such, investors have the right to share in the profits of the fund. So if a mutual fund owns dividend-paying stocks, for example, any dividends received would be passed along to the fund’s investors.

•   Understanding dividend payments. Depending on how the fund is structured or what the brokerage selling the fund offers, investors may be able to receive any dividends or interest as cash payments or they may be able to reinvest them. With a dividend reinvestment plan or DRIP, investors can use dividends to purchase additional shares of stock, often bypassing brokerage commission fees in the process.

•   Understanding fund fees. Investors pay an expense ratio to invest in mutual funds. This reflects the annual cost of owning the fund, expressed as a percentage. Passively managed mutual funds tend to have lower expense ratios.

   Actively managed funds, on the other hand, tend to be more expensive, but the idea is that higher fees may seem justified if the fund produces above-average returns.

It’s also important to know that mutual funds are priced and traded just once a day, after the market closes. This is different from exchange-traded funds, or ETFs, for example, which are similar to mutual funds in many ways, but trade on an exchange just like stocks, and typically require a lower initial investment than a mutual fund.

Investors interested in opening an investment account can learn more about how a particular mutual fund works, what it invests in, and the fees involved by reading the fund’s prospectus.

Types of Mutual Funds for Retirement

There are some mutual funds designed for people who are saving for retirement. These funds typically combine portfolio diversification, often with a greater emphasis on bonds and fixed income, and the potential for moderate gains.

For instance, retirement income funds (RIFs) are intended to be more conservative with moderate growth. RIFs may be mutual funds, ETFs, or annuities, among other products.

Target-rate funds, as mentioned, adjust their asset allocation based on an investor’s intended retirement date, and get more conservative as that date approaches. This automated strategy may help some retirement savers who are less experienced at managing their portfolios over time.

Recommended: What is Full Retirement Age for Social Security?

Mutual Funds for Retirement Planning

Mutual funds are arguably one of the most popular investment options for retirement planning. According to the Investment Company Institute, 53.7% of U.S. households totaling approximately 121.6 million individual investors owned mutual funds in 2024. Fifty-three percent of individuals who own mutual funds are ages 35 to 64 — in other words, those who may be planning for retirement — the research found.

There are also many investors living in retirement who own mutual funds. According to the Investment Company Institute, 58% of households aged 65 or older owned mutual funds in 2024.

So are mutual funds good for retirement? Here are some of the pros and cons to consider.

Pros of Using Mutual Funds for Retirement

Investing in mutual funds for retirement planning could be attractive for investors who want:

•   Convenience

•   Basic diversification

•   Professional management

•   Reinvestment of dividends

Investing in a mutual fund can offer exposure to a wide range of securities, which could help with diversifying a portfolio. And it may be easier and less costly to purchase a single fund that holds hundreds of stocks than to purchase individual shares in each of those companies.

The majority of mutual funds are actively managed (and sometimes called active funds). Actively managed mutual funds are professionally managed, so investors can rely on the fund manager’s expertise and knowledge. And if the fund includes dividend reinvestment, investors can increase their holdings automatically which can potentially add to the portfolio’s growth.

Cons of Using Mutual Funds for Retirement

While there are some advantages to using mutual funds for retirement planning, there are also some possible disadvantages, including:

•   Potential for high fees

•   Overweighting risk

•   Under-performance

•   Tax inefficiency

As mentioned, mutual funds carry expense ratios. While some index funds may charge as little as 0.05% in fees, there are some actively managed funds with expense ratios well above 1%. If those higher fees are not being offset by higher than expected returns (which is never a guarantee), the fund may not be worth it. Likewise, buying and selling mutual fund shares could get expensive if your brokerage charges steep trading fees.

While mutual funds generally make it easier to diversify, there’s the risk of overweighting one’s portfolio — owning the same holdings across different funds. For example, if you’re invested in five mutual funds that hold the same stock and the stock tanks, that could drag down your portfolio.

Something else to keep in mind is that an actively managed mutual fund is typically only as good as the fund manager behind it. Even the best fund managers don’t always get it right. So it’s possible that a fund’s returns may not live up to your expectations.

You may also have to contend with unexpected tax liability at the end of the year if the fund sells securities at a gain. Just like other investments, mutual funds are subject to capital gains tax. Whether you pay short- or long-term capital gains tax rates depends on how long you held a fund before selling it.

If you hold mutual funds in a tax-advantaged retirement account, then capital gains tax doesn’t enter the picture for qualified withdrawals

Pros of Mutual Funds

 Cons of Mutual Funds

•   Mutual funds offer convenience for investors

•   It may be easier and more cost-effective to diversify using mutual funds vs. individual securities

•   Investors benefit from the fund manager’s experience and knowledge

•   Dividend reinvestment may make it easier to build wealth

•   Some mutual funds may carry higher expense ratios than others

•   Overweighting can occur if investors own multiple funds with the same underlying assets

•   Fund performance may not always live up to the investor’s expectations

•   Income distributions may result in unexpected tax liability for investors

Investing in Mutual Funds for Retirement Planning

The steps to invest in mutual funds for retirement are simple and straightforward.

1.    Start with an online brokerage account, individual retirement account (IRA) such as a traditional IRA, or a 401(k). You can also buy a mutual fund directly from the company that created it, but a brokerage account or retirement account is usually the easier way to go.

2.    Set your budget. Decide how much money you can afford to invest in mutual funds. Keep in mind that the minimum investment can vary for different funds. One fund may allow you to invest with as little as $100 while another might require $1,000 to $3,000 or even more to get started. In some cases, setting up automatic contributions may lower the required minimum.

3.    Choose funds. If you already have a brokerage account or an IRA like a SEP IRA, this may simply mean logging in, navigating to the section designated for buying funds, selecting the fund or funds and entering in the amount you want to invest.

4.    Submit your order. You may be asked to consent to electronic delivery of the fund’s prospectus when you place your order. If your brokerage charges a fee to purchase mutual funds, that amount will likely be added to the order total. Once you submit your order to purchase mutual funds, it may take a few business days to process.

Tips for Selecting Retirement-Ready Mutual Funds

If you’re considering investing in mutual funds for retirement, here are some strategies to keep in mind.

•   Determine your risk tolerance and retirement goals. As discussed previously, the closer you are to retirement, the more conservative you may want to be. For example, you might want to consider target-date or bond funds.

•   Analyze the fund’s performance. You can look for funds that have a history of consistent returns for the past three, five, and 10 years.

•   Check out expense ratios. If a mutual fund’s fees are high, you may want to consider other funds instead.

•   Evaluate the possible tax implications. Mutual funds are subject to capital gains tax, as mentioned. Index funds may be more tax efficient. You can read more about this below.

Determining If Mutual Funds Are Right for You

Whether it makes sense to invest in mutual funds for retirement can depend on your time horizon, risk tolerance, and overall investment goals. If you’re leaning toward mutual funds for retirement planning, here are a few things to consider.

Investment Strategy

When comparing mutual funds, it’s important to understand the overall strategy the fund follows. Whether a fund is actively or passively managed may influence the level of returns generated. The fund’s investment strategy may also determine what level of risk investors are exposed to.

For example, index funds are designed to mirror the market. Growth funds, on the other hand, typically have a goal of beating the market. Between the two, growth funds may produce higher returns — but they may also entail more risk for the investor and carry higher expense ratios.

Choosing funds that align with your preferred strategy, risk tolerance, and goals matters. Otherwise, you may be disappointed by your returns or be exposed to more risk than you’re comfortable with.

Cost

Cost is an important consideration when choosing mutual funds for one reason: Higher expense ratios can eat away more of your returns.

When comparing mutual fund expense ratios, it’s important to look at the amount you’ll pay to own the fund each year. But it’s also important to consider what kind of returns the fund has produced historically. A low-fee fund may look like a bargain, but if it generates low returns then the cost savings may not be worth much.

It’s possible, however, to find plenty of low-cost index funds that produce solid returns year over year. Likewise, you shouldn’t assume that a fund with a higher expense ratio is guaranteed to outperform a less expensive one.

Fund Holdings

It’s critical to look under the hood, so to speak, to understand what a particular mutual fund owns and how often those assets turn over. This can help you to avoid overweighting your portfolio toward any one stock or sector.

Reading through the prospectus or looking up a stock’s profile online can help you to understand:

•   What individual securities a mutual fund owns

•   Asset allocation for each security in the fund

•   How often securities are bought and sold

If you’re interested in tech stocks, for example, you may want to avoid buying two funds that each have 10% of assets tied up in the same company. Or you may want to choose a fund that has a lower turnover rate to minimize your capital gains tax liability for the year.

Tax Efficiency of Mutual Funds in Retirement

As mentioned, when held in a taxable account mutual funds are subject to capital gains tax. Dividend income from mutual funds is also taxed. When mutual funds are held in a tax-advantaged retirement account, investors need to consider the tax treatment of those accounts rather than capital gains.

With actively managed mutual funds, fund managers typically need to constantly rebalance the fund by
selling securities to reallocate assets, among other things. Those sales may create capital gains for investors. While mutual fund managers usually use tax mitigation strategies to help diminish annual capital gains, this is a factor for investors to consider.

Index funds tend to have less turnover of assets than actively managed funds and thus may generally be more tax efficient.

Managing Risk with Mutual Funds in a Retirement Portfolio

Generally speaking, mutual funds offer diversification and less risk compared to some other investments. That’s why they are often part of a retirement portfolio. However, it’s important to remember risk is inherent in investing whether you’re investing in mutual funds or another asset class.

Investors can select mutual funds that align with their risk tolerance, financial goals, and the amount of time they have before retirement (the time horizon). A younger investor may choose funds that potentially offer higher growth but also have higher risk like stock funds. Those closer to retirement age may opt for more conservative options, such as bond funds, and they might want to consider target rate funds that automatically adjust their asset allocation to be in sync with an investor’s retirement date.

Performance of Mutual Funds Compared to Other Retirement Investments

When considering mutual funds, it’s important to look at a fund’s performance over time. Not all funds hit their benchmarks or deliver consistent returns over the long term.

In 2024, according to Morningstar, of the nearly 3,900 actively managed equity funds tracked, only 13.2% beat the S&P 500 SPX index. The average gain was 13.5% compared to the 25% return of the S&P 500.

Historically, index funds have generally performed better overall than actively managed funds.

Other Types of Funds for Retirement

Mutual funds, and target date funds in particular, are one of the ways to save for retirement. But there are other options you might consider. Here’s a brief rundown of other types of funds that can be used for retirement planning.

Real Estate Investment Trusts (REITs)

A real estate investment trust isn’t a mutual fund. But it is a pooled investment that allows multiple investors to own a share in real estate. REITs pay out 90% of their income to investors as dividends.

An investor might consider a REIT, which is considered a type of alternative investment, if they’d like to reap the potential benefits of real estate investing without actually owning property.

Exchange-Traded Funds (ETFs)

Exchange-traded funds are another retirement savings option. Investing in ETFs — for instance, through a Roth or traditional IRA — may offer more flexibility compared to mutual funds. They may carry lower expense ratios than traditional funds and be more tax-efficient if they follow a passive investment strategy.

Income Funds

An income fund is a specific type of mutual fund that focuses on generating income for investors. This income can take the form of interest or dividend payments. Income funds could be an attractive option for retirement planning if an individual is interested in creating multiple income streams or reinvesting dividends until they’re ready to retire.

Bond Funds

Bond funds focus exclusively on bond holdings. The type of bonds the fund holds can depend on its objective or strategy. For example, you may find bond funds or bond ETFs that only hold corporate bonds or municipal bonds, while others offer a mix of different bond types. Bond funds could potentially help round out the fixed-income portion of your retirement portfolio.

IPO ETFs

An initial public offering or IPO represents the first time a company makes its shares available for trade on a public exchange. Investors can invest in multiple IPOs through an ETF. IPO ETFs invest in companies that have recently gone public so they offer an opportunity to get in on the ground floor. However, IPO ETFs are relatively risky and are generally more suitable for experienced investors.

The Takeaway

Mutual funds can be part of a diversified retirement planning strategy. Regardless of whether you choose to invest in mutual funds, ETFs or something else, the key is to start saving for your pos-work years sooner rather than later. Time can be one of your most valuable resources when investing for retirement.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Are mutual funds safer than individual stocks for retirement?

Generally speaking, mutual funds tend to carry less risk than individual stocks for retirement. Mutual funds provide diversification by investing in a mix of stocks, bonds, and other assets, which may help reduce overall risk. Individual stocks, on the other hand, depend on the performance of one company, which makes them riskier.

What percentage of my retirement portfolio should be in mutual funds?

There is no one single approach to asset allocation. The percentage of your portfolio that’s in mutual funds depends on your individual goals, risk tolerance, and time horizon. Younger investors with retirement far in the future may want to consider a more aggressive strategy that’s heavier on stocks, with more possibility for growth, but also involves more risk. Conversely, an investor near retirement age will likely want to be more conservative, and they might choose less risky options such as fixed income and bond funds.

How often should I review my mutual fund holdings?

There is no fixed rule for how often to review mutual fund holdings. Some investors may prefer biannual or annual reviews, while others might feel more comfortable with quarterly reviews. Reviewing a portfolio can help you monitor mutual fund performance, track your returns, and manage risk, so choose the schedule you are most comfortable with.

Can mutual funds provide steady income in retirement?

Certain types of mutual funds, such as retirement income funds (RIFs), are designed to provide a steady source of income in retirement. Ideally, an investor may want to have a mix of stocks, bonds, and cash investments that provide streams of income and growth in retirement and help preserve their money.

What are the tax implications of mutual fund investments in retirement?

Mutual funds are subject to capital gains tax when held in a taxable account. Actively managed funds must report capital gains every time a share is sold or purchased and may result in more capital gains tax. Index funds tend to have less turnover of assets and are generally more tax efficient. However, you may wish to consult a tax professional about your specific situation.

Photo credit: iStock/kali9

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q125-056

Read more
Mar
11
2025
What is Delta in Options Trading?

What is Delta in Options Trading?

By | Growing Wealth, invest, Investing | Comments Off on What is Delta in Options Trading?

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

In options trading, delta measures the sensitivity of an option’s price relative to changes in the price of its underlying asset. Delta is a risk metric that compares changes in a derivative’s underlying asset price to the change in the price of the derivative itself.

In short, delta measures the sensitivity of a derivative’s price to a change in the underlying asset. Using delta as part of an option’s assessment may help investors make better trades.

Key Points

•   Delta measures how option prices change in response to the underlying asset’s price.

•   Call options have a delta between 0 and 1; put options have a delta between 0 and -1.

•   Higher absolute delta values indicate greater price sensitivity.

•   Delta-neutral strategies balance portfolios by offsetting price movements.

•   Delta offers a probabilistic estimate of price movement, not a guaranteed outcome.

What Is Delta?

Delta is one of “the Greeks,” a set of trading tools denoted by Greek letters. Some in options trading refer to the Greeks as risk sensitivities, risk measures, or hedge parameters. The delta metric is a commonly used Greek for measuring risk; the other four are gamma, theta, vega, and rho.

Delta Example

For each $1 that an underlying stock moves, the derivative’s price changes by the delta amount. Investors typically express delta as a decimal value or percentage. For example, let’s say there is a long call option with a delta of 0.40. If the option’s underlying asset increased in price by $1.00, the option price would increase by $0.40.

Because delta changes alongside underlying asset changes, the option’s price sensitivity also shifts over time. Various factors impact delta, including asset volatility, asset price, and time until expiration.

For call options, delta increases toward 1.0 as the underlying asset price rises. For put options, delta moves toward -1.0 as the underlying asset’s price falls.

Recommended: A Beginner’s Guide to Options Trading

How Is Delta Calculated?

Analysts calculate delta using the following formula with theoretical pricing models:

Δ = ∂V / ∂S

Where:

•   ∂ = the first derivative

•   V = the option’s price (theoretical value)

•   S = the underlying asset’s price

The formula Δ = ∂V / ∂S represents how small changes in the underlying price (S) affects the option’s value (V).

Some analysts may calculate delta with the more complex Black-Scholes model that incorporates additional factors. This model is a widely used theoretical pricing model that factors in volatility, time decay, and interest rates to estimate an investment’s delta. Traders generally don’t calculate the formula themselves, as trading software and exchanges do it automatically.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How to Interpret Delta

Delta is a ratio that compares changes in the price of derivatives and their underlying assets. The direction of price movements will determine whether the ratio is positive or negative.

Bullish options strategies have a positive delta, and bearish strategies have a negative delta. It’s important to remember that unlike stocks, buying or selling options does not necessarily indicate a bullish or bearish strategy.

Traders use delta to gain an understanding of whether an option will expire in the money or not. The more an option is in the money, the further the delta value will deviate from 0, towards either 1 or -1.

The more an option goes out of the money, the closer the delta value gets to 0. Higher delta means higher sensitivity. An option with a 0.9 delta, for example, will change more if the underlying asset price changes than an option with a 0.10 delta. If an option is at the money, the underlying asset price is the same as the strike price, so there is a 50% chance that the option will expire in the money or out of the money.

Recommended: Differences Between Options and Stocks

Calls: Long and Short

For call options, delta is positive, indicating that the option’s price will increase as the underlying asset increases. Delta’s value for calls range from 0 to 1. When a call option is at the money (i.e. the asset price equals the strike price), the delta is near 0.50, meaning it has an equal probability of being out-of-money or in-the-money. As the underlying asset’s price increases, delta moves closer to 1. This signals that the option has demonstrated a high price sensitivity.

•   For long call positions, delta increases toward 1 as the underlying asset’s price rises, signaling greater price sensitivity.

•   For short call positions, delta is negative, meaning the position loses value as the asset price increases

Puts: Long and Short

For put options, delta is negative, indicating that the option’s price will increase when the underlying asset’s price decreases. Delta’s value for puts ranges from 0 to -1. As with call options, when a put option is at the money, the delta is near -0.50, representing an equal probability that the put could expire in or out of the money. If an underlying asset’s price decreases, the delta would move closer to -1, which would indicate an option has high price sensitivity to price changes in its underlying asset.

•   For long put positions, delta moves closer to -1 as the underlying asset’s price decreases, indicating greater price sensitivity.

•   For short put positions, delta is positive, meaning the position loses value as the asset price declines.

How Traders Use Delta

In addition to assessing option sensitivity, traders look to delta as a probability that an option will end up in or out of the money.

Every investor has their own risk tolerance, so some might be more willing to take on a risky investment if it has a greater potential reward. When considering Delta, traders recognize that the closer it is to 1 or -1, the greater the option’s sensitivity is to movements in the underlying asset.

If a long call has a Delta of 0.40, traders often interpret this as a 40% chance of expiring in the money. So if a long call option has a strike price of $30, the owner has the right to buy the stock for $30 before the expiration date. There is believed to be a 40% chance that the stock’s price will increase to at least $30 before the option contract expires. These outcomes are not guaranteed, however.

Traders also use Delta to put together options spread strategies.

Delta Neutral

Traders may also use Delta to hedge against risk. One common options trading strategy, known as Delta neutral, is to hold several options with a collective Delta near 0.

The strategy reduces the risk of the overall portfolio of options. If the underlying asset price moves, it will have a smaller impact on the total portfolio of options than if a trader only held one or two options.

One example of this is a calendar spread strategy, in which traders use options with various expiration dates in order to get to Delta neutral.

Delta Spread

With a delta spread strategy, traders buy and sell various options to create a portfolio that offsets so the overall delta is near zero. With this strategy the trader hopes to make a small profit off of some of the options in the portfolio.

Using Delta Along With Other Greeks

Delta measures an option’s directional exposure. It is just one of the Greek measurement tools that traders use to assess options. There are five Greeks that work together to give traders a comprehensive understanding of an option. The Greeks are:

•   Delta (Δ): Measures the sensitivity between an option price and the price of the underlying security.

•   Gamma (Γ): Measures the rate at which delta is changing.

•   Theta (θ): Measures the time decay of an option. Options become less valuable as the expiration date gets closer.

•   Vega (υ): Measures how much implied volatility affects an option’s value. Higher implied volatility generally leads to higher option premiums.

•   Rho (ρ): Measures an option’s sensitivity to changing interest rates. Rho is most suited for long-dated options because changes in interest rates have a larger effect on their value.

The Takeaway

Delta provides an estimate of how much the price of an option may change relative to a $1 change in the price of its underlying security. Delta is a useful metric for traders evaluating options and can help investors determine their options strategy. Traders often combine it with other tools and ratios during technical analysis.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

FAQ

What does a 10 delta option mean? Or a 30 delta option?

A 10 delta option means the option’s price is expected to change by $0.10 for every $1.00 change in the underlying asset’s price. A 30 delta option would change by $0.30 for the same price movement.

What is the ideal delta for a covered call?

The ideal delta for a covered call is typically between 0.30 and 0.40. This range balances earning a decent premium while minimizing the risk of the call being exercised too quickly.

Do you want high or low delta options?

It depends on your strategy. High delta options are more sensitive to price changes in the underlying asset and are closer to being in the money. Low delta options are less sensitive but cost less and are generally further out of the money.

How accurate is delta in options trading?

Delta is an estimate, not a guarantee. It’s generally accurate for small price changes in the underlying asset, but may become less reliable for larger movements since delta itself changes over time (as it’s influenced by gamma).

Why is delta negative for put options?

Delta is negative for put options because their value increases as the underlying asset’s price decreases. The negative delta reflects this inverse relationship.

Does delta increase with volatility?

Not directly. Delta measures price sensitivity, while volatility impacts vega (which reflects changes in option prices due to implied volatility). Higher volatility can push options further in or out of the money, however, indirectly influencing delta.

Photo credit: iStock/PeopleImages

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q125-106

Read more
Mar
10
2025
broken piggy bank

How to Cash in a Bond

By | Growing Wealth, invest, Investing | Comments Off on How to Cash in a Bond

Cash savings bonds are long-term investments that are issued by the government, and that can be redeemed for cash. When you were younger, you may have received savings bonds from your grandparents or a relative. Now that you’re older, the bonds have matured, and you’re finally ready to redeem them to pay for an expense or reinvest the money.

However, you may be uncertain about how cashing savings bonds works and what their value is. Find out about how to cash in a bond and how much bonds are worth.

Key Points

•   Savings bonds are long-term, low-risk investments issued by the U.S. government.

•   Lost or stolen bonds can be replaced by submitting FS Form 1048 to the Treasury.

•   The TreasuryDirect website provides a calculator to determine the current value of savings bonds.

•   Redemption of savings bonds can be done at financial institutions or through TreasuryDirect.gov.

•   Redeeming bonds before five years results in a penalty of losing three months of interest.

What Are Savings Bonds?

Savings bonds are long-term, low-risk investments that are a debt instrument of the United States government. Created during World War II, they initially allowed citizens to help fund the U.S. government during the war, and were formerly called Series E War Savings Bonds. (Nowadays, there are different types of bonds, as outlined below.) Since these bonds are guaranteed by the U.S. government, they are generally considered among the safest investments out there.

Types of Savings Bonds

There is more than one type of savings bond: There are EE and I bonds.

EE bonds have fixed interest rates which remain the same for at least 20 years. The government guarantees that the bond’s value will double after 20 years, too. I bonds have variable interest rates that change every six months, and part of those changes depend on the rate of inflation. The government also guarantees that the interest rate will never fall below zero.

Both types of bonds are sold for face value.

How Savings Bonds Generate Interest

Savings bonds generate interest through compounding. Over time, interest is added to the bond’s face value, and that compounds. So, as time goes on, the value of the bond itself increases as more interest is added onto the higher principal.

How Do I Cash In a Savings Bond?

Once you’re ready to redeem a savings-bond, you have a couple of options, depending on the specific nature of the savings bond you have.

Steps to Redeem Paper Savings Bonds

If it’s an older paper savings bond, financial institutions, like a bank, can often cash them out. If the bank will not redeem these bonds, they should be able to point the owner towards an institution that can. It can be helpful to call the bank first to make sure it’s able to cash the full amount of a bond’s worth.

It’s also possible to cash savings bonds through Treasury Retail Securities Services. Bond owners typically just need to complete FS Form 1522, with a certified signature, and mail the bonds and form to Treasury Retail Securities Services, PO Box 9150, Minneapolis, MN 55480-9150.

How to Cash in Electronic Savings Bonds

Another option is to convert older savings bonds into electronic bonds. Go to TreasuryDirect.gov and link a bank account to cash the existing bonds out. If you have electronic bonds, you can cash them in at the Treasury Direct website. Typically, once redeemed, the bond amount is sent to an owner’s bank account within a few days.

If you have questions about the bond redemption process, you can contact Treasury Direct by filling out an email form on the website, or call them at 844-284-2676.

Note, too, that since the interest earned on savings bonds are subject to federal taxes (but not local state taxes), bond owners can either pay taxes every year they have the bond or wait until it’s redeemed and pay all the tax due at the end. After a bond is cashed out, an IRS Form 1099-INT is issued that shows the owner’s taxable gain.

How To Calculate the Value of Your Savings Bonds

Before figuring out how to redeem savings bonds, many recipients first want to calculate their bonds’ present value. Fortunately, TreasuryDirect.gov helps bond owners to do just that.

Using the TreasuryDirect Savings Bond Calculator

Using the TreasuryDirect Savings Bond Calculator can give you a number of pieces of information related to paper savings bonds.

On this government website, a bond recipient or purchaser can see how much their bonds are now worth by inputting the current date, indicating whether the bond is Series E, Series EE, or Series I, and noting the issue date and serial number. The site will store this information, so users can view it again at a later time.

It’s worth noting here a few things that the Treasury savings bond calculator cannot do, including:

•   verifying whether not a user actually owns the bonds

•   guaranteeing that a bond is eligible for redemption

•   confirming that the serial number is valid

•   creating a savings bond based on the information provided

Anyone who’s been issued an electronic savings bond can go to TreasuryDirect.gov and click the “Current Holdings” tab to see how much their bonds are worth.

Understanding Maturity Dates and Interest Rates

Savings bonds generally have maturity dates ranging from 20 to 30 years–some types all have 30-year maturity dates. Effectively, this means that they will accrue or earn interest for that entire time frame, until they mature and expire. The interest rate is the rate at which the bond will earn interest until it reaches maturity.

With that information, investors should be able to do some back-of-the-envelope math to get a sense of what their savings bonds can generate.

When To Cash a Savings Bond

When a Series EE bond arrives at maturity (after 20 years), the bond owner can redeem the principal on it or let it collect more interest for 10 years beyond the maturity date. To redeem, an owner must hold the bond for at least a year. It’s helpful to remember that if a savings bond is redeemed within five years of the purchase date, a three-month interest penalty must be paid.

When looking into how to cash in a Series I savings bond, the same penalty of three months’ interest is applied when the bond is redeemed less than five years from its purchase date.

As mentioned, Series E bonds purchased between 1941 to 1980 no longer earn interest. However, it’s still possible to cash out or redeem savings bonds from these years. To cash in Series HH bonds, the bonds must be mailed to Treasury Retail Security Services along with a completed FS Form 1522 and a certified signature.

Finding Lost or Stolen Savings Bonds

Sometimes owners lose printed bonds that were given to them as children. In that case, if an owner no longer possesses the physical copy of the bond, there are some steps that can be taken to replace them.

Replacement Process for Missing Bonds

If your bond is missing or stolen, you can go to TreasuryDirect.gov and fill out an FS Form 1048, which is a “Claim for Lost, Stolen, or Destroyed United States Savings Bonds.” All that’s needed is the issue date, face-value amount, bond number, the owner’s Social Security number (or the purchaser’s Social Security number), and names and addresses noted on the bonds.

On the Treasury site, it’s also possible to designate whether bonds were lost, stolen, or destroyed (and even attach any remaining pieces of the bond along with the form). By listing a bank account and routing number here, the Treasury can deposit the bond’s value into an owner’s account when they’re ready to redeem. It’s key to remember that the form must be certified with a bond owner’s signature. Once completed, the form can be sent to Treasury Retail Securities Services, P.O. Box 9150, Minneapolis, MN 55480-9150.

Tips to Secure Your Savings Bonds

Physical savings bonds can be stored securely in a safe or even at a safety deposit box at a bank. Investors could also register their bonds which cements ownership and beneficiary information for later reference.

How Do You Buy Savings Bonds?

Buying savings bonds these days is pretty easy: You can actually buy them directly from the Treasury.

Buying Savings Bonds Through TreasuryDirect

You can buy electronic Series EE and Series I bonds savings bonds from Treasury Direct. Simply go to the website and set up an account. Then fill out the form, including the amount you want to purchase in bonds, and use your credit card or debit card to buy the bonds. The electronic bonds will be kept in your account at Treasury Direct.

If you prefer paper bonds, you can only purchase paper Series I bonds. You’ll need to use your IRS tax refund to purchase them. When you file your taxes, fill out IRS form 8888 to indicate how much of your refund should go to I bonds.

Giving Savings Bonds to Others

It’s possible to give savings bonds to others as a gift, or for any reason whatsoever. The process of purchasing them is more or less the same — you can do so online via TreasuryDirect — and you can even send the recipient an announcement so that they know they’ve been given the bond.

The Takeaway

Many bond owners opt to reinvest money earned on their savings bonds once the bonds are redeemed. If they don’t need the cash right away, the gains on a bond could go towards another type of investment, where that money might continue to grow. Remember, too, that savings bonds need to be purchased from the U.S. Treasury.

It may also be worthwhile checking out options for online bank accounts, which can likewise offer competitive interest rates on your savings.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

🛈 Savings bonds can be purchased directly from the U.S. Treasury. SoFi, however, offers its members alternative savings vehicles such as high-yield savings accounts.

FAQ

Do banks cash savings bonds?

You can cash paper savings bonds at many banks. Not every bank cashes paper bonds, however, so you may want to call the bank first and inquire. If you have electronic savings bonds you cash them in online at TreasuryDirect.gov. Simply log into your account to cash in your electronic bonds.

What is the best way to cash in savings bonds?

If you have electronic savings bonds, the best way to cash them in is at TreasuryDirect.gov. Just log into your online account to complete the transaction. The money can be transferred via direct deposit to your savings or checking account.

How long should you wait to cash in a savings bond?

If possible, it’s best to wait until a bond reaches maturity before cashing it in to take full advantage of the interest that accrues over time. However, if you want to cash in a bond before then, try to wait at least five years before redeeming it so you won’t lose any accrued interest. If you cash in a bond before the five-year mark, you will lose three months’ worth of interest. Finally, it’s important to know that you have to wait at least 12 months from the time of purchase before cashing in most savings bonds. Finally, it’s important to know that you have to wait at least 12 months from the time of purchase before cashing in most savings bonds.

Can I cash savings bonds before they mature?

It is possible to cash in a savings bond as long as you’ve owned it for more than one year. Doing so, however, means you forgo future interest payments, and effectively, leave money on the table. If you cash them out after owning them for less than five years, you’ll also lose three months of interest.

What taxes apply when cashing in savings bonds?

You will owe taxes on the income derived from a savings bond, and will receive a tax form as necessary outlining the interest you earned for each tax year.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi members with direct deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBNK-Q125-094

Read more
Mar
07
2025
Guide to Risk Neutral Probability

Guide to Risk Neutral Probability

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Guide to Risk Neutral Probability

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

“Risk neutral,” in the context of investing, means that an investor focuses on the expected gains of a potential investment rather than its accompanying risks. This concept comes up frequently in options trading, as it’s one of the core tenets in how options are valued.

Risk neutrality is more of a valuation concept than a strategy. It’s often used by investment firms as a framework for the valuation of options and other complex derivatives.

Key Points

•   A call debit spread involves buying a call option and selling another with a higher strike price, aiming for a bullish profit with limited risk.

•   Entry requires purchasing a call and selling a higher strike call with the same expiration; exit by reversing these positions.

•   Traders can use the call debit spread strategy to hedge against the risk of volatility collapse, which can negatively impact long call positions.

•   Time decay affects the spread minimally when the asset price is near the middle of the strike prices.

•   Early closure of profitable positions maximizes gains and reduces the risk of short call assignment and transaction fees.

What Is Risk Neutral?

Risk-neutral investors are concerned with the mathematical expected returns of an investment in options trading without incorporating risk factors into their valuation framework . When confronted with what may appear to be a risky decision versus the potential of a “sure thing,” risk-neutral investors are indifferent as long as the expected value of both options balance out.

Risk Neutral vs Risk Averse

Unlike risk neutrality, risk aversion considers risk and usually prefers certainty when comparing investment alternatives. While risk-averse investors consider expected value, they will also demand a “risk premium,” or additional benefit, for taking on additional risk in a transaction.

A risk premium refers to the additional return investors require to compensate for the uncertainty of potential losses. This premium reflects an investor’s tolerance for risk, and can influence their investment preferences.

Risk-neutral investors are generally indifferent between investment options with the same expected values, regardless of the accompanying risk factors. The concept of risk does not play into a risk-neutral investor’s decision-making process, and no risk premium is demanded for uncertain outcomes with equal expected values.

Most retail investors are risk averse, meaning they prefer investments with lower risk exposure, though they may still have some level of risk tolerance. Terms like “risk-adjusted returns” are common in the retail investment space, and entire doctrines in behavioral economics and game theory are built around the cornerstones of loss or risk-aversion.

The difference between risk-neutral vs. risk-averse investors can be illustrated with an example of probability-based decision-making.

Example of Risk Neutrality

To illustrate risk neutrality, consider a hypothetical situation with two investment options: one which involves a guaranteed payoff of $100, while the other involves a 50% chance of a $200 payoff or a 50% chance you receive nothing.

In our hypothetical scenario, the risk-neutral investor would be indifferent between the two options, as the expected value (EV) in both cases equals $100.

1.    EV = 100% probability X $100 = $100

2.    EV = (50% probability X $200) + (50% probability X $0) = $100 + 0 = $100

A risk-averse investor would factor in risk into their decision, however, making the two alternatives unequal in their decision-making framework. Given that the second option involves uncertainty (and therefore risk), the risk-averse investor would demand an added payoff to justify taking on any added risk.

Reframing the problem above, the risk averse investor would choose Option 1, given that both options return the same expected value, and Option 1 involves the greatest certainty.

On the other hand, the risk neutral investor would remain indifferent because, in their valuation framework, risk does not carry weight — only expected value matters. Since both options yield an EV of $100, they would not prefer one over the other, regardless of uncertainty.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Risk Neutral Pricing and Valuation

Risk neutrality is used extensively in valuing derivative securities. It establishes a basis for determining theoretical equilibrium pricing between buyers and sellers in any transaction. Therefore, it’s an important aspect of options trading strategies.

Given that risk-averse investors demand a premium for taking on additional risk — and because each investor’s risk tolerance differs — pricing derivatives can become complex. This risk premium can present a problem from an analytical perspective; it introduces “noise” and complexity that can complicate the pricing of derivatives and other investments.

Investment valuation is typically based on the present value of expected future cash flows, a principle that applies across various risk preferences. Future cash flows are typically discounted using a required rate of return, which may be risk-free, risk-adjusted, or risk-neutral depending on the valuation approach.

In a risk-neutral framework, the discount rate remains consistent across investments, disregarding individual risk tolerance levels and risk premiums

To adjust for this complexity in derivatives trading, mathematicians and financial professionals may apply risk-neutral measures when pricing derivatives.

Understanding Risk Neutral Probability

Risk neutrality is used to find objective pricing for derivatives. Therefore, risk-neutral probability removes the noisy risk factor from calculations when finding fair value.

This differs from real-world, risk-based pricing, which introduces any number of security-specific or market-based factors back into the calculation. The downside of this “real-world probability” is that it makes calculating value an exceedingly complex exercise, as it requires fine-tuned adjustments for almost every unique factor that might affect an investment.

Risk-neutral probabilities allow investors to apply a consistent single rate towards the valuation of all assets for which the expected payoff is known. This simplifies the valuation process.

This is not to say that risk-aversion and other costs are not factored into calculations, however. Risk-averse investors would rarely choose to accept trades that don’t offer risk premiums over the long run.

Instead, risk-neutral probabilities serve as a foundation for valuation models, with additional risk factors incorporated when necessary.

The Takeaway

Identifying what type of investor you are is important before diving in. If you’re a risk-neutral investor, choosing between risky and non-risky investments will be based on expected values.

If you are risk averse in your options trading strategy, your investment opportunities will need to be assessed based on whether you are receiving a risk premium commensurate with the risk you perceive.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

FAQ

Is risk neutral the same as risk free?

Risk neutral does not imply risk free. Risk neutral is simply a conceptual approach for evaluating trade offs without the impact of risk-factors.

Risk continues to exist in the context of each investment when evaluating tradeoffs; risk neutral simply suspends risk as a factor in the evaluation process.

What makes some companies risk neutral?

From a theoretical perspective, companies may behave in a risk-neutral manner by hedging their exposure through insurance, derivatives, or risk transfers. They can do this by purchasing insurance, buying financial derivatives, or transferring their risk to other parties. This allows them to focus on expected outcomes rather than the risk-related costs of those decisions.

Conceptually, shareholders may also want firms to make decisions in a risk-neutral manner, as individual investors can hedge risk exposure themselves by buying the shares of a number of other firms to diversify and offset these risk factors.

What is an example of risk neutral?

An example of risk neutral would be an individual who’s indifferent between a 100% chance of receiving $1,000, versus a 50% chance of receiving $2,000 (and a 50% chance of receiving nothing).

In both cases, the expected value would be $1,000, after calculating for both probability and return. This expected value would be what risk-neutral investors would focus on. By contrast, a risk-averse individual would choose the first option, as the outcome has more certainty (and less risk).

Photo credit: iStock/Szepy

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q125-014

Read more
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2025 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender