Financial Topics Archives | Page 16 of 822

Mar

2025

Everything You Need to Know About Lifestyle Funds and Lifestyle Investing

By Rebecca Lake | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Lifestyle funds are investment funds that base their asset allocation on someone’s age, risk tolerance, and investing goals. Individuals who want to build wealth over the long term in a relatively hands-off way might consider lifestyle investings.

There are different types of lifestyle funds investors may choose from, based on their appetite for risk, the level of risk needed to achieve their goals, and their investing time horizon. Lifestyle assets often also appear inside different types of retirement accounts, including employer-sponsored retirement plans and individual retirement accounts (IRAs). Whether becoming a lifestyle investor makes sense for you can depend on what you hope to achieve with your portfolio, how much risk you’re comfortable taking, and your overall time horizon for investing.

What are Lifestyle Funds?

A lifestyle fund or lifestyle investment holds a mix of investments that reflect an investor’s goals and risk tolerance. These investment funds tailor their investment mix to a specific investor’s needs and age to provide a simplified solution for reaching their goals.

Lifestyle funds may invest in both equities (i.e. stocks) and fixed-income securities, such as bonds and notes. These funds may require fewer decisions by the asset owner, since they adjust automatically through changing lifestyle needs until you reach retirement. With lifestyle assets, as with other types of funds, it’s important to consider the balance between risk and reward.

Lifestyle funds that carry a higher degree of risk may offer higher returns to investors, while those that are more conservative in terms of risk may yield lower returns.

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How Do Lifestyle Funds Work?

Typically purchased through a retirement account or a brokerage account, lifestyle funds work by creating a diversified portfolio to meet an investor where they are, while also taking into account where they’d like to be 10, 20 or 30 years from now.

An investor can choose from an initial lifestyle fund allocation, then adjust the risk level up or down based on their preferences. A fund manager reviews the asset allocation for the fund and rebalances periodically to help an investor stay on track with their goals.

The level of risk an investor takes may correlate to the average age of retirement, which for most people is around 65. So someone who’s 25 years old now has 40 years to invest for the future, meaning they can afford to take more risk to achieve their goals. As they get older, their tolerance for risk may decrease which could mean moving away from stocks and toward fixed-income investments.

Unlike target-date funds, the level of risk in lifestyle funds doesn’t change significantly over time. So if you were to choose an aggressive lifestyle fund at 25, the asset allocation of that fund would more or less be the same at age 65. That’s important to understand for choosing the lifestyle fund that’s appropriate for your risk tolerance and goals.

Recommended: Explaining Asset Allocation by Age

Two Stages of Lifestyle Funds

Lifestyle investing can work in different stages, depending on where you are in your investing journey. Lifestyle funds accommodate these different stages by adjusting their asset allocation.

This is something the fund manager can do to ensure that you’re working toward your goals without overexposing yourself to risk along the way. The two stages of lifestyle funds are the growth stage and the retirement target date stage.

1. Growth Stage

The growth stage represents the period in which a lifestyle investor is actively saving and investing. During the growth stage, the emphasis is on diversifying investments to achieve the appropriate balance between risk and reward. This phase represents the bulk of working years for most people as they move from starting their careers to reaching their peak earnings.

In the growth stage, lifestyle funds hold an asset allocation that reflects the investor’s goals and appetite for risk. Again, whether this is more conservative, aggressive or somewhere in-between depends on the individual investor. At this time, the investor is typically concerned with funding retirement accounts, rather than withdrawing from them.

2. Retirement Target Date

The retirement target date stage marks the beginning of the countdown to retirement for an investor. During this stage, the focus shifts to preparing the investor to begin drawing an income from their portfolio, rather than making new contributions or investments.

At this point, a lifestyle investor may have to decide whether they want to maintain their existing asset allocation, shift some or all of their assets into other investments (such as an annuity), or begin drawing them down in cash. For example, an investor in their mid-50s may decide to move from an aggressive lifestyle fund to a moderate or conservative lifestyle fund, depending on their needs, anticipated retirement date, and how much risk they’re comfortable taking.

Different Types of Lifestyle Funds

Lifestyle funds aren’t all alike and there are different options investors may choose from. There are different ways lifestyle funds can be structured, including:

• Income-focused funds. These lifestyle funds aim to produce income for investors, though capital appreciation may be a secondary goal. Fixed-income securities typically make up the bulk of lifestyle income funds, though they may still include some equity holdings.

• Growth-focused funds. Lifestyle growth funds are the opposite of lifestyle income funds. These funds aim to provide investors with long-term capital appreciation and place less emphasis on current income.

• Conservative asset allocation funds. Conservative lifestyle funds may have a long-term goal of achieving a set total return through both capital appreciation and current income. These funds tend to carry lower levels of risk than other lifestyle funds.

• Moderate asset allocation funds. Moderate lifestyle funds often take a middle ground approach in terms of risk and reward. These funds may use a “fund of funds” strategy, which primarily involves investing other mutual funds.

• Aggressive asset allocation funds. Aggressive lifestyle funds may also use a “fund of funds” approach, though with a slightly different focus. These funds take on more risk, though rewards may be greater as they seek long-term capital appreciation.

Lifestyle Investment Risks

Investing for retirement with lifestyle assets has some risks, so it’s important to make sure that the fund you choose matches your risk tolerance. Risk tolerance refers to the amount of risk an investor is comfortable taking in their portfolio. Risk capacity is the amount of risk needed to achieve investment goals.

Typically, younger investors can afford to take more risk in the early years of their investment career as they have more time to recover from market declines. But if that investor has a low risk tolerance, they may still choose to stick with more conservative investments. If their risk tolerance doesn’t match up with the amount of risk they need to take to achieve their investment goals, they could fall far short of them.

When considering lifestyle funds, it’s important to consider your risk mix and risk level. While lifestyle funds can simplify investing in that you don’t necessarily need to make day-to-day trading decisions, it’s still important to consider how your risk tolerance and risk capacity may evolve over time.

As you move from the growth stage to the retirement target date stage, for instance, you may need to make some adjustments to your lifestyle fund choices in order to keep pace with your desired goals.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Advantages of Lifestyle Funds

In addition to their risks, lifestyle funds offer numerous advantages to investors, starting with simplicity. When you invest in a lifestyle fund, you know more or less what to expect in terms of asset allocation, based on the risk tolerance that you specify. These funds don’t require you to be an active investor in order to realize returns.

Some funds also automatically rebalance on behalf of investors, so there’s very little you need to do, other than be mindful of how the fund’s risk mix reflects your risk tolerance at any given time.

A lifestyle fund can offer broad diversification, allowing you to gain exposure to a variety of assets without having to purchase individual stocks, bonds or other securities.

Compared to other types of mutual funds or exchange-traded funds (ETFs), lifestyle funds may carry lower expense ratios. That can allow you to retain more of your investment returns over time.

Finally, lifestyle funds encourage investors to stay invested through market ups and downs. That can help you to even out losses through dollar-cost averaging.

Lifestyle Funds vs Target Date Funds

If you have a 401(k), then you’re likely familiar with target date funds as they’re commonly offered in workplace retirement plans. A target date fund, or lifecycle fund, is a mutual fund that adjusts its asset allocation automatically, based on the investor’s target retirement date. These funds are distinguishable from lifestyle funds because they typically have a year in their name.

So a Target Date 2050 fund, for example, would attract investors who plan to retire in the year 2050. Target date funds also take a diversified approach to investing, with asset allocations that include both stocks and fixed-income securities.

The difference between target date funds and lifestyle funds is that target date funds follow a specific glide path. As the investor gets closer to their target retirement date, the fund’s asset allocation adjusts to become more conservative. Lifestyle funds don’t do that; instead, the asset allocation remains the same.

The Takeaway

Whether you choose to invest with lifestyle funds, target date funds, or something else, the most important thing is to get started saving for retirement. The longer your time horizon until retirement, the more time your money has to grow through the power of compounding interest.

If you feel like incorporating lifestyle funds into your investing strategy may help you reach your financial goals, be sure to take the pros and cons into consideration. It may also be helpful to consult with a financial professional for guidance.

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

What is a lifestyle pension fund?

A pension fund is a type of defined benefit plan, in which employees receive retirement benefits based on their earnings and years of service. A lifestyle pension fund is a pension fund that allocates assets using a lifestyle strategy in order to meet an investor’s goals and needs.

What is a lifestyle strategy?

In investing, a lifestyle strategy is an approach that chooses investments that can help an investor to reach specific milestones or goals while keeping their age and risk tolerance in mind. With lifestyle funds, the asset allocation doesn’t change substantially over time.

What is a lifestyle profile?

A lifestyle profile is a tool that investors use to help them select the most appropriate lifestyle funds based on their age, risk tolerance goals.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/GaudiLab

SoFi Invest®

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

Mar

2025

Guide to Mega Cap Stocks

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Mega cap, or “megacap,” is a term that describes the largest publicly-traded companies, based on their market capitalization. Mega cap stocks typically include industry-leading companies with highly recognizable brands.

Investing in mega cap stocks, along with companies that have a smaller market capitalization, can help build a diversified investment portfolio. Spreading investment dollars across different market caps may allow investors to minimize potential risks. But like any security, mega cap stocks have both pros and cons that investors should consider. Learning more about how they work and what sets them apart from other types of stocks can help you decide whether there’s a place for them in your portfolio.

Market Capitalization, Explained

Mega cap stocks sit at one end of the market capitalization spectrum, representing the very largest companies in the public markets. Market capitalization is a commonly used method for categorizing publicly-traded companies. In simple terms, market capitalization or market cap measures a company’s value, as determined by multiplying the current market price of a single share by the total number of shares outstanding.

For example, say a company’s stock is priced at $50 per share and it has 10 million shares outstanding. Following the formula of $50 x 10,000,000, the company would have a total market capitalization of $500 million.

Most often, companies are assigned to one of three categories, based on their market capitalization as follows:

• Small cap: Market value of $250 million to $2 billion

• Mid cap: Market value of $2 billion to $10 billion

• Large cap: Market value above $10 billion

While most companies fit into one of these three groups, some outliers exist on either end of the spectrum. The smallest of the small cap stocks are microcap stocks, while the largest companies are the mega caps.

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Mega Cap Stock Definition

Mega cap stocks have a market capitalization that’s significantly beyond $10 billion required for classification of large cap stocks. Instead, these companies have market capitalizations in the hundreds of billions or even of $1 trillion or more.

There are a handful of companies with market caps of more than $1 trillion, and those companies only passed the trillion-dollar mark in recent years. That said, it’s likely more companies will become mega cap stocks in the years ahead.

10 Companies With the Largest Market Cap

As of June 2023, these are the ten companies with the largest market caps. Note, too, that there isn’t always a direct correlation between market cap and stock price!

1. Apple

Apple, which trades under the market ticker AAPL, has a market cap of $2.9 trillion, and shares trade at more than $185. Apple is a tech company that produces consumer tech goods and software, including the iPhone. Its latest quarterly report (Q2 2023) showed revenue of almost $95 billion.

2. Microsoft

Microsoft trades under the MSFT ticker, and has a market cap of more than $2.5 trillion. Microsoft, like Apple, is a large tech company that creates software and hardware for businesses and consumers. Microsoft shares trade for nearly $340, and its latest revenue numbers tallied nearly $53 billion for the quarter.

3. Alphabet

Yet another large tech company, specializing in software and ad sales, Alphabet (the parent company of Google) has a market cap of more than $1.57 trillion. Alphabet trades under the GOOG ticker (it has numerous share classes), and shares trade for around $124. Its latest quarterly revenue was almost $70 billion.

4. Amazon

Amazon is an ecommerce company that sells just about everything under the sun on its digital platform, as well as offering cloud services to businesses. Amazon trades under the AMZN ticker, and has a market cap of $1.22 trillion, and shares trade for more than $125. Amazon’s latest quarterly revenue was $127 billion.

5. NVIDIA

NVIDIA makes computer chips, and has a market cap of $1.07 trillion, with share prices of around $434. NVIDIA trades under the NVDA ticker, and its most recent quarterly revenue was $7.19 billion.

6. Tesla

Tesla, an electric car maker, is not a mega cap stock, but close. Its market cap is $857 billion, with share prices of more than $270. It trades under the ticker TSLA, and saw revenue of $23.3 billion during Q1 2023.

7. Berkshire Hathaway

Berkshire Hathaway is a conglomerate holding company, meaning that it is involved in many industries, including real estate and insurance. It has many stock classes, but trades under the ticker BRK.A, and is valued at more than $516,000 (its other shares trade for significantly less). Its market cap is nearly $743 billion, and its latest quarterly revenue was more than $85 billion.

8. Meta

Meta is the parent company of Facebook, and trades under the ticker META. Its market cap is $726 billion, and shares trade for more than $283. Revenue for the first quarter of 2023 was almost $28 billion.

9. Visa

Visa is a financial services company, which most recently brought in quarterly revenue of almost $31 billion. Visa trades under the ticker V, and has a market cap of more than $466 billion, with shares trading for more than $227.

10. UnitedHealth Group

UnitedHealth Group is a healthcare and insurance company with a market cap of $437 billion. Shares are trading for nearly $470, and its latest quarterly revenue numbers amounted to $336 billion.

3 Pros of Investing in Mega Cap Stocks

There are several good reasons to consider making mega cap stocks part of your asset allocation strategy.

1. Diversification

Investing across different sectors and market capitalizations spreads out risk, since economic ups and downs may affect smaller, mid-sized and larger companies differently.

2. Stability

Established mega cap companies are among the most stable in the economy and may be better able to withstand a market downturn compared to smaller or newer companies without cash reserves or a solid brand reputation.

3. Dividends

Some mega cap stocks pay dividends to investors since they don’t need to reinvest profits into growth. That can provide an additional stream of income or allow for faster portfolio growth if they’re reinvested.

Cons of Investing in Mega Cap Stocks

While there are some things that make mega cap companies attractive to investors, it’s important to consider the potential downsides:

Limited Upside

Since many mega caps have already done most of their growing, there may be limited space for their share prices to increase.

Perception vs Reality

Market capitalization measures the stock market’s perceived value of a stock, not its intrinsic value. So mega cap status alone shouldn’t be considered a reliable indicator of a company’s fundamentals or financial health.

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How To Invest in Mega Caps

If you understand the investment risk and potential rewards that come with mega cap stocks and you’re interested in adding them to your portfolio, there are two ways to do it. You can choose to invest in individual mega cap stocks, or you can put money into an investment fund, such as a mutual fund or an exchange-traded fund (ETF) that holds mega caps.

You can also look at investing in a market index that can give your portfolio exposure to mega cap stocks.

Buying individual stocks allows you to pick and choose which mega caps you want to purchase. But this may require more of a hands-on approach as you’ll need to research individual companies. There are similarities and differences, in that regard, between investing in mega cap and investing in small cap stocks.

Investing in a thematic ETF focused on mega cap stocks may be a simpler way to diversify with larger companies. This allows you to have exposure to more mega cap stocks in your portfolio.

ETFs can be traded on an exchange, just like a stock, allowing for greater liquidity and flexibility than traditional mutual funds. Lower turnover ratios can make ETFs more tax-efficient than regular mutual funds. Depending on which mega cap ETF you choose, you may pay a much lower expense ratio than you would with traditional mutual funds.

Buying Stocks With SoFi

Mega cap stocks refers to stocks that have a market capitalization of more than $10 billion, and in some cases, more than $1 trillion. As of June 2023, there are only a handful of mega cap stocks out there, but several companies may become mega cap stocks in the subsequent years.

Mega cap stocks offer stability and the potential for dividend income, though they may have lower upside than smaller stocks that have more room to grow. The right role for mega cap stocks in your portfolio will depend on your investment goals, risk tolerance, and time horizon.

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

What are examples of mega caps?

Some examples of mega cap stocks include Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN), the first two of which have market caps of more than $2 trillion.

How many mega cap stocks are there in the U.S.?

Mega cap stocks are stocks with share prices of vastly more than $10 billion, and as such, there are many on the market – dozens, in fact. But there are only three or four with market caps of more than $1 trillion.

What is the difference between a large-cap and mega cap?

While mega cap stocks are typically defined as having market caps of more than $10 billion (often more than $200 billion), large-cap stocks have market caps ranging from $2 billion to $10 billion.

About the author

Rebecca Lake

SoFi Invest®

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

Mar

2025

What Are Treasury Inflation-Protected Securities (TIPS)?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Treasury Inflation-Protected Securities, or TIPS, are one way to hedge against inflation in a portfolio. Inflation, or a sustained period of rising consumer prices, can take a bite out of investor portfolios as the prices of goods and services increase.

These government-issued securities are inflation-protected bonds that adjust in tandem with shifts in consumer prices to maintain value.

Investing in TIPS bonds could make sense for investors who are seeking protection against inflation or who want to increase their conservative asset allocation.

Recommended: Smart Ways to Hedge Against Inflation

What Are TIPS?

Understanding Treasury Inflation-Protected Securities starts with understanding a little about how bonds work. When you invest in a bond, whether it’s issued by a government, corporation or municipality, you’re essentially lending the issuer your money. In return, the bond issuer agrees to pay that money back to you at a specified date, along with interest. For that reason, bonds are often a popular option for those seeking fixed income investments.

TIPS are inflation-protected bonds that pay interest out to investors twice annually, at a fixed rate applied to the adjusted principal of the bond. This principal can increase with inflation or decrease with deflation, which is a sustained period of falling prices. When the bond matures, you’re paid out the original principal or the adjusted principal—whichever is greater.

Here are some key TIPS basics to know:

• TIPS bonds are issued in terms of 5, 10 and 30 years

• Interest rates are determined at auction

• Minimum investment is $100

• TIPS are issued electronically

• You can hold TIPS bonds until maturity or sell them ahead of the maturity date on the secondary market

Treasury Inflation-Protected Securities are different from other types of government-issued bonds. With I Bonds, for example, interest accrues over the life of the bond and is paid out when the bond is redeemed. Interest earned is not based on any adjustments to the bond principal—hence, no inflationary protection.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

How Treasury Inflation-Protected Securities (TIPS) Work

Understanding how TIPS work is really about understanding the relationship they have with inflation and deflation.

Inflation refers to an increase in the price of goods and services over time. The federal government measures inflation using price indexes, including the Consumer Price Index (CPI). The federal government measures inflation using the Consumer Price Index, which measures the average change in prices over time for a basket of consumer goods and services. That includes things like food, gas, and energy or utility services.

Deflation is essentially the opposite of inflation, in which consumer prices for goods and services drop over time. This can happen in a recession, but deflation can also be triggered when there’s a significant imbalance between supply and demand for goods and services. Both inflation and deflation can be detrimental to investors if they have trickle-down effects that impact the way consumers spend and borrow money.

When inflation or deflation occurs, inflation-protected bonds can provide a measure of stability with regard to investment returns. Here’s how it works:

• You purchase one or more Treasury Inflation-Protected Securities

• You then earn a fixed interest rate on the TIPS bond you own

• When inflation increases, the bond principal increases

• When deflation occurs, the bond principal decreases

• Once the bond matures, you receive the greater of the adjusted principal or the original principal

This last part is what protects you from negative impacts associated with either inflation or deflation. You’ll never receive less than the face value of the bond, since the principal adjusts to counteract changes in consumer prices.

Are TIPS a Good Investment?

Investing in inflation-protected bonds could make sense if you’re interested in creating some insulation against the impacts of inflation in your portfolio. For example, say you invest $1,000 into a 10-year TIPS bond that offers a 2% coupon rate. The coupon rate represents the yield or income you can expect to receive from the bond while you hold it.

Now, assume that inflation rises to 3% over the next year. This would put the bond’s face value at $1,030, with an annual interest payment of $20.60. If you were looking at a period of deflation instead, then the bond’s face value and interest payments would decline. But the principal would adjust to reflect that to minimize the risk of a negative return.

Pros of Investing in TIPS

What TIPS offer that more traditional bonds don’t is a real rate of return versus a nominal rate of return. In other words, the interest you earn with Treasury Inflation Protected Securities reflects the bond’s actual return once inflation is factored in. As mentioned, I Bonds don’t offer that; you’re just getting whatever interest is earned on the bond over time.

Since these are government bonds, there’s virtually zero credit risk to worry about. (Credit risk means the possibility that a bond issuer might default and not pay anything back to investors.) With TIPS bonds, you’re going to at least get the face value of the bond back if nothing else. And compared to stocks, bonds are generally a far less risky investment.

If the adjusted principal is higher than the original principal, then you benefit from an increase in inflation. Since it’s typically more common for an economy to experience periods of inflation rather than deflation, TIPS can be an attractive diversification option if you’re looking for a more conservative investment.

Cons of Investing in TIPS

There are some potential downsides to keep in mind when investing with TIPS. For example, they’re more sensitive to interest rate fluctuations than other types of bonds. If you were to sell a Treasury Inflation-Protected Security before it matures, you could risk losing money, depending on the interest rate environment.

You may also find less value from holding TIPS in your portfolio if inflation doesn’t materialize. When you redeem your bonds at maturity you will get back the original principal and you’ll still benefit from interest earned. But the subsequent increases in principal that TIPS can offer during periods of inflation is a large part of their appeal.

It’s also important to consider where taxes fit in. Both interest payments and increases in principal from inflation are subject to federal tax, though they are exempt from state and local tax. The better your TIPS bonds perform, the more you might owe in taxes at the end of the year.

How to Invest in Treasury Inflation-Protected Securities

If you’re interested in adding TIPS to your portfolio, there are three ways you can do it.

1. Purchase TIPS bonds directly from the U.S. Treasury. You can do this online through the TreasuryDirect website. You’d need to open an account first but once you do so, you can submit a noncompetitive bid for inflation protected bonds. The TreasuryDirect system will prompt you on how to do this.

2. Purchase TIPS through a banker, broker or dealer. With this type of arrangement, the banker, broker or dealer submits a bid for you. You can either specify what type of yield you’re looking for, which is a competitive bid, or accept whatever is available, which is a noncompetitive bid.

3. Invest in securities that hold TIPS, i.e. exchange-traded funds or mutual funds. There’s no such thing as a TIP stock but you could purchase a TIPS ETF if you’d like to own a basket of Treasury Inflation-Protected Securities. You might choose this option if you don’t want to purchase individual bonds and hold them until maturity.

When comparing different types of investments that are available with ETFs or mutual funds, pay attention to:

• Underlying holdings

• Fund turnover ratio

• Expense ratios

Also consider the fund’s overall performance, particularly during periods of inflation or deflation. Past history is not an exact predictor of future performance but it may shed some light on how a TIPS ETF has reacted to rising or falling prices previously.

The Takeaway

Treasury Inflation-Protected Securities may help shield your portfolio against some of the negative impacts of inflation. Investors who are worried about their purchasing power shrinking over time may find TIPS appealing.
But don’t discount the value of investing in stocks and other securities as well. Building a diversified portfolio that takes into consideration an investor’s personal risk tolerance, as well as financial goals and time horizons, is a popular strategy.

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.

About the author

Rebecca Lake

SoFi Invest®

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

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Mar

2025

What Are Structured Products? A Comprehensive Guide for Investors

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Structured products are investment vehicles that are structured to seek specific objectives or goals. Most often, structured products are designed with the aim of generating returns based on the performance of an underlying security or basket of securities.

Structured products may offer investors built-in downside protection, with the potential for higher returns. However, investing in structured products does have risks, which investors should be aware of.

Key Points

• Structured products are investment vehicles designed to seek specific objectives, often linked to the performance of underlying securities.

• Structured products offer the potential for higher returns and downside protection but also come with higher risks.

• Structured products are suitable for experienced investors comfortable with derivatives and higher risk, not ideal for beginners.

• Structured products are generally complex, less liquid, and taxed at ordinary income rates, which can be a disadvantage for some.

• They can enhance portfolio diversification by providing indirect exposure to alternative investments.

Understanding Structured Products

Structured products are a type of alternative investment that can act as a counterbalance to more traditional investments, like stocks or bonds. Alternative investments, in general, may be structured to seek higher returns for investors compared to other investment types, though they typically entail a higher degree of risk.

They also require that investors hold onto them until they mature, meaning that they’re suited to buy-and-hold strategies, which can be important to note for investors who may have a different overall investment strategy.

Definition and Basic Concepts

In simple terms, a structured product is an investment that derives its value from other investments. Structured products are designed to offer maximum upside, based on market conditions.

There are different categories of structured products you might invest in:

• Participation products: These track an underlying asset, which may be an individual security or an index. Risk/reward profiles align with the underlying asset.

• Yield enhancement products: These pay a set coupon or interest rate and offer downside risk protection, so long as the underlying asset’s value remains at or above a certain level.

• Capital protection structured products: These offer guaranteed recovery of your initial investment, with the potential to benefit from increases in the value of the underlying asset.

Market-linked certificates of deposit (CDs) are one example of structured products. These are bank CDs that tie potential returns to an underlying asset, such as individual stocks or a stock index.

For example, you might invest $10,000 into a market-linked CD that bases returns on the performance of the S&P 500. The CD has a 12-month term. During that period, you get the benefit of returns that parallel the performance of the 500 largest publicly traded companies in the U.S., with the reassurance of FDIC insurance protection.

Individuals and institutional investors can invest in structured products. The difference between institutional vs. individual investors lies in who they represent. Institutional investors trade on behalf of other investors; a bank is one example. Individual investors trade for themselves.

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How Structured Products Differ from Traditional Investments

Structured products are distinct from traditional products in terms of how they work and what they’re designed to do for investors.

Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) may be good for diversifying your portfolio, but there are limits to the needs they can meet for certain investors. Structured products may help fill gaps in a portfolio.

In terms of what a structured product looks like, they can be issued as:

• Publicly offered or privately placed debt securities

• Closed-end funds or trusts

• CDs

Each option has a different risk/reward profile, allowing investors to select structured products that align with their goals and risk tolerance. Structured products can be traded on exchanges just like stocks and some also trade on the secondary market, though that’s rare.

Compared to stocks or other traditional investments, structured products tend to be more complex in both how they work and how they’re taxed. In the past, structured products required a substantial minimum investment. Today, more financial institutions offer structured products such as market-linked CDs with low minimum buy-ins, reducing barriers to entry for a broader range of investors.

Benefits and Risks of Structured Products

Structured products can be attractive to investors for a variety of reasons. Some of the chief benefits of investing in structured products may include:

• Potential for higher returns, based on the performance of the underlying asset

• Indirect exposure to alternative investments

• Certain types may have built-in downside protections

It’s important to understand that structured product returns follow an “if/then” model. If the underlying asset delivers ABC return, then you reap XYZ rate of return.

That’s what makes structured products both enticing — and risky. You’re essentially banking on the underlying asset meeting or exceeding performance expectations. But structured products allow for flexibility, so you can choose investments that are most aligned with the outcomes you seek.

That can enhance diversification. And if you’re unsure why portfolio diversification matters, it’s simple. A diversified portfolio helps you to balance risk.

On the risk side, it’s important to know that structured products are not liquid investments, as they require you to hold the investment until maturity. That is, investors can’t sell early if they hope to receive the specified returns and protections they signed up for. They’re less widely traded than traditional stocks or bonds and if you need to exist before maturity, you may have to do so at a loss.

Structured products are often highly customized, which adds another wrinkle if you plan to sell. Cost structures can sometimes be difficult to decipher and high fees can detract from your overall rate of return. Gains are taxed at ordinary income tax rates, versus the more favorable long-term capital gains rate.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Who Should Consider Structured Products?

Structured products are more appropriate for some investors than others. If you’re a complete beginner to trading, you may want to familiarize yourself with more traditional investments before looking into structured products.

These investments may be most suitable for investors who:

• Have experience with derivatives

• Are comfortable accepting a higher degree of risk to seek potentially better returns

• Want to diversify with alternative investments, without buying them directly

• Understand the liquidity implications of allocating part of their portfolio to structured products

Note that some structured product finance investments may require you to be an accredited investor. The Securities and Exchange Commission (SEC) defines an accredited investor as someone who:

• Has a net worth >$1 million, excluding their primary residence AND

• Has income over $200,000 (or $300,000 with a spouse or partner) in each of the prior two years, with a reasonable expectation for the same income in the current year

Financial professionals who hold a Series 7, Series 65, or Series 82 securities license may also qualify.

Evaluating and Purchasing Structured Products

If you’re interested in adding structured products to your portfolio, it’s important to do your research. The due diligence process can involve:

• Checking the minimum investment requirements and accredited investor requirements, if applicable

• Researching the product’s underlying assets/investments to understand how it generates returns and what type of performance you might expect.

• Reviewing the fees associated with the structured product

• Understanding the product’s risk profile and how it corresponds to your personal risk tolerance

• Planning your eventual exit from the investment and what consequences may apply if you need or want to exit early

Working with a financial advisor can be helpful if you have questions about how a particular structured product works or where it might fit into your portfolio. A financial professional can look at your entire asset allocation, risk tolerance, and goals to determine how well structured products might work for you.

The Takeaway

While alternative investments may enable you to seek potentially higher returns in your portfolio, it’s important to weigh the benefits against the risks. Structured products can offer exposure to alternatives, with some downside protection added. While SoFi doesn’t offer structured product investments at this time, it does allow you to invest in stocks, ETFs, and more.

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

Are structured products suitable for beginner investors?

Structured products are often complex, which could make them a less suitable choice for beginner investors. You may want to learn the basics of stocks and bonds first before exploring the possibilities of structured products and other alternative investments.

How are structured products taxed?

Gains from structured products are typically taxed at ordinary income rates vs. the long-term capital gains tax rate. That could be a disadvantage if you’re in a higher tax bracket year to year, as the long-term capital gains rate maxes out at 20%.

Can I sell a structured product before maturity?

It’s possible to sell structured products before maturity if you can find a buyer on the secondary market. If you’re unable to find a buyer you may have to sell to the original issuer at a reduced price. You may also be charged fees or penalties to sell before maturity, which can reduce returns.

About the author

Rebecca Lake

Photo credit: iStock/Hiraman

SoFi Invest®

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

SOIN-Q324-056

Mar

2025

What Do Investment Bankers Do?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Investment banking is a specialized area of the financial services industry that focuses on aiding governments, corporations and other entities to raise capital and complete mergers and acquisitions. The term “investment banker” refers to an individual who works for an investment bank that offers these services.

Investment banking is typically considered to be a prestigious career, and becoming an investment banker can be lucrative for those willing to complete the necessary education and training.

What Is an Investment Banker?

Investment bankers work for investment banks, which are effectively middlemen between entities that need capital and entities that provide it. In simpler terms, investment bankers help their clients to expand and grow their businesses or operations.

Another way to think of an investment banker is as a financial advisor to governments, corporations, and other businesses. As part of their professional duties, they may guide clients in making financial decisions that directly or indirectly affect their bottom line.

Investment bankers are most often associated with Wall Street, though they work in cities throughout the world. Some of the largest investment banks in the United States include Goldman Sachs & Co., Morgan Stanley, J.P. Morgan, Bank of America Merrill Lynch, and Blackstone.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Do Investment Bankers Do?

Investment bankers play an important role in helping companies achieve their financial goals. When a corporation is planning an upcoming expansion project, for instance, its board may turn to an investment bank for help. An investment banker can analyze the company’s financial situation to determine the best way to meet its needs.

In terms of the specific tasks an investment banker may carry out, that depends largely on the type of clients they work with.

Assisting With Initial Public Offerings

Investment bankers can play a critical role in helping clients secure capital. Depending on the client, this can be done through a variety of means, including the launch of an initial public offering (IPO).

An initial public offering, or IPO, allows private companies to offer shares of its stock to the public for the first time. The investment banker assists by creating a prospectus explaining the details of the IPO, marketing it to potential investors, and navigating Securities and Exchange Commission (SEC) compliance rules.

Investment bankers are key to whether the company’s IPO is a success. They help determine the initial price of the offering, which is critical. Pricing too high could scare off investors, while going too low could undercut their client’s profits.

Bond Issuance

Government agencies and corporations often use bonds as a fundraising tool. For example, if a city government needs money to improve local roads they might issue a municipal bond to fund the project. Investors purchase the bonds on the bond market, giving the government the capital it needs to complete the road updates. Investors can hold onto the bond and earn interest on it, or they can sell it to another investor.

As with an IPO, an investment banker’s role in issuing bonds may include preparing the bond issuance documents, setting a price, submitting it to the SEC for approval, and marketing the bond to investors to raise capital.

Equity and Debt Financing

Equity and debt financing are two other ways that companies can tap into funding. With equity financing, companies raise capital by selling an ownership share in the business. Venture capital and private equity are common examples of equity financing.

Debt financing involves taking out loans or lines of credit, without giving up ownership stakes. An investment banker can help companies assess which type of financing makes more sense for their business model, and help them work through the process of securing the funding.

For example, investment bankers may work with startups to pitch angel investors, while they might help more established companies compare and select loan options.

Mergers and Acquisitions

Another common task that investment bankers assist companies with is mergers and acquisitions. In a merger, two companies enter into an agreement to become a single business entity. Each company is treated as an equal in the transaction. An acquisition, on the other hand, involves one company purchasing another.

In either type of arrangement, companies may use investment bankers to oversee the process. This could involve negotiating the terms of a merger or acquisition and reporting the details of the transaction to the SEC to ensure compliance. When a company considers an acquisition, investment bankers can also help identify and vet potential targets.

Investing and Asset Management

While investment bankers’ duties primarily revolve around raising capital for their clients, there are other services they may perform. This can include things like:

• Investment research and analysis

• Buying and selling securities

• Offering advisory services

• Asset management

These services are similar to what a personal financial advisor might offer their clients.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Become an Investment Banker

If you’re interested in a career in investment banking, there are a few things to know. In terms of education, a bachelor’s degree is typically a minimum requirement for most investment banker jobs. Though some investment banks may look for candidates that have earned a higher degree of education, such as an MBA or a graduate-level degree in finance.

Aside from education, there are certain skills that may help you be successful as an investment banker. Those include:

• Ability to perform under pressure

• Good communication skills

• Solid marketing skills

• Firm grasp of financial markets and modeling

• Strong attention to detail

Depending on your responsibilities, you may also need a securities license. That may include completing one of more of the following licensing exams:

• Series 7 General Securities Representative Qualification Examination (GS)

• Series 79 Investment Banking Representatives Exam

• Series 63 Uniform Securities Agent State Law Exam

Before you can take these exams, you first have to be employed and sponsored by a FINRA-member firm or other self-regulatory organization member.

Taking and passing the Securities Industries Essentials (SIE) Exam could help improve your chances of being hired as an intern or junior employee. That process begins early, with many banks hiring summer interns more than a year ahead of the start of the program.

How Much Do Investment Bankers Make?

Investment bankers generally earn above-average salaries. Even at the entry level, it’s possible to make $100,000 or more, and salaries for top Wall Street bankers can easily range into the millions or tens of millions. But investment banking is one of the hardest jobs on Wall Street. So, if you’re not prepared to routinely work 100-hour weeks or constantly be on-call for your clients, it may not be the job for you.

The Takeaway

Investment bankers work primarily with institutional investors, governments and corporations rather than individual investors. But you can still benefit from the work investment bankers do behind the scenes indirectly.

Investment bankers may work in a variety of roles, such as helping facilitate IPOs, or mergers and acquisitions. It can be a lucrative career path, too, but generally requires a graduate-level education, and additional licensing.

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.

About the author

Rebecca Lake

Photo credit: iStock/fizkes

SoFi Invest®

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

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Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

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FAQ

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How are structured products taxed?

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What Do Investment Bankers Do?

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