Jun
13
2023
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What Are Leveraged ETFs?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Leveraged ETFs?

Leveraged exchange-traded funds (ETFs) are tradable funds that allow investors to make magnified bets on an underlying index. Leveraged ETFs have been popular among investors looking to amplify their exposure to a market with a single trade. But they have their risks, like all investments.

Because of how they augment price swings, leveraged ETFs can cause massive losses. And for reasons related to their inner mechanics, they’re not good at delivering sizable returns when held for an extended time. That means investors may not see the returns they expect.

How Do Leveraged ETFs Work?

Exchange-traded funds, or ETFs, are securities, but themselves are a form of index investing. They’re typically baskets of stocks, bonds or other assets that aim to mirror the moves of an index, though ETFs can have many different aims or goals. Leveraged ETFs use derivatives so that investors can double (2x), triple (3x) or short (-1) the daily gains or losses of the index. Financial derivatives are contracts whose prices are reliant on an underlying asset.

In finance, leverage is the practice of using borrowed money to increase the potential return on an investment. Leveraged ETFs use derivatives to increase the potential return on an investment.

Let’s look at a hypothetical example. Say an investor buys a regular, non-leveraged ETF. Here’s how such an ETF would work. If it tracks the S&P 500 Index and the benchmark gauge rises 1% on a given day, the non-leveraged ETF would also climb about 1%.

If, however, the investor buys a triple leveraged ETF or 3x ETF, their return for that given trading day could be a 3% gain. The reverse scenario could also happen, though. If the S&P 500 fell 1% on a given day, the owner of the triple leveraged ETF can suffer a 3% loss.


💡 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 Is ‘Decay’ in Leveraged ETFs?

There are pros and cons to ETFs themselves. But leveraged ETFs can be particularly problematic for investors due to their design. They are constructed to deliver multiples of an underlying asset’s daily returns, not weekly, monthly or annual returns. Leveraged ETFs don’t deliver the exact magnitude of 2x or 3x if held for longer than a day.

So, if the S&P 500 were to rise 5% in a week, a triple leveraged S&P 500 would not climb 15% in that week. The same would be true for a double leveraged ETF. There’s no guarantee it would return 2x or 10% to its owner.

That’s because of how leveraged ETFs are constructed. In order to maintain their 2x or 3x exposure, leveraged ETFs use derivatives that need to be rebalanced at the end of each day. This process can erode the returns of the ETFs — a process known as “decay” in the market.

Types of Leveraged ETFs

1.    Double Leveraged (2x) ETFs give investors double exposure to the daily return of an index of stocks, bonds, or commodities. So if an asset or market moves 1.5% in a single day, the fund aims to deliver a return of 3% that day.

2.    Triple Leveraged (3x) ETFs try to provide investors with 3x amplification. So if the underlying asset or index rises or falls 2% on a trading day, the ETF seeks to rise or fall 6%.

3.    Inverse (-1) ETFs are also considered to be leveraged ETFs. They move in the opposite direction of the underlying asset they’re designed to follow. So if an index moves -1%, the ETF would aim to climb 1%, and vice versa. Inverse ETFs are essentially a form of shorting a stock. Investors are able to short the underlying market by buying shares of an inverse ETF.

Pros of Leveraged ETFs

Easy Leveraged Trades

Leveraged ETFs have made it easier for investors to make leveraged wagers on the market, which can be a day-trading strategy but not a practice that’s readily available to all investors, particularly retail investors at home who may be trading in smaller increments.

Useful For Quick Leveraged Market Wagers

Leveraged ETFs can be useful for a one-day wager that an investor wants to make on an underlying market, such as technology stocks, high-yield bonds, or emerging markets.

Allow For Easy Shorting

Inverse ETFs can give investors the ability to short, or bet against, an asset. Short sales aren’t easily available to non-professional investors, particularly retail investors at home. Shorting can be a way for investors to hedge or offset the risk in their holdings.

Cons of Leveraged ETFs

Potential For Outsized Losses

With leveraged ETFs, investors could potentially see outsized losses due to how the products compound returns. For instance, if an index were to tumble 3% in a single day, a holder of leveraged ETFs would experience a plunge of 9% in the shares of their fund.

Rebalancing Needs

Because of how they’re constructed, leveraged ETFs need to be rebalanced daily. This process can cause what’s known as “decay” in the fund, when the performance veers from the underlying asset’s returns. This means investors may not see the 2x or 3x returns if the leveraged ETF is held for longer than a single trading session.

Increased Investment Risk

Inverse ETFs allow investors to short assets, but because of how there’s no limit to how high an asset can go, that means investors could see their holdings in the inverse ETF go to zero.

Derivative Risks

Leveraged ETFs use derivatives to achieve their amplified returns. Therefore, investors should be aware of the counterparty risk — or the risk from the other parties involved in the derivatives.

Higher Costs

Leveraged ETFs tend to be more expensive than traditional ETFs. Investors who want to understand how fund fees work should look at the ETF’s expense ratio. For instance, some popular leveraged ETFs can have an expense ratio of 0.95%. That compares with more traditional ETFs, which can have an expense ratio of around 0.20%.

Closure Risks

There’s a high risk of closure. Investors who don’t sell out of their leveraged ETF shares before the delisting date could be left with positions that are difficult or costly to liquidate.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Regulation of Leveraged ETFs

Regulators’ rules on leveraged ETFs have varied in recent years. And they continue to change. In early 2023, the Securities and Exchange Commission (SEC) issued a bulletin about leveraged ETFs, warning investors about the particular risks associated with them.

In October 2020, the SEC made a rule change that would make it easier to launch leveraged ETFs, while capping the amount of leverage at 200%. The move was a break away from prior announcements that sought to slow down the creation of new leveraged ETFs. The SEC had previously allowed existing leveraged ETFs to be continued to be traded, while putting restrictions on the approval of new such funds. The SEC issued an alert about leveraged funds to retail investors in 2009.

In May 2017, the SEC approved the first quadruple (4x) leveraged ETF, only to halt its decision soon after.

Some investment firms and ETF providers have pushed for the term “ETF” to not be applied to leveraged and inverse funds. They argue that the term “ETF” is used for a range of products that can lead to significantly different outcomes for investors.

The Takeaway

Leveraged ETFs use derivatives in their construction to try to deliver amplified returns for an investor. Relative to index funds, ETFs can allow entire markets to be more easily traded, similar to how shares of a stock are traded. Leveraged ETFs are not safe for all investors, particularly inexperienced ones.

These ETFs can cause massive losses because of how they magnify returns. In addition, market observers and regulators have said that leveraged ETFs may be better suited for professional or experienced investors to be used within a single trading session. The use of derivatives in such funds causes their performance to veer from the underlying market if the ETFs are bought and held. As always, it’s important to do your research about any ETF or investment before investing.

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.

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.

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.

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.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jun
13
2023
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Understanding the Permanent Portfolio Strategy

By | Growing Wealth, invest, Investing | Comments Off on Understanding the Permanent Portfolio Strategy

The permanent portfolio investment strategy involves creating an investment portfolio that is equally diversified among four asset classes. It was introduced by investment advisor Harry Browne in his 1981 book, “Inflation-Proofing Your Investments.” The goal of the permanent portfolio is for it to perform well during both economic booms and recessions.

It aims to provide both growth and low volatility. Historically the strategy has been successful. But engaging in the strategy requires a bit of legwork, like learning how to build the portfolio, and considering the pros and cons of the strategy.

What Is the Permanent Portfolio?

The permanent portfolio is diversified equally with precious metals, Treasury bills, government bonds, and growth stocks. The allocation is as follows:

•   25% U.S. Stocks

•   25% Treasury Bills

•   25% Long-Term Treasury Bonds

•   25% Gold

Although these investments can be volatile and incur losses, their values are not strongly correlated, so by holding some of each, investors may be able to prevent significant losses. The idea is that at least one asset in the portfolio is always working. Each asset class performs well in different conditions:

•   Stocks tend to perform well during times of economic prosperity and are good for growth.

•   Gold tends to protect from currency devaluations, perform well during inflation, and do fine during growth periods.

•   Bonds are a safe investment that perform well during deflationary times and do fine during growth periods.

•   Cash protects from losses during recessions and deflationary times, and is liquid.

Gold and bonds are generally safe havens during a recession and inflationary times, while the stock market provides growth during economic booms. Cash is stable and creates a source of funding for rebalancing and downturns.

Another way of looking at it is by categorizing the four asset classes into four economic conditions:

•   Prosperity: Stocks perform well during prosperous times, as public sentiment is positively correlated to stock market increases.

•   Inflation: Gold investments perform well during inflationary times because the purchasing power of the dollar decreases, so people flock to gold as a safe haven.

•   Deflation: When the price of goods and services decreases, deflation occurs. Long-term bonds perform well in this environment because interest rates decrease, which increases the value of older bonds.

•   Recession: Cash is good to hold during a recession while other assets are at a low. Investors can buy up assets while they’re down and still have some money on hand if they need it.

Rather than trying to time the market and moving funds around accordingly, the permanent portfolio is a simple set-it-and-forget-it strategy for long-term investing.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Historical Performance

The permanent portfolio has historically performed as it’s designed to. It grows steadily over time and doesn’t experience significant losses during market downturns. For example, during the 1987 market crash, utilizing the permanent portfolio would have only incurred losses of 4.5%, while a 60/40 portfolio would have dropped 13.4%.

In general, the permanent portfolio has a somewhat lower return than a 60/40 portfolio, but it carries less risk and volatility.

The permanent portfolio had an average annual return of 8.69% between 1978 and 2017, while the 60/40 portfolio earned 10.26%, and the 100% U.S. stock portfolio earned 11.50%. Within that time frame, the permanent portfolio outperformed the other two several times within five-year periods.

Pros of the Permanent Portfolio

There are several upsides to building a permanent portfolio:

•   Simple, set-it-and-forget-it strategy. Once it’s set up, investors only need to rebalance their portfolio about once a year.

•   Avoiding significant losses through diversification while gaining returns over time. The portfolio is designed to minimize volatility but still increase in value over the long term.

•   Although assets such as stocks can grow significantly, they can also have significant downturns. The permanent portfolio grows more slowly over time while avoiding those losses.

Cons of the Permanent Portfolio

Like any investment strategy, the permanent portfolio does come with some downsides:

•   Stocks tend to grow more over time than the other assets included in the portfolio, so investors miss out on some of that growth by only having a 25% stock allocation.

•   The permanent portfolio includes only U.S. stocks, so investors miss out on exposure to emerging markets and international stocks. When Browne developed the permanent portfolio, international stocks were not a popular investment, so he would not have included them in his allocation.

•   Another potential con is that the permanent portfolio only includes Treasury bonds. Other types of bonds can also be good choices for diversification.

•   Although cash is a fairly safe asset to hold during a depression, that type of downturn doesn’t happen often. By holding such a large amount of cash, investors miss out on growth opportunities.

•   Overall, the permanent portfolio is fairly conservative, so investors could see higher returns using another strategy. Allocating more to stocks and alternative investments is likely to provide greater growth, but will carry greater risk.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Building a Permanent Portfolio

Although the permanent portfolio strategy outlines the percentage of funds to allocate to different asset classes, investors still need to select specific assets to invest in. For example, investors might choose individual stocks for their portfolio, or they might invest in ETFs that include solely U.S. stocks or bonds. The upside of ETFs is they are easy to buy and sell, they minimize fees, and they provide diversification.

Managing a permanent portfolio is fairly simple once it’s set up. It’s a good idea to rebalance the portfolio at least once a year to ensure that the 25% allocations remain the same. If one area of the portfolio has grown or declined, investors can rebalance to even them out.

The Variable Portfolio

Some investors may decide that the permanent portfolio is too safe for them and they’d prefer a strategy conducive to higher growth. Using the variable portfolio method, investors put 5% to 10% of their money into riskier or more experimental investments. That way, the majority of holdings are still in the steady growth permanent portfolio, but investors can play around with some alternative investments as well.

Alternatives to the Permanent Portfolio

Although the permanent portfolio has its merits and has performed well historically, it isn’t the right choice for everyone. Some investors might want to allocate more of their portfolio to stocks, while others might want to diversify into more types of assets. There are many investing strategies out there to choose from, or investors can create their own.

Just because a particular strategy has performed well in the past doesn’t mean it will continue to do so in the future. It’s important for investors to do their own research and due diligence to decide what works best for their own goals and risk tolerance.

Below are some of the most popular strategies:

60/40

The 60/40 strategy is popular, especially among retirees, because it has performed well over the past century.

It involves creating a portfolio with 60% stocks and 40% bonds. Similar to the permanent portfolio, the 60/40 gives investors exposure to the growth of the stock market while reducing risk and volatility with the inclusion of bonds.

The benefit of the 60/40 strategy compared to the permanent portfolio is that it has a large stock allocation, but some still consider the 40% bond allocation too high. There has also been discussion in recent years about whether the 60/40 portfolio will continue to be a successful strategy in the coming decades.

There are downsides, too, which include the fact that a 60/40 portfolio will likely not provide the same returns as one more invested in stocks. Depending on your specific investing goals, that’s something to keep in mind. It’s also possible that stock and bond values could decline at the same time, leading to a fall in the overall value of the portfolio.

Business Cycle Investing

Those looking for an intermediate-term strategy might want to use the business cycle investing strategy for some or all of their portfolio. Using this strategy, investors keep track of the business cycle and adjust their investments according to which stage of the cycle the nation is in.

Different industries and types of assets do better within each stage of the cycle, so investors can make predictions about when to buy and sell each asset and invest accordingly. To execute this strategy effectively, it is a good idea to have an understanding of past market contractions and their catalysts. This strategy requires more time, research, and effort than long-term, set-it-and-forget-it strategies, but can be successful for those willing to put in the work.

It could be unsuccessful if investors aren’t able to stay on top of the news and happenings related to the business cycle, and are able to readjust their holdings and allocations accordingly. It requires a more active approach, in other words, which may not be suited for each individual investor.

Rule of 110

Investors subtract their age from 110 to figure out what percentage of their money to allocate to stocks and bonds. For example, a 40-year-old would create a portfolio of 70% stocks and 30% bonds. As the investor gets older, they rebalance their portfolio accordingly.

Dollar-Cost Averaging

Here, investors put the same amount of money toward any particular asset at different points in time. Rather than putting all of their money into the markets at once, they space it out over time. Utilizing the dollar-cost averaging strategy allows investors to average out the amount they pay for that asset over time. Sometimes they buy low and sometimes they buy high, but they aren’t attempting to time the market or predict what will happen.

Lump Sum Investing

With the most basic strategy of all, investors put all of their available cash into the stock market right away. There’s no waiting for a particular time or trying to figure out what else to invest in. The theory behind this is that the overall trend line of the stock market continues to go up over the long term, even if it has downturns along the way. This might be a choice for investors who simply want to take advantage of stock market growth and aren’t afraid of volatility.

Alternative Investments

In addition to stocks and bonds, investors may want to consider diversifying into alternative investments, which could include real estate, franchises, or farmland. While some alternative investments carry a lot of risk and require research, they can also come with significant growth. Conversely, alternative investments tend to be very risky and speculative, and could see significant losses as well. The risks associated with alternative investments are something all investors should consider.

The Takeaway

The permanent portfolio involves equally allocating your investments to four specific asset classes. Those classes include precious metals, Treasury bills, government bonds, and growth stocks. While this method has proven beneficial for some investors in the past, it has its potential downsides, and won’t be the right strategy for everyone.

Once you’ve decided what your investing strategy is going to be and created some personal financial goals, you’re ready to start building your portfolio.

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.

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.
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 $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jun
13
2023
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How Does Magic Formula Investing Work?

By | Growing Wealth, Investing, Terminology | Comments Off on How Does Magic Formula Investing Work?

Magic formula investing is a rules-based investing strategy developed by hedge fund manager and professor Joel Greenblatt. First outlined in his book, “The Little Book That Beats the Market,” the magic formula investing strategy takes a simplified approach to choosing investments that virtually any investor can apply.

It draws on principles of value investing to create portfolios with the potential to outperform the market. For interested investors, knowing the ins and outs of the strategy before applying it is important.

What Is Magic Formula Investing?

At its core, Greenblatt’s magic investing formula focuses on finding good companies to invest in that are trading at attractive prices. Specifically, this strategy focuses on two things: Stock price, and the cost of capital.

The magic formula helps investors find or pinpoint companies that they deem undervalued by the market, and that are likely to offer a high return on their invested capital. It shares some similarities with value investing, which emphasizes finding the “hidden gems” that trade below their intrinsic value.

Value investors often follow a buy-and-hold strategy, in which securities are purchased with the intent to hold them long-term. The idea is that even though the market may have undervalued a company, it could grow in value over time and result in higher returns once an investor decides to sell.

This strategy utilizes fundamental analysis, which involves looking at things like revenue and earnings, and calculating return on equity to measure a company’s financial health.

The difference between a buy and hold strategy and magic formula investing is that fundamental analysis doesn’t come into play. Instead, the formula relies on Greenblatt’s stock-screening method to identify the most promising stocks to invest in.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

What Is the Magic Investing Formula?

Screening stocks using the magic formula method is based on a rankings system. As developed by Greenblatt, this system uses three distinct criteria to rank companies: earnings before interest and taxes (EBIT), earnings per share, and return on capital.

Earnings Before Interest and Taxes (EBIT)

This is one way to measure a company’s profitability. This figure represents the net income of a company before income tax expense and interest expenses are deducted. To calculate a company’s EBIT, you’d subtract income tax expense and interest expenses from its revenue.

Earnings Per Share (EPS)

EPS is another measure of profitability, though it’s calculated differently than EBIT. With EPS, you divide a company’s net profit by the total number of common shares of stock it has outstanding. This is also a way to measure a company’s value, since EPS can tell you roughly how much money it makes per share of stock. A higher EPS may suggest higher value and a willingness for investors to pay more for shares of a company’s stock.

Return on Capital

Return on capital measures how well a company is able to allocate its capital to investments that are profitable. To figure out this number, you’d subtract dividends from net income, then divide that by the sum total of the company’s debt and equity.

By applying EBIT, EPS, and return on capital, the magic formula method is intended to determine the best quality companies at the best price.

How Magic Formula Investing Works

For investors interested in using the magic investing formula to build a portfolio, there’s a specific sequence of steps to follow that Greenblatt outlines.

1. Set a Market Capitalization Threshold

Market capitalization (commonly known as market cap) represents the current number of shares of stock a company has outstanding multiplied by the price per share. Companies can be categorized as small-cap, mid-cap or large-cap, based on their market capitalization.

For magic formula investing, an investor will typically start by excluding any companies with a market capitalization below $100 million. But one could set this number higher or lower, depending on personal preferences. Greenblatt advocates setting the threshold at $1 billion (which means large-cap) to minimize volatility.

2. Exclude Certain Securities

In magic formula investing, an investor next needs to eliminate several categories of investments. Those include stocks in the financials and utilities sectors, as well as foreign companies and American Depositary Receipts (ADRs). An ADR offers a way to indirectly own foreign companies that aren’t traded on U.S. stock exchanges.

3. Make the Necessary Calculations

Once an investor has narrowed down their list of companies, they can start running the numbers. Specifically, this means calculating:

•   Earnings before interest and taxes (EBIT)

•   Earnings yield (EBIT divided by enterprise value, which is a company’s total value as measured by its market capitalization plus total debt minus its cash assets)

•   Return on capital (EBIT divided by the sum total of net fixed assets and working capital)

4. Create Your Rankings

After doing the above math, an investor can move on to ranking companies according to the magic formula — from highest earnings yield and highest return on capital to lowest. From this point on, one would focus on the top 20 to 30 companies when choosing how to invest.

5. Start Building Your Portfolio

Greenblatt suggests buying the stocks that rank in that top 20-30 list on a rolling basis. For instance, an investor would buy two to three positions per month for one year, eventually owning 24 to 36 of the top ranking companies. According to Greenblatt’s formula, owning at least 20 different companies will help to maintain diversification.

At the end of the 12-month period, the magic formula dictates that investors would sell off the losing stocks and the winners, being mindful of capital gains taxes rules. Then they’d start the cycle over again, using the magic formula rules to select a new crop of stocks to invest in.

Holding stocks for a year before selling at a gain or loss is intended to help maximize your after-tax returns. When you sell stocks at a profit that you’ve held longer than one year you’d be subject to the more favorable long-term capital gains tax rate.


💡 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.

Magic Formula Investing Results

Any time one is considering an investment strategy, it’s important to look at how well it works when it comes to generating returns. Greenblatt’s approach is intended to help investors choose companies whose performance can potentially beat the market. And according to him, it has helped generate a 30% annual rate of return for investors who use the strategy, which is well above the typical return generated by the S&P 500.

There’s no guarantee that investors will see a positive return utilizing the strategy for any given year, however.

Whether investors can replicate those magic formula investing results for themselves can depend on different variables. For example, an individual portfolio may produce a very different return profile if an investor adjusts the market capitalization threshold up or down. Or if a company has an above-average year for revenue and profits, that could affect how the ranking calculations shake out.

Pros and Cons of Magic Formula Investing

The main idea behind the magic formula method is that it’s a simple enough strategy for even beginner investors to use. The idea is that by following the formula, an investor can eliminate some of the noise when making investment decisions.

That includes not giving in to investment biases that could prompt an investor to buy or sell at the wrong time. By focusing on the rankings and sticking with a one-year rolling schedule of buying and then selling, an investor can potentially remove their emotions from the equation. This can help avoid selling off stocks in a panic if the market becomes more volatile.

Downsides of Magic Formula Investing

While this formula can help an investor create a diversified portfolio, it’s still exclusionary in that it doesn’t include investing in foreign companies or companies in the financials and utilities sectors.

Beyond that, there’s no certainty that an investor will see positive magic formula investing results in the form of above-average returns — as noted. Greenblatt himself says that there’s nothing “magical” about the formula and that it shouldn’t be considered a guarantee of investment returns or performance. As with any investing strategy, it isn’t foolproof.

Finally, the magic formula investing strategy is meant to be a long-term one. For investors more interested in seeing quick results versus adopting a buy and hold mindset, day trading might be more appropriate.

The Takeaway

Hedge fund manager and professor Joel Greenblatt devised his magic formula investing strategy as a way to invest in a curated group of good companies with high potential for returns. The system ranks companies according to three criteria: earnings before interest and taxes (EBIT), earnings per share, and return on capital. The system is simple enough that it’s intended for anyone from first-time investors to more seasoned investors.

But as with any investment strategy, there is no guarantee that the magic formula investing results will be positive every time. There is a potential for both gains and losses.

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.

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.

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.


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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Paying off $50,000 in Credit Card Debt

Paying off $50,000 in Credit Card Debt

By | Debt Payoff, Financial Independence, personal_loan | Comments Off on Paying off $50,000 in Credit Card Debt

Not all debt is bad. In fact, taking out loans and using credit cards responsibly is how most people build credit to access low-interest loans in the future. However, a problem arises if budgeting is poorly managed or finances become tight.

In either case, it’s easy to slide further and further into debt with no clear path to financial freedom. Before you know it, you may end up with $50,000 in credit card debt, which can feel insurmountable. But instead of throwing up your hands, here are some tips for how to pay off $50,000 in credit card debt and get your finances back on track.

Tips for Paying Off $50,000 in Credit Card Debt

Unsure of how to pay down $50,000 in credit card debt? Here are some paths forward you may consider, depending on your financial situation and preferences.

1. Pay More Than the Minimum

If you only pay the minimum balance on your card each month, it will take you much longer to pay off the debt. That’s because you will continue to pay a high interest rate. If you can pay off more than the minimum and start chipping away at the principal loan amount, you’ll pay less in interest over time, and the debt will disappear faster.

2. Focus on High-Interest Debt First

High-interest debt is the most expensive, so you’ll save money if you can get rid of it sooner. Check your credit cards to see which one has the highest annual percentage rate (APR), and then pay that one off first. Then, use the amount you save once that card is paid off to work on paying down the card with the next-highest APR.

3. Pay Off the Card With the Lowest Balance First

A different approach to paying down credit card debt is to initially focus on the card with the lowest balance. This is known as the snowball method, and it can help you stay motivated to pay down debt when you see each card’s balance getting paid off one by one.

4. Review Your Expenses

You might be able to free up cash to put toward paying off your credit card debt by taking a close look at how you spend your money and perhaps creating a budget that’s a bit stricter.

A good place to start when looking for areas to cut back are monthly subscriptions that you’re not using or don’t need, such as streaming services or audiobooks. You might also consider whether you can change your lifestyle. Look for ways to reduce your expenses — perhaps you can eat out less, buy cheaper groceries, or downsize your home.

5. Use Extra Cash to Pay Down Your Debt

If you’re lucky enough to receive a bonus at work or an unexpected windfall, use it to pay down your debt rather than adding it to your spending pool. Also think about whether you could take on some gig work, which would allow you to increase your income temporarily while you focus on paying down some of your debt.

Debt Management Program

Another option you might explore to get a handle on $50,000 of credit card debt is a debt management program (DMP). Credit counseling agencies offer DMPs to help people better manage their finances through education and counseling.

These agencies are non-profit organizations that assign counselors to individuals who need help. The counselors provide advice and guidance, and negotiate with the client’s creditors to develop reduced payment plans. Creditors are eager to get paid back, so they’re usually amenable to lowering interest rates and waiving fees for clients who work with a DMP and show they’re serious about repaying their debt.

If you choose to work with a DMP, you’ll usually make a single monthly payment, which then gets distributed to your creditors. The DMP will lower the amount of interest you’re paying overall and remove late fees, which means more of your money goes toward paying down your principal. This translates to your debt getting paid off quicker.

There’s usually a fee for a credit counselor’s services, and you will be required to close all of the accounts under the DMP so that you don’t continue to rack up debt. Still, a DMP can help relieve financial stress since you’re taking concrete steps to improve your financial situation.

Credit Card Debt Forgiveness

Credit card forgiveness occurs when a creditor forgives you of debt. While this might sound like a surefire path to financial freedom, this is rare for credit card companies, and it usually comes at a cost. Instead, what credit card companies might do is agree to negotiate a settlement whereby you pay a portion of the amount you owe with penalties. If you’re three or more months behind and unable to catch up with payments, it’s possible to negotiate a settlement with a credit card provider.

That being said, a creditor is more likely to offer forgiveness right before selling your debt to a collector because they’ll have to sell the debt for less than the full amount you owe and lose money. Negotiating a settlement with you instead may minimize their losses. It’s even easier to pursue debt forgiveness from a debt collector because collectors can profit even if you only pay some of the amount you owe.

Note that forgiven debt is considered income by the IRS, so you will owe taxes on the forgiven amount.

Additional Options for Paying Off Debt

Other options for paying off $50,000 in credit card debt include taking out a debt consolidation loan, which is a common type of personal loan, or turning to a home equity loan or a balance transfer credit card.

Home Equity Loan

If you have equity in your home, a home equity loan might offer a lower interest rate than your credit card and provide cash to pay off some of that higher-interest debt.

However, you will have to factor closing costs into the equation. Also know that you’re putting your home at risk if you can’t stay on top of monthly payments.

Personal Loan

Among the many common uses for personal loans is debt management and consolidation. If approved, you can use the funds you receive from a personal loan to pay off your credit cards. This will consolidate your debt, leaving you with just one payment to worry about each month.

Ideally, you’ll be able to secure a lower interest rate as well, which can offer savings. A personal loan calculator can help you determine if lowering your interest rate and monthly payments with a personal loan could help you save on total interest.

Recommended: Get Your Personal Loan Approved

Balance Transfer

With a balance transfer, you move your existing credit card debts to another card, ideally one that offers a lower interest rate. Some balance transfer credit cards even offer a temporary introductory APR that’s as low as 0%, though you’ll generally need solid credit to qualify for the most competitive offers.

Just note that a balance transfer fee will apply, so you’ll need to factor that into your overall costs. Also make sure that you’ll be able to pay off your balance in full before the introductory APR ends — otherwise, the interest rate could rise dramatically.

The Takeaway

Figuring out how to pay off $50,000 in credit card debt can seem overwhelming. Luckily, there are a number of options at your disposal. You might try a debt payoff method like the debt snowball or the debt avalanche, or you might look for ways to cut back or bring in extra money to put toward debt payments. Seeking help through a DMP is another option if you’re struggling to get your financial life back in order.

Another possibility is consolidating your debt by taking out a personal loan. Loan amounts range from $5,000 to $100,000, and it’s possible to get funds the same day you sign – or you could have SoFi pay off your credit card directly.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Should I sign up for a debt management program?

Consider signing up for a debt management program if you feel overwhelmed by your debt. A credit counselor can consolidate your debts into one payment and simplify the debt repayment process, as well as offer general advice and guidance.

Should I seek credit card forgiveness?

Credit card forgiveness is rare to receive. However, you might be able to negotiate with your creditor to reduce the amount you owe, which can help relieve some of your debt burden.

How long will it take to pay off $50k in credit card debt?

How long it will take you to pay off $50,000 in credit card debt depends on the APR and the amount of your monthly payment. For example, assuming you’re not continuing to add to your debt, if you have an APR of 19.07% and make monthly payments of $2,000, it will take you 33 months to pay off your debt. If you were only paying $1,000 a month at that APR, it would take you 101 months.

Photo credit: iStock/milan2099

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 Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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What Is a Straddle in Options Trading?

By | invest, Investing, Terminology | Comments Off on What Is a Straddle in Options Trading?

A straddle is an options trade with which investors can profit regardless of which direction an asset moves. Because of this, a straddle is considered a “neutral options strategy.”

Long straddles are used when an investor expects greater volatility in an underlying asset. They involve buying a call option and put option simultaneously. Short straddles are used when an investor expects little movement in an asset. They involve selling a call and a put at the same time. It’s important to keep in mind that straddles are a complex options strategy that aren’t suitable for most investors.

Understanding Puts and Calls

A call option gives investors the right, but not the obligation, to buy an asset. A put option versus a call gives the right to sell. A seller of a call is obligated to deliver the underlying asset if the buyer exercises the contract. Meanwhile, a seller of a put is obligated to buy the underlying asset if the contract is exercised.

Long straddles are popular when investors anticipate an event will significantly move a stock’s price, such as after a company’s earnings or big product announcement. On the flip side, short straddles are common when investors think volatility expectations are too high, meaning that share prices will move sideways or only change slightly.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

How to Put on a Straddle Trade

In options trading, an investor can put on a straddle in two ways: 1) They can buy a call option and put option. Both contracts need to have the same strike price and expiration date. Or 2) They can sell a call and put option that both have the same strike price and expiration date.

In options terminology, the strike price is the level at which the options contract can be exercised. For instance, say a stock is trading at $10 a share and a call option on it has a strike price of $12. If the stock reaches $12, the investor has the right, but not the obligation, to exercise the option.

An option’s expiration date is the date by which the call or put must be exercised. So an investor has until the expiry to exercise the option by buying or selling the underlying asset. After that date, the options become worthless. Another important term for options investors is the premium. This is the value or cost of the option itself.

Examples of Straddles

The two types of straddles discussed here are the long straddle and the short straddle. These are just two of many different options trading strategies.

In a long straddle, the move in the underlying asset needs to exceed the cost of the two premiums — one for the call, one for the put — in order for the investor to break even on the trade. The cost of the two premiums is the maximum amount of money the investor can lose. In a short straddle, the cost of the two premiums is the maximum amount the investor can earn from the trade.

Long Straddle Example

Let’s say an investor believes Company A will either soar or plummet after releasing its quarterly earnings call. Company A’s shares currently trade in the market at $50 each.

In order to put on a long straddle, the investor pays $2 for a call contract and $2 for a put contract for a total cost of $4. Both contracts have a strike price at $50. The total cost for the investor will be $400, since each options contract equals 100 shares of stock.

So in order for the investor to break even on the trade, the stock will have to either rise above $54 a share or fall below $46. That’s because $50 plus $4 is $54, while $50 minus $4 is $46. Here is the formula to calculate the breakeven levels in long straddles:

Upper breakeven level = Strike price + Total cost of options premiums

Lower breakeven level = Strike price – Total cost of options premiums

Short Straddle Example

In a short straddle trade, the investor sells a call and put that have the same strike price and expiration. An investor might do this when they believe the market’s expectations for volatility in a stock are too high.

Say for instance, the implied volatility for Company B has climbed substantially. Implied volatility is the market’s expectations for volatility in an asset. In other words, the market believes Company B will see a big stock move after making a product announcement.

However, one investor thinks these expectations are inflated. If the stock’s move after the announcement is actually muted, the value of both the calls and puts would drop quickly. Meanwhile, the short-straddle investor has benefited by having collected the premiums from selling the options.

However, the potential investment risks of a short straddle trade are high, because the underlying asset’s potential to climb higher is unlimited and an investor may have to pay the market price to cover the short call.

Pros & Cons of Straddles

Pros of Straddles

1.    Market neutral: Investors can benefit from an options trade even if they’re uncertain which direction the underlying asset will move.

2.    Premiums costs: With long straddles, the cost of premiums could be relatively low. Say for instance an investor finds a stock that they believe will see high volatility. Meanwhile, the cost of the calls and puts are not yet too expensive. The investor can potentially make a profit from this long straddle trade.

3.    Volatility bet: With long straddles, investors can make money when an asset’s stock volatility is high.

Cons of Straddles

1.    Pricey premiums: It can be tricky to get market timing right. When implied or expected volatility for an asset is high, the price of options premiums can also rise. This means investors looking to put on a long straddle trade can encounter costlier premiums. Plus, with long straddles, investors have to pay the cost of two premiums.

2.    Time decay: Options lose value as they get closer to their expiration date — a concept known as theta or time decay in the derivatives market. Time decay may become a concern if market volatility is low for a while and an investor is trying to exercise a long straddle position.

3.    Potential losses: In a short straddle, the potential loss is unlimited while the potential upside is limited.



💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

Straddles vs Strangles

In contrast to a straddle, a long strangle involves buying both calls and puts but with different strike prices.

Strangles are more common when investors believe a stock is more likely to move in one direction, but still want to hold some protection in case the opposite scenario occurs.

The advantage of a strangle is that the costs of putting them on are typically lower than straddles.

The Takeaway

An options straddle is essentially a two-trade bundle that’s designed to allow investors to wager whether there will be a major move in an asset’s price or not.

In a long straddle, investors have the potential to capture a significant profit while having paid only a relatively low cost for the options premiums. However, If the stock trades sideways or doesn’t post a big move, the investor will lose the money they invested in the premiums. In a short straddle, the opposite is true. If the underlying asset doesn’t post a big move, the investor can make money.

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®.


With SoFi, user-friendly options trading is finally here.

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.
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