Mar
03
2020

How a Parent Plus Loan Can Lower the Cost of College

By | Budgeting & Goals, Family Finances, Life & Career, Student Loans, student_loan | No Comments

When children first learn to walk, their parents usually hold their hand until they get the hang of it.

When children learn to ride a bike, their parents often run alongside them holding on until they get control.

In the same way, when children go off to college, parents typically want to help with the costs. College is expensive, after all, and they don’t want their kids to be buried in student debt before they ever really get on their own two feet.

So many parents offer all the support they can—even if they have to borrow the money. Which is why the government created Parent PLUS Loans—federal student loans that are extended directly to biological or adoptive parents (and, in some cases, stepparents) of undergraduate students.

The loans, which allow parents to borrow up to the cost of attendance at their student’s school, minus any other forms of financial aid received by the student, are relatively easy to get. They do require a credit check, but many private lenders have stricter eligibility criteria.

Direct PLUS Loans for parents, commonly called Parent PLUS Loans, are popular. According to the National Student Loan Data System, as of the second quarter of 2019, at least 3.5 million borrowers currently owe a collective $93.9 billion in Parent PLUS Loans.

Unfortunately, that’s becoming a problem. The Brookings Institute reported at the end of 2018 (the most recent report from them on the topic) that repayment outcomes for parent borrowers appear to be getting worse as balances continue to increase.

“Many parents supporting college students are saddled with large debt burdens,” the report states, “ultimately repaying just enough to avoid default and sometimes owing significantly more than their initial balance.”

Well-intentioned borrowing can end up backfiring on parents, who could be making loan payments for years or even decades, depending on the student loan repayment plan they choose.

That might not seem like a big deal when the loan is new—especially if the parents are nowhere near retirement age. But as the payments drag on, long after those children are settled and doing fine—perhaps with families of their own—it might make sense to rethink the debt and how it should be repaid.

For some parents, that could mean refinancing the student loans with a private lender, with the goal of getting lower monthly payment or a lower interest rate.

Some private lenders, like SoFi, allow the child to take out a refinanced loan to pay off the Parent PLUS loan. Or parents could set up an arrangement to have the child pay the Parent PLUS loan once they graduate from college.

Either way, Parent PLUS Loan refinancing is an option for getting that debt load under control. Here’s a guide to some key pros and cons and some steps to getting started:

1. So What Exactly Is Parent PLUS Loan Refinancing?

Parent PLUS Loans are federal loans offered to parents of undergraduate students. Refinancing these loans means consolidating them into one new loan from a private lender, ideally with a lower interest rate and/or better loan terms.

2. What Are the Benefits of Parent PLUS Loan Refinancing?

There are few reasons Parent PLUS Loan refinancing can make sense for a family. Moving to one manageable payment with a potentially lower interest rate might make it possible to pay off the loan faster and for less money overall.

Direct PLUS Loans typically have a higher interest rate than other federal student loans, and competitive private lenders (including SoFi) can potentially offer lower rates to qualifying borrowers.

3. Is There a Downside to Refinancing?

Yes. Federal Parent PLUS Loans come with certain borrower protections that private loans don’t offer. Payments can be deferred, and some or all of the debt may be discharged in the event of parental disability or bankruptcy or if the school closed.

(To make Parent PLUS Loans eligible for income-contingent repayment forgiveness—the only income-driven repayment plan Parent PLUS Loans are eligible for—the loans must be consolidated with a Direct Consolidation Loan—see the next topic.)

These federal benefits will be lost when refinancing to a private loan. However, some lenders offer their own benefits.

4. What’s the Difference Between a Federal Consolidation Loan and Private Loan Refinancing?

A federal Direct Consolidation Loan allows borrowers to combine multiple federal education loans into one more manageable payment.

And it may give borrowers access to additional federal loan repayment plans (including the income-contingent repayment plan). But it’s generally aimed at lowering payments by lengthening the amount of time agreed upon to pay the loan—not by lowering the interest rate.

The new fixed interest rate on a Direct Consolidation Loan is the weighted average of the interest rates on the loans that are being consolidated, rounded up to the nearest eighth of a percent. Also, parents can’t put a federal consolidation loan in their child’s name or transfer their debt to their child. So it is not the same as refinancing a Parent PLUS Loan through a private lender.

5. What Should Families Consider Before Moving Forward With Parent PLUS Loan Refinancing?

When refinancing, the new interest rate and overall eligibility for the loan may be determined by a number of factors. A bumpy credit history can affect a person’s ability to refinance.

Refinancing can be an especially attractive option for those with a steady income and strong credit histories. A borrower’s debt-to-income ratio and ability to pay when making lending decisions are typically also factors, but every lender has different criteria—so shopping around to compare offers is wise.

6. How Can Parents Get a Refinanced Loan in Their Name?

Parents can research the best refinancing interest rates, loan terms, and other benefits online, then apply for a new loan.

If the application is accepted, parents can use it to pay off the Parent PLUS Loan, then begin making scheduled payments to the new lender. The child can make payments on it if they choose as well, but the loan will still be in the parents’ names.

7. Can Parents Use Parent PLUS Loan Refinancing to Transfer That Debt Into the Child’s Name?

The short answer is “no.” The longer answer is, “but there’s another option.”

There’s no federal repayment program that will allow you to transfer your Parent PLUS Loan to your child. If the child is offering (or, at least, willing) to take over the debt, however—and if they have the means to make the payments—refinancing with a private lender can make that possible. In this case, it’s the child, not the parent, who applies for the loan.

With a few private lenders (SoFi included), your child can take out a refinanced loan and use it to pay off their parents’ Parent PLUS Loan. Your child still has to qualify and provide additional documentation (check with each lender to understand what’s required). And just like any would-be borrower, a solid credit history and a secure income (among other factors) help determine the interest rate offered.

If the child’s refinanced loan application is accepted, they can take over their parent’s PLUS loan and start paying it off. If there are any bumps in the road for the child, such as limited work history or adverse credit, parents could agree to co-sign for the new refinanced loan.

It’s important to remember, though, that a co-signer is promising to pay off the debt if the borrower stops making payments. So, parents who co-sign are still on the hook if their child can’t come up with the money every month.

If that scenario has your head spinning, it’s understandable. Refinancing might not be right for every family. But if you’re one of the many Parent PLUS borrowers who ends up with more debt than expected, refinancing to a private loan could be an option worth considering.

Interested in refinancing your Parent PLUS Loan? SoFi offers competitive interest rates, member benefits, no fees, and a quick and easy online application process.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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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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Feb
26
2020
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Understanding Stocks 101

By | Growing Wealth, Investing | No Comments

Maybe you’ve heard that investing can be the key to unlocking your financial future—or maybe you’ve just watched Wolf of Wall Street one too many times. Either way, if you’re hoping to start investing, you’ve probably already realized how much there is to learn.

Understanding the stock market can be confusing on its own, let alone actually opening an account, choosing individual stocks, and deciding when’s the right time to buy and sell them.

This post will cover helpful investing basics for getting started on your own investment journey, from how to understand stocks to actually pulling the trigger and buying some of your own.

Welcome to Understanding Stocks 101.

How Does the Stock Market Work?

Understanding stocks begins by—you guessed it—understanding the stock market. And although you may have learned the basics back in grade school, chances are you could use a refresher.

The stock market is, simply put, the space in which investors buy and sell stocks—portional pieces of ownership of publicly owned companies, otherwise known as shares. Other assets, like ETFs, are also sold on the stock market, but for the purposes of this post, the focus will be on stocks.

What Is a Stock, Exactly?

So what does “portional pieces of ownership” mean?

When you buy a stock, you become a partial owner of a company, which means you’re entitled to a cut of the profits—and to a say in certain corporate matters.

Common stockholders generally get voting rights in important business affairs, like electing the board of directors, as well as shifts in corporate goals or major changes to the business structure.

The more shares you own, the more ownership you claim over the company—which means you get a proportionally higher cut of the earnings and sometimes more voting power, as well. It depends on the company: Some issue one vote per share, while others issue each shareholder a single vote regardless of how much stock they own.

Stock earnings can be paid in the form of dividends—a certain amount of the company’s profits in a specific time period—which the company issues at its discretion.

Some companies pay dividends on a regular basis (for instance, quarterly), and other companies pay dividends only if and when they meet certain profit thresholds and have “residual” capital available to disperse. Some companies may choose to not pay a dividend at all.

Investors also earn money on stocks in the form of appreciation in value: As the company grows and performs and its stocks are in higher demand, the value of an individual stock can go up. So if you purchase a share of Company XYZ for $10 in 2014 and then sell it for $30 in 2015, you’ve earned $20 in profit.

A Caveat: Preferred Stock

There is one exception to the rules outlined above: preferred stock. This is a separate type of asset that works similarly, but not in the exact same way, as common stock—which, as its name suggests, is the most common type of stock on the market.

Preferred stockholders are so called because they’re paid first when it comes time to issue dividends—and in the case of a catastrophe or company failure, they’re remunerated before common stockholders are, which makes them a slightly less risky asset to hold. (More on risk in just a minute!)

In exchange for this right to be paid first, preferred stockholders forego voting rights, and in many cases, preferred shares appreciate less than their common stock counterparts.

As in all things, it’s a tradeoff between risk and reward: Preferred stocks may be more stable but are also potentially less valuable than common stocks. And there’s typically no such thing as a risk-free investment!

Pros and Cons of Investing in Stocks

So why do people invest in stocks, and what are the drawbacks?

Strengths of Stock Investments

•   Stocks often have exponential earning potential, and can potentially yield a much higher return than other types of investments like bonds or CDs.

•   Stocks are flexible—you can often buy and sell them on the market at will, whether that means same-day trading or buying and holding for much longer periods.

Drawbacks of Stock Investments

•   Stocks are one of the riskiest asset classes; the exact same market dynamics that can lead to exponential growth can also lead to significant losses if a company doesn’t do well—or even possibly leave you with absolutely nothing if the company folds.

•   Stocks may not be as stable of an income vehicle in the same way other assets, like bonds, are. For example, if you purchase a bond, you’ll have a face value dollar amount guaranteed to you at the time of maturity, which allows you to plan for those specific earnings assuming the bond issuer doesn’t default. Stocks, on the other hand, may or may not pay dividends and might appreciate or depreciate in value; nothing is guaranteed.

•   Smart stock investing often requires a decent amount of research and footwork, particularly as compared to other assets readily available on the market, like mutual funds and ETFs, which offer a pre-diversified basket of assets that might help you hedge your bets against crashes and company failures.

Speaking of research…

Choosing Stocks

If you decide that stock market investing is right for you, a good next step is to put on your thinking cap. Choosing which stocks to buy can be a project in its own right.

Since stocks walk that knife’s edge between great return potential and relatively high risk, it’s often helpful to be choosy when you’re deciding which company you want to put your money into.

Although they can seem complex at first glance, understanding stock charts—the graphs that show how a stock’s price has changed over time, as well as a wealth of other information—isn’t impossible.

The trend line follows the value the stock has fetched on the market historically, and if it’s going upwards to the right, that means the stock has increased in price.

Keep in mind, past performance is never a guarantee of future returns and there is typically much more to deciding if a stock is a good investment, but learning how it has performed historically can be a good place to start.

When it comes to what to look for in a stock, it’s helpful to consider the company’s overall position and corporate policies, as well as diving into more granular data like its earnings per share figure or price-to-earnings ratio.

And choosing individual stocks is just the beginning. What do you do with the stocks once you own them? After all, the biggest earning potential in stock market investing is all about selling those shares, not buying them.

Some Investment Strategies

Different investors use different investment strategies to meet their financial goals. Which method is best for you will depend on what you’re hoping to get out of your stock market experience—as well as how much work you want and are able to put into it.

For instance, day trading can lead to high earnings in a short timeframe if you do it right—but that’s a big “if.” Figuring out the right time to buy and sell on such a short-term basis requires considerable study and considerable luck, too, not to mention time and effort. Many day traders make the stock market their full-time occupation.

In the case of most stock market beginners, buy-and-hold investing could be a good place to start. As the name suggests, this type of investment strategy is often about the long game: buying carefully selected stocks (and other assets) that could potentially lead to long-term earnings and which you don’t plan to sell for quite a while.

One of the best things about buy-and-hold investing is that long-term capital gains—earnings made on assets held for a year or longer—are subject to lower tax requirements than short-term capital gains.

While earnings you make on short-term holdings will be taxed by regular income brackets, long-term capital gains are sometimes taxed at lower overall rates (0%, 15%, or 20%), although there are exceptions.

Of course, timing can be important, even to buy-and-hold investors; learning when to buy stocks and when to let them go is a beneficial step towards becoming a well-informed trader.

Where to Buy Stocks

Now that you’ve got more of an understanding of how the stock market works and you feel informed enough to choose your first stock, where can you go to buy it?

Although it’s called the stock market, there’s no one central building you visit to pick stocks off a shelf. Instead, stocks are often traded through a broker (like Leonardo DiCaprio’s character in that infamous stock-related movie) or brokerage firm.

These days, you don’t have to call someone in a chaotic office to make a stock purchase. You can open a brokerage account online in minutes, all from the comfort of your couch and pajamas—and if you play your cards right, you can do it without spending money on fees.

Although many major brokerage firms offer actively managed investment accounts that charge annual management fees (often expressed as a percentage of your assets under management, or AUM), some also offer free brokerage accounts that allow you to DIY your portfolio.

You can buy and trade stocks and ETFs directly without paying an advisor to assist in choosing them. Although you’ll often still be assessed a trade fee or commission fee for each sale or purchase, some of these accounts allow you to trade certain assets without paying a fee.

Once you choose a brokerage, you’ll also be able to decide between a range of different types of investment accounts, including specialized account types like a Roth or traditional IRA.

These investment vehicles, which carry special tax incentives but also strict withdrawal rules, can be great for long-term financial goals. But when it comes to plain-Jane investments that you can cash out whenever you choose, a regular investment account will often suffice.

Ready to Get Started on Your Investment Journey?

Whether you’re simply trying to solidify your financial future and retire with a comfortable nest egg, or you’re hoping to turn your investing hobby into a regular source of daily income, becoming an investor all starts with a single step—or, in this case, click.

Thanks to the magic of the internet, you can get started with the stock market right from your laptop, or even your mobile phone.

If you’re interested in learning all the ins and outs of the stock market and creating a customized, personally picked portfolio of stocks and other assets, active investing might be the right path for you.

Active investors who trade online with SoFi are often able to ramp up their stock market knowledge by actually making hands-on trades, all with the support of a dedicated team and a wider community (and, of course, with no stock or ETF transaction fees—that part’s really important!).

If you’re interested in stock market basics, but mostly want to get the benefit of investing without all of the research and footwork, there are still plenty of options available to you.

SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

Download the SoFi Invest mobile app today.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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

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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.
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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.

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Feb
12
2020
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The First Step to Investing: Understand Your Goals

By | Growing Wealth, invest, Investing | No Comments

When it comes to investing, most people start with What. What should I invest in? What should my portfolio strategy be? What stock should I invest in?

But there’s actually a more important place to start: Why. Why do you want to invest in the first place? Why are you building a portfolio?

Selecting an investment strategy largely depends on your financial goals. This is sometimes an overlooked first step in building a sound investment strategy.

You can’t plan the right portfolio unless you know what you want to save for, how much you want to save, and when you’d like to use that money.

You might think of building an investment strategy as a top-down approach. Start with the big picture idea of what you want to accomplish. Then, hone in on the strategy that makes the most sense given those goals. Should you even be in stocks, or in bonds? Or should your money be held in cash? Or, should you do something else entirely?

Setting Your Financial Goals

First, you may want to consider these two recommended goals: Creating an emergency fund and saving for retirement. These are sometimes referred to as “bookend goals, because they are your primary short-term and primary long-term financial goals. From there, how you prioritize your other goals is entirely up to you.

Creating an Emergency Fund

Your emergency fund is a lump sum that you can easily access should an emergency arise—for example, if you get laid off or face unexpected health costs. It is common knowledge that this fund be three to six times your monthly spend, depending on how risk-averse and well-insured you are.

Consider Asking Yourself:
•   How much do I spend each month?
•   How much of that is necessary spending, and how much is discretionary?
•   How many months’ expenses would I like to have saved?
•   Do I have dependents or others that live off my income?
•   What’s my target emergency fund?

Creating a Retirement Fund

Retirement may be your largest long-term financial goal, and even if it feels very far away, it’s helpful to start saving early. Why? The earlier you start saving, the more time your money has to work for you.

Consider Asking Yourself:
•   At what age do you want to retire? For those born after 1960, full Social Security full Social Security retirement age is 67 .
•   How much money do you need to live on each year (in today’s dollars)?
•   How long do you expect to live? Statistically, those born in the 1980s have a life expectancy of about 79 years, but to be safe (and optimistic), you may want to plan for (much) longer.
•   What do you currently have saved for this goal? You may want to use a retirement calculator to see if you are on track.

Your In-Between Goals: Houses, Families, Businesses, and More

How you prioritize everything in-between your emergency fund and retirement depends entirely on you. For example, do you want to buy a home? Start a family? Launch a business? Go on an epic month-long vacation? Many of the above?

Any goal you can think of is on the table. You may want to be specific—exactly how much money you need to achieve each goal, and by when. Why? If you’re specific, you’ll have a much higher likelihood of reaching that target, when the time comes to use that money, you’ll have already given yourself permission and can enjoy it.

Consider Asking Yourself:
•   What is your goal?
•   When do you need the money?
•   How much do you need?
•   How much can you save each month?
•   What may be some obstacles that could come up?

Starting Your Investment Strategy

As you’ve seen in the exercises above, each of your goals has a specific time horizon. This leads to an underlying investment strategy: Generally speaking, the longer the time horizon, the more risk you can afford to take, because you can weather market volatility.

When making a decision about how to build a portfolio, you may want to keep in mind that risk and reward are two sides of the same coin. You cannot have one without the other.

There is no such thing as an investment that is high reward with no risk. (If someone promises such an arrangement to you, you may want to run for the hills—it’s probably a scam.)

Oftentimes, risk comes in the form of volatility, which is how much the price of an investment type fluctuates. Although these fluctuations are often temporary, it can take months or even years for returns to even back out to their historical averages.

Short Term (Less Than Three Years)

For goals like: Setting up an emergency fund, travel, buying a new car.

A good rule of thumb is to keep any money you need within the next three years “liquid,” or available to access as soon as you need it. For example, the whole point of having emergency cash is to have access to that money without worry.

Additionally, it is unlikely that you will want to subject money designated for the short term to the volatility of investments like the stock market. The biggest risk you take with short-term money is losing any of it at all, so you’ll probably want to keep it in cash.

If you have a higher risk tolerance, you can consider investing some money for short-term goals in a conservative portfolio that will pay a higher interest than a savings account, but that still has a low risk of losing money. If you go this route, you may want to remain flexible about when and how you tap into those investments.

Your cash can be held in a savings account of your choosing. You may elect to keep this cash in an interest-bearing savings account where you can earn interest on your cash savings. You may even find it helpful to open multiple savings accounts, giving them distinct names, in order to keep track of your various goals.

Medium Term (Five to 10 Years)

For goals like: Home purchase, starting a family.

With a time horizon of five to 10 years, you may be able to afford taking some risk with your money and give it a greater chance to grow. For these types of goals, you could potentially choose a moderate or moderately conservative portfolio.

Depending on your comfort level, this portfolio may hold a combination of cash, other fixed-income investments, like bonds, and some stocks.

More than likely, you’ll hold these investments in an investment account, which is sometimes also called a brokerage account.

For goals where you’re investing money for the mid-term, it generally does not make sense to use a retirement account like a 401(k) or Traditional IRA. You could be penalized for pulling the money out before retirement.

Medium to Long Term (10-20 Years)

For goals like: Child’s college savings, second home

With a time horizon of 10-20 years, you may be able to afford taking more risk with your money in order to take advantage of the power of compounding.

Depending on your comfort level, you may want to consider a moderate to moderately aggressive portfolio. Generally, the longer your investing timeline, the more risk you can take. This may mean building in a higher allocation to stocks and bonds.

Investments for goals with a pre-retirement timeline should be held in an investment or brokerage account. For a child’s college, consider using a 529 Plan which provides some tax benefits to those that are saving for the purpose of higher education.

Long Term (20+ Years)

For goals like: Retirement, financial independence

For long-term goals, time may be on your side. Having several decades or more gives a portfolio time to weather the ups and downs of the market and economic cycles. This allows an investor to take on more risk with the hope of more reward.

With this in mind, you may want to focus on aggressive growth while you are young, and then shift to a more conservative investment allocation over time. Depending on your comfort with the stock market, this may mean allocating a majority of your portfolio to the stock market or other high-risk, high-reward investments.

To save for retirement, you may want to consider investing in an online IRA, a 401(k) plan, or some other retirement-specific account. Retirement accounts have benefits when it comes to taxes, such as deferment on paying taxes until you withdraw from your 401k, or the ability to withdraw contributions from your Roth IRA early without penalties.

What’s Next?

Once you’ve outlined your goals, you’ve completed the first step of investing.

A good second step? Learning more about the investment options that are available to you. This will aid you in building a portfolio that will help you achieve your goals.

A good place to start is learning the different asset classes and their respective risk and reward profiles. If you are going to be invested in something, it’s helpful to know what to expect. Proper expectations may make you a more successful long-term investor.

Another option is to set up a complimentary appointment with a SoFi financial planner, who can help you define and quantify your goals and discuss the potential investment strategies to reach them. With SoFi Invest, this service is complimentary.

Depending on how involved you would like to be, SoFi has options for building your own investing portfolio or having an automated portfolio built for you, with your goals in mind. There are no associated costs or fees with utilizing either investing option.

Investing isn’t just for the wealthy; it’s for anyone who wants to achieve financial goals. There are low-cost, simple, and effective investing options that are accessible to investors of all sizes. You could get started today with a few clicks.

But before you do, you may want to spend some time thinking about what you’re investing for. Naming your goals will help guide you towards an appropriate investment portfolio. As a bonus, thinking deeply about goals may just help you to find the motivation to stick with them.

Interested in investing, now that you know where to start? Check out SoFi Invest® today.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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Feb
05
2020
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Investment Risks and Ways to Manage

By | Growing Wealth, invest, Investing | No Comments

When it comes to the stock market, things can change—rapidly. Numerous factors impacting the value of individual stocks and the market as a whole can translate into being up one day, down the next. And try as they might, it can be near impossible for analysts to predict how the stock market will fare.

While the markets can be unpredictable, fluctuation is a sign that the stock market is working normally. As an investor, it’s important to get comfortable with the market’s volatility. Understanding how risk plays a role in investing can help inform the investing decisions you make for yourself.

What Is Investment Risk?

All investments come with risk. Unlike when you store your money in a savings account, investing has no guarantees that you’ll earn a return. When you invest, experiencing a financial loss is a possibility.

Different types of investments come with different levels of risk. Typically, as the risk increases, so do the potential returns. Understanding the types of risks associated with investing can be the key to informing your risk tolerance.

Types of Investment Risk

Just as there are a variety of investment vehicles, there are a number of different types of risk involved in investing. Here are a few common kinds:

Market Risk

Sometimes global economic trends, like a recession, or current events, like a natural disaster or political turmoil, can impact how the markets perform. Market risk refers to the potential for an investor to experience losses due to factors that are influencing the financial markets as a whole.

This type of risk is often referred to as systematic risk. The four most common types of market risk include interest rate, equity, commodity, and currency risk.

Interest rate risk reflects the market fluctuations that might occur after a change in interest rates is announced. Fixed-income investments, like bonds, are the investments that are most likely to be influenced by interest rate risk.

Equity risk refers specifically to the risk investors face from market volatility—the possibility that the value of shares will decrease.

Commodity risk comes from price fluctuations in commodities (raw materials) that impacts the users and producers of those same materials.

Currency risk is also known as exchange-rate risk. It stems from the price differences when comparing one currency to another. This type of risk is most relevant to investors who have assets in a foreign country or companies who have a lot of activities abroad.

Inflation Risk

Inflation measures the increase of the cost of goods over a set period of time and a rise in inflation means consumers have less purchasing power. Inflation risk is a concern for investors that have money saved in accounts with fixed interest rates, because the rate of inflation may outpace the fixed interest rate being earned.

Business Risk

When you buy a stock, you’re essentially buying a small share of the company. In order to make a possible return on your investment, the company you’ve invested in needs to remain in business. If a company goes out of business, common stockholders are likely the last to get paid, if at all.

Liquidity Risk

This type of risk reflects the concern that investors won’t find a market for their holdings when they ultimately do decide to sell their investments. This could prevent investors from buying and selling assets as desired; they may have to sell for a lower price, if they are able to sell at all.

This risk could also apply to investments with strict term limits like a certificate of deposit (CD). Account holders would typically face a penalty from withdrawing or liquidating this account before the specified time.

Horizon Risk

In investing, a time horizon is the amount of time you have until a specific financial goal.

A lengthy time horizon could potentially allow you to take on riskier investments, since if you do suffer a loss, your investments will have more time to rebound.

Horizon risk occurs when the time horizon of an investment is unexpectedly shortened—like, say, by an unexpected, expensive medical emergency.

On the other side of the spectrum, investors in or nearing retirement could face the risk of outliving their savings. This is referred to as longevity risk.

Concentration Risk

This type of risk can occur when an investor is invested in a limited number of assets or owns assets only in one category or asset class. If that one category experiences losses, so will a concentrated investment portfolio.

The Investment Risk Pyramid

Remember the food pyramid? Before MyPlate , the food pyramid was the gold standard of nutrition in the U.S. It recommended a hearty foundation of grains, followed by a smaller layer of fruits and veggies, followed by an even smaller layer of dairy, meats, beans, eggs, and nuts. At the very top, making up the smallest portion of the pyramid were fats, oils, and sweets.

The investment risk pyramid takes a similar approach, and could prove helpful if you’re looking for guidance as you’re evaluating the risks associated with different types of investments.

It may help you understand which investments pose the greatest risk, and can assist you in creating a portfolio that falls in line with your personal risk tolerance.

At the base of the pyramid are lower risk investments that have the potential to earn foreseeable returns. These investments create the foundation of a financial portfolio. Low risk investments typically include things like government bonds, CDs, money market accounts, and savings accounts.

In the middle of the pyramid are investments with moderate risk. These investments will be a little riskier than the base of the pyramid, but will hopefully lead to capital appreciation. Investments like high-income government bonds, real estate, equity mutual funds, and large and small cap stocks would fall into this category.

The riskiest investments are at the peak of the pyramid. Just like sweets, fats, and oils should make up a limited portion of your diet, these investments are generally recommended to only make up a relatively small portion of your overall investment portfolio.

Since these investments are so risky, some guidelines suggest only investing money that, if lost, won’t cause serious issues in your day-to-day life.

As you continue building your investment portfolio, it’s helpful to know that although the investment risk pyramid can be a useful tool, it’s just a guideline. Just as everyone’s dietary and nutritional needs are different, so are individual investment portfolios.Take it with a grain of salt.

Managing Risk

Here’s the thing about investing—risk is an unavoidable reality. While you won’t be able to eliminate risk completely, there are strategies to help you manage the investment risks your portfolio is subject to.

Understanding Your Financial Goals and Risk Tolerance

The first step in managing risk will be determining your risk tolerance—how much risk you are willing to take on as an investor. Your financial goals could help inform your risk tolerance. Consider asking yourself what you want to use your money for and then figuring out the timeline for when you’ll need it.

The amount of time you have to invest will likely influence the type of investments you make with your money.

For example, if you are saving for retirement in 40 years, you may be able to take on more risk than someone who plans to retire, in say, 10 years.

Try as we might, we can’t plan for everything and life can change quickly. As it does, it can be helpful to re-check your financial goals and re-assess your risk tolerance to see if any changes are necessary.

For example, if you’ve recently had a child, you may want to integrate a college fund into your financial plan. Or perhaps you and your partner have decided you want to upgrade to a bigger house before growing your family.

Diversifying Your Portfolio

With a diversified portfolio, your money isn’t concentrated into one specific area. Instead, it’s spread across different asset classes—like stocks, bonds, and real estate—the money isn’t concentrated in one specific area within each asset class.

While it can be tempting to concentrate your investments into areas you are most familiar with, limiting yourself to only a few industries or types of investments can be the financial equivalent of putting all of your eggs in one basket.

A diversified portfolio can provide some insulation to risk. If your portfolio is highly concentrated in one area and that sector takes a dip, it’s likely your portfolio will be impacted.

But if your portfolio is balanced across varied assets and classes, the impact of one underperforming section won’t be felt as dramatically. While a diversified portfolio won’t eliminate risk, it could help make your portfolio a little less vulnerable.

You could choose to diversify your portfolio through a series of thoughtful investments. As an alternative, you could also choose to invest in mutual funds or ETFs—exchange-traded funds.

When you buy shares in a mutual fund, you are automatically invested in each company that is included in the fund, which provides instant diversification. ETFs, on the other hand, bundle a group of securities together in one neat package and they can be a low-cost way to diversify your portfolio.

Monitoring Your Investments

It can be tempting to set it and forget it when it comes to investments. But keeping an eye on your portfolio is another step that could potentially help you manage risk. You won’t know there is an issue unless you monitor progress.

As the market fluctuates, your portfolio likely will, too. Consider setting a recurring time to monitor your holdings. It doesn’t have to be every day, but once a week or even once a month could be a good idea.

How have the assets been performing? Is your portfolio still in line with your current risk preferences? If not, consider taking the time to make adjustments so you’re comfortable with where your investments stand.

Regularly checking in with your investments will also allow you to monitor your progress and see if you’re still on track with your goals.

Asking for Help

Investing can be confusing. Sometimes all it takes a second set of (experienced) eyes to provide a bit of clarity. Don’t feel like you have to build your investment portfolio in a vacuum.

Consider speaking with a financial advisor who can assist you in creating a personalized financial plan that is designed to help you achieve your specific goals.

Know that financial advisors often charge fees for their services, but they can often provide valuable insight and advice. SoFi members have access to one-on-one advice with certified financial professionals, at absolutely no cost.

Becoming an Investor

Now that you understand how risk impacts investments and some of the ways to manage risk, you might be ready to build your investment portfolio. Investing can be a good way to grow your wealth in the long term. And the good news is it’s never too early or too late.

If you’re ready to get started, consider an account with SoFi Invest®, which offers a variety of options so you can invest in line with your personal risk preferences and financial goals.

For those that like to be in the driver’s seat—there’s active investing. You can buy and sell stocks, creating a completely personalized portfolio without any fees.

Investors who prefer to take a less intensive approach can opt for an automated account. You won’t have to worry about tracking individual stock prices and making timely trades. The account will do most of the work for you, automatically rebalancing to stay in line with your specified risk preference.

And SoFi offers a range of exchange-traded funds. SoFi offers four different types of ETFs that are intelligently weighted and are automatically rebalanced, so they’re always at the forefront of growing industry.

Ready to start managing your investment risks? Learn more about ETF investing and how they can help you make the most of your investments.


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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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Jan
30
2020
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How Do ETFs Work?

By | Growing Wealth, Investing | No Comments

The big ol’ world of investing can feel overwhelming to navigate. There are stocks, bonds, commodities, mutual funds, and exchange-traded funds, to name a few.

With so many choices, it can be hard to nail down just where to start.

The confusion is especially real for investors who are just getting into the game, whether it’s because they are young, earning more for the first time, or are finally ready to invest after paying down student loans.

One investment type that has gained in popularity with all types of investors, both new and seasoned, is the exchange-traded fund. This investment type is more commonly referred to by its acronym, “ETF.”

How do ETFs work? An ETF is an investment fund that you can buy and sell like a stock, but that potentially bundles together some other investment types, such as bonds.

In this way, they are similar to mutual funds, though ETFs are structured to give them some tactical advantages over mutual funds.

To understand the benefits of the ETF, it helps to first know what an ETF is and how ETFs work. With some ETF basics down, you can decide whether it’s the right choice for your investment portfolio.

What is an ETF?

An ETF is an investment fund that pools together different assets, such as stocks, bonds, commodities, or currencies, and then divides its ownership up into shares.

This means that with just a few clicks, it is possible to buy one fund that provides exposure to hundreds or thousands of investment securities. ETFs are often heralded for helping investors gain diversified exposure to the market for a relatively low cost.

This is important to understand—the ETF is simply the suitcase that packs investments together. When you invest in an ETF, you are exposed to the underlying investment. For example, if you are invested in a stock ETF, you are invested in stocks. If you are invested in a bond ETF, you are invested in bonds.

ETFs were created to try and improve upon the mutual fund. Unlike a mutual fund, which only trades once a day, an ETF is structured so that it trades like a stock, on an exchange (such as the New York Stock Exchange), during normal market hours.

While the market is open, it is possible to buy or sell an ETF nearly instantaneously—and see an ETF’s value in real-time. A mutual fund only provides its value at the end of the trading day.

Most ETFs track a particular index that measures some segment of the market. For example, there are multiple ETFs that track the S&P 500 index. The S&P 500 index is a measure of the stock performance of 500 leading companies in the United States.

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Therefore, if you were to purchase one share of an S&P 500 index fund, you would be invested in all 500 companies in that index, in their proportional weights.

This means that most ETFs are passive, which means to track an index. Again, their aim is to provide an investor exposure to some particular segment of the market in an attempt to return the average for that market. If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively-managed ETFs, where there’s a person or group that is making decisions about what securities to buy and sell within the fund. Generally, these will charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.

How Do ETFs Work?

To answer the question, “How do ETFs work?” it helps to start by thinking about how a mutual fund works, because mutual funds are slightly more intuitive.

Investors in mutual funds buy their shares from, and sell their shares to, the mutual funds themselves. Mutual funds price their shares each business day, usually after the trading day is closed.

To calculate the value of one share, the fund first calculates its total assets (minus its liabilities) to obtain the Net Asset Value (NAV) of its holdings. Then, the NAV is divided by the total number of shareholders.

Because ETFs trade on a continual basis, this pricing methodology wouldn’t be fast enough. ETF sponsors need to create and redeem shares throughout the day. Therefore, ETFs require market arbitrage to keep their prices accurate. How exactly does that work? Let’s take a look.

First, remember that an ETF trades like a stock. For this to happen, ETF sponsors generally have a relationships with one or more “authorized participants”—typically large broker-dealers. Generally, ETFs only work with authorized participants to purchase and redeem shares.

They are able to make fast exchanges with ETF sponsors when they need either large blocks of the underlying securities, called “creation blocks,” or when they are attempting to trade out the ETF fund shares themselves.

But this is only part of the story. ETF prices are constantly fluctuating with the buying and selling of that ETF. That’s the power of supply and demand at work.

Meanwhile, the same thing is happening with the underlying stocks held within the fund. Because of this, the price (also known as the market value) of the ETF can deviate from the price of its underlying assets (the Net Asset Value, or NAV).

This creates an opportunity for arbitrage, where a trader could potentially take advantage of the discrepancy between the NAV and the market value.

When these traders act in a way to take advantage of the discrepancy, it helps to close the gap, and push the two values closer. By publishing the NAV and allowing traders to act on the information, the market price of an ETF often stays near that of the NAV.

Benefits of Using ETFs

ETFs are gaining popularity as a tool for short and long-term investors alike—they make it easy to get started. Some investors may opt to take the DIY approach, and others will prefer to have someone help manage their ETF strategy. Either way, ETFs offer some benefits to the investors that choose to use them.

Tax Benefits

ETFs are often considered more tax efficient than a mutual fund. When shares of a mutual fund are redeemed, it is possible that capital gains taxes are passed through to investors.

Because ETFs generally “redeem” shares through an in-kind trade with an active participant, minimal capital gains taxes are triggered. ETFs typically pass through less capital gains costs than comparable mutual funds.

Talk to a tax professional to learn more about the potential tax benefits of an ETF.

Low-Cost

ETFs and mutual funds charge what is called an “expense ratio,” which is an annual fee charged for upkeep in the fund. While both index mutual funds and ETFs are considered cost-effective ways to invest in the market, ETFs usually eke out some costs savings over index mutual funds.

Expense ratios aren’t the only fees charged by both ETFs and mutual funds, though. Because an ETF trades like a stock, there is often a transaction/trading fee to buy in and out of the fund.

Some mutual funds may have front-end load fees or back-end load fees that work in a similar manner, though you’d generally only see these fees on actively-managed mutual funds. Either way, make sure that you are looking at all of the fees involved in buying or selling any investment, not just the expense ratio.

Easy Diversification

Ever heard of the investing adage, “don’t put all your eggs in one basket?” That’s the idea behind diversifying your investments. Owning just one bond or one stock, or even a handful of bonds or stocks, can be considered risky.

By owning hundreds of investments all within one single investment, you minimize the risk of any one investment (such as a stock) doing poorly and tanking your portfolio along with it.

For example, if you were to buy an S&P 500 index ETF, you’re not just investing in one fund, but you’re investing in the 500 leading companies in the United States, achieving near-instant diversification. And by using an ETF, you get access to this diversification at a fairly low cost.

Investing in ETFs

There is no one way to use ETFs to invest. Some investors may be interested in the short-term moves of the market and use ETFs to place bets for or against those moves. Other investors may use ETFs to achieve broad, cheap exposure to the market in a long-term, buy-and-hold strategy.

For those interested in the latter, long-term strategy—which is likely most people—it is possible to buy a portfolio of ETFs through your brokerage firm of choice. This strategy will require you to choose investments that match up with your long-term goals and risk tolerance.

Investors who are interested in utilizing an ETF strategy but aren’t interested in the DIY approach may prefer to have the help of a professional.

Not only can the right professional help guide you into the right portfolio strategy for you, but they are there to help you manage your ETF strategy over the long-term. A professional can help you rebalance your portfolio and manage your investments from a tax standpoint.

If you want to invest in low-cost, diversified ETFs and have the support of investment professionals, check out SoFi Invest®.

SoFi utilizes the modern technology of ETF investing while providing a real live human advisor to answer questions, at no extra cost. For many investors, it will truly be the best of both worlds.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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


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

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, LLC and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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