Financial Topics Archives | Page 83 of 822

Mar

2025

How to Find a Financial Advisor

By Kelly Boyer Sagert | Growing Wealth, invest, Investing | Comments Off

Deciding you’re ready to consult with a financial advisor is an important step in reaching your financial goals — but finding the right professional starts with a clear-eyed look at what your needs are and what you can afford.

Generally, an advisor will examine a client’s total financial picture, from debt to savings and investments. They can discuss financial objectives (whether retirement, saving for college, or another goal), and help create a plan to attain those goals. Different advisors offer various qualifications, and their cost structures vary as well.

Some professionals simply offer guidance or a basic plan, often for a flat fee; others may completely manage a client’s portfolio — while others may offer services such as tax and estate planning. A robo advisor, which is a low-cost automated investment portfolio is also an option if your needs are not complex.

Key Points

• The first step in finding a financial advisor is knowing what you need and what you can afford.

• A financial advisor can provide a range of services, from creating a basic financial plan to managing your entire portfolio — or coordinating insurances and tax or estate planning.

• If you’re looking for a low-cost investment plan, you may want to consider a robo advisor, which is an automated portfolio managed by a sophisticated algorithm.

• Some advisors charge a flat fee, some charge a commission, some use a hybrid model — or charge by the hour. Be sure to understand the cost structure before working with any professional.

Benefits of Using a Financial Advisor

Financial advisors can help their clients create a financial plan that guides people through various stages of life and helps them make progress toward their goals. Typically, advisors meet or communicate regularly with clients, and the plan has some degree of personalization.

Plus, advisors can help their clients stay the course, saving and investing for the long term. Creating a financial plan is a key step, but then it’s crucial to stick with the plan. This isn’t always easy when, for example, the market is volatile and emotions are triggered. But that’s when an experienced advisor may come in handy; they can provide perspective and help clients stay focused.

Some financial advisors help clients to become more financial savvy. Some may make trades for their clients, while many monitor investments made to help ensure that a client’s portfolio is on track. Some help with tax issues as well, e.g. whether to use a strategy like tax-loss harvesting, and more complex financial matters like estate planning.

Some may make trades for their clients, and monitor investments to help ensure that a client’s portfolio is on track.

Some help with tax issues as well, e.g. whether to use a strategy like tax-loss harvesting, and more complex financial matters like estate planning.

Sometimes making a list of requirements can be helpful when trying to find a financial advisor, whether you’re investing online or through a traditional brokerage.

Under some circumstances you may even want to consider hiring a wealth advisor.

Seeking an Advisor

The next step in finding an advisor is to obtain some recommendations. To get a list of advisors to consider:

Friends and Family Recommendations

• Ask friends and family if they’ve used or are using an advisor. If so, what services are they receiving? How happy are they? Are there any concerns about any of the advisors they’re using? Ideally you want to take recs from people in similar circumstances to your own.

• Do the same with business colleagues, or people who belong to the same organizations that you do.

By looking at the websites of these advisors, do they seem like a potential match?

Industry Associations

Another option when seeking an advisor is to consult industry associations and trade groups, and to look for advisors with these credentials.

• The National Association of Personal Financial Advisors website (NAPFA focuses on fee-only financial planners).

• Financial Planning Association (FPA). Advisors in this network are Certified Financial Planners® (CFPs) and the FPA site lets you search by location, area of specialty, how they’re paid, and any asset minimums they may require.

• Garrett Planning Network. All advisors in this network charge an hourly rate.

Finding the Right Fit

Just as you wouldn’t buy the first car you test-drove, or the first pair of shoes you tried on, you don’t have to commit to working with the first financial planner you talk to. Many advisors offer a free consultation so you can find out more about them.

While the selection process does take a little extra time, it’s worth investing that time for your future financial security.

Questions to Consider

Some people may find that the same names keep cropping up when asking for recommendations and exploring online resources. Thus, it may make sense to create a short list of financial advisors and explore those options in more depth.

Questions to ask those advisors can include:

• What specific services do you offer?

• What processes do you use to create a plan for me?

• What qualifications and credentials do you have?

• How often would we meet or otherwise communicate?

• What is your overall investment philosophy?

• What is your fee structure?

If you’re a beginning investor, it can help to ask about the financial advisor’s experience in getting new people started with planning and investing in a basic portfolio.

Fiduciary Rules

Another key question: Is the financial advisor a fiduciary? If so, the advisor must work in the best interests of a client and either disclose conflicts of interest or avoid them. If an advisor is not a fiduciary, he or she is required only to make recommendations that are considered suitable.

The so-called fiduciary standard, most recently re-issued as a ruling in 2024 from the Department of Labor, is embroiled in legal challenges. But it’s important to know, as you look for a financial advisor, that this important set of protections exists. Even if the law itself is in limbo, many advisors embrace a similar SEC “best interest” standard and its protections for investors — i.e., advisors must avoid conflicts of interest and place a client’s interests first.

Advisors who follow a fee-based or hourly payment structure are, by definition, fiduciaries. Those who get paid a commission when clients make certain investments may or may not be a fiduciary because they earn a commission when selling an investment or insurance product or other service.

This is why it’s important to always inquire about an advisor’s fee structure and compensation.

Common Financial Advisor Charges

Financial advisors’ fees can be structured in a number of ways, and what you pay for a financial advisor depends on a number of factors. In general, financial advisors are either paid a flat fee (such as a retainer or a fee-for-services), commissions on products and investments they sell you (such as insurances and/or mutual funds), or a hybrid.

Retainer

Some advisors charge a retainer, typically due monthly, quarterly, or annually. The fees can range significantly; annually, the low end may be around $2,000 to $3,000, with the high end running into the five figures or more, depending on the services provided. Investors can ask an advisor to explain what services they get for paying the retainer.

Commission

In this scenario, advisors get paid a commission based on the products (investments, insurances) they sell to clients. Some advisors may receive a percentage of the assets of a client before the investments are made. Others can be paid by a financial institution after the transaction has occurred, while others may charge clients each time that a stock is bought or sold.

Percentage of Assets Under Management (AUM)

Similar to a retainer, some advisors charge a percentage of the assets being managed. Generally speaking, paying 1% annually is reasonable under this structure when including both the fees of a financial advisor and any investment fees. When considering an advisor who charges these fees, it can make sense to ask for a breakdown and the reasoning behind the fee structure.

Planning Fees

This could be an upfront fee for a financial plan or for ongoing advice. There can also be a subscription-based fee structure, similar to a retainer. Fees for these services vary widely, so be sure to ask what your all-in costs would be when working with any advisor.

Hourly Fees

This would involve a straight hourly fee for services provided. For example, setting up your retirement portfolio might cost $X, while setting up a 529 college savings plan for your kids might cost $Y.

Robo Advising vs Financial Advisors

It may also make sense to consider an online robo-advisor, also known as an automated investing platform. This is an algorithm-driven digital platform that provides clients with basic financial guidance in the form of pre-set portfolio options, similar to a prix fixe menu at a restaurant.

How a Robo Advisor Works

A robo advisor is not like a human advisor; it’s more like a high-tech investment manager.

First, the investor responds to a questionnaire by inputting their goals and time horizon. Typical questions may also include risk tolerance. (Here’s a helpful risk tolerance quiz.) Based on the investor’s preferences, the technology on the backend comes up with a recommended portfolio option (e.g. a portfolio that’s more aggressive or more conservative).

What a Robo Advisor Portfolio Might Cost

Because most automated portfolios consist of low-cost index or exchange-traded funds (ETFs), these services are considered cost efficient compared with using a human advisor. Also, you’re not paying for hands-on advice or personal planning.

Robo portfolios often involve an annual fee, perhaps 0.25% to 1% of the account balance. In some instances, a robo advisor may charge a small monthly dollar amount for lower balances, e.g. $4 per month, instead of a percentage. Remember, these costs are in addition to the fees for the underlying funds in your portfolio.

Considerations for Using a Robo Advisor

Automated investing platforms may not be the right choice for people who need personalized advice for complex financial situations, such as tax and estate planning. It also wouldn’t fit the needs of investors who simply prefer to sit down with a human advisor.

Similar to human advisors, different robo advisor programs offer different services. So if the idea of robo advising sounds appealing, it can help to check more than one option.

Free Financial Advice

Some financial companies offer complimentary financial advice for their customers. In some cases this feature is only offered if your account balance is high enough.

Some employers that provide a company retirement plan may also offer free financial seminars. These are typically educational in nature.

Topics discussed can include how to:

• Set and reach financial goals, based on the current financial landscape.

• Create a budget and practice good spending habits.

• Leverage debt strategically by balancing repayment of debt with saving for long-term goals.

• Build an emergency fund and save for the future.

• Create an investment strategy that dovetails with personal risk tolerance and goals.

And remember, even though an advisory service might be touted as ‘no cost’, remember that different investment products always come with a fee, such as an expense ratio.

The Takeaway

Deciding to work with a financial advisor is an important step toward taking control of your financial future. Finding the right person, however, takes time and diligence. Financial advisors can come with a range of qualifications and specialties. The services they offer and the fees they charge also vary.

Fortunately, there are a number of organizations that can help you do a search for someone who is the right fit. And you can also consider taking a more tech-driven route and using a robo-advisor.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

Open an automated investing account and start investing for your future with as little as $50.

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-052

Mar

2025

Explaining the Different Types of Asset Classes

By Becca Stanek | Growing Wealth, invest, Investing, Terminology | Comments Off

If you’re new to investing, you might ask, “What is an asset class?” Here’s an explainer—plus learn how this can help you diversify your portfolio.

Mar

2025

Living off Dividend Income: What You Need to Know

By Jamie Cattanach | Growing Wealth, invest, Investing | Comments Off

Dividend income: what is it? How is it taxed? Can you make your living off of dividend income alone? We cover all that and more.

Mar

2025

How to Build an Investment Portfolio for Beginners

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

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

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

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

Key Points

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

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

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

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

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

The Basics: What Is an Investment Portfolio?

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

Types of Investment Portfolios

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

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

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

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

Why Building a Balanced Portfolio Matters

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

What Is a Balanced Portfolio?

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

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

The Value of Diversification

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

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

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

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

Assessing Risk Tolerance and Setting Investment Goals

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

Conservative vs. Aggressive Investing

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

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

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

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

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

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

Choosing a Goal for Your Portfolio

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

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

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

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

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

Short Term: Starting an Emergency Fund

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

That’s when your emergency fund comes in.

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

Medium Term: Saving for a Major Event

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

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

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

Recommended: What Is Automated Investing?

Long Term: Starting a Retirement Portfolio

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

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

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

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

Prioritizing Diversification

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

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

Types of Diversification

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

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

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

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

Understanding Types of Risk

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

Systematic Risk

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

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

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

Understanding Idiosyncratic Risk

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

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

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

4 Steps Towards Building an Investment Portfolio

Here are four steps toward building an investment portfolio:

1. Set Your Goals

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

2. What Sort of Account Do You Want?

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

Taxable vs. Tax-Deferred Accounts

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

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

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

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

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

3. Choosing Investments Based on Risk Tolerance

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

Balancing Risk and Return

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

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

4. Allocating Your Assets

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

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

The Takeaway

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

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

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

FAQ

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

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

Can beginners create their own stock portfolios?

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

What should be included in investment portfolios?

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

What is the 60/40 portfolio rule?

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

What is a balanced portfolio?

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

SoFi Invest®

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

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

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

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

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

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

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

SOIN-Q125-037

Mar

2025

Are Mutual Funds Good for Retirement?

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

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

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

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

Key Points

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

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

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

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

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

Understanding Mutual Funds

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

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

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

How Mutual Funds Work

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

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

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

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

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

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

Types of Mutual Funds for Retirement

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

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

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

Mutual Funds for Retirement Planning

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

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

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

Pros of Using Mutual Funds for Retirement

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

• Convenience

• Basic diversification

• Professional management

• Reinvestment of dividends

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

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

Cons of Using Mutual Funds for Retirement

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

• Potential for high fees

• Overweighting risk

• Under-performance

• Tax inefficiency

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

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

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

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

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

Pros of Mutual Funds	Cons of Mutual Funds
• Mutual funds offer convenience for investors • It may be easier and more cost-effective to diversify using mutual funds vs. individual securities • Investors benefit from the fund manager’s experience and knowledge • Dividend reinvestment may make it easier to build wealth	• Some mutual funds may carry higher expense ratios than others • Overweighting can occur if investors own multiple funds with the same underlying assets • Fund performance may not always live up to the investor’s expectations • Income distributions may result in unexpected tax liability for investors

Pros of Mutual Funds

Cons of Mutual Funds

• Mutual funds offer convenience for investors

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

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

• Dividend reinvestment may make it easier to build wealth

• Some mutual funds may carry higher expense ratios than others

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

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

• Income distributions may result in unexpected tax liability for investors

Investing in Mutual Funds for Retirement Planning

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

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

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

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

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

Tips for Selecting Retirement-Ready Mutual Funds

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

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

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

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

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

Determining If Mutual Funds Are Right for You

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

Investment Strategy

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

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

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

Cost

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

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

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

Fund Holdings

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

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

• What individual securities a mutual fund owns

• Asset allocation for each security in the fund

• How often securities are bought and sold

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

Tax Efficiency of Mutual Funds in Retirement

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

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

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

Managing Risk with Mutual Funds in a Retirement Portfolio

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

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

Performance of Mutual Funds Compared to Other Retirement Investments

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

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

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

Other Types of Funds for Retirement

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

Real Estate Investment Trusts (REITs)

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

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

Exchange-Traded Funds (ETFs)

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

Income Funds

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

Bond Funds

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

IPO ETFs

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

The Takeaway

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

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

FAQ

Are mutual funds safer than individual stocks for retirement?

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

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

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

How often should I review my mutual fund holdings?

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

Can mutual funds provide steady income in retirement?

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

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

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

Photo credit: iStock/kali9

About the author

Rebecca Lake

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

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