Dec
02
2024
What Is the January Effect and Is It Good For Investors?

January Effect: What It Is and Is It Good for Investors?

By | Growing Wealth, invest, Investing | Comments Off on January Effect: What It Is and Is It Good for Investors?

The January Effect is a term that some financial market analysts use to classify the first month as one of the best-performing months, stock-wise, during the year. Analysts and investors who believe in this phenomenon claim that stocks have large price increases in the first month of the year, primarily due to a decline in share prices in December. Theoretically, following the dip in December, investors pour into stocks, which may boost prices in January.

However, many analysts claim that the January Effect and other seasonal anomalies are nothing more than market myths, with little evidence to prove the phenomenon definitively. Nonetheless, it may be helpful for investors to understand the history and possible causes behind the January Effect.

Key Points

•   January Effect suggests stocks rise in January due to December price dips, which creates buying opportunities.

•   Small-cap stocks benefit most from the January Effect due to liquidity.

•   Tax-loss harvesting during the month of December may lower stock prices.

•   Investors then buy in January, boosting stock prices.

•   January Effect’s impact is debated; It’s either attributed to market myths or real behavior.

What Is the January Effect?

As noted above, the January Effect is a phenomenon in which stocks supposedly see rising valuations during the first month of the year. The theory is that many investors sell holdings and take gains from the previous year in December, which can push prices down. This dip supposedly creates buying opportunities in the first month of the new year as investors return from the holidays. This buying can drive prices up, creating a “January Effect.”

Believers of the January Effect say it typically occurs in the first week of trading after the New Year and can last for a few weeks. Additionally, the January Effect primarily affects small-cap stocks more than larger stocks because they are less liquid.

To take advantage of the January Effect, investors who are online investing or otherwise can either buy stocks in December that are expected to benefit from the January Effect or buy stocks in January when prices are expected to be higher due to the effect. Investors can also look for stocks with low prices in December, but have historically experienced a surge in January, and buy those stocks before the increase.

Recommended: How To Know When to Buy, Sell, Or Hold a Stock

What Causes the January Effect?

Here are a few reasons why stocks may rise in the first month of the year.

Tax-Loss Harvesting

Stock prices supposedly decline in December, when many investors sell certain holdings to lock in gains or losses to take advantage of year-end tax strategies, like tax-loss harvesting.

With tax-loss harvesting, investors can lower their taxable income by writing off their annual losses, with the tax timetable ending on December 31. According to U.S. tax law, an investor only needs to pay capital gains taxes on their investments’ total realized gains (or losses).

For example, suppose an investor owned shares in three companies for the year and sold the stocks in December. The total value of the profit and loss winds up being taxed.

Company A: $20,000 profit
Company B: $10,000 profit
Company C: $15,000 loss

For tax purposes, the investor can tally up the total investment value of all three stocks in a portfolio — in this case, that figure is $15,000 ($20,000 + $10,000 – $15,000). Consequently, the investor would only have to pay capital gains taxes on $15,000 for the year rather than the $30,000 in profits.

If the investor still believes in Company C and only sold the stock to benefit from tax-loss harvesting, they can repurchase the stock 30 days after the sale to avoid the wash-sale rule. The wash-sale rule prevents investors from benefiting from selling a security at a loss and then buying a substantially identical security within the next 30 days.

Recommended: Tax Loss Carryforward

A Clean Slate for Consumers

U.S. consumers, who play a critical role in the U.S. economy, traditionally view January as a fresh start. Adding stocks to their portfolios or existing equity positions is a way consumers hit the New Year’s Day “reset” button. If retail investors buy stocks in the new year, it can result in a rally for stocks to start the year.

Moreover, many workers may receive bonus pay in December or January may use this windfall to buy stocks in the first month of the year, adding to the January Effect.

Portfolio Managers May Buy In January

Like consumers, January may give mutual fund portfolio managers a chance to start the year fresh and buy new stocks, bonds, and commodities. That puts managers in a position to get a head start on building a portfolio with a good yearly-performance figure, thus adding more investors to their funds.

Additionally, portfolio managers may have sold losing stocks in December as a way to clean up their end-of-year reports, a practice known as “window dressing.” With portfolio managers selling in December and buying in January, it could boost stock prices at the beginning of the year.

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Is the January Effect Real?

The January Effect has been studied extensively, and there is evidence to suggest that it is somewhat real. Studies have found that small- and mid-cap stocks tend to outperform the market during January because they are less liquid.

But some analysts note that the effect has become less pronounced in recent years due to the rise of tax-advantaged investing accounts, like 401(k)s and individual retirement accounts (IRAs). Investors who use these accounts may not have a reason to sell in December to benefit from tax-loss harvesting. Therefore, while the January Effect may be somewhat real, its impact may be more muted than in the past.

January Effect and Efficient Markets

However, many investors claim that the January Effect is not real because it is at odds with the efficient markets hypothesis. An efficient market is where the market price of securities represents an unbiased estimate of the investment’s actual value.

Efficient market backers say that external factors — like the January Effect or any non-disciplined investment strategy — aren’t effective in portfolio management. Since all investors have access to the same information that a calendar-based anomaly may occur, it’s impossible for investors to time the stock market to take advantage of the effect. Efficient market theorists don’t believe that calendar-based market movements affect market outcomes.

The best strategy, according to efficient market backers, is to buy stocks based on the stock’s underlying value — and not based upon dates in the yearly calendar.

History of the January Effect

The phrase “January Effect” is primarily credited to Sydney Wachtel, an investment banker who coined the term in 1942. Wachtel observed that many small-cap stocks had significantly higher returns in January than the rest of the year, a trend he first noticed in 1925.

He attributed this to the “year-end tax-loss selling” that occurred in December, which caused small-cap stocks to become undervalued. Wachtel argued that investors had an opportunity to capitalize on this by buying small-cap stocks during the month of January.

However, it wasn’t until the 1970s that the notion of a stock rally in January earned mainstream acceptance, as analysts and academics began rolling out research papers on the topic.

The January Effect has been studied extensively since then, and many theories have been proposed as to why the phenomenon may occur. These include ideas discussed above, like tax-loss harvesting, investor psychology, window-dressing by portfolio managers, and liquidity effects in stocks. Despite these theories, the January Effect remains an unexplained phenomenon, and there is a debate about whether following the strategy is beneficial.

The Takeaway

Like other market anomalies and calendar effects, the January Effect is considered by some to be evidence against the efficient markets hypothesis. Nevertheless, there is evidence that the stock market does perform better in January, especially with small-cap stocks. Whether one believes in the January Effect or not, it’s always a good idea for investors to use strategies that can best help them meet their long-term goals.

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.

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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.

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.

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Dec
02
2024
How to Calculate Rate of Return

Rate of Return (RoR): Formula and Calculation Examples

By | Growing Wealth, invest, Investing | Comments Off on Rate of Return (RoR): Formula and Calculation Examples

Calculating rate of return, as it relates to investing, is a way for investors or traders to get a sense of how much money they stand to gain or lose from their investments. It’s a relatively simple formula and calculation, and can help investors evaluate their overall performance in the markets. It does have some shortcomings, however, such as not accounting for the time value of money or the timing of cash flows. So, there are alternative calculations out there to help get even more accurate results.

Key Points

•   The Rate of Return (RoR) measures an investment’s gain or loss as a percentage of its initial value over a specific period.

•   Calculating RoR involves identifying the initial and end values, applying the formula, and can be done manually or using tools like Excel.

•   RoR helps investors evaluate investment performance, compare different investments, and make informed decisions about resource allocation.

•   Understanding RoR is crucial for assessing investment performance, aligning with financial goals, and determining market performance relative to other opportunities.

What Is Rate of Return?

Rate of return is a measure of an investment’s gain or loss, expressed as a percentage of its initial value, over a given period of time. If calculated correctly, your rate of return will be expressed as a percentage of your initial investment. Positive rate of return calculations indicate a net gain on your investment, while negative results will indicate a loss.

Don’t confuse this with the expected rate of return, which forecasts your expected returns using probability and historical performance.

When using the rate of return formula, your chosen time period is referred to as your “holding period.” Regardless of whether your holding period lasts days, months, or even years. It’s important that you keep the time periods consistent when comparing investment performance.

How to Calculate Rate of Return

You can calculate the rate of return on your online investing or other type of investing activity by comparing the difference between its current value and its initial value, and then dividing the result by its initial value.

Multiplying the result of that rate of return formula by 100 will net you your rate of return as a percentage. You’ll know whether you made money on your investment depending on whether your result comes in as positive or negative.

Rate of Return Formula

The standard rate of return formula can be represented as follows:

R = [ ( Ve – Vb ) / Vb ] x 100

In this equation:

R = Rate of return

Ve = End of period value

Vb = Beginning of period value

The aforementioned formula can be applied to any holding period to find your rate of return “R” over that timespan.

“Ve,” your end of period value, should represent the value of your investment, including any interest or dividends earned over your holding period.

Finally “Vb” should represent the value of your initial investment. It will be used as the relative basis on which your investment returns are calculated.

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Example of Calculating Rate of Return

To help you understand how to calculate the rate of return, we’ll walk you through an example. Again, here’s the formula:

R = [ ( Ve – Vb ) / Vb ] x 100

Let’s say an investor buys an investment for $125 a share which pays no dividends. This $125 investment will be your beginning of period value (“Vb”).

After one year, the value of the investment rises to $150 and the investor chooses to sell it. Given that $150 represents the value of the investment at the end of the holding period, $150 will be your end of period value (“Ve”).

To calculate the rate of return, enter the values for Vb and Ve into the rate of return formula. With the correct values in place, your equation should look like this:

R = [ ( $150 – $125 ) / $125 ] X 100

Solving out this formula using order of operations, your calculations should proceed as follows:

R = [ $25 / $125 ] X 100

R = 0.2 X 100

R = 20%

If done correctly, the formula should calculate a one year rate of return of 20%, based on the beginning and end of period values provided.

How to Calculate Rate of Return Using Excel

Calculating the rate of return in Excel simply requires you to enter the right inputs in a few cells; then tie those cells together using a few simple equations.

Excel is a powerful purpose-built application designed to crunch numbers and is a go-to-standard when making investment calculations.

While you can enter these inputs anywhere you want on the spreadsheet, we’ll walk you through an example to get you started. We’ve also restated the rate of return formula here to help you follow along.

R = [ ( Ve – Vb ) / Vb ] x 100

After opening a blank excel spreadsheet on your desktop, start by entering the beginning and of period investment values using the following inputs in the corresponding cells.

Cell B2: End of period value of investment (“Ve”)

Cell B3: Beginning of period value of investment (“Vb”)

It’s a good idea to enter a description of what each cell represents in the corresponding column “A” cells, to help you remember what each value means.

Now that we have all the necessary inputs for our formula, it’s time to tie them together. We’ve broken this step into several cells for ease of understanding.

Cell B4: Type in “=B2-B3”

This cell calculates the difference in value between your end of period (“Ve”) and beginning of period (“Vb”) investment.

Cell B5: Type in “=B4/B3”

This cell will divide the difference in value (Cell B5), by the beginning of period value (Cell B3), to obtain a decimal measure of your rate of return.

Cell B6: Type in “=B5*100”

Multiplying the decimal metric from cell B5 by 100 will calculate your resulting rate of return as a percentage.

If done correctly, cell B6 should show your rate of return.

Note: For more advanced Excel users, the same result can be obtained by entering: “=(B2-B3)/B3*100” within a single cell. You can try this in any blank cell to double check your work.

Considerations When Using Rate of Return

The main advantages of the rate of return calculation is that it’s simple and easy to calculate. It gives you a straightforward method to measure the profitability of an investment over any time period.

However, its simplicity does result in some shortcomings, particularly when it comes to more complex investments with numerous cash flows. We dive into these limitations below.

Recommended: What Is a Good Rate of Return?

What are the Limitations of Simple Rate of Return?

The main limitations of the simple rate of return calculation are that it ignores the time value of money and timing of cash flows.

The time value of money is an important concept when it comes to finance, as it explains that money today is always worth more than the same sum of money paid in the future. This is due to the inherent earnings potential of cash held now.

In tandem with the concept above, the simple rate of return calculation also fails to account for the timing of cash flows.

Cash flows are particularly important when dealing with more complex portfolios or investments that might have multiple reinvestment periods over time or multiple dividend payouts.

The simple rate of return calculation, in some ways, oversimplifies the rate of return into a simple accounting measure over an arbitrary amount of time. To address these shortcomings, professionals typically use alternate measures like internal rate of rate (IRR) and annualized rate of return.

Annualized Rate of Return Formula

The annualized rate of return is a slightly more complicated formula that solves the compatibility issues of the simple rate of return calculation by standardizing all calculations over an annual period.

The annualized rate of return formula can be exhibited as follows.

Ra = ( Ve / Vb ) 1 / n – 1 X 100

Where,

Ra = Annualized Rate of Return

Ve = End of period value

Vb = Beginning of period value

n = number of years in holding period

Annualized rate of return (Ra) standardizes your rate of return on an annual basis; this allows you to make fair comparisons with other annualized performance figures.

“Ve,” your end of period value, represents the value of your investment at the end of the holding period, including any interest or dividends earned.

“Vb” represents the value of your initial investment.

Other Types of Return Formulas

There are a multitude of other return metrics that can help you evaluate performance.

While the calculations for these metrics fall outside the scope of this reading, we touch on some of the most commonly used ones and why they’re used.

•   Internal Rate of Return (IRR): This represents the expected annual compound growth rate of a specific investment and is usually used to help determine whether an investment is worthwhile.

•   Return on Invested Capital (ROIC): Measures a firm’s profitability in relation to the total debt and equity invested by stakeholders.

•   Return on Equity (ROE): Measures a firm’s net income in relation to the total value of its shareholder’s equity.

How Investors Can Use Rate of Return

Retail investors, institutional investors, and even corporate decision makers use the rate of return to gauge the performance of their investments over time. It’s useful when compared against a benchmark index, return expectations, or other investment options to gauge how your investment performed on a relative basis.

When comparing investment returns, it’s important to make sure you’re making fair comparisons to ensure you’re making apples-to-apples comparisons. For example, the S&P 500 might not serve as a fair benchmark for a portfolio invested 100% in international equities, as these are substantially different investment types. Benchmark comparisons give meaning to your rate of return and help you evaluate whether you’re outperforming on a relative basis.

The Takeaway

Knowing how to calculate your rate of return gives you a useful tool for evaluating your investments’ performance. The best part about the rate of return calculation is that it can be done over almost any timespan, provided the returns you’re trying to compare have the same holding period.

Investors can calculate rate of return by hand, or by using an online spreadsheet. The same is true for annualized rate of return — which helps to standardize return rates over longer periods. Those are fairly simple ways to gauge investment returns, but there are a number of other metrics that help you assess and compare investment returns, so be sure to use the tool that aligns best with what you need to know.

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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.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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Nov
27
2024
9 ESG Metrics Investors Should Know

9 ESG Metrics Investors Should Know

By | Growing Wealth, invest, Investing | Comments Off on 9 ESG Metrics Investors Should Know

A number of investors are choosing to invest in securities with an environmental, social, and governance (ESG) focus that may align with their values and investment goals. Many see ESG companies as being potentially more sustainable long-term. But determining whether a company’s ESG strategies are having the desired impact requires the use of ESG metrics to measure progress and enable accountability.

In addition, these days many investors also want to know how well companies are managing the risks associated with climate-related changes — which also requires metrics that can show whether a company is meeting key standards.

These concerns aren’t new, but they have driven a number of new ESG-focused regulatory efforts here and abroad. As yet, however, there isn’t a universal set of ESG metrics used by all investors or financial firms to evaluate a company’s progress toward ESG goals, or better manage ESG risks. What’s more, the regulatory landscape in this sector is evolving, which, for the near future, may make it challenging to track certain metrics over time. That said, there are a number of frameworks that companies and governments have embraced that can inform investors’ choices.

Key Points

•   With the growing appeal of ESG strategies, there is also a need for reliable ways to assess companies’ ESG performance and risk mitigation.

•   ESG metrics are necessary for accurate company disclosures, which also support transparency and accountability.

•   The use of ESG metrics and disclosures can also help investors compare companies within and across industries.

•   A number of organizations are establishing mandatory standards and/or compliance rules, although some are in flux or facing legal opposition.

•   At the moment, companies can choose from a range of ESG frameworks and standards.

What Is ESG Investing?

ESG stands for environmental, social, and governance standards that can help people assess whether companies are meeting certain criteria, as well as whether they are mitigating ESG-related risk factors that may impact performance.

•   Environmental factors capture how well a company safeguards the physical environment (e.g., reducing emissions, pollutants).

•   Social criteria refer to employee safety, fair labor practices, community investment, relationships with customers and vendors.

•   Governance factors include issues of leadership, fraud prevention, transparency in accounting and reporting, and more.

ESG investing began in the 1970s, broadly speaking, although impact investing in various forms has been around for centuries.

At first, investing with the aim of creating positive change for society and the planet seemed anchored in a kind of “do-goodism” and less focused on financial outcomes. In the last 20 or 30 years, though, investors have become interested in socially responsible investing (SRI), as many funds in this category have shown themselves to offer returns that are comparable to traditional strategies, according to a report published in 2023 by Morningstar, a fund rating and research firm.

ESG Metrics Are Key to ESG Reporting

Thus, with the growing appeal of ESG investments to some investors, there is a commensurate need for reliable ways to assess companies’ ESG performance when choosing to invest online or through a traditional brokerage.

ESG frameworks help companies, as well as investors, assess an organization’s stated aims in terms of meeting ESG standards. In theory, relying on a common set of metrics should help encourage more efficient and transparent ESG reporting.

•   ESG metrics establish a layer of transparency and accountability.

•   Reliable ESG reporting helps build trust and a positive image with investors, communities, and other stakeholders.

•   In addition, companies that adhere to ESG standards may be able to demonstrate better risk management.

Recommended: Beginner’s Guide to Sustainable Investing

What Are ESG Metrics?

Until now, ESG metrics and reporting standards have been largely proprietary or voluntary. But owing to widespread concerns about climate change and climate-related risk factors, thousands of companies around the world have adopted voluntary frameworks and metrics in recent years.

There are thousands of metrics in use, many are specific to certain industries. Common ESG metrics typically assess how well an organization is limiting pollutants and emissions, meeting renewable energy targets, upholding fair labor standards, adhering to transparency in accounting, corporate board selection, and more.

The Use of ESG Frameworks

Companies may be required to use certain metrics in their reporting and disclosures. Here too there is considerable variation.

For example, the Global Reporting Initiative (GRI), which has a voluntary governance structure, is a nonprofit organization that was established in 1999 to create a set of guidelines that help companies and governments disclose their efforts in light of climate change, human rights, and corruption.

More than three-quarters (78%) of the world’s largest corporations have adopted the GRI standards, making it the most common ESG framework at the moment.

In addition, there has been a rise in the number of organizations that are establishing mandatory standards and/or compliance rules that require standardized reporting and verifiable metrics regarding ESG performance.

For example, the Corporate Sustainability Reporting Directive (CSRD) began rolling out mandatory ESG reporting rules in January of 2024 in the European Union. The CSRD compliance rules impact non-E.U. companies, as well, about a third of which are based in the United States.

Similarly, some financial institutions have created screener tools that investors can use to evaluate certain securities, but these are typically proprietary and cannot be used to evaluate investments at a different institution.

SEC Climate-Disclosure Rules on Hold

Another widely watched set of reporting requirements was led by the Securities and Exchange Commission (SEC) over the last few years. The SEC adopted new rules in March of 2024, which established a higher bar for companies and required them to disclose ESG-related operational risks and expenses, as well as efforts to meet sustainability targets: e.g., emissions reduction.

But those rules were quickly challenged and remain on hold at the time of publication. Likewise, similar efforts in states like California and elsewhere have been stalled.

Recommended: The Growth of Socially Responsible Investing

The Importance of ESG Metrics

Although the landscape of ESG frameworks and reporting standards is still evolving, and is largely in flux, ESG metrics are important because they help investors to gauge a firm’s impact on environmental issues, societal issues, and issues of corporate responsibility against a set of comparable peers.

Since many investors who are interested in ESG strategies are also committed to making an impact with their money, being able to benchmark outcomes is important.

The Limitations of ESG Metrics

However, it can be difficult to measure ESG policies across different industries, as no official regulations for standardized ESG reporting currently exist. For example, a financial institution might require different standards for energy efficiency vs. an agricultural company or an actual energy producer.

Finally, some of the existing standards are qualitative and may be prone to subjectivity, which can make the ESG evaluation process difficult to quantify. These can all present challenges when you’re trying to apply ESG principles to your investing strategy.

Having an awareness of some of the limitations around these metrics can help investors use the currently available criteria wisely.

9 Common ESG Metrics

Commonly employed ESG metrics consist of both qualitative and quantitative metrics across all three categories of environmental, social, and governance factors.

3 Common Environmental Metrics

Environmental metrics measure the long-term ecological sustainability of a firm’s actions. These can be related to emissions, finite natural resources, and the environment, among other things.

Many of these metrics can be tracked on an aggregate basis or relative to other operating metrics (per capita, per unit produced, etc.).

•   Emissions: Quantifies how much a firm emits in greenhouse gasses, or whether it’s working to reduce carbon emissions through its operations.

•   Waste: Measures how much waste a company generates or recycles in their operations. Can also reflect a company’s impact on its surrounding ecology: e.g., air or water pollution.

•   Resource Usage: Tracks the efficiency and extent of a firm’s operations when it comes to using energy, water, or other key resources.

3 Common Social Metrics

Social metrics evaluate how a firm’s policies impact its workforce, the community, and society at large. Attempts to quantify these metrics have largely been implemented on a per-occurrence basis, or as a rate over time.

•   Human resources: Evaluates how a company treats its employees, gender pay gaps, diversity, frequency/magnitude of any workplace litigation, and employee turnover.

•   Labor safety: Tracks a firm’s commitment to safe labor practices via metrics like frequency of workplace accidents and lost productivity.

•   Product development and safety: Examines a firm’s product quality and sustainability through metrics like number of recalls, complaints, or even frequency of litigation. Can also be linked to environmental standards when it comes to how product inputs are sourced.

3 Common Governance Metrics

Governance metrics pertain to issues relating to business ethics, mitigation of agency risks, and transparency in reporting. These can be measured in terms of how executives are compensated, board policies, and accounting choices, among others.

•   Ownership structure: Reviews how faithful a firm is to its shareholders when it comes to metrics like the number of independent directors on the board, or how voting rights are distributed between management and shareholders.

•   Executive compensation: Measures executive compensation relative to industry standards or company profitability. Can also be tied to social concerns when measuring how compensation structures vary for different genders/minorities.

•   Financial reporting: Tracks a firm’s accounting policies and how comprehensive and accurate they are. Could involve reviewing a firm’s books for key disclosures or frequency of one-off exceptions.

How Do Firms Report ESG Metrics?

To some degree, how each firm reports its ESG metrics depends on its policies regarding disclosures. But now companies do have some standardization for reporting climate-related risk factors and mitigation efforts.

Keep in mind, the adoption of ESG frameworks can vary widely by firm and disclosure of these metrics is still largely voluntary. Additionally, certain metrics may be difficult to quantify and, in some cases, management, stakeholders, or shareholders may disagree on the impact of certain ESG factors.

As a result, professional money managers sometimes may solicit the assistance of third-party ESG consultants to obtain an independent assessment of how a company actually performs on ESG metrics.

How Can Investors Use ESG Metrics?

Investors want to be discerning when investing in specific firms or funds that offer an ESG approach.

Given the range of ESG frameworks and the inconsistency in how frameworks are applied, investors should be aware that some firms may cherry-pick which ESG metrics they use. Investment funds and ETFs that offer an ESG-based approach may use their own proprietary metrics when deciding how to allocate ESG investments; which may make them difficult to compare.

When using ESG metrics, you’ll want to examine a company’s ESG-related disclosures closely to ensure that there’s consistency in the data being reported. Depending on the metric you’re examining, you may wish to avoid making comparisons across disparate industries and focus on identifying “best-in-class” investments for a single industry.

The Takeaway

Broadly speaking, ESG metrics can offer investors a useful dimension for evaluating certain types of sustainable investment choices. Although a unified set of ESG standards and metrics is a work in progress, there has been a steady push among regulatory bodies to establish ESG reporting requirements, here and worldwide.

As with any investment strategy, investors will want to manage their expectations appropriately and employ ESG metrics as part of a larger toolbox for investment analysis.

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.

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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.
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.

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2024

Roth TSP vs. Roth IRA: How They Compare

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Roth TSP vs. Roth IRA: How They Compare

Both Thrift Savings Plans (TSPs) and Individual Retirement Accounts (IRAs) come in traditional and Roth versions. One of the main differences between a Roth TSP vs. Roth IRA is who can contribute. Federal employees and members of the military can save in a Roth TSP. Anyone with earned income that’s within IRS income thresholds can contribute to a Roth IRA.

In either case, your contributions are not tax-deductible, but you can make tax-free qualified withdrawals when you retire.

Key Points

•   Roth TSPs are available to federal employees and military members, while Roth IRAs are accessible to anyone with earned income within IRS income thresholds.

•   Contributions to both Roth TSPs and Roth IRAs are made with after-tax dollars, allowing for tax-free qualified withdrawals in retirement.

•   Roth TSPs have higher annual contribution limits and allow for employer matching contributions, unlike Roth IRAs.

•   Roth IRAs typically offer a broader choice of investment options than Roth TSPs.

•   Choosing between a Roth TSP and Roth IRA depends on employment status, contribution capacity, and retirement goals.

What Are Roth Thrift Savings Plans (TSP)?

The Thrift Savings Plan is a retirement plan that’s designed specifically for federal employees. You’re generally eligible to contribute to a TSP if you’re covered by the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS). Members of the military can also save for retirement in a TSP.

A Roth TSP allows you to contribute after-tax dollars. When you make qualified withdrawals in retirement, those withdrawals are not taxed. Earnings are considered qualified if:

•   At least 5 years have passed since January 1 of the first year in which you began making contributions, and

•   You’re 59 ½ or older, permanently disabled, or deceased.

Contributions are made through elective salary deferrals, similar to a 401(k) plan. Catch-up contributions are allowed for workers aged 50 or older. Under the SECURE 2.0 Act, a higher catch-up contribution limit applies in 2025 for those ages 60 to 63. The IRS determines how much you can save in a Roth TSP each year. Here are the contribution limits for 2024 and 2025.

2024

 2025
Elective Deferrals $23,000 $23,500
Catch-Up Contributions $7,500 $7,500
$11,250 for those ages 60-63
Annual Additions Limit $69,000 $70,000

The annual additions limit is the total amount you can contribute in a calendar year. It includes employee contributions, as well as automatic and matching contributions made by your employing agency. Catch-up contributions do not count in this total.

🛈 While SoFi does not offer a Roth TSP, we do offer a Roth IRA to help members save for retirement.

What Are Roth IRAs?

A Roth IRA retirement account is an individual retirement account that allows you to contribute after-tax dollars, then make qualified withdrawals tax-free. Roth IRAs are available to individuals through brokerages, banks, and other financial institutions, rather than through employers.

You’ll need to have earned income to contribute to a Roth IRA. The IRS sets the maximum annual contribution limit. Catch-up contributions are allowed if you’re 50 or older. Here’s how the limits compare for 2024 and 2025.

2024

 2025
Annual Contributions $7,000 $7,000
Catch-Up Contributions $1,000 $1,000

The annual limit does not apply to rollover or reservist contributions. How much you can contribute to a Roth IRA is based on your income and tax filing status.

You can make the full contribution in 2024 if:

•   You file single or head of household and your modified adjusted gross income (MAGI) is less than $146,000

•   You’re married, file separately, did not live with your spouse during the year and your MAGI is less than $146,000

•   You’re married and file jointly or are a qualifying widow(er) and your MAGI is less than $230,000

You can make a full contribution in 2025 if:

•   You file single or head of household and your MAGI is less than $150,000

•   You’re married, file separately, did not live with your spouse during the year, and your MAGI is less than $150,000

•   You’re married and file jointly or are a qualifying widow(er) and you’re MAGI is less than $236,000

There are no required minimum distributions for Roth IRAs, so you can leave money in your account until you need it. You can also withdraw original contributions at any time, without a tax penalty.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Similarities Between Roth TSP vs. Roth IRA

It’s important to open a retirement account that fits your needs. In terms of what’s similar between a Roth IRA vs. Roth TSP, they both allow you to contribute money on an after-tax basis. In other words, you pay taxes on the money that goes into the plan upfront so you can withdraw it tax-free later.

Once you reach age 59 ½, you can begin taking distributions without triggering any tax consequences. In terms of early withdrawals from a TSP vs. Roth IRA, there’s no difference. The IRS can assess a 10% early withdrawal penalty when taking money out of either account prematurely.

Both Roth IRAs and Roth TSPs are subject to the five-year rule mentioned earlier. Again, that rule dictates that at least five years must have passed since making your first contribution in order to avoid a tax penalty when making withdrawals.

TSP Roth vs. Roth IRA Similarities
Funded with… After-tax dollars
Contributions are… Not tax-deductible
Qualified withdrawals are… Tax-free

Differences Between Roth TSP vs. Roth IRA

While they do have some things in common, there are some notable differences between a Roth IRA vs. TSP.

First, the TSP is an employer-sponsored plan, while an IRA is not. If you don’t work for the federal government you wouldn’t have access to a Roth TSP, but you could still open a Roth IRA and contribute to it.

Next, Roth TSPs have much higher annual contribution limits and catch-up contribution limits. They also allow for employer matching contributions, something you won’t get with a Roth IRA. Your ability to contribute to a TSP is not limited by your income either.

While Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty, that’s not the case for Roth TSPs.

TSP Roth vs. Roth IRA Differences
Contribution limits… Are higher for Roth TSPs
Matching contributions… Only apply for Roth TSPs
Contribution withdrawals… Only Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty

Roth TSP vs. Roth IRA: The Pros

There are several types of retirement plans that can offer tax advantages, including both Roth TSP and Roth IRA accounts. In terms of the pros, the main benefits of choosing either of these accounts lies in the ability to withdraw money when you retire tax-free.

If you expect to be in a higher tax bracket when you retire, Roth TSP or Roth IRA withdrawals won’t increase your tax liabilities. That’s a good thing if the value of your investments within either account has risen significantly since you first begin making contributions.

Roth TSPs may help you save a decent amount of money for retirement if you’re able to max out your plan each year. The addition of employer matching contributions is another benefit, since that’s essentially “free” money. You don’t get that with Roth IRAs, but these accounts can still be a good way to save if you don’t have access to a retirement plan at work.

Roth TSP Pros Roth IRA Pros

•   Contribute money on an after-tax basis

•   Contributions grow tax-free

•   Qualified withdrawals are tax-free

•   High annual contribution and catch-up contribution limits

•   Employer matching contributions may help your savings grow faster

•   Eligibility to contribute is not tied to your income

•   Contribute money on an after-tax basis

•   Contributions grow tax-free

•   Qualified withdrawals and withdrawals of original contributions are tax-free

•   Save for retirement even if you don’t have a workplace retirement plan

Roth TSP vs. Roth IRA: The Cons

While there are some advantages to saving in a Roth TSP or Roth IRA, there are also some potential downsides. For one thing, you’ll need to have a federal job (that is, work for the federal government is some capacity) in order to contribute to a Roth TSP. With a Roth IRA, your ability to make a contribution hinges on your income and filing status.

Roth TSPs are also known for offering a narrower range of investment options. If you make an in-service withdrawal from your account and you’re not age 59 ½ yet, you should be prepared to pay a tax penalty.

A Roth IRA doesn’t offer matching contributions, nor can you borrow from it. Any early withdrawals that are not qualified or don’t otherwise meet the five-year rule could be subject to tax penalties. While you might have more investment options to choose from, it’s important to be mindful of the fees you may pay.

Roth TSP Cons Roth IRA Cons

•   Must be an eligible federal employee to contribute

•   Investment selection may be limited

•   In-service withdrawals only allowed for financial hardship

•   Early withdrawal penalty may apply

•   Must be within the IRS threshold guidelines to contribute

•   How much you can contribute is tied to income and filing status

•   No option to take loans

•   No employer matching contributions

•   Early withdrawal penalty may apply

Roth TSP vs. Roth IRA: Which Is Better for Your Retirement Goals?

Selecting a retirement plan is an important decision as you want to choose an option that aligns with your needs, goals, risk tolerance, and objectives. Contributing to a Roth TSP could be wise if you’re a federal employee, since you can take advantage of higher contribution limits and employer matching contributions.

A Roth IRA, meanwhile, could make sense if you don’t have access to a retirement plan at work or you want to supplement your employer’s plan. Contributing to a retirement plan at work doesn’t bar you from also contributing to a Roth IRA, as long as you’re within the income limits set by the IRS.

The one that’s better for you may depend on where you work, how much money you’re able to contribute to retirement savings each year, and when you plan to retire. When comparing investment options for a Roth TSP vs. Roth IRA, consider the overall track record of those investments as well as the fees you might pay.

The Takeaway

Whether you choose a Roth IRA vs. Roth TSP or something else, it’s important to save for retirement early and often. Even if you can only afford to contribute small amounts to a retirement account, they can add up over time as long as you remain consistent.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Should I max out my TSP or Roth IRA?

If you can afford to max out your TSP, it might make sense to do so before maxing out a Roth IRA. The simple reason for that is TSPs have higher annual contribution limits and you can also get a matching contribution from your employer. If you only have a Roth IRA, then maxing it out each year can help you save the most money possible toward your retirement goals.

Is a Roth IRA better for retirement or a Roth TSP?

A Roth IRA is a good retirement savings option if you want to be able to make tax-free withdrawals later. However, a Roth TSP allows you to contribute a larger amount of money each year and your employer can also make matching contributions on your behalf.

Does a Roth TSP reduce taxable income?

Roth TSP contributions are made using after-tax dollars, so they do not reduce your taxable income for the year. You can, however, manage your tax liability by taking advantage of any deductions and credits you might be eligible for.

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SoFi Invest®

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

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

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

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.

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26
2024

21 Jobs for Graduate Students: Working While in School

By | Fresh Out of School, Growing Wealth, Life Stages | Comments Off on 21 Jobs for Graduate Students: Working While in School

As a graduate student, you can get a job while you’re in school to help cover your living expenses and even some of your college costs. A job can also help you gain experience and learn skills that can be beneficial in your career. Of course graduate school can be demanding, and you’ll need to balance your classes with work. But part-time jobs for graduate students can still make a lot of sense.

There are a variety of jobs for graduate students to choose from, both on and off campus. Read on for more information about finding a job while in graduate school.

Key Points

•   Part-time jobs, internships, and fellowships offer valuable work experience and financial support for graduate students.

•   Flexible job options include online, summer, and on-campus roles.

•   Graduate assistant jobs, teaching assistant positions, and resident advisor roles provide tuition waivers and stipends.

•   Graduate students can find online jobs that tap into their skills, such as web design or freelance writing and editing.

•   Balancing work and studies is essential for managing graduate school demands.

When Should Graduate Students Apply for Jobs?

When graduate students should apply for jobs depends on the type of job they’re pursuing. For instance, if you’d like to apply for an internship or graduate assistantship, or for a resident advisor or teaching assistant position, you’ll likely need to start the process months in advance or even the semester before. Check with your school or department about the specific timing.

If you’re pursuing a job off-campus, such as a position in retail or at a restaurant, you can apply anytime you’re ready. You may want to wait until you have your class schedule so you can see when you’ll have free time to work.

Earning money while you’re in school can not only help you tackle the cost of your living expenses, it could also allow you to start paying some of your student debt, such as any interest that’s accruing on federal or private student loans while you’re in school.

What Are Some Jobs for Graduate Students?

The best jobs for graduate students offer a flexible work schedule so that you can stay on top of your coursework. There are job opportunities on and off campus. Some jobs allow you to get experience in your field of study; others offer the chance to earn good money. Here are some of your options.

Internships

With a college internship as a grad student, you gain hands-on experience, networking opportunities, and mentorship from professionals that can help you develop a range of skills in your field. For example, as a finance intern, you might do financial modeling, data analysis, create financial reports, and work on special projects.

Types of Internships

There are many different kinds of internships available, including:

•   Research internship: Research interns assist professors with such tasks as conducting research for studies, gathering data, and working with other students and professors to write research reports.

•   Paid internship: These internships, typically offered by companies, are common in fields like law, medicine, business, and engineering. Paid internships can help you expand your knowledge of the field and get real-world experience to put on your resume. How much these internships pay varies by company.

•   Unpaid internship: Some businesses and organizations that have volunteer staff, including nonprofit charities, may have unpaid internships available. Students may be able to earn academic credits instead. Unpaid internships are legal under the Fair Labor Standards Act as long as the intern is the “primary beneficiary” of the internship. However, unpaid internships must meet specific state government criteria. Before taking an unpaid internship, you may want to consult your state’s labor guidelines.

•   Partially paid internship: These are internships in which interns receive a stipend or compensation to help cover expenses of the internship, such as commuting costs, but they don’t get paid.

•   Remote internship: Virtual internships may be available, especially for digital or IT jobs. Rather than going to an office to work, you can do the job from anyplace. This type of internship can offer more flexibility to grad students.

Part-Time Jobs for Graduate Students

In addition to internships, graduate students can also consider part-time jobs. These are some of the best part-time jobs for graduate students.

•   Graduate assistant: A graduate assistantship is an academic job you apply for, and acceptance is based on faculty recommendations and academic excellence. Graduate assistants, who usually do research and handle administrative duties, typically receive a tuition waiver when they work for faculty members or school departments.

•   Teaching assistant (TA): Teaching assistantships give you teaching experience and help pay for your education through a stipend or tuition discount. TAs typically help professors by doing such things as teaching classes, grading tests and papers, preparing lesson plans, and meeting with students.

•   Tutor: Another option is to become a tutor to work with college students that need academic help. You might expand your services by tutoring high school students in specific subject areas or for tests like the SAT.

•   On-campus assistant jobs: Many different types of assistant jobs may be available to graduate students on campus. These include library assistant, administrative assistant, IT support staff, admissions assistants, assistants who help with university events, and lab technician assistants. Check with the school’s HR department to learn about available opportunities and what the payment or stipend might be.

•   Resident advisor (RA): Graduate students can serve as RAs who act as a resource and support system to students, make sure dorm policies are followed, and organize social events and activities. RAs typically receive free housing and meals as well as a stipend.

•   Graduate fellowship: Graduate fellowships are merit-based programs and they tend to be competitive. Fellows receive financial support to focus on graduate research and training, such as stipends, a tuition waiver, and health insurance coverage. Fellowships can be offered by colleges; local, state, and federal agencies; and private foundations.

•   Off-campus jobs: You may be able to find part-time off-campus jobs in the local community in retail, food service, delivery, or distribution. While these jobs may not have anything to do with your degree, they can give you a steady income. The pay varies by job type.

Summer Jobs for Graduate Students

Summer break is the perfect time to get a job as a grad student because you can work full-time for several months. You can earn money to put toward your degree, which could help with getting out of student loan debt.

Some good summer jobs for graduate students include:

•   Camp counselor or instructor: If you like children, consider teaching at one of the many recreational summer camps for kids. There are day camps and sleep-away camps, so you’ll have different options to choose from.

•   Event coordinator: If you’re staying at school for the summer, you can look for a position as an event coordinator for an on-campus summer program like Upward Bound, which prepares high school students from low-income families for college. You can also look for event coordinator positions at community centers and nonprofit organizations.

•   Outdoor jobs: If you enjoy being outside, consider working as a lifeguard, landscaper, dog walker, or caddy at a golf club. You can also check with local, state, and national parks for available outdoor positions.

Online Jobs for Graduate Students

If you’re looking for a position that offers flexibility and the chance to work from home with your busy school schedule, one of the many online jobs for graduate students may be right for you. You can choose from a number of positions like the ones below.

•   Social media manager: If you enjoy being on social media and you’re good at it, you could work as a social media manager for a business or company to help promote their services and engage with their customers.

•   Online tutor: Sign up with one of the numerous online tutoring programs, such as Chegg, SolutionInn, Course Hero, and Transtutors, to work virtually with students.

•   Virtual assistant: Virtual assistants do a variety of jobs for companies, including, clerical work, bookkeeping tasks, appointment scheduling, email correspondence, and data entry.

•   Freelance writer or editor: This could be a good opportunity for a journalism or English grad student. As a freelancer, you can write and edit for different digital platforms. You might focus on SEO writing, technical writing, or copy editing.

•   Graphic/web designer: Design students can consider a summer job as a graphic or web designer. You’ll need to know design software, typography, color theory, and have good graphic editing skills.

•   Affiliate marketer: By becoming an affiliate marketer, graduate students can earn a commission by referring an online audience to certain products or services. When customers click on affiliate links and make a purchase, the affiliate marketer gets a fee or percentage of the profit.

Recommended: Student Debt by Major

Paying for Grad School

Landing a paid internship or getting a part-time, online, or seasonal job while you’re in grad school is one way to help cover some of the costs of college.

Another way to pay for school is with financial aid. Explore your federal financial aid options first. Fill out the Free Application for Federal Student Aid (FAFSA) to learn what financial aid you qualify for, including scholarships and grants, and federal student loans, including Direct PLUS federal loans (also called Grad PLUS loans). Direct PLUS loans disbursed on or after July 1, 2024 and before July 1, 2025 have a 9.08% federal student loan interest rate.

In addition, search for private scholarships and grants offered by your state and some organizations and businesses to see what kind of gift aid opportunities you can find.

Finally, you can supplement any remaining gap in your financial aid by taking out private student loans offered by banks, credit unions, and private lenders. The interest rates on these loans may be variable or fixed, and the rate you get depends on your credit history, income, and other factors. Our student loan payment calculator can help you determine how much you’ll pay on your loans over time.

You can refinance student loans in the future for a lower rate or better terms if you qualify for them. However, be aware that if you refinance federal student loans, you’ll lose access to federal benefits like income-driven repayment and student loan forgiveness programs.

The Takeaway

The best jobs for graduate students can help you pay for some of your college costs and give you valuable working experience that could help you find a full-time position after graduation. You could apply for an internship, fellowship, or apprenticeship in your field, or you could work as a resident advisor or teaching assistant. There are also online, summer, and part-time jobs grad students can explore.

Financial aid like scholarships and grants, and federal and private student loans can also help you pay for college. And you have the option to refinance student loans in the future for better rates and terms if it makes sense to do so.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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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.

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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