Jun
13
2023
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Understanding the Permanent Portfolio Strategy

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

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

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

What Is the Permanent Portfolio?

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

•   25% U.S. Stocks

•   25% Treasury Bills

•   25% Long-Term Treasury Bonds

•   25% Gold

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

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

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

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

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

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

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

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

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

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

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

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


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

Historical Performance

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

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

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

Pros of the Permanent Portfolio

There are several upsides to building a permanent portfolio:

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

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

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

Cons of the Permanent Portfolio

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

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

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

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

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

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

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

Building a Permanent Portfolio

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

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

The Variable Portfolio

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

Alternatives to the Permanent Portfolio

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

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

Below are some of the most popular strategies:

60/40

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

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

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

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

Business Cycle Investing

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

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

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

Rule of 110

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

Dollar-Cost Averaging

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

Lump Sum Investing

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

Alternative Investments

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

The Takeaway

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

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

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


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

SoFi Invest®

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

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Jun
13
2023
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What Is a Straddle in Options Trading?

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

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

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

Understanding Puts and Calls

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

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


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

How to Put on a Straddle Trade

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

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

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

Examples of Straddles

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

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

Long Straddle Example

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

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

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

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

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

Short Straddle Example

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

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

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

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

Pros & Cons of Straddles

Pros of Straddles

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

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

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

Cons of Straddles

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

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

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



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

Straddles vs Strangles

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

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

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

The Takeaway

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

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

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.


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

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Jun
13
2023
What every new investor should know about risk

What Every New Investor Should Know About Risk

By | Growing Wealth, invest, Investing | No Comments

Risk is a critical component of each and every investment, and there are several things about risk, and an individual’s ability to handle it, that investors need to know about. Those include the types of risk involved in investing, the relationship between risk and potential returns, and how to effectively manage it.

Investors should consider their appetite and tolerance for risk, and try to determine which assets are suitable for them. Investing involves understanding the risk profiles of the different assets, among other things, too.

Higher Risk, Higher Potential Return

The most important thing to understand about risk is something you’ve probably heard before: Generally, the higher the risk of your investment, the greater return you should expect on your money. It is, however, the nature of risk that the return you expect might not be the return you actually get.

The concept of “Modern Portfolio Theory” emphasizes that risk and reward are linked. If you hope for a higher return, you should also expect higher volatility — the variability of actual returns. The returns on an exchange-traded fund (ETF) may be up one year and down the next.

Returns on a mutual fund of emerging market stocks will likely have much wider changes in returns from year-to-year, or even month-to-month. You might make a lot more money, but you also could lose much more.


💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

How Much Risk Should You Take?

When determining a level or risk that you’re comfortable with, you want to first look at the goals you have (buying a house, saving for college, and retiring, to name a few), as well as how many years will it be before you need the money for each goal. That’s called a “time horizon.”

balancing risk

Generally speaking, the longer the time horizon, the more risk you can afford to take, because you have more time to recover from market downturns.

This is why young people are advised to put their retirement savings in a more aggressive portfolio. As you get closer to retirement, you’ll generally want to be more conservative. You can also consult a retirement calculator to see where you stand on your retirement goals.

Risk Tolerance Quiz

Take this 9 question quiz to see what your risk tolerance is.

⏲️ Takes 1 minute 30 seconds

What Types of Risk Are There?

There are several types of risk that every investor should be aware of. Here are a few:

•   market

•   business specific

•   price volatility

•   interest rate

•   concentration

Some risks you can’t avoid, like market risk or beta. The market goes up and down, and this often affects all stocks. Investors can measure the risk in their stock holdings by finding their portfolio’s beta. This will show how sensitive one’s portfolio is to volatility in the market.

You can, however, reduce other risks. For example, if you buy individual stocks, you open yourself up to business specific risk. But, if you buy an index fund, you are buying assets in multiple companies. If one of these companies falters, it will impact the index, but it won’t have the same harsh impact on your investment. This is why seasoned investors tend to emphasize portfolio diversification so much.

How Should You Manage Risk?

On a broad level, how do you use these concepts to manage your investing risk? One method is to utilize different asset allocation strategies to your advantage.

For example, if you wanted to take a particularly low-risk, or conservative position, you could allocate your portfolio to contain more bonds than stocks. Bonds tend to be safer investments than stocks (though it’s important to remember that there’s no such thing as a “safe” investment), and as such, may be less volatile if the market experiences a downturn or correction.

If you still wanted to play it safe but allow for some risk (and potentially bigger returns), you could split your portfolio’s allocation – that could include 50% stocks, 50% bonds, or something along those lines. Further, if you feel like you have a high risk tolerance, you could take an aggressive position, and invest most of, or your entire portfolio in stocks.


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

Managing Specific Types of Risk

If you want to get more granular, you can try to manage specific types of risk in your portfolio, such as interest rate risk, business-specific risk, etc.

Interest rate risk, for one, has to do with investment values fluctuating due to changing interest rates. This generally involves bond investments, and one way to try and manage it is through diversification, or even by participating in hedge funds — though that can be its own can of worms, so do your research before jumping into hedge funds.

As for business-specific risk? This refers to specific or particular companies or industries. For example, the aerospace industry faces a different set of challenges and risks than the food production industry. So, changes to the Federal Aviation Administration could, as a hypothetical, cause price fluctuation to aerospace stocks, but not other types of stocks. Again, this can largely be solved through diversification.

There are numerous other types of risks, too, and managing them all is difficult, if not impossible, for the typical investor. You can consider consulting a financial professional for further advice, however.

A good course to take? Be honest with yourself. Over time this portfolio is more likely to have a higher return than the other one, but only if you stay invested through the bad times as well as the good. If that isn’t you, no problem — just pick a less risky asset allocation.

The Takeaway

Risk is unavoidable when investing, and as such, it’s important to understand the nature of the risk, avoid taking risks that you can’t afford, and then to take steps to mitigate risk and still reap the benefits. Think about it like driving a car: It’s risky, but you understand that risk and mitigate it by maintaining your car, obeying traffic laws, and buying insurance. The return is that you get where you’re going faster.

There are no guarantees in investing, but you can make an informed choice of the amount of risk you are willing to take and invest intelligently to reach your 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.

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.

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.

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

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

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Jun
13
2023
solar panel installation

How to Invest in Energy Stocks

By | Growing Wealth, invest, Investing, Terminology | Comments Off on How to Invest in Energy Stocks

Investors are newly attuned to the energy sector, given the global energy crisis that began in 2022 and has continued into 2023 — raising concerns but also increasing investment opportunities in some sectors.

After all there are many different kinds of energy companies, including exploration and production, oilfield services, pipelines, storage and transportation of oil and gas, and renewable energy such as solar, wind, or geothermal heat.

Energy stocks make up one of the 11 sectors in the S&P 500, which consists of the 500 largest stocks in the U.S. For an investor looking for the top energy stocks, this is the list to watch.

How to Choose an Energy Sector Stock

The energy industry is large and complex. In the oil and natural gas industries alone, there are upstream (production), midstream (transport), and downstream (finished product applications) companies in which an investor might choose to invest their money.

For some investors, the source of the energy can impact their interest in owning stock.

Coal used to be a major fuel source, but the global energy crisis or 2022-23 has sparked significant growth in installations of renewable power, with total capacity predicted to almost double worldwide in the next five years, according to a 2022 report by the U.S. Energy Information Administration (EIA).

Beyond more commonly known wind, solar energy, and geothermal energies, other sources of renewable energy include hydropower, biodiesel, ethanol, wood and wood waste, and municipal solid waste.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

How to Invest in Individual Energy Sector Stocks

One way to invest in the energy industry is to buy individual stocks of oil and gas companies or renewable energy companies. When an investor owns individual energy stocks, they have the freedom to buy and sell them as frequently they choose, and also to engage in options trading strategies.

Recommended: Sustainable Investing Guide

When investing in a particular stock, the more hands-on learning the investor can do about the company, the better informed they’ll be. In considering renewable energy stocks or other energy stocks, an investor might want to examine the company’s finances — including cash flow, debt, and other factors such as the price-to-earnings ratio and the dividend payout ratio. Investors might also research the history of the stock and how it has performed over the past 10, five or even one year.

Investors might also compare individual energy stocks with other similar ones that are involved in other aspects of the industry.

The Downside of Buying Individual Energy Sector Stocks

Choosing individual energy sector stocks — whether from oil and gas companies or solar and wind farms — can be challenging and require an investor’s time in researching a company’s financials for a clearer overall picture.

Additionally, buying individual shares of a company can be risky since stock prices can be volatile. There are many factors that can impact an energy stock price, such as the price of crude oil, the price of natural gas, geopolitical issues, decisions made by OPEC, supply and demand from various industries and consumers, and other economic issues.


💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

How to Invest in Energy ETFs

Some investors prefer to invest in exchange-traded funds (ETFs) which are composed of dozens or even hundreds of stocks in an industry.

This diverse investment bundle generally lowers the amount of risk for an investor, vs owning individual stocks.

One advantage of investing in an energy ETF is that an investor can start by buying just one or two shares of the ETF and gradually add more shares as their budget allows.

With energy sector ETFs, investors can choose to invest in ETFs that focus on oil and natural gas, or solar companies, or more generally on renewable energy or clean energy.

Additionally, investors can look for buzzwords like green investing that may indicate an overlap of industries and missions.

The Takeaway

Energy stocks — whether shares in oil or natural gas companies, or solar or other renewable energy stocks — can be a vital part of a diverse investment portfolio. Investors can focus on a particular part of the sector that interests them, or else invest broadly in the sector.

As with other sectors, when it comes to investing in energy sector stocks, investors might choose to buy individual shares, or they might invest in an energy sector ETF. The decision comes down to personal opinion and comfort level.

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


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

SoFi Invest®

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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

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

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Jun
13
2023
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How to Start Investing in Utilities

By | Growing Wealth, invest, Investing | Comments Off on How to Start Investing in Utilities

Investors looking for a value investment that typically provides steady income without much volatility might consider investing in utilities. Utility companies provide essential services that the public uses on a daily basis, such as water and electricity, making them generally stable investments.

Investing in utilities is considered to be low risk compared to other different types of stocks, since utility companies are regulated entities with few competitors. Plus, their profits and expenditures are very predictable, so they tend to provide steady performance.

In addition, utilities are a constant in modern life — people always need them — so utility companies tend to ride out economic downturns without significant volatility, and may provide higher dividends than other fixed income assets.

What are Utility Stocks?

The utilities sector includes electricity, gas, water, and waste services. Cable and telephone companies used to be placed in the utilities sector, but now they are within the communications sector due to shifts in technology and competition.

The utilities sector includes companies that generate traditional power as well as alternative and sustainable energy (sometimes called green energy), as well as companies that transmit and distribute power to homes and businesses. Companies that provide natural gas generally buy it from oil and gas drilling companies and distribute it to customers. Water companies provide clean water to customers and collect and treat dirty water.

Since there will always be a consumer demand for basic utility services, the sector continues to invest in infrastructure, resulting in continuous growth.

There are government regulations protecting utility companies, making it difficult for competitors to enter the market. Regulations also control the prices that utility companies charge for goods and services, making their earnings predictable and creating even more stability in the market.

It’s also extremely expensive to build the infrastructure needed to provide utilities. This allows utility companies to establish themselves in a region and grow steadily over time without significant volatility.

Who Should Invest in Utilities Stocks?

Utility stocks are generally considered to be income stocks rather than growth stocks, since they provide consistent dividends but don’t tend to significantly increase in value.

Some people might be tempted to think of utility stocks as similar to bonds, since they provide consistent income and tend to be stable and safe. But they are not the same. One difference is that the yields from utility stocks tend to be higher than those of bonds and other fixed income investments. These factors make them popular as a safe haven asset, and among retirees and conservative investors.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Choosing Utilities Stocks to Invest in

There are a number of ways to evaluate a stock in a utility company before buying it — here’s what investors might want to consider.

New Utility Companies and Emerging Markets

Since utility stocks have high dividends (making them popular monthly dividend stocks) and tend to be established companies, they don’t have the opportunity for significant growth. But some stocks in emerging markets or those of new utility companies can be an exception. Growth investors tend to gravitate towards these types of utility stocks, use utilities as a safe haven during market downturns, or as a way to diversify.

Companies with Moderate Dividend Payouts

Investors can look at a company’s dividend payout ratio to see how much of its profits it retains and how much it pays out to shareholders. If a company pays out less to shareholders, it may have more potential for growth since it keeps those revenues to invest back into the business and won’t need to borrow as much money.

Undervalued Utility Companies

Technical analysis can help both growth and value investors pick out which utility stocks might be undervalued and those which have the most potential for growth and income.

Utilities with Healthy Credit Ratings

Another tool investors can look at when choosing utility stocks is their credit rating. A higher credit rating means a company will be able to borrow more money, which is important for utility companies that need to continue investing in and maintaining infrastructure. However, too much debt isn’t a good sign, so investors should look at the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and debt-to-total-capital ratios when comparing potential utility stock investments.

Other factors to consider when choosing utility stocks:

•  The region in which the company operates
•  The regulatory market in that region
•  The utility the company provides and its business model
•  The dividend rate
•  The company’s financials

Investors who want to gain exposure to a broad cross section of the market rather than choosing individual stocks might choose to invest in utility ETFs and mutual funds.

Benefits of Investing in Utilities Stocks

There are several reasons investors choose to add utility stocks to their portfolio:

•  They tend to pay out higher dividends than other fixed-income assets and stocks.
•  They are considered safe and stable investments. There will always be a demand for utilities, investors tend to sell off higher-risk investments first, they are under government regulation, and they have few competitors.
•  They tend to have high dividends and stability. Even though they don’t always see significant growth, their high dividends and low volatility make them a popular investment, so they do continue to grow over time.
•  They can be a safe haven asset during economic downturns. Utilities provide essential services, making them a good way to diversify a portfolio.
•  They have little competition. Government regulations create the opportunity for utility companies to essentially become monopolies within their operating region, reducing the ability for competitors to enter the market.
•  Certain utility stocks may provide tax benefits. This can include lower capital gains rates for qualified dividends.


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

Downsides of Investing in Utilities

Although there are many reasons to invest in utilities, like any investment, they come with some downsides:

•  They are riskier than bonds. Since they are still part of the stock market, their values do fluctuate along with market trends. Utility stocks lost about half of their value (not including dividends) in both of the major market downturns in the past decade.
•  They don’t provide opportunity for significant short-term growth. Here, their stability can be seen as a negative.
•  Rising interest rates can negatively affect utility stocks. That’s because utility companies tend to hold a lot of debt since their businesses require significant capital investment. As interest rates rise, companies have a higher debt burden. Also, when interest rates rise, stock prices tend to decrease, thereby decreasing their amount of equity funding and causing some investors to shift funds into other types of assets.
•  Utility companies are affected by changes in government policy. Regulations can also make it challenging for companies to grow, since they can’t easily increase their prices.
•  Not every utility company has high returns. The best choices for investors are the ones that show visible potential for both growth and high-yield dividends. Since utility infrastructure is expensive to build and maintain, companies need to show that they will be able to continue running and growing while still earning enough profit to pay out dividends.

The Takeaway

Investing in utility stocks can be a good way to diversify a portfolio, by adding low-volatility assets that typically have high dividends. The public will always need utilities like water, gas, electric and renewable energy — and that allows utility companies to weather economic downturns relatively well.

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

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

SoFi Invest®

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

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


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

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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