Jul
08
2024

REITs vs Real Estate Crowdfunding

By | Growing Wealth, invest, Investing | Comments Off on REITs vs Real Estate Crowdfunding

As a type of alternative investment, real estate can add diversification to a portfolio and act as a hedge against inflation. Real estate investment trusts (REITs) and real estate crowdfunding offer two unique entry points to this alternative asset class.

Both allow you to invest in real estate without being required to own property directly. Comparing the pros and cons of real estate crowdfunding vs. REIT investing can help you decide which one makes the most sense for your portfolio.

Understanding Real Estate Investment Trusts (REITs)

Real estate investment trusts are legal entities that own or finance income-producing properties or invest in mortgage-backed securities. The types of properties a REIT may invest in can include:

•   Hotels and resorts

•   Office space

•   Warehouses

•   Storage space

•   Multifamily apartment buildings

•   Data centers

•   Medical facilities

•   Retail shopping centers

•   Single-family homes

The primary attraction of REITs is the ability to enjoy the benefits of property investment — namely, dividend income — without purchasing real estate directly.

REITs are also considered a type of alternative investment. As with many alternative investments, real estate-based assets don’t tend to move in sync with the stock market. For this reason, investing in REITs may provide portfolio diversification.

REITs may be publicly traded, meaning they trade on an exchange like a stock. REITs must pay out 90% of their taxable income to shareholders as dividends, though some may pay as much as 100%.

If you compare REITs vs. real estate mutual funds, dividends aren’t always required with the latter. Real estate mutual funds can invest in REITs, mortgage-backed securities, or individual properties. While you may have access to a broader range of properties, you may enjoy less liquidity with real estate funds.

Recommended: SoFi’s Alt Investment Guide for Beginners

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Overview of Real Estate Crowdfunding

What is real estate crowdfunding? It’s a strategy that allows multiple investors to pool funds for property investment. In return, investors share in the profits generated by the investments. Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.

In terms of how it works, real estate crowdfunding platforms seek out investment opportunities and fully vet them before making them available to investors. Individual investors can then choose which properties they’d like to invest in.

Depending on the nature of the investment, you may collect interest payments, rental income, or dividends. Real estate crowdfunding can offer access to a variety of property types, including:

•   Multifamily housing

•   Industrial space

•   Build-for-rent projects

The minimum investment varies by platform — it is commonly upwards of $5,000, but may be $500 or even lower in some cases. Some real estate crowdfunding platforms require investors to be accredited, meaning they must:

•   have an income exceeding $200,000 (or $300,000 with a spouse or spousal equivalent) in each of the two prior years, with an expectation of the same income for the current year, OR

•   have a net worth exceeding $1 million, alone or with a spouse/spousal equivalent, excluding the value of their primary residence, OR

•   hold a Series 7, Series 65, or Series 82 license in good standing

Comparing REITs and Real Estate Crowdfunding

When choosing between a REIT vs. crowdfunding, it’s helpful to understand each option’s potential advantages and disadvantages.

Pros and Cons of REITs

Here are the main benefits of investing in REITs vs. crowdfunding.

•   Risk management. Alternative investments like real estate may help you balance risk in your portfolio. REITs and real estate in general have a lower correlation with the stock market.

•   Accessibility. Purchasing an actual investment property usually requires getting a loan and raising capital for down payments and closing costs. REITs can offer a much lower barrier to entry for investors.

•   Dividends. REITs must pay dividends to investors, which may be attractive if you want to generate passive income with investments.

•   Liquidity. Publicly traded REITs offer liquidity since you can buy and sell shares as needed, similar to a stock.

•   Returns. REITs can potentially generate significant returns in a portfolio compared to stocks or other investments.

Now, here are some of the drawbacks of REIT investing.

•   Fees. You’ll typically pay management fees to invest in REITs, as with any investment, but some may charge more than others. Paying attention to investment costs is key, as the more fees you pay, the less of your investment returns you keep.

•   Overweighting. You can choose which REITs to invest in, but you don’t have a say in the underlying properties. Investing in REITs that own similar properties could overweight your portfolio in a single sector (e.g., malls or office buildings) and thus increase your risk profile.

•   Interest rate risk. Changing interest rates can affect the value of REITs, which can influence the yield you might get. When rates rise, REIT values can decline, requiring you to adjust your expectations for a profit.

•   Taxes. REIT dividends are typically taxed as ordinary income, up to 37% (plus a 3.8% investment surtax). But investors may also see a short- or long-term profit from the REIT, which would be taxed as capital gains. There is also the potential for return on capital, which can be complicated. It may be wise to consult a professional.

Pros and Cons of Real Estate Crowdfunding

Here are the main pros of crowdfunding real estate investments.

•   Diversification. As with REITs, real estate crowdfunding allows you to diversify beyond traditional stocks and bonds.

•   Low minimums. Some, though not all, real estate crowdfunding platforms allow you to get started with as little as a few hundred dollars. That can make entering this alternative asset class or spreading your investment dollars out over multiple property types easier.

•   Geographic diversification. Real estate crowdfunding platforms can offer investors exposure to markets across the country. That can make it easier to target a specific region if you’re looking for the next “hot” market.

•   Returns. Crowdfunded real estate may generate above-average returns, or exceed the returns you could get with REITs.

•   Passive income. Owning a rental property can be time-intensive if you’re managing the property yourself. Real estate crowdfunding allows you to reap the benefits of rental income, without the typical headaches that go along with being a property owner.

And now, here are the cons.

•   Fees. Just like REITs, real estate crowdfunding platforms can charge fees. Fee structures can sometimes be complex, making it difficult to assess what you’ll pay to invest.

•   Illiquidity. Liquidity in the stock market is one thing, but when it comes to real estate crowdfunding, it’s an even bigger consideration owing to the length of time your capital may be locked into an investment. Once you invest in a property, you’re essentially committed to owning it for the duration of the holding period. It’s not unusual for real estate crowdfunding platforms to offer investments with holding periods of five years or more, making them highly illiquid.

•   Accreditation requirements. Some crowdfunding platforms only accept accredited investors. If you don’t meet the standards, you won’t be able to invest through those platforms.

•   Taxes. Income from crowdfunded real estate investments is taxable, though not always in the same way. You may be subject to different tax rates based on how dividends and interest are paid out to you. You may want to consult with a professional.

Which Investment Strategy Is Riskier?

It’s difficult to pinpoint which is riskier when comparing a REIT vs. real estate crowdfunding, as each one has different risk factors.

With REITs, the biggest risks may include:

•   Liquidity risk, which could make it difficult to sell your shares if you’re ready to leave an investment.

•   Changing market conditions or rising and falling trends, either of which could directly impact real estate values.

•   Interest rate sensitivity, which can influence REIT values.

The main real estate crowdfunding risks may include:

•   Platform risk, or the risk that the marketplace you’re using to invest could shut down before you’re able to withdraw your capital.

•   Poor vetting, which may allow unsuitable investments to make it onto the platform.

•   Changing regulations, which may affect the real estate crowdfunding space as a whole.

Whether you choose a REIT vs. crowdfunding, lack of education or understanding is also a risk factor. If you don’t understand the basics of how either type of investment vehicle works, you could be putting yourself in a position to lose money.

Due Diligence Considerations

REITs and real estate crowdfunding platforms should perform due diligence in vetting investments to make sure they’re suitable. However, it’s wise to do your own research to understand what you’re investing in, who you’re investing with, and the potential risks.

As you compare REITs or real estate crowdfunding platforms, keep the following in mind:

•   Minimum requirements to start investing, including accredited investor status

•   Range of investment options

•   Transparency concerning fees and investment selection

•   Holding periods

•   Performance track record

•   Overall reputation

Talking to other investors who have used a particular crowdfunding platform or invested in a certain REIT can offer perspective on the good and bad.

The Takeaway

Real estate can be an addition to your portfolio if you already have some experience in the market, and have an affinity for real estate. As a type of alternative asset class, investing in real estate can add diversification to your portfolio, and potentially act as a hedge against inflation. Both REITs and real estate crowdfunding enable you to invest in real estate without the hassle of actual property ownership and maintenance, but come with different risk factors than you’d find with traditional securities.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What are the main advantages and disadvantages of investing in REITs?

Investing in REITs can offer the benefits of dividend income and portfolio diversification, without requiring you to own property directly. The disadvantages of REITs can include interest rate risk and market risk, both of which can affect the value of your investments.

How does real estate crowdfunding differ from traditional REIT investments?

Real estate crowdfunding allows investors to pool funds together to invest in property and collect interest, dividends, and/or rental income. REITs own and operate investment properties and pay dividends to investors. REITs and real estate crowdfunding can differ concerning the types of properties you can invest in, the minimum investment required, and the fees you’ll pay.

How are taxes treated for REITs and real estate crowdfunding?

REIT dividends are primarily treated as ordinary income for tax purposes (although you may face capital gains on any profits). Real estate crowdfunding returns may be subject to capital gains tax and/or ordinary income tax rates, depending on how they’re structured. Because the tax treatment of these two entities can be complicated, it’s probably wise to consult a professional.

Photo credit: iStock/kate_sept2004

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.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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

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

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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08
2024
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Margin Trading: What It Is and How It Works

By | Growing Wealth, invest, Investing | No Comments

In the investing ecosystem, the term “margin” is used to describe the money that may be borrowed from a brokerage to execute trades or a strategy. Buying assets on margin can help magnify gains and returns, but it can do the same with your losses.

When you buy on margin, you’re purchasing assets using money that you borrow from your broker. Margin trading might seem more complicated than some other ways to invest in the stock market, but it’s a method that many investors favor — especially experienced investors. If there’s one thing to know about margin trading, though, it’s that it can cut both ways, and may incur serious risks.

What Is Margin Trading?

Margin trading, or “buying on margin,” is an advanced investment strategy in which you trade securities using money that you’ve borrowed from your broker to potentially increase your return. Margin is essentially a loan where you can borrow up to 50% of your security purchase, and as with most loans, a margin loan comes with an interest rate and collateral.

Trading on margin is similar to “buying on credit.” Using margin for a trade is also known as leveraging. Margin interest rates are determined by your broker, and collateral types can be stock holdings or cash. Traders must also maintain a margin balance, known as the maintenance margin, in their accounts to cover potential losses.

As noted, margin trading is a bit more complicated (and risky) than some other ways to invest in the stock market, but it’s a tactic used by many investors.

How Does Margin Trading Work?

While margin trading may seem straightforward, it’s important to understand all the parameters.

For all trades, your broker acts as the intermediary between your account and your counterparty. Whenever you enter a buy or sell trade on your account, your broker electronically executes that trade with a counterparty in the market, and transfers that security into/out of your account once the transaction is completed.

To execute trades for a standard cash account vs. margin account, your broker directly withdraws funds for a cash trade. Thus every cash trade is secured 100% by money you’ve already deposited, entailing no risk to your broker.

In contrast, with margin accounts, a portion of each trade is secured by cash, known as the initial margin, while the rest is covered with funds you borrow from your broker.

Consequently, while margin trading affords you more buying power than you could otherwise achieve with cash alone, the additional risk means that you’ll always need to maintain a minimum level of collateral to meet margin requirements.

While margin requirements can vary by broker, we’ve defined and outlined the minimums mandated by financial regulators.

Term

 Amount

 Definition
Minimum margin $2,000 Amount you need to deposit to open a new margin account
Initial margin 50% Percentage of a security purchase that needs to be funded by cash
Maintenance margin 25% Percentage of your holdings that needs to be covered by equity

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Increase your buying power with a margin loan from SoFi.

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*For full margin details, see terms.

Example of Margin Trading (Buying on Margin)

Here’s an example of how margin trading works, or could work, in the real world. Imagine you open a margin account with $2,000 at a brokerage firm. It’s helpful to keep the maintenance margin in mind, too, when reading through this example.

Now, say you have your eyes set on Stock X, that’s trading at $100 per share. You can afford to buy 10 shares with the cash in your account. But, you want to buy more — margin allows you to do that. Given your margin account’s 50% initial margin requirement, that means you can effectively double your purchasing power.

So, you can buy 20 shares of Stock X for a total of $2,000, and $1,000 of that purchase would be buying on margin.

If Stock X appreciates in value by, say, 100% (it’s now worth $200 per share), you could sell your holdings and end up with $4,000. You could then pay back your brokerage for the margin loan, and have realized a greater return than you would have without using margin.

But the opposite can happen, too. If Stock X depreciates by 50% (it’s now worth $50) and you sold your holdings, you’d have $1,000, and owe your broker $1,000. So, you’ve wiped out your cash reserves by using margin — one of its primary risks.

To recap: In both scenarios, the margin loan balance remains the same ($1,000), while the equity value took the entire gain or loss.

Bear in mind, too, that for simplicity, this example ignores interest charges. In a real margin trade, you would need to also back out any interest expense incurred on the margin loan before calculating your return; this would act as an additional drag on earnings.

Potential Benefits of Margin Trading

As noted, margin trading has some pretty obvious benefits or advantages. Those may include the following:

•   Potential to enhance purchasing power. A primary benefit of margin trading is the potential expansion of an investor’s purchasing power, sometimes exponentially. This could possibly help boost returns if the price of the stock or other investment purchased with a margin trade goes up.

•   Possible lower interest rates. Benefits of margin loans might include lower interest rates relative to other types of loans, such as personal loans, if the investor is borrowing money to make trades. Plus, there typically isn’t a repayment schedule.

•   Diversification. You could also use margin trading to diversify your portfolio.

•   Selling short. Another potential advantage might be a complicated trading method called short selling. Margin trading might make it possible for you to sell stocks short. Short selling differs from most other investment strategies in that investors make a bet that a stock’s price will fall.

Note, however, that the rules for short selling with a margin account can get even more complicated than a traditional margin trade. For instance, Regulation T of the Federal Reserve Board requires margin accounts to have 150% of the value of the short sale when the trade is initiated.

While the benefits of being able to buy more investments — and potentially generate larger returns — might seem appealing to some investors, there are also some potential risks to using margin. It might be worth considering these before you decide if trading on margin is right for you.

Potential Risks of Margin Trading

There are potential benefits, and there are potential risks associated with margin trading. Here are some of those risks:

•   Possible loss beyond initial investment. While a primary benefit of margin trading may be increased buying power, investors could lose more money than they initially invested. Unlike a cash account, the traditional way to buy stocks or other investments, losses in a margin account can actually extend beyond the initial investment.

For example, if an investor purchases $20,000 worth of stock with a cash account, the most they can lose is $20,000. If that same investor uses $10,000 of their own money and a margin — essentially a loan — of $10,000 and the stock loses value, they may actually end up owing more money than their initial $10,000.

•   Possibility of margin call. Another potential negative aspect of margin trading is getting a margin call. Investors might need to put additional funds into their account on short notice if a margin call is triggered because the investment lost value. Moreover, a drop in value might mean an investor needs to sell off some or all of the investment, even at an inopportune time.

The SEC warns investors that they must sell some of their stock, or deposit more funds to cover a margin call. If you get a margin call, it is your responsibility to deposit more funds, add securities or sell holdings in your account. If you don’t meet the margin call after a number of warnings from your broker, then the broker has the right to sell all or some of the current positions to bring the account back up to minimum value.

💡 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.

How to Get Started With Margin Trading

Typically, the first step to getting started with margin trading is to open a margin account with a brokerage firm.

Even if you already have a stock or investment account, which are cash accounts, you still need to open a margin account because they are regulated differently. First-time margin investors need to deposit at least $2,000 per FINRA rules. If you’re looking to day trade, this dollar figure goes up to $25,000 according to FINRA rules. This is the minimum margin when opening a margin trading account.

Once the margin account has been opened and the minimum margin amount deposited, the SEC advises investors to read the terms of their account to understand how it will work.
The SEC advises investors to hedge their risks by making sure they understand how margin works, understanding that interest charges may be levied by your broker, knowing that not all assets can be purchased on margin, or even communicating with your broker to get a sense if a margin account is the right tool for you.

The Takeaway

Margin trading, as discussed, means that investors are trading securities with borrowed funds from their brokers. This allows them to potentially increase their returns, but also carries the risk of ballooning losses. As with most investing strategies and vehicles, margin trading comes with a unique set of potential benefits, risks, and rewards.
Margin trading can seem a little more complicated than some other approaches to investing. As the investor, it is up to you to decide if the potential risks are worth the potential rewards, and if this strategy aligns with your goals for the future.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

Is margin trading profitable?

Margin trading can be profitable, but there are no guarantees for investors that it will be. It can also lead to outsized and substantial losses for investors, so it’s important to consider the risks and potential benefits.

What happens if you lose money on margin?

If you lose money on margin, you may have a negative balance with your brokerage, and owe the broker money. You may also be subject to interest charges on that balance, too.

Should beginners trade on margin?

It’s best to consult with a financial professional before trading on margin, but generally, it’s likely that professionals would recommend beginners do not trade on margin.

How do you pay off margin?

Typically, if you have a negative balance in your margin account, you can reduce or pay it off by simply depositing cash into your account, or selling assets.

SoFi Invest®

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

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

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


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

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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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Investment Strategies By Age

By | Growing Wealth, invest, Investing, Life & Career | No Comments

Your age is a major factor in the investment strategy you choose and the assets you invest in. The investments someone makes when they’re in their 20s should look very different from the investments they make in their 50s.

Generally speaking, the younger you are, the more risk you may be able to tolerate because you’ll have time to make up for investment losses you might incur. Conversely, the closer you are to retirement, the more conservative you’ll want to be since you have less time to recoup from any losses. In other words, your investments need to align with your risk tolerance, time horizon, and financial goals.

Most important of all, you need to start saving for retirement now so that you won’t be caught short when it’s time to retire. According to a 2024 SoFi survey of adults 18 and older, 59% of respondents had no retirement savings at all or less than $49,999.

Here is some information to consider at different ages.

Investing in Your 20s

In your 20s, you’ve just started in your career and likely aren’t yet earning a lot. You’re probably also paying off debt such as student loans. Despite those challenges, this is an important time to begin investing with any extra money you have. The sooner you start, the more time you’ll have to save for retirement. Plus, you can take advantage of the power of compounding returns over the decades. These strategies can help get you on your investing journey.

Strategy 1: Participate in a Retirement Savings Plan

One of the easiest ways to start saving for retirement is to enroll in an employer-sponsored plan like a 401(k). Your contributions are generally automatically deducted from your paycheck, making it easier to save.

If possible, contribute at least enough to qualify for your employer’s 401(k) match if they offer one. That way your company will match a percentage of your contributions up to a certain limit, and you’ll be earning what’s essentially free money.

Those who don’t have access to an employer-sponsored plan might want to consider setting up an individual retirement account (IRA). There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both let you contribute the same amount (up to $7,000 in 2024 for those under age 50), but one key difference is the way the two accounts are taxed. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement. With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire.

Strategy 2: Explore Diversification

As you’re building a portfolio, consider diversification. Diversification involves spreading your investments across different asset classes, such as stocks, bonds, and real estate investment trusts (REITs). One way twentysomethings might diversify their portfolios is by investing in mutual funds or exchange-traded funds (ETFs). Mutual funds are pooled investments typically in stocks or bonds, and they trade once per day at the end of the day. ETFs are baskets of securities that trade on a public exchange and trade throughout the day.

You may be able to invest in mutual funds or ETFs through your 401(k) or IRA. Or you could open a brokerage account to begin investing in them.

Strategy 3: Consider Your Approach and Comfort Level

As mentioned, the younger an individual is, the more time they may have to recover from any losses or market downturns. Deciding what kind of approach they want to take at this stage could be helpful.

For instance, one approach involves designating a larger portion of investments to growth funds, mutual funds or ETFs that reflect a more aggressive investing style, but it’s very important to understand that this also involves higher risk. You may feel that a more conservative approach that’s less risky suits you better. What you choose to do is fully up to you. Weigh the options and decide what makes sense for you.

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Investing in Your 30s

Once you’re in your 30s, you may have advanced in your career and started earning more money. However, at this stage of life you may also be starting a family, and you likely have financial obligations such as a mortgage, a car loan, and paying for childcare. Plus, you’re probably still paying off your student loans. Still, despite these expenses, contributing to your retirement should be a top priority. Here are some ways to do that.

Strategy 1: Maximize Your Contributions

Now that you’re earning more, this is the time to max out your 401(k) or IRA if you can, which could help you save more for retirement. In 2024, you can contribute up to $23,000 in a 401(k) and up to $7,000 in an IRA. (If you have a Roth IRA, there are income limits you need to meet to be eligible to contribute the full amount, which is one thing to consider when choosing between a Roth IRA vs. a traditional IRA.)

Strategy 2: Consider Adding Fixed-Income Assets to the Mix

While you can likely still afford some risk since you have several decades to recover from downturns or losses, you may also want to add some fixed-income assets like bonds or bond funds to your portfolio to help counterbalance the risk of growth funds and give yourself a cushion against potential market volatility. For example, an investor in their 30s might want 20% to 30% of their portfolio to be bonds. But, of course, you’ll want to determine what specific allocation makes the most sense for your particular situation.

Strategy 3: Get Your Other Financial Goals On Track

While saving for retirement is crucial, you should also make sure that your overall financial situation is stable. That means paying off your debts, especially high-interest debt like credit cards, so that it doesn’t continue to accrue interest. In addition, build up your emergency fund with enough money to tide you over for at least three to six months in case of a financial setback, such as a major medical expense or getting laid off from your job. And finally, make sure you have enough funds to cover your regular expenses, such as your mortgage payment and insurance.

Investing in Your 40s

You may be in — or approaching — your peak earning years now. At the same time, you likely have more expenses, as well, such as putting away money for your children’s college education, and saving up for a bigger house. Fortunately, you probably have at least 20 years before retirement, so there is still time to help build your nest egg. Consider these steps:

Strategy 1: Review Your Progress

According to one rule of thumb, by your 40s, you should have 3x the amount of your salary saved for retirement. This is just a guideline, but it gives you an idea of what you may need. Another popular guideline is the 80% rule of aiming to save at least 80% of your pre-retirement income. And finally, there is the 4% rule that says you can take your projected annual retirement expenses and divide them by 4% (0.04) to get an estimate of how much money you’ll need for retirement.

These are all rough targets, but they give you a benchmark to compare your current retirement savings to. Then, you can make adjustments as needed.

Strategy 2: Get Financial Advice

If you haven’t done much in terms of investing up until this point, it’s not too late to start. Seeking help from financial advisors and other professionals may help you establish a financial plan and set short-term and long-term financial goals.

Even for those who have started saving, meeting with a financial specialist could be useful if you have questions or need help mapping out your next steps or sticking to your overall strategy.

Strategy 3: Focus on the Your Goals

Since they might have another 20-plus years in the market before retirement, some individuals may choose to keep a portion of their portfolio allocated to stocks now. But of course, it’s also important to be careful and not take too much risk. For instance, while nothing is guaranteed and there is always risk involved, you might feel more comfortable in your 40s choosing investments that have a proven track record of returns.

Investing in Your 50s

You’re getting close to retirement age, so this is the time to buckle down and get serious about saving safely. If you’ve been a more aggressive investor in earlier decades, you’ll generally want to become more conservative about investing now. You’ll need your retirement funds in 10 years or so, and it’s vital not to do anything that might jeopardize your future. These investment strategies by age may be helpful to you in your 50s:

Strategy 1: Add Stability to Your Portfolio

One way to take a more conservative approach is to start shifting more of your portfolio to fixed-income assets like bonds or bond funds. Although these investments may result in lower returns in the short term compared to assets like stocks, they can help generate income when you begin withdrawing funds in retirement since bonds provide you with periodic interest payments.

You may also want to consider lower-risk investments like money market funds at this stage of your investment life.

Strategy 2: Take Advantage of Catch-up Contributions

Starting at age 50, you become eligible to make catch-up contributions to your 401(k) or IRA. In 2024, you can contribute an additional $7,500 to your 401(k) for a total contribution of $30,500 for the year if you max out your plan.

In 2024, the catch-up contribution for an IRA is an additional $1,000 for a total maximum contribution of $8,000 for the year. This allows you to stash away even more money for retirement.

Strategy 3: Consider Downsizing

Your kids may be out of the house now, which can make it the ideal time to cut back on some major expenses in order to save more. You might want to move into a smaller home, for instance, or get rid of an extra car you no longer need.

Think about what you want your retirement lifestyle to look like — lots of travel, more time for hobbies, starting a small business, or whatever it might be — and plan accordingly. By cutting back on some expenses now, you may be able to save more for your future pastimes.

Investing in Your 60s

Retirement is fast approaching, but that doesn’t mean it’s time to pull back on your investing. Every little bit you can continue to save and invest now can help build your nest egg. Remember, your retirement savings may need to last you for 30 years or even longer. Here are some strategies that may help you accumulate the money you need.

Strategy 1: Get the Most Out of Social Security

The average retirement age in the U.S. is 65 for men and 63 for women. But you may decide you want to work for longer than that. Waiting to retire can pay off in terms of Social Security benefits. The longer you wait, the bigger your monthly benefit will be.

The earliest you can start receiving Social Security Benefits is age 62, but your benefits will be reduced by as much as 30% if you take them that early. If you wait until your full retirement age, which is 67 for those born in 1960 or later, you can begin receiving full benefits.

However, if you wait until age 70 by working longer or working part time, say, the size of your benefits will increase substantially. Typically, for each additional year you wait to claim your benefits up to age 70, your benefits will grow by 8%.

Strategy 2: Review Your Asset Allocation

Just before and during retirement, it’s important to make sure your portfolio has enough assets such as bonds and dividend-paying stocks so that you’ll have income coming in. You’ll also want to stash away some cash for unexpected expenses that might pop up in the short term; you could put that money in your emergency fund.

Some individuals in their 60s may choose to keep some stocks with growth potential in their asset allocation as a way to potentially avoid outliving their savings and preserve their spending power. Overall, people at this stage of life may want to continue the more conservative approach to investing they started in their 50s, and not choose anything too aggressive or risky.

Strategy 3: Keep investing in your 401(k) as long as you’re still working.

If you can, max out your 401(k), including catch-up contributions, in your 60s to sock away as much as possible for retirement. This can be especially helpful if you didn’t invest as much as you ideally should have at earlier ages. Contributing to your 401(k) could also help lower your taxable income now, when you may be in a higher income tax bracket than you were in previous decades.

Also, you can continue to contribute to any IRAs you may have — up to the limit allowed by the IRS, which is $8,000 in 2024, including catch-up contributions. If you have a Roth IRA, you will need to meet the income limits in order to contribute.

The Takeaway

Investing for retirement should be a priority throughout your adult life, starting in your 20s. The sooner you begin, the more time you’ll have to save. And while it’s never too late to start investing for retirement, focusing on investment strategies by age, and changing your approach accordingly, can generally help you reach your financial goals.

For instance, in your 20s and 30s you can typically be more aggressive since you have time to make up for any downturns or losses. But as you get closer to retirement in your 40s, 50s, and 60s, your investment strategy should shift and take on a more conservative approach. Like your age, your investment strategy should adjust across the decades to help you live comfortably and enjoyably in your golden years.

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).


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

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

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.

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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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.
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01
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Guide to High-Risk Stocks

Guide to High-Risk Investments

By | Growing Wealth, invest, Investing | Comments Off on Guide to High-Risk Investments

High-risk investments may be types of investments or securities in which investors may experience significant losses, or significant gains. Generally, high-risk investments tend to be from cyclical, volatile industries, or take the form of equity in relatively new, untested companies. In contrast, lower-risk investments tend to be related to more established businesses or sectors.

But there are many types of high-risk investments. These can include stocks, cryptocurrencies, and even investing in venture capital or private equity (if available to you, as an investor). The important thing to know about high-risk investments is, broadly speaking, that the higher the associated potential reward with an investment, the higher the risks, too.

What Is Considered a High-Risk Investment?

There’s no set definition of “high-risk investment,” other than it can refer to any type of investment vehicle that may involve more innate or inherent risk than another type of investment. It may be helpful to think of risk as relative, too — if a Treasury bill, for instance, is generally considered to be a low-risk investment, a penny stock may exist on the other end of the spectrum.

It’s important to remember that no matter what you’re adding to your portfolio, investing almost always involves risk. In other words, there are no “safe” investments, but some may be “safer” than others.

The question for most new investors will be how much risk they are willing to take on (often referred to as risk tolerance). If you’re looking to take on substantial risk to reap potential rewards, you may want to look at certain subsets of stocks. Of course, it’s important to remember that the more risk you take on, the more you stand to potentially lose.

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💡 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.

Examples of High-Risk Investments

As noted, high-risk investments can take many forms. Here are some of the more common and higher-risk investments you may encounter.

Highly Volatile Stocks

Experts typically consider stocks to be one of the riskier asset categories to invest in, especially compared to bonds or certificates of deposits. But not all stocks are created equal, or have equal risk profiles. There are different classes of stocks that are riskier than others.

Here are some examples of high-risk, high-reward stocks that tend to be more volatile.

Penny Stocks

Broadly defined as stocks that trade at a market value of less than five dollars per share, penny stocks can be found across all industries. Penny stocks might represent shares of companies in utilities, energy, gold mining, technology, or anything else. Like other high-risk, high-reward stocks, penny stocks can yield high returns in a short amount of time. However, the risks of penny stocks may outweigh the potential for high rewards due to low trade volumes, lack of information on the companies, fraud, and other drawbacks.

IPO Stocks

Investing in stocks of newly public companies can also be higher risk. These initial public offering (IPO) stocks generally tend to be less tested by the market, making them more prone to price swings or ups and downs in business trends.

Commodities or Commodity Stocks

Commodity stocks, or stocks of companies that produce raw materials like oil, grains, and metals, tend to be highly volatile. That’s partly because these commodity industries are cyclical, or closely tied to economic growth. So, any sign of slowing growth or perceived signs of slowing growth can cause investors to sell this group.

💡 Recommended: Why Is It Risky to Invest in Commodities?

Cryptocurrencies

Bitcoin, and the entire digital currency market, have become mainstream fixtures in the financial markets. While certain cryptocurrencies are the most popular or recognizable, there are thousands of coins or tokens that investors could, potentially, get their hands on. But given Bitcoin’s wild price swings over the years, it’s easy to see why investors may want to try and ride its popularity to large returns.

However, the cryptocurrency market is still very volatile and highly speculative, with digital assets remaining mostly unregulated — for now. That’s likely to change in the years ahead. For investors, know this: Crypto is about as risky of an asset as you can find on the market.

💡 Recommended: Cryptocurrency Glossary

Spread Betting

Spread betting refers to making a bet on the direction of the price of an asset without actually holding it. In spread betting, you make money if the asset moves in the way you predicted, and you lose if it moves the opposite way. Investors can bet on currencies, bonds, commodities, or stocks.

Spread betting is often offered as a leveraged product, meaning investors can trade on margin. If the margin requirement were 10%, for example, a bet of $10,000 could be made with as little as $1,000. This amplifies both losses and gains. When trading on margin, investors are vulnerable to margin calls and can lose more than they initially invest.

Leveraged ETFs

A leveraged investment vehicle offers returns or losses several multiples higher than what someone has to invest, which makes an asset like a leveraged exchange-traded fund (ETF) potentially high-risk. Leveraged ETFs use debt or derivatives to generate two or three times the daily performance of an underlying index.

There are leveraged ETFs that rise in price along with the assets they track (bull ETFs) and those that rise in price when the assets they follow go down in price (bear ETFs, also known as leveraged inverse ETFs).

Hedge Funds

While not all investors are engaging with hedge funds, they’re worth discussing due to how relatively high-risk investing in one can be. Hedge funds operate by collecting a pool of investors’ money that gets invested in different assets. The goal of a typical hedge fund is to get high rates of return for investors by any means possible. That generally means taking calculated risks.

There is no established definition of what a hedge fund can invest in. Some hedge funds specialize in asset classes, like junk bonds, real estate, or equities — all relatively high-risk categories.

In general, hedge funds are only available to accredited investors. That means investors have to fit specific criteria. Specific financial entities like trusts and corporations can also be accredited investors.

Further, part of what makes hedge funds risky is that they are not subjected to government regulations that offer protection to everyday investors. The reasoning is that only sophisticated investors should be involved in the first place.

Venture Capital

Venture capital is a form of investing that targets a new company and seeks to help it grow. Again, like hedge funds, many investors likely aren’t involved with venture capital, but at some point, they might be.

The requirements for companies to access the public equity markets, meaning they raise money by selling their shares on an exchange where any average investor can purchase them, are high. Most corporations aren’t eligible for this kind of funding, so some of them turn to venture capitalists.

Venture capital funds often receive funding from large institutions like pension funds, university endowments, insurance companies, and financial firms.

The term “venture capital” has become closely associated with the tech industry, as many entrepreneurs in technology that believe they have promising ideas turn to venture capitalists to fund their startups. Traditional business loans often require real assets as collateral, and with many modern companies being information-based, that kind of loan isn’t always an option.

The fact of the matter is that new businesses fail often (about 25% don’t even make it one year), making venture capital investing full of risk. But the possibility of early investment in the next big tech company means the potential reward can also be high.

Angel Investing

Angel investing is a form of equity financing — a way for businesses to fund their operations in exchange for a stake of ownership in the company. Compared to venture capital, “angel investor” is a more generic term that applies to anyone willing to take a gamble on a new startup. Angel investors are often high-net-worth individuals looking for significant returns on their investments.

Why Invest in High-Risk Stocks

Investors may invest in high-risk stocks and similar securities because they may provide substantial returns. For some, the prospect of massive returns is simply too much to ignore.

Very few people, however, probably put 100% of their portfolios into high-risk investments. Instead, taking on risk is considered part of a broader asset allocation strategy.

Ideally, investors take on just enough risk to potentially increase their returns without ruining their long-term prospects should they lose up to a significant percentage of their allocation to high-risk assets. The balance between safe and risky investments tends to be determined by individual investor goals.

Conventional wisdom often says that younger investors in their 20s or 30s tend to be able to afford greater risks since they will, in theory, have the rest of their working lives to earn back any potential losses. Meanwhile, investors closer to retirement typically focus on relatively safer investments that are likely to produce more reliable, albeit likely smaller, returns.

A Warning About High-Risk Investments

There are different ways to attempt to measure risk. Some are objective measurements of aspects of a specific investment, while others are more generic insights. Penny stocks and IPOs tend to be riskier than shares of big companies, for example, because their underlying businesses generally aren’t as stable or profitable.

Statistically-based risk measurements, such as standard deviation, seek to assign mathematical value to the risk involved in a particular investment. Calculating portfolio beta is another way to monitor how sensitive your stock holdings are to broader swings in the market.

An important thing to note is that riskier investments are generally considered ones with greater volatility and potential for negative returns. When it comes to high-risk stocks and other investments involving significant risk, wise investors often follow the adage: never invest more than you can afford to lose. High-risk investors must be prepared for the possibility of losing a significant amount or the entirety of an investment.

Remember, too, that it may also be worthwhile to discuss your strategy with a financial professional.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

High-risk investments are just that — risky — but that might not necessarily mean everyone must avoid them all the time. If you have the risk tolerance, you can utilize high-risk investments to help build wealth and meet your financial goals. Investing in more volatile companies may help individuals benefit from the potential growth of these businesses.

Again, though, it may be a good idea to stick to a larger investment strategy that incorporates high-risk investments in balance with more conservative ones. A financial professional can also help you review options and allocations based on your risk-tolerance, if you need guidance.

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

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

FAQ

Which type of investment has the highest risk?

It’s difficult, if not impossible to say which type of investment has the highest associated risk, but some of the investment vehicles that do fit the description are options, certain types of stocks (penny stocks, for instance), and investing in hedge funds or venture capital.

Which type of stock is the highest risk?

While it’s not really possible to pinpoint any one type as “the highest risk,” penny stocks have one of the highest associated risk profiles. Penny stocks, which trade for less than $5, generally, and are shares of unproven, small, or young companies.

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.

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.

SOIN-Q224-1900554-V1

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Jun
25
2024

Guide to Art as an Investment

By | Growing Wealth, invest, Investing | Comments Off on Guide to Art as an Investment

Investing in art can add diversification to a portfolio if you’re ready to move beyond traditional stocks and bonds. Alternative investments like art can offer above-average returns and offset some of the impacts of market volatility.

Art investment has traditionally had a higher barrier to entry, as individual works of art may carry five and six-figure prices (or more). In addition, there are a number of risk factors when investing in art, including lack of liquidity and lack of transparency around pricing.

However, new ways to invest in art have emerged that make it a more accessible asset class to a broader range of investors.

What Is Art Investing?

Art investing refers to the purchase of works of art to sell them at a profit at a later date. Apart from owning individual artworks (which can be expensive and difficult to maintain), there are a range of new ways to invest in art, including:

•   Fractional share investing through online art platforms

•   Art funds

•   Art stocks

•   Non-fungible tokens (NFTs)

Buying art as an investment doesn’t require you to have an advanced art degree or professional background in the art world. You will, however, need to be willing to spend some time learning about this alternative investment to understand how the market works.1

How Art Investing Works

Investing in art requires a certain mindset, and doing your due diligence to size up what constitutes the best opportunities for you, depending on your goals.

Art, like other alternative investments, may require a much longer holding period for you to realize returns, which contributes to the lack of liquidity in this space. It may be challenging to find a buyer if the artwork or the artist is not in demand.

It’s also important to understand traditional art ownership, along with some of the newer investment vehicles.

Individual Works

Similar to investing in a traditional asset class like stocks, investing in individual works requires knowing some fundamentals: a history of the artist, their status (e.g., are they in demand?), the relevance of a given work, and a sense of whether it’s overvalued or undervalued.

The risks of choosing individual works include the possibility of fraud, the cost of maintaining the work (e.g., storage and insurance), and hidden charges, similar to investment fees (e.g., commissions and other costs). Given the fragility of most art, there is also the risk of physical damage or total loss.

Fractional Shares of Art

Owing to the high cost of owning blue-chip works of art (as well as other highly valued works) it’s now possible to buy fractional shares of art, similar to investing in fractional shares of stock.

There are a number of new platforms that sell fractional art shares, and each may have its own system and process (more below).

The risk of buying fractional shares of art is that, as with any investment, there are no guarantees of a return.

Art Funds

Similar to traditional mutual funds and ETFs, an art fund is a type of pooled investment fund. But unlike conventional equity funds, say, that hold many different stocks, art funds often hold only a handful of works. Investors who buy shares of the fund are buying into the collective, potential value of those works.

Art funds are generally structured as closed-end funds, but with a twist: investors typically contribute their capital over a period of three to five years, often with no returns for another specified time period (terms vary).

These funds are highly illiquid, and (in addition to the unpredictability of the art market itself) there are substantial risks to locking up your capital for what could be years, for an unspecified return upon redemption.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Types of Artists

There are generally three types of artists you may invest in:

•   Blue-chip artists: Blue-chip artists are individuals everyone has most likely heard of. Names like Van Gogh, Picasso, and Banksy are familiar to people both within and outside the art world.

Works from these artists typically carry the least risk because there’s always someone willing to buy them. The downside is that the average investor may not have sufficient capital to purchase individual blue-chip artworks since they can cost hundreds of thousands, if not millions, of dollars.

•   Established artists: Established artists are known artists whose works typically command higher prices, but have not yet reached blue-chip status. Investing in art from established artists can offer solid return potential with a moderate degree of risk.

•   Emerging artists: Emerging artists present the greatest risk since they’re still up and coming. However, you might be able to generate a sizable profit from investing in their art if their career takes off.3

Risks and Returns of Investing in Art

Investing in alternatives such as art carries risks that are similar to other alternative investments, like commodities, real estate, collectibles, and other assets. Investors who are willing to accept a higher degree of risk, however, may enjoy a substantial upside.

Here’s a side-by-side look at the pros and cons of investing in art.

Rewards

 Risks
Art investment offers the potential for higher returns.

Art can add diversification to a portfolio, allowing you to better manage market volatility and the impacts of inflation.

Investing in art can help you grow wealth while allowing you to support your favorite artists and contribute something to the art community.

A significant amount of capital is not necessarily required to begin investing in art.

Interest in art has persisted for hundreds of years, making it a reliable investment option for the longer term.

An investment in art is not guaranteed to be profitable.

Certain types of art investments offer limited liquidity, which could make it difficult to exit quickly.

Valuing artworks is often highly subjective, which could make it difficult for a beginning investor to determine what a piece is truly worth.

Owning individual artworks may entail paying maintenance and storage fees, as well as insurance.

Forgeries and fakes are a real part of the art world investors must contend with.

If you’re trying to decide whether to invest in art, consider your personal risk tolerance and investment horizon.

Dive deeper: Why Invest in Alternative Investments?

5 Ways to Start Investing in Art

When deciding how to invest in art, it’s important to remember that you’re not locked into any single path. You might choose multiple investment strategies to build out your art portfolio.

With that in mind, here are some of the best ways for beginners to start investing.

1. Fractional Art Shares

Fractional art share investing is a relatively new phenomenon. It works like this:

•   You join an art investment marketplace.

•   The marketplace vets works of art and lists them for investment.

•   You buy fractional shares of individual works of art.

•   When the artwork sells you get a piece of the profits.

Typically, you invest a minimum amount to buy a certain number of shares of a work you believe will appreciate. So you might hold 30 shares of a Basquiat piece and 20 shares of a Warhol.

The platform purchases and maintains the art; you don’t actually see or handle it. If it appreciates within a set period of time, the piece will be sold and profits will be distributed proportionately to each investor’s ownership amount.

The downside is that you might need $10,000 or more to get started on a fractional share marketplace. Additionally, you don’t get to choose when the artwork sells — that’s determined by the platform.

While trading fractional shares isn’t available on public exchanges yet, some fractional art platforms operate a secondary market whereby shareholders can execute trades.

2. Art Funds

Art investment funds are typically privately managed funds that offer investors exposure to multiple works. In that sense, they’re similar to traditional mutual funds.

Some art funds are index funds, meaning they seek to replicate the returns of an art market index, similar to a traditional index like the S&P 500. Other art funds are equity funds that try to beat the market.

If you’re considering art funds, check the minimum investment to get started. Certain funds may be limited to accredited investors, or require you to have $20,000 or more to purchase shares.

Also, consider the fund’s expense ratio, which determines your cost of owning it yearly.

3. Art Stocks

Art stocks offer a slightly different way to invest in art. Rather than funding individual artworks, you might invest in publicly traded companies that:

•   Manufacture art supplies

•   Handle art restoration

•   Sell art insurance

•   Produce art prints

•   Create digital art software programs or applications

•   Create software or apps used by museums

This type of art investment is more tangential, but may be worth a look if you’re interested in the art world in its entirety, not just individual paintings or sculptures.

Similar to investing in art funds, consider the minimum investment required to buy shares. And study the stock’s past performance and risks to fully understand what you’re buying.

4. Non-Fungible Tokens (NFTs)

Non-fungible tokens or NFTs are digitized versions of various works, including art. NFTs and their owners are recorded on the blockchain so they can’t be duplicated or reproduced.

If you’re weighing NFTs, carefully consider the risks as well as the amount you plan to invest. A good rule of thumb for this type of investment may be to limit yourself only to what you can afford to lose.

5. Individual Works of Art

You might invest in art by purchasing individual pieces. Again, you may choose from blue-chip, established, or emerging artists.

The advantage is that you can decide when to sell and you’re not necessarily locked in for decades. Art flipping, a controversial practice in art circles, involves buying works of art and selling them quickly for a profit. It’s similar to house flipping, another type of alternative investment.

If you’re interested in buying individual pieces, you might buy them from:

•   Galleries

•   Private dealers

•   Art auctions

Purchasing directly from the artist may also be an option, though this may require some negotiation to decide on a price.

Before buying a piece of art, consider the ongoing costs of ownership. For example, you may need to pay to have it professionally stored to avoid damage to the work. And depending on its value you may need to buy insurance for your investment.

The Takeaway

Art and other alternative investments can help you create a well-rounded portfolio. The important thing to remember is that art is an alternative investment, with specific risks and potential advantages. While you could make a profit with art investments, you could also lose money, so it’s wise to assess the risks before wading in.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Is art a good investment?

Art can be a good investment for people who have sufficient means to invest and are comfortable with the various risks. It’s possible to realize higher returns from art investments compared to stocks or bonds, but it typically requires a longer holding period. Reduced liquidity can make art a less attractive investment for people who are looking for near-term gains.

How do you start investing in art?

You can start investing in art by deciding which strategy you’d like to pursue. Do you like the idea of owning fractional shares, or share in an art fund? Would you prefer to buy stock in art-related companies? Or do you feel confident in your taste, and budget, as a collector to purchase individual works? Be sure to vet your all-in costs, how long your money might be locked up, and whether there are risks with one choice versus another.

Why do millionaires invest in art?

Millionaires may invest in art for different reasons, ranging from a desire for higher returns to a passion for art as a collectible. As alternative investments go, art can be profitable, though it does take some knowledge of the market to assess which pieces are most likely to see the greatest appreciation.

Photo credit: iStock/Antonio_Diaz

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

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

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