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Q: What Is Wash Trading?

Wash trading, also referred to as wash sale and round-trip trading, occurs when an investor buys and sells the same security at the same time in an attempt to influence pricing or trading activity.

Mar

2025

Wash Trading: What Is It and How Does It Work?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Wash trading is a practice which involves entering into securities transactions for the express purpose of giving the appearance that a trade has taken place although their portfolio has not substantially changed. Also referred to as round-trip trading, wash trading is a prohibited activity under the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934.

In some cases, wash trading is a direct attempt at market manipulation. In others, wash trading may result from a lack of investor knowledge. This may be the case with wash sales, in which an investor sells one financial instrument then replaces it with a similar one right away. It’s important to understand the implications of making a wash trade and what one looks like in action.

Key Points

• Wash trading involves investors engaging in the simultaneous buying and selling of securities to create the illusion of trading activity.

• Wash trading involves the simultaneous buying and selling of the same or similar securities.

• This practice can be a form of market manipulation or result from a lack of investor knowledge.

• The goal of wash trading is to influence pricing or trading activity, often through collaboration between investors and brokers.

• Wash trading is illegal and can result in penalties, including the disallowance of tax deductions for losses.

What Is Wash Trading?

Wash trading occurs when an investor buys and sells the same or a similar security investment at the same time. The Internal Revenue Service (IRS) also refers to this as a wash sale, since buying the same security cancels out the sale of that security. It’s also called round-trip trading, since you’re essentially ending where you began — with shares of the same security in your portfolio.

Wash trades can be used as a form of market manipulation. Investors can buy and sell the same securities in an attempt to influence pricing or trading activity. The goal may be to spur buying activity to send prices up or encourage selling to drive prices down.

Investors and brokers might work together to influence trading volume, usually for the financial benefit of both sides. The broker, for example, may benefit from collecting commissions from other investors who want to purchase a stock being targeted for wash trading. The investor, on the other hand, may realize gains from the sale of securities through price manipulation.

Wash trading can be a subset of insider trading, which requires the parties involved to have some special knowledge about a security that the general public doesn’t. If an investor or broker possesses insider knowledge they can use it to complete wash trades.

How Does Wash Trading Work?

On the surface level, a wash trade means an investor is buying and selling shares of the same security at the same time. But the definition of wash trades goes one step further and takes the investor’s intent (and that of the broker they may be working with) into account. There are generally two conditions that must be met for a wash trade to exist:

• Intent. The intent of the parties involved in a wash trade (i.e. the broker or the investor) must be that at least one individual involved in the transaction must have entered into it specifically for that purpose.

• Result. The result of the transaction must be a wash trade, meaning the investors bought and sold the same asset was bought and sold at the same time or within a relatively short time span for accounts with the same or common beneficial ownership.

Beneficial ownership means accounts that are owned by the same individual or entity. Trades made between accounts with common beneficial ownership may draw the eye of financial regulators, as they can suggest wash trading activity is at work.

A telling indicator of wash trading activity is the level of risk conveyed to the investor. If a trade doesn’t change their overall market position in the security or expose them to any type of market risk, then it could be considered a wash.

Wash trades don’t necessarily have to involve actual trades, however. They can also happen if investors and traders appear to make a trade on paper without any assets changing hands.

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Example of a Wash Trade

Here’s a simple wash trade example:

Say an investor who’s actively involved in day trading owns 100 shares of ABC stock and sells those shares at a $5,000 loss on September 1. On September 5, they purchase 100 shares of the same stock, then resell them for a $10,000 gain. This could be considered a wash trade if the investor engaged in the trading activity with the intent to manipulate the market or to unfairly claim a tax deduction for the loss.

Is Wash Trading Illegal?

Yes. The Commodity Exchange Act prohibits wash trading. Prior to the passage of the Act, traders commonly used wash trading to manipulate markets and stock prices. The Commodity Futures Trade Commission (CFTC) also enforces regulations regarding wash trading, including guidelines that bar brokers from profiting from wash trade activity.

The IRS has rules of its own regarding wash trades. The rules disallow investors from deducting capital losses on their taxes from sales or trades of stocks or other securities that are the result of a wash sale. Under the IRS rules, a wash sale occurs when you sell or trade stocks at a loss and within 30 days before or after the sale you:

• Purchase substantially identical stock or securities

• Acquire substantially identical stock or securities in a fully taxable trade

• Acquire a contract or option to buy substantially identical stock or securities, or

• Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA

Wash sale rules also apply if you sell stock and your spouse or a corporation you control buys substantially identical stock. When a wash sale occurs, you’re no longer able to claim a tax deduction for those losses.

So, in short, yes, wash trading is illegal.

Difference Between Wash Trading & Market Making

Market making and wash trading are not the same thing. A market maker is a firm or individual that buys or sells securities at publicly quoted prices on-demand, and a market maker provides liquidity and facilitates trades between buyers and sellers. For example, if you’re trading through an online broker you’re using a market maker to complete the sale or purchase of securities.

Recommended: What Is a Brokerage Account?

Market making is not market manipulation. A market maker is, effectively, a middleman between investors and the markets. While they do profit from their role by maintaining spreads on the stocks they cover, this is secondary to fulfilling their purpose of keeping shares and capital moving. Without market makers, trades would take longer to execute and the markets could become sluggish.

How to Detect & Avoid Wash Trading

The simplest way to avoid wash trading as an investor is to be aware of what constitutes a wash trade or sale. Again, this can mean the intent to manipulate the markets by placing similar trades within a short time frame, or it can mean inadvertently executing a wash sale because you’re not familiar with the rules.

In the latter case, you can avoid wash trading or wash sales by being mindful of the securities you’re buying and selling and the time frame in which those transactions are completed. So selling XYZ stock at a loss, then buying it again 10 days later to sell it for a profit would likely constitute a wash sale, if you executed the trade in an attempt to be able to deduct the initial loss.

It’s also important to understand how the 30 days period works for timing wash sales. The 30 day rule extends to the 30 days prior to the sale and 30 days after the sale. So effectively, you could avoid the wash sale rule by waiting 61 days to replace assets that you sold in your portfolio to be on the safe side.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Wash Trading in Crypto Trading

Cryptocurrency can be a target for wash-trading activity. In the EOS case, wash trades were suspected of being used as a means of driving up investor interest surrounding the cryptocurrency during its initial offering. High-frequency trading has also been a target of scrutiny, as some believe it enables wash trading in the crypto markets. Whether wash trading rules and regulations specifically apply to crypto, however, is a bit murky.

The Takeaway

Wash trading involves selling certain securities and then replacing them in a portfolio with identical or very similar securities within a certain time period. This is done so as to avoid making substantial changes in your portfolio. Wash trading is illegal in practice but it’s also avoidable if you’re investing consciously and with a strategy in place.

Understanding when wash sale rules apply can help you to stay out of trouble with the IRS. If you’re unclear about it, you can consult with a financial professional for guidance.

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Photo credit: iStock/mapodile

About the author

Rebecca Lake

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

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Mar

2025

What Are Capital Expenditures?

By Rebecca Lake | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Capital expenditures, or CapEx, refers to the money a company spends or invests to promote its future growth. This is different from operating expenditures, which deal with the day-to-day costs of running a business. Both show up on a business accounting statement, and both matter for maintaining a healthy bottom line.

From an investment perspective, understanding capital expenditures and how a company spends its money can be useful for evaluating stocks when deciding where to invest. More specifically, the capital expenditure formula is often part of a fundamental analysis approach to gauge a company’s overall financial health and stability. Understanding how to calculate capital expenditures can be helpful when comparing stocks.

Capital Expenditures: Definition & Overview

Here’s a simple definition of capital expenditure: A capital expenditure is any amount of money that a company spends to further its growth.

Capital expenditures typically include the purchase, improvement, or maintenance of physical assets, though it can also refer to intangible assets, such as patents or trademarks. It includes assets that a company will own over more than one accounting period, many of which can depreciate in value over time.

Types of Capital Expenditures

The type of capital expenditures a company has depends on the industry it belongs to and the nature of its business. So, if you’re sector investing, the analyses may vary. Generally, capital expenditure examples can include:

• Land

• Buildings or warehouses

• Equipment

• Machinery

• Business vehicles

• Computer hardware and/or software

• Furniture or fixtures

• Patents

• Licenses

Capital expenditures are most often long-term investments that have a shared goal: to help promote or further business growth. For example, a manufacturing company may decide to upgrade its equipment to speed up production and increase efficiency. The return on that investment comes later, when the company increases its output and generates bigger profits.

Capital Expenditures vs. Operating Expenditures

In accounting, capital expenditures are separate from a company’s operating expenditures. An operating expenditure is money a company spends to maintain normal business operations.

Examples of operating expenditures include:

• Rent or lease payments for business property

• Utilities

• Insurance

• Employee payroll

• Inventory

• Marketing costs

• Office supplies

Bottom-up investors use both capital expenditures and operating expenditures to measure how a company spends its money, but it’s important to avoid confusing them. In a nutshell, capital expenditures represent long-term investments in assets that will be used in the future, while the operating expenditures represent short-term outlays.

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How to Calculate Capital Expenditures

Companies calculate capital expenditures and include it on their cash flow statements under the section noted for investing activities. If you have access to a company’s cash flow statement or other key company financial information, you wouldn’t necessarily need to calculate capital expenditures because the relevant numbers would already be included.

But if you don’t have cash flow information available, or you simply want to do the math on your own, there’s a capital expenditures formula you can use. This formula is simple, though it does require that you have certain information about a company’s financial situation, including:

• Depreciation and amortization for capital expenditure assets

• Current period PP&E (Property, Plant & Equipment)

• Prior period PP&E

Property, Plant & Equipment refers to assets listed on a company’s balance sheet. In simpler terms, these are the assets that help generate revenue and profits for the business. So again, this can include things like equipment, machinery, vehicles, office equipment or land. Of those assets, land is the only one that typically doesn’t depreciate in value over time.

If you have these three pieces of information, you can then apply the capital expenditures formula. The formula looks like this:

CapEx = Current period PP&E – Prior period PP&E + Current period depreciation

Here’s how it works using hypothetical numbers. Say you’re evaluating a company that has a current period PP&E of $70,000, a prior period PP&E of $50,000 and $20,000 in current period depreciation. Your capital expenditures formula would look like this:

CapEx = $70,000 – $50,000 + $10,000
CapEx = $30,000

These calculations are relatively easy to do if you have all the relevant details from a company’s balance sheet. Once you can calculate capital expenditures, you can use the formula to evaluate investments.

Capital Expenditures and Fundamental Analysis

Fundamental analysis is one strategy for comparing investments and it’s typically used when investing for the long-term. With this type of analysis, the emphasis is on what makes a company financially healthy. This is something you may be interested in when trying to evaluate a stock appropriately and decide whether to invest in it.

A fundamental analysis approach considers a company’s assets and liabilities. But it also utilizes certain financial ratios that measure how money moves in and out of the company. Some of the most important ratios include:

• Price to earnings (P/E) ratio

• Earnings per share (EPS)

• Current ratio

• Quick ratio

• Return on equity (ROE)

• Book-to-value ratio

• Projected earnings growth (PEG)

All of these ratios measure a company’s value, which is important if you’re using a value investing approach. The goal there is to identify companies that have been undervalued by the market but have long-term growth potential. By investing in these companies and holding on to them, investors can benefit from price appreciation as they rise in value over time.

So where do capital expenditures fit in?

In terms of gauging a company’s value, capital expenditures offer insight into projected growth over the long-term. When a company regularly invests money in purchasing or upgrading assets, that can be a sign of financial strength and an eventual increase in value. On the other hand, a company pulling back on capital expenditures may hint at cash flow struggles that are impeding future growth.

One thing that’s important to keep in mind is that capital expenditures aren’t a foolproof indicator of a company’s long-term growth potential. It’s possible that a company may spend money with good intentions, only to have them backfire.

In an earlier example, we mentioned a manufacturing company purchasing new equipment to boost production. If that investment doesn’t pan out as expected–if, for example, the equipment requires constant maintenance and repairs that eat into profits or it falls short of expectations for increasing production speed–that could inhibit the company’s growth plans.

The Takeaway

Capital expenditures can be particularly helpful to investors if you favor a value investing approach or you lean toward buy-and-hold investing. Understanding how a company is investing in itself for the long-term can help you decide whether it makes sense as part of your portfolio.

Once you’re ready to invest, it’s important to choose the right tools for doing so. There are many out there, with numerous pros and cons. It’s a good idea to do your research when finding the right platform to invest, just like you would when researching specific investments.

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.

Photo credit: iStock/akinbostanci

About the author

Rebecca Lake

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

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Mar

2025

What Are Commodities? How Do They Fit Into the Stock Market?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Commodities are the raw materials that are the building blocks of most types of production, whether for commercial, military, or industrial goods. Different types of grain, livestock, metals, and energy sources (such as crude oil) are some of the most common commodities.

Although commodities may offer some advantages to investors, commodities are considered a high-risk market, as prices can fluctuate based on numerous factors that are hard to anticipate: e.g. weather events; regional political changes; supply chain issues, and more.

Nonetheless, investing in commodities can be useful for diversification because commodities tend to have a low correlation with traditional asset classes like stocks and bonds. Commodities are considered alternative investments, and thus they may be better suited to some investors than others.

Key Points

• Commodities are raw materials used in production, including grain, livestock, metals, and energy sources like crude oil.

• Investing in commodities can offer diversification as they have a low correlation with traditional assets.

• Commodities can be traded on commodities exchanges through futures contracts or through investment vehicles like mutual funds and ETFs.

• Commodities prices are influenced by factors like supply and demand, weather events, and geopolitical changes.

• Commodities trading carries risks due to price volatility and external factors, making it important to consider personal risk tolerance.

What Is a Commodity?

A commodity is a raw material that can be bought, sold, or traded according to its value in producing other types of goods. Some commodities, like sugar or beef, may be consumed directly.

Understanding Commodities

Many of the things you use or consume in everyday life start off in commodity form. For example, the gas you put in your car is created by refining crude oil.

The hallmark of a commodity is that a unit of one type of commodity rarely differs substantially from another unit of that commodity. Thus one bushel of corn is equivalent to any other bushel of corn. One bar of gold is interchangeable with any other bar of gold.

This is quite different from traditional investments like stocks and bonds, where the quality of one stock can vary widely from another; or where one bond may get a triple-A rating and another is rated as junk.

Another difference is that the market forces that impact the movement of stocks or bonds often don’t apply to commodities, which are driven by supply and demand. So an inflationary period could hurt the performance of stocks or bonds, but might benefit commodities when the prices of certain goods rise.

This is one reason why commodities are considered alternative investments, which are not correlated with the movements of more traditional assets and thus can offer investors some diversification.

Trading Commodities

While stocks are traded on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq, commodities and commodities futures are traded on a commodities exchange, such as the New York Mercantile Exchange (NYME) or the Chicago Mercantile Exchange (CME).

The Chicago Board of Trade has established standards of measurement and grades of quality for different types of commodities that facilitate commodities trading. For example, there are 5,000 bushels of #2 yellow corn per corn contract, and corn can be traded on the spot or cash market, or the futures market.

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Commodity Types and Examples

Broadly speaking, commodities can be divided into one of two categories: hard or soft.

• Hard commodities generally must be mined or otherwise extracted from the earth.

• Soft commodities are sourced naturally either through agriculture or cultivation.

Hard and soft commodities can serve different purposes in the global economy and supply chain. Within these broader categories, you can further distinguish specific types of commodities from one another.

	Types of Commodities	Examples
Hard	• Energy • Precious Metals • Industrial Metals	• Aluminum Copper • Crude Oil • Diesel • Gold • Lead • Natural Gas • Nickel • Palladium • Platinum • Silver • Tin • Zinc
Soft	• Agricultural Products • Livestock	• Cattle • Coffee • Corn • Cotton • Orange juice • Palm Oil • Pork • Soybeans • Sugar • Tea • Wheat

Types of Commodities

Examples

Hard

• Energy

• Precious Metals

• Industrial Metals

• Aluminum Copper

• Crude Oil

• Diesel

• Gold

• Lead

• Natural Gas

• Nickel

• Palladium

• Platinum

• Silver

• Tin

• Zinc

Soft

• Agricultural Products

• Livestock

• Cattle

• Coffee

• Corn

• Cotton

• Orange juice

• Palm Oil

• Pork

• Soybeans

• Sugar

• Tea

• Wheat

Hard and soft commodities may be traded globally but have a smaller geographic footprint in terms of where they’re sourced from.

For example, nearly 100 countries around the world produce crude oil, but five countries are responsible for 52% of the supply. China, meanwhile, is the world’s largest producer of wheat, generating around 17% of total production.

How Are Commodities Traded on the Stock Market?

Commodities are most often traded on an exchange using futures contracts. A commodity futures contract is an agreement to either buy or sell a specified quantity of a commodity at some future date at a predetermined price. It’s important to note that commodities futures are not regulated by the Securities and Exchange Commission.
Futures are not the only way to trade commodities, however. Investors may also choose to pursue:

• Direct investment via cash (on the spot market)

• Mutual funds

• Exchange-traded funds (ETFs)

• Exchange-traded notes (ETNs)

• Commodity-linked stocks and bonds

Of these options, direct investment tends to prove the most difficult for individual investors. Trading commodities through direct investment requires the exchange of physical goods. However, physically holding one ton of wheat or 1,000 head of cattle isn’t a realistic expectation for most commodities traders.

Mutual funds and ETFs can offer an easier access point to the commodities market while allowing investors to diversify. Rather than tying up investment dollars in a single commodity, an investor may diversify across several different types of commodities within a single fund or ETF.

Regardless of how someone invests in commodities, there are real risks to weigh. Commodities can be highly volatile as there are a variety of outside factors that can influence the direction in which prices move.

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What Determines Commodities Prices?

Supply and demand play an integral role in determining how commodities are valued. When supply exceeds demand, e.g. if there were a drop-off in the demand for copper, the price of that commodity would also likely drop. But if a new technology like AI emerges, creating demand for precious metals, that could drive some commodities prices up.

Global events, such as widespread flooding or war can also trigger fluctuations in commodity prices.

Volatility in commodities pricing can have far-reaching effects on the global economy. Research from the International Monetary Fund (IMF) suggests that swings in commodity prices, meaning what a country pays for its imported commodities vs. what it collects for exported ones, have the potential to hinder long-term economic growth, particularly for those countries that are significant exporters.5

The IMF also determined that instability in commodity prices may also increase volatility in domestic inflation. Rising prices for basic domestic goods, such as food or energy, can be especially burdensome in countries that have developing economies.

The Takeaway

What are commodities? Commodities are all around you, from the clothes you wear to the foods you eat, to the technology you use at home and at work.

Within the financial markets, commodities play an important role in price regulation for consumer goods. As an investor, commodities trading can open up new avenues to diversification, though it’s wise to consider how these investments align with your personal risk tolerance.

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FAQ

What Is a Commodity vs. a Stock?

A commodity is a raw material that’s used to create something else, such as crude oil that’s refined into gasoline or wheat that’s used to produce bread. Whereas a stock represents an ownership share in a company.

Are commodities riskier than stocks?

Commodities can be riskier than stocks because they’re often speculative in nature and their pricing can be highly volatile. Some types of commodities may prove more stable than others, though it’s important to consider how supply and demand may affect pricing.

What is the safest commodity to invest in?

There are no “safe” investments, and there is always the risk of loss when investing. With commodities, choosing one that is more insulated from fluctuations in pricing can be beneficial, but this can be difficult to predict. Gold and some precious metals may fare well when inflation rises, or there’s increased uncertainty in the markets about interest rates. Again there are no guarantees.

About the author

Rebecca Lake

Photo credit: iStock/deyanarobova

SoFi Invest®

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Mar

2025

What Are Cyclical Stocks?

By Rebecca Lake | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves through upturns and downturns. A cyclical stock is the opposite of a defensive stock, which tends to offer more consistent returns regardless of macroeconomic trends.

Investing in cyclical stocks could be rewarding during periods of economic prosperity. During a recession, however, certain types of cyclical stocks may suffer if consumers are spending less.

What Is a Cyclical Stock?

The stock market is not static; it moves in cycles that often mirror the broader economy. To understand cyclical stocks, it helps to understand how the market changes over time, with the understanding that this has a different impact on different types of stocks.

A single stock market cycle involves four phases:

Accumulation (trough)

After reaching a bottom, the accumulation phase signals the start of a bull market and increased buying activity among investors.

Markup (expansion)

During the markup phase more investors may begin pouring money into the market, pushing stock valuations up.

Distribution (peak)

During this phase, investors begin to sell the securities they’ve accumulated, and market sentiment may begin to turn neutral or bearish.

Markdown (contraction)

The final phase of the cycle stock is a market downturn, when prices begin to significantly decline until reaching a bottom, at which point a new market cycle begins.

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Cyclical Stocks Examples

The cyclicality of a stock depends on how they react to economic changes. The more sensitive a stock is to shifting economic trends, the more likely investors would consider it cyclical. Some of the most common cyclical stock examples include companies representing these industries:

• Travel and tourism, including airlines

• Hotels and hospitality

• Restaurants and food service

• Manufacturing (i.e. vehicles, appliances, furniture, etc.)

• Retail

• Entertainment

• Construction

Generally, consumer cyclical stocks represent “wants” versus “needs” when it comes to how everyday people spend. That’s because when the economy is going strong, consumers may spend more freely on discretionary purchases. When the economy struggles, consumers may begin to cut back on spending in those areas.

Cyclical Stocks vs Noncyclical Stocks

Cyclical stocks are the opposite of non cyclical or defensive stocks. Noncyclical stocks don’t necessarily follow the movements of the market. While economic upturns or downturns can impact them, they may be more insulated against negative impacts, such as steep price drops.

Non Cyclical stocks examples may include companies from these sectors or industries:

• Utilities, such as electric, gas and water

• Consumer staples

• Healthcare

Defensive or non cyclical stocks represent things consumers are likely to spend money on, regardless of whether the economy is up or down. So that includes essential purchases like groceries, personal hygiene items, doctor visits, utility bills, and gas. Real estate investment trusts that invest in rental properties may also fall into this category, as recessions generally don’t diminish demand for housing.

Cyclical stocks may see returns shrink during periods of reduced consumer spending. Defensive stocks, on the other hand, may continue to post the same, stable returns or even experience a temporary increase in returns as consumers focus more of their spending dollars on essential purchases.

Dive deeper: Cyclical vs Non-Cyclical Stocks: Investing Around Economic Cycles

Pros and Cons of Investing in Cyclical Stocks

There are several reasons to consider investing in cyclical stocks, though whether it makes sense to do so depends on your broader investment strategy. Cyclical stocks are often value stocks, rather than growth stocks. Value stocks are undervalued by the market and have the potential for significant appreciation over time. Growth stocks, on the other hand, grow at a rate that outpaces the market average.

If you’re a buy-and-hold investor with a longer time horizon, you may consider value cyclical stocks. But it’s important to consider how comfortable you are with investment risk and riding out market ups and downs to see eventual price appreciation in your investment. When considering cyclical stocks, here are some of the most important advantages and disadvantages to keep in mind.

Pros of Cyclical Stocks

• Return potential. When a cyclical stock experiences a boom cycle in the economy, that can lead to higher returns. The more money consumers pour into discretionary purchases, the more cyclical stock prices may rise.

• Predictability. Cyclical stocks often follow market trends, making it easier to forecast how they may react under different economic conditions. This could be helpful in deciding when to buy or sell cyclical stocks in a portfolio.

• Value. Cyclical stocks may be value stocks, which can create long-term opportunities for appreciation. This assumes, of course, that you’re comfortable holding cyclical stocks for longer periods of time.

Cons of Cyclical Stocks

• Volatility. Cyclical stocks are by nature more volatile than defensive stocks. That means they could post greater losses if an unexpected market downturn occurs.

• Difficult to time. While cyclical stocks may establish their own pricing patterns based on market movements, it can still be difficult to determine how long to hold stocks. If you trade cyclical stocks too early or too late in the market cycle, you could risk losing money or missing out on gains.

• Uneven returns. Since cyclical stocks move in tandem with market cycles, your return history may look more like a rollercoaster than a straight line. If you’re looking for more stable returns, defensive stocks could be a better fit.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Invest in Cyclical Stocks

When considering cyclical stocks, it’s important to do the research before deciding which ones to buy. Having a basic understanding of fundamental analysis and technical analysis can help.

Fundamental analysis means taking a look under a company’s hood, so to speak, to measure its financial health. That can include looking at things like:

• Assets

• Liabilities

• Price to earnings (P/E) ratio

• Earnings per share (EPS)

• Price to earnings growth (PEG)

• Book to value ratio

• Cash flows

Fundamental analysis looks at how financially stable a company is and how likely it is to remain so during a changing economic environment.

Technical analysis, on the other hand, is more concerned with how things like momentum can affect a stock’s prices day to day or even hour to hour. This type of analysis considers how likely a particular trend is to continue.

Considering both can help you decide which cyclical stocks may be beneficial for achieving your short- or long-term investment goals.

The Takeaway

Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves. Cyclical stocks could be a good addition to your portfolio if you’re interested in value stocks, or you want to diversify with companies that may offer higher returns in a strong economy.

Investing in cyclical stocks does have its pros and cons, however, like investing in just about any other type or subset of securities. Investors should make sure they know the risks, and consider talking to a financial professional before making a decision.

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.

About the author

Rebecca Lake

SoFi Invest®

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

Mar

2025

Everything You Need to Know About Lifestyle Funds and Lifestyle Investing

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

Lifestyle funds are investment funds that base their asset allocation on someone’s age, risk tolerance, and investing goals. Individuals who want to build wealth over the long term in a relatively hands-off way might consider lifestyle investings.

There are different types of lifestyle funds investors may choose from, based on their appetite for risk, the level of risk needed to achieve their goals, and their investing time horizon. Lifestyle assets often also appear inside different types of retirement accounts, including employer-sponsored retirement plans and individual retirement accounts (IRAs). Whether becoming a lifestyle investor makes sense for you can depend on what you hope to achieve with your portfolio, how much risk you’re comfortable taking, and your overall time horizon for investing.

What are Lifestyle Funds?

A lifestyle fund or lifestyle investment holds a mix of investments that reflect an investor’s goals and risk tolerance. These investment funds tailor their investment mix to a specific investor’s needs and age to provide a simplified solution for reaching their goals.

Lifestyle funds may invest in both equities (i.e. stocks) and fixed-income securities, such as bonds and notes. These funds may require fewer decisions by the asset owner, since they adjust automatically through changing lifestyle needs until you reach retirement. With lifestyle assets, as with other types of funds, it’s important to consider the balance between risk and reward.

Lifestyle funds that carry a higher degree of risk may offer higher returns to investors, while those that are more conservative in terms of risk may yield lower returns.

💡 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.

How Do Lifestyle Funds Work?

Typically purchased through a retirement account or a brokerage account, lifestyle funds work by creating a diversified portfolio to meet an investor where they are, while also taking into account where they’d like to be 10, 20 or 30 years from now.

An investor can choose from an initial lifestyle fund allocation, then adjust the risk level up or down based on their preferences. A fund manager reviews the asset allocation for the fund and rebalances periodically to help an investor stay on track with their goals.

The level of risk an investor takes may correlate to the average age of retirement, which for most people is around 65. So someone who’s 25 years old now has 40 years to invest for the future, meaning they can afford to take more risk to achieve their goals. As they get older, their tolerance for risk may decrease which could mean moving away from stocks and toward fixed-income investments.

Unlike target-date funds, the level of risk in lifestyle funds doesn’t change significantly over time. So if you were to choose an aggressive lifestyle fund at 25, the asset allocation of that fund would more or less be the same at age 65. That’s important to understand for choosing the lifestyle fund that’s appropriate for your risk tolerance and goals.

Recommended: Explaining Asset Allocation by Age

Two Stages of Lifestyle Funds

Lifestyle investing can work in different stages, depending on where you are in your investing journey. Lifestyle funds accommodate these different stages by adjusting their asset allocation.

This is something the fund manager can do to ensure that you’re working toward your goals without overexposing yourself to risk along the way. The two stages of lifestyle funds are the growth stage and the retirement target date stage.

1. Growth Stage

The growth stage represents the period in which a lifestyle investor is actively saving and investing. During the growth stage, the emphasis is on diversifying investments to achieve the appropriate balance between risk and reward. This phase represents the bulk of working years for most people as they move from starting their careers to reaching their peak earnings.

In the growth stage, lifestyle funds hold an asset allocation that reflects the investor’s goals and appetite for risk. Again, whether this is more conservative, aggressive or somewhere in-between depends on the individual investor. At this time, the investor is typically concerned with funding retirement accounts, rather than withdrawing from them.

2. Retirement Target Date

The retirement target date stage marks the beginning of the countdown to retirement for an investor. During this stage, the focus shifts to preparing the investor to begin drawing an income from their portfolio, rather than making new contributions or investments.

At this point, a lifestyle investor may have to decide whether they want to maintain their existing asset allocation, shift some or all of their assets into other investments (such as an annuity), or begin drawing them down in cash. For example, an investor in their mid-50s may decide to move from an aggressive lifestyle fund to a moderate or conservative lifestyle fund, depending on their needs, anticipated retirement date, and how much risk they’re comfortable taking.

Different Types of Lifestyle Funds

Lifestyle funds aren’t all alike and there are different options investors may choose from. There are different ways lifestyle funds can be structured, including:

• Income-focused funds. These lifestyle funds aim to produce income for investors, though capital appreciation may be a secondary goal. Fixed-income securities typically make up the bulk of lifestyle income funds, though they may still include some equity holdings.

• Growth-focused funds. Lifestyle growth funds are the opposite of lifestyle income funds. These funds aim to provide investors with long-term capital appreciation and place less emphasis on current income.

• Conservative asset allocation funds. Conservative lifestyle funds may have a long-term goal of achieving a set total return through both capital appreciation and current income. These funds tend to carry lower levels of risk than other lifestyle funds.

• Moderate asset allocation funds. Moderate lifestyle funds often take a middle ground approach in terms of risk and reward. These funds may use a “fund of funds” strategy, which primarily involves investing other mutual funds.

• Aggressive asset allocation funds. Aggressive lifestyle funds may also use a “fund of funds” approach, though with a slightly different focus. These funds take on more risk, though rewards may be greater as they seek long-term capital appreciation.

Lifestyle Investment Risks

Investing for retirement with lifestyle assets has some risks, so it’s important to make sure that the fund you choose matches your risk tolerance. Risk tolerance refers to the amount of risk an investor is comfortable taking in their portfolio. Risk capacity is the amount of risk needed to achieve investment goals.

Typically, younger investors can afford to take more risk in the early years of their investment career as they have more time to recover from market declines. But if that investor has a low risk tolerance, they may still choose to stick with more conservative investments. If their risk tolerance doesn’t match up with the amount of risk they need to take to achieve their investment goals, they could fall far short of them.

When considering lifestyle funds, it’s important to consider your risk mix and risk level. While lifestyle funds can simplify investing in that you don’t necessarily need to make day-to-day trading decisions, it’s still important to consider how your risk tolerance and risk capacity may evolve over time.

As you move from the growth stage to the retirement target date stage, for instance, you may need to make some adjustments to your lifestyle fund choices in order to keep pace with your desired goals.

💡 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.

Advantages of Lifestyle Funds

In addition to their risks, lifestyle funds offer numerous advantages to investors, starting with simplicity. When you invest in a lifestyle fund, you know more or less what to expect in terms of asset allocation, based on the risk tolerance that you specify. These funds don’t require you to be an active investor in order to realize returns.

Some funds also automatically rebalance on behalf of investors, so there’s very little you need to do, other than be mindful of how the fund’s risk mix reflects your risk tolerance at any given time.

A lifestyle fund can offer broad diversification, allowing you to gain exposure to a variety of assets without having to purchase individual stocks, bonds or other securities.

Compared to other types of mutual funds or exchange-traded funds (ETFs), lifestyle funds may carry lower expense ratios. That can allow you to retain more of your investment returns over time.

Finally, lifestyle funds encourage investors to stay invested through market ups and downs. That can help you to even out losses through dollar-cost averaging.

Lifestyle Funds vs Target Date Funds

If you have a 401(k), then you’re likely familiar with target date funds as they’re commonly offered in workplace retirement plans. A target date fund, or lifecycle fund, is a mutual fund that adjusts its asset allocation automatically, based on the investor’s target retirement date. These funds are distinguishable from lifestyle funds because they typically have a year in their name.

So a Target Date 2050 fund, for example, would attract investors who plan to retire in the year 2050. Target date funds also take a diversified approach to investing, with asset allocations that include both stocks and fixed-income securities.

The difference between target date funds and lifestyle funds is that target date funds follow a specific glide path. As the investor gets closer to their target retirement date, the fund’s asset allocation adjusts to become more conservative. Lifestyle funds don’t do that; instead, the asset allocation remains the same.

The Takeaway

Whether you choose to invest with lifestyle funds, target date funds, or something else, the most important thing is to get started saving for retirement. The longer your time horizon until retirement, the more time your money has to grow through the power of compounding interest.

If you feel like incorporating lifestyle funds into your investing strategy may help you reach your financial goals, be sure to take the pros and cons into consideration. It may also be helpful to consult with a financial professional for guidance.

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

What is a lifestyle pension fund?

A pension fund is a type of defined benefit plan, in which employees receive retirement benefits based on their earnings and years of service. A lifestyle pension fund is a pension fund that allocates assets using a lifestyle strategy in order to meet an investor’s goals and needs.

What is a lifestyle strategy?

In investing, a lifestyle strategy is an approach that chooses investments that can help an investor to reach specific milestones or goals while keeping their age and risk tolerance in mind. With lifestyle funds, the asset allocation doesn’t change substantially over time.

What is a lifestyle profile?

A lifestyle profile is a tool that investors use to help them select the most appropriate lifestyle funds based on their age, risk tolerance goals.

About the author

Rebecca Lake

Photo credit: iStock/GaudiLab

SoFi Invest®

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

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Everything You Need to Know About Lifestyle Funds and Lifestyle Investing

What are Lifestyle Funds?

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1. Growth Stage

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Different Types of Lifestyle Funds

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FAQ

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