Jan
09
2024

Understanding Stop-Loss Orders: A Comprehensive Guide

By | Growing Wealth, invest, Investing | Comments Off on Understanding Stop-Loss Orders: A Comprehensive Guide

When an investor places a stop-loss order, sometimes referred to as a stop order, they order their broker to buy or sell a stock once shares reach a certain price. This price is called a “stop price.” Placing a stop-loss order can potentially help keep people from losing money.

There are several types of stop-loss orders, too, that investors can use to increase their chances of retaining any applicable returns. Knowing what they are, and how to use them, can be beneficial to many investors.

What Is a Stop-Loss Order?

A stop-loss order is a market order type that automatically executes a transaction once certain parameters are met — those parameters being set by the investor. In effect, a stop-loss order limits an investor’s potential losses, by “locking in” their profit or gain in relation to a given position.

It may be helpful to think of stop-loss orders as a set of instructions given to your brokerage or investment platform that will automatically execute a trade once a security reaches a given price.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

How Stop-Loss Orders Work

Stop-loss orders work by executing a predetermined order or set of instructions set by an investor or trader. Effectively, an investor can decide that if the value of one of their stocks falls below a certain threshold, they’ll want to sell it, thereby preserving the gain or profit they’ve made on the stock’s appreciation over time.

So, if the stock’s value starts to fall, and hits the threshold decided upon by the investor, an automatic sell order will execute, and the investor’s position will be vacated – or, their stocks will be sold automatically. This way, if the stock continues to lose value, the investor’s already cashed out, and they won’t lose any more value if they had held onto their stocks.

Different Types of Stop-Loss Orders

There are a few key types of stop-loss orders investors should know about:

Sell-stop Order

A sell-stop order is an order to sell a stock when shares hit a certain price. Let’s look at two examples. The first shows how sell-stop orders can help investors limit their losses.

Daniel buys 10 shares of Stock X at $150 each. He knows he could lose money, but he wouldn’t be comfortable losing more than 10% of what he initially invests.

To ensure he doesn’t lose more than 10%, Daniel sets up a sell-stop order for $135, which is 10% less than he originally paid for his shares of Stock X. If Stock X shares drop to $135, his broker will immediately sell them, so he only loses 10%.

By setting up a sell-stop order, Daniel has limited his losses. (Remember, 10% is just an example, not a suggestion. Everyone has different preferences when investing.)

Now let’s look at an example of how a sell-stop order can lock in profits. This time, Daniel buys 10 shares of Stock Y for $100 each. Six months later, shares have increased to $150 each.

Daniel doesn’t want to lose any of his unrealized gains. “Unrealized gains” are the gains investors make when share prices increase, but they haven’t sold their shares, so they haven’t collected any of the money yet.

Daniel’s Stock Y shares have increased by $50, or $500 total. If the share price drops below the original $100, he could lose all those unrecognized gains.

But Daniel isn’t ready to sell his Stock Y shares yet, either. If the share price continues to increase, he wants to keep earning money. So, he sets up a sell-stop order.

Now that the Stock Y share price is $150, Daniel might set up a sell-stop order for, say, $130. If shares drop to $130, his broker automatically sells them.

Although Daniel wouldn’t be able to keep the full $500 he could have earned had he sold his shares at $150, he would still pocket $30 per share, or $300 total.

In the example of Daniel’s Stock X shares, he prevented losses. With his Stock Y shares, he’s locked in gains. When trading, you’ll probably hear the term “market order” pop up frequently. Know that a stop-loss order is not the same as a market order. When people place market orders, they buy or sell stocks at the current market price, whatever that may be. With a stop-loss order, people “schedule” a market order that is triggered once a predetermined price has been hit.

So once a stock hits its stop price, the stop-loss order becomes a market order. The stop price isn’t necessarily the same price that the shares will be sold at.

For example, Daniel’s stop price for his Stock Y shares is $130, but by the time they sell, they may have dropped to $125.

As a result, he loses more money than he’d anticipated. Or the share price could increase to $135 when they sell, so Daniel only loses $15 per share, even though he was prepared to lose $20.

Buy-stop Order

Knowing what a sell-stop order is, a buy-stop order is similarly exactly what it sounds like. Investors set up a buy-stop order to purchase a stock once shares hit a price higher than the current market price.

Buy-stop orders are placed under the assumption that once a stock starts to increase, it will gain momentum and continue to rise.

If Daniel knows that Stock S shares generally sell for between $20 and $25, he might set up a buy-stop order to purchase 10 shares once they reach $26. The computer system would buy 10 shares on his behalf, and he’d hope Stock S share prices would continue to rise.

Trailing Stop-loss Order

Regular sell-stop orders and buy-stop orders are set at a specific dollar amount. Trailing stop-loss orders are different.

When someone sets a sell trailing-stop order for a certain amount, it tracks (or “trails”) the stock and sells shares once they decrease by that amount. A buy trailing-stop order “trails” the stock and buys shares once they increase by that amount.

Let’s look at an example with real numbers to break it down.

Let’s say Daniel buys shares of Stock A for $40 each. He sets a sell trailing stop-loss order for $1. As long as the stock increases, he’ll hold onto his shares. But as soon as the share price dips by $1, Daniel’s broker will sell his shares of Stock A.

If Stock A’s share price drops from $40 to $39, Daniel’s broker will sell his shares. And if the share price gradually increases to $44 but then drops to $43, a sell trailing-stop order for $1 will cause his broker to sell shares at a stop price of $43. (But remember, because a stop-loss order turns into a market order, shares might be at a price other than $43 by the time they sell.)

Trailing-stop orders are useful for locking in gains. As long as share prices increase, investors keep their shares. Once it decreases by a predetermined amount, the stock is sold.

Advantages of Using Stop-Loss Orders

Stop-loss orders have a couple of primary advantages: Limiting losses, and locking in profits or gains.

Risk Management and Loss Limitation

The most obvious advantage of a stop-loss order is that it keeps people from losing too much money in the market. In the first example of Daniel’s shares of Roku, he set a sell-stop order so that even if he did lose money, he didn’t lose more than he was comfortable with or could afford.

Stop-loss orders aren’t just for preventing losses, though. People can also use them to secure a capital gain.

With Daniel’s stop-loss order for Stock Y, his shares increased from $100 to $150, and he set up a sell-stop order for $130 so that if the stock started to dip, he would pocket at least $30 per share, or $300 total.

If Daniel hadn’t set that sell-stop order for his Stock Y investment, he could have incurred a net loss. Hypothetically, let’s say the share price continued to drop to $90 before he finally sold. He would have lost $10 per share, or $100, rather than gained $300.

Using Stop-Loss Orders to Lock in Profits

Stop-loss orders can also lock in profits. That can lead to some peace of mind for some investors.

In other words, a stop-loss order can make the investment process less stressful. People don’t have to check in on their stocks three times per day, five days per week to track share prices and decide whether they want to buy or sell.

Stop-loss orders help remove other emotions from the process, too. It can be easy to make irrational or rash decisions when trading stocks.

Daniel might get emotionally attached to his Stock Y shares, so he holds onto it even when it becomes a bad investment. Or he tells himself he’ll sell once Stock Y shares drop 10%, but he has a hard time pulling the trigger.

Some people are the type to “set it and forget it.” They buy stocks and forget to check in on them at all. Daniel might say he’ll sell his Stock Y shares when the price decreases 10%, but he simply forgets to check the market for three months. Stock Y’s share price continues to drop, and he loses significant money.

Stop-loss orders can be ideal for investors who want to “set it and forget it” and they have the potential to reduce portfolio risk if used appropriately.

Disadvantages and Risks of Stop-Loss Orders

Stop-loss orders can have some drawbacks, too, just as they have potential advantages.

Potential Drawbacks and Market Impact

Stop-loss orders can work against investors when there’s a short-term drop in the share price, or drawback.

Consider this: Maybe Daniel buys 20 shares of Stock B for $30 per share. He sets a sell-stop order for $28.Monday, shares are at $30, but they fall to $28 on Tuesday, so his broker automatically sells all 20 shares. By Friday, shares have jumped up to $33, so Daniel has lost $60 in just a few days because there was a short-term dip.

It’s helpful to research how much a stock tends to fluctuate in a given amount of time to avoid these types of problems. Maybe Stock B’s share price regularly fluctuates by a few dollars at a time, so Daniel should have set his stop-loss order at a lower price.

If investors understand their stocks’ trends, they can probably set up stop-loss orders more strategically. However, research goes out the window when there is a “flash crash.” This is a sudden, aggressive drop in stock prices — but prices can jump back up just as quickly.

Flash crashes aren’t common, but they occasionally occur.

In this case, Daniel’s Stock B shares could drop from $30 to $15 in the morning, and because he set up a sell-stop order, they automatically sell. But the share price jumps to $32 by the time the closing bell sounds, and Daniel loses out on those gains because he had a sell-stop order.

Understanding Price Gaps and Slippage

Another drawback to consider is that once a stock hits its stop price, the stop-loss order becomes a market order, or an order to sell a stock at the current market price. When a stop-loss order becomes a market order, shares sell for the next available price — or, what’s often called a price gap.

If the difference between an investor’s stop price and the next available price is a few cents, it might not be a big deal. But if the market is volatile that day and the market price is several dollars below the stop price, someone could end up losing quite a bit of cash — especially in the case of a flash crash.

Granted, a stop-loss order turning into a market order could be either a pro or a con, depending on whether a share price increases or decreases. Regardless, some investors might consider it a disadvantage to not know what to expect.

When and Why to Use Stop-Loss Orders

Investors can choose to use stop-loss orders in a variety of scenarios, but they can likely be most beneficial if an investor feels that a security’s price is likely to fall in the near future, or if they’re particularly risk-averse and want to lock in their gains.

With that in mind, there may not necessarily be an ideal scenario in which a stop-loss order is best used or deployed — it’ll depend on the individual investor’s goals and concerns. Again, if they’re particularly risk-averse or at a point in their life where they can’t wait for the market to rebound, and want to lock in their gains, it may be a good idea to use one. If not, a stop-loss order may be less useful.

It may be a good idea to talk to a financial professional, too, about when or if using a stop-loss order is a good idea at a given point in time.

Strategic Considerations in Various Market Conditions

If you’re uncomfortable with the risks that come with stop-loss orders, you may choose not to use them. But know that a huge purpose of stop-loss orders is to minimize risk, and depending on market conditions, they may help ease your anxiety. Even so, it might be helpful to think about the trade-offs and whether the pros outweigh the cons, in your particular financial situation.


💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Setting Stop-Loss Order Levels

While each and every investor will have different considerations to make when setting stop-loss order levels, there are some things to broadly keep in mind.

Determining Price Levels for Stop-Loss Orders

There’s no exact science when determining price levels for stop-loss orders. It really comes down to an investor’s risk threshold — or, how much loss they’re willing to stomach before they want to bail on a position. Again, that will vary from investor to investor.

It may be helpful to think of that threshold in terms of a percentage. For instance, if a stock’s value declines by 10%, would you want to sell? How about 20%? These can be broad, general markers that many investors can utilize. But there are more advanced methods, too, like using moving averages to determine an acceptable stop-loss placement.

You could even use support and resistance levels to work as guidelines, too. It depends on how thorough or exact you’d like to be.

The Takeaway

Stop-loss orders are a type of market order that can be helpful to investors who want to preserve their gains, or who may want to limit their risk. There’s no exact science as to when and how to use them, but they can be an important and powerful tool in any investor’s kit — though there’s no obligation to ever necessarily use them.

If you’re unsure of whether you should start incorporating stop-loss orders into your strategy, it may be helpful to talk about it with a financial professional. Again, these are just one tool of many, and if you’re particularly risk-averse, they may be worth investigating further.

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

What’s the main difference between a limit stop-loss order and limit order?

The main difference between a limit stop-loss order and a limit order is that limit orders guarantee trades execute at a specified price, whereas stop orders can be used to limit potential losses. Limit orders specify the maximum price an investor is willing to pay, where a stop-loss order specifies the threshold at which an investor wishes to sell.

Do stop-loss orders always work?

Stop-loss orders do not always work, as there can be glitches within a trading platform’s system, low market liquidity, trading stoppages, and market gaps that can throw an investor’s plans out the window.

Is a stop-loss order better than a stop-limit?

A stop-loss order is not necessarily better than a stop-limit order, as they’re two different things that can or could be used together as a part of an overall investment strategy.

Is a stop-loss a good strategy?

Using stop-loss orders may be a good strategy for certain investors, but it’ll depend on the specific investor’s overall strategy, goals, and risk tolerance. What’s good for one investor may not necessarily be good for another.

What are stop-loss rules?

Stop-loss rules are specified by investors when inputting a stop-loss order. These rules specify the price at which an investor will want to vacate a position or sell their holdings — it’s a threshold at which they want to sell and maintain their gains.

What is the best way to set up stop-loss and make a profit?

There are many strategies and tactics that investors can use to set up stop-loss orders, which might help them maintain profit and value. Some investors, for example, use a percentage as a guideline, while others might use moving averages to determine stop-loss limits, and others could use support and resistance levels.

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.

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.

SOIN1023173

Read more
Jan
09
2024

Understanding Value Investing: Principles, Strategies, and Risks

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Understanding Value Investing: Principles, Strategies, and Risks

Value investing is an investment philosophy that takes an analytical approach to selecting stocks based on a company’s fundamentals — such as earnings growth, dividends, cash flow, book value, and intrinsic value. Value investors don’t follow the herd when it comes to buying and selling, which means they tend to ignore tips and rumors they hear from coworkers and talking heads on TV.

Instead, they look for stocks that seem to be trading for less than they should be, perhaps because of a negative quarterly report, management scandal, product recall, or simply because they didn’t meet some investors’ high expectations.

What Is Value Investing?

A value investor’s goal is to find stocks that the market may be undervaluing. And after conducting their own analysis, an investor then decides whether they think the targeted stocks have potential to accrue value over time, and to invest.

In effect, value investing is an investment strategy that involves looking for “deals” in the market, and taking portfolio positions accordingly.

Historical Background and Evolution

Value investing has been championed and used by some of the most storied investors in history. For example, Warren Buffett, the CEO of Berkshire Hathaway, also known as the “Oracle of Omaha,” is probably the most famous (and most quoted) value investor of all time.

From 1965 to 2017, Buffett’s shares in Berkshire Hathaway had annual returns of 20.9% compared to the S&P 500’s 9.9% return.

Buffett’s mentor was Benjamin Graham, his teacher at Columbia Business School and later his employer, who is known as “the father of value investing.” Columbia professor David Dodd, another Graham protegee and colleague, is recognized for helping him further develop several popular value investing theories.

Billionaire Charlie Munger, vice chairman of Berkshire Hathaway Corp., was another super-investor who followed Graham and Dodd’s approach. And billionaire investor Seth Klarman , chief executive and portfolio manager of the Baupost Group, is a longtime proponent.

Joel Greenblatt, who ran Gotham Capital for over two decades and is now a professor at Columbia Business School, is the co-founder of the Value Investors Club.

The Core Principles of Value Investing

The main goal of value investing is to buy a security at a price that is near or less than its intrinsic value. That is, the investor is not paying a premium or markup on the stock — they’re getting a “deal” when they invest in it. There can be many elements at play when determining a value stock, including intrinsic value, margin of safety, and market inefficiencies.

Intrinsic Value and Margin of Safety

Intrinsic value refers to a stock’s “true” value, which may differ from its “market” value. It can be a difficult concept to wrap your head around, but at its core, determining a stock’s intrinsic value can help an investor determine whether they’re actually finding a value stock, or if they’d potentially be overpaying for a stock. That’s why the concept of intrinsic value is critical to value investors.

Similarly, investors need to incorporate a “margin of safety,” which accounts for some wiggle room when they’re trying to determine a stock’s intrinsic value. In other words: Investors can be wrong or off in their calculations, and calculating a margin of safety can give them some margin of error when making determinations.

Belief in Market Inefficiencies

Value investors also tend to believe that the market is rife with inefficiencies. That means that the market isn’t perfect, and doesn’t automatically price all stocks at their intrinsic values — opening up room to make value investments. If you, conversely, believe that the market is perfectly efficient, then there wouldn’t be any stocks that are priced below their intrinsic value.


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

Strategies and Techniques in Value Investing

Value investing isn’t about finding a big discount on a stock and hoping for the best, or making a quick buck on a market trend.

Value investors seek companies that have strong underlying business models, and they aren’t distracted by daily price fluctuations. Their decisions are based on research, and their questions might include:

•   What is the potential for growth?

•   Is the company well managed?

•   Does the company pay consistent dividends?

•   What is the company doing about unprofitable products, projects, or divisions?

•   What are the company’s competitors doing differently?

•   How much do I know about this company or the business it’s in?

Investors who are familiar with an industry or the products it sells (either because they’ve worked in that business or they use those goods or services) can tap that knowledge and experience when they’re analyzing certain stocks.

The same line of thought can be applied to companies that sell products or services that are in high demand. That brand might be expected to remain in demand into the future because the company has a reputation for evolving as times (and challenges) change.

Identifying Undervalued Stocks

Identifying undervalued stocks requires time, patience, and some good, old-fashioned analysis. That mostly includes fundamental analysis, which is a method of evaluating securities by looking at its underlying financial health. That typically involves digging into financial statements and records.

Analyzing Financial Statements and Reports

Investors who are time-crunched or still learning the basics might find the homework daunting. Deep diving into earnings reports, balance sheets, and income statements, and pondering what the future might hold isn’t for everyone.

Understanding Market Dynamics and Herd Mentality

Doing what feels right on a personal level instead of going with the flow is a big part of value investing. And it isn’t always easy.

If everyone around you is talking about a particular stock, that enthusiasm can be contagious. Which is why a typical investor’s decision making is often heavily influenced by relatives, co-workers, friends, and acquaintances.

For an investor who believes the pursuit of market-beating performance is more about randomness than research, emotions (fear, greed, FOMO) can be their worst enemy. Behavioral biases can lead to knee-jerk reactions, which can result in investing mistakes. It takes patience and discipline to stick with a value investing strategy.

This is all to say that investors should do their best to get a handle on overarching market dynamics, rather than investing emotionally or going with the crowd.

Value investors don’t follow the herd. They eschew the efficient market hypothesis, which states that stock prices already reflect all known information about a security (market inefficiencies!).

Value investors take the opposite approach. If a well-known company’s stock price drops, they look for the reasons why the company might be undervalued. And if there are strong signs the company could recover and even grow in the future, they consider investing.

Value vs Growth Investing

Value investing is often discussed alongside growth investing. Value versus growth stocks represent different investment styles or approaches.

Differences and Performance Comparisons

In a general sense, value stocks are stocks that have fallen out of favor in the market, and that may be undervalued. Growth stocks, on the other hand, are shares of companies that demonstrate a strong potential to increase revenue or earnings thereby ramping up their stock price.

In terms of performance value stocks may not be seeing much price growth, whereas growth stocks may be experiencing rapid price appreciation.

Pros and Cons of Each Approach

Both value and growth investing have their pros and cons.

Value investing, for instance, may see investors experience lowering volatility when investing, and also getting more dividends from their investments. But their portfolio might accrue value more slowly — if at all. Conversely, growth investing may see investors accrue more gains more quickly, but also with higher levels of volatility and risk.

The Process of Value Investing

As noted, value investing is a type of investing strategy, but it’s similar to how a value shopper might operate when hoping to buy a certain brand of a smartwatch for the lowest price possible. If that shopper suddenly saw the watch advertised at half the price, it would make them happy, but it also might make them wonder: Is there a new version of the watch coming out that’s better than this one? Is there something wrong with the watch I want that I don’t know about? Is this just a really good deal, or am I missing something?

Also as discussed, their first step would likely be to go online and do some research. And if the watch was still worth what they thought, and the price was a good discount from a reliable seller, they’d probably go ahead and snap it up.

Investing in stocks can work in much the same way. The price of a share can fluctuate for various reasons, even if the company is still sound. And a value investor, who isn’t looking for explosive, immediate returns but consistency year after year, may see a drop in price as an opportunity.

Value investors are always on the lookout to buy stocks that trade below their intrinsic value (an asset’s worth based on tangible and intangible factors). Of course, that can be tricky. From day to day, stocks are worth only what investors are willing to pay for them. And there doesn’t have to be a good reason for the market to change its mind, for better or worse, about a stock’s value.

But over the long run, earnings, revenues, and other factors — including intangibles such as trademarks and branding, management stability, and research projects — do matter.

Finding and Evaluating Value Stocks

Value investors use several metrics to determine a stock’s intrinsic value. A few of the factors they might look at (and compare to other stocks or the S&P 500) include:

Price-to-earnings Ratio (P/E)

This ratio is calculated by dividing a stock’s price by the earnings per share. For value investors, the lower the P/E, the better; it tells you how much you’re paying for each dollar of earnings.

Price/earnings-to-earnings Ratio (PGE)

The PEG ratio can help determine if a stock is undervalued or overvalued in comparison to another company’s stock. If the PEG ratio is higher, the market has overvalued the stock. If the PEG ratio is lower, the market has undervalued the stock. The PEG ratio is calculated by taking the P/E ratio and dividing it by the earnings growth rate.

Price-to-book Ratio (P/B)

A company’s book value is equal to its assets minus its liabilities. The book value per share can be found by dividing the book value by the number of outstanding shares.

The price-to-book ratio is calculated by dividing the company’s stock price by the book value per share. A ratio of less than one is considered good from a value investor’s perspective.

Debt-to-equity Ratio (D/E)

The debt-to-equity ratio measures a company’s capital structure and can be used to determine the risk that a business will be unable to repay its financial obligations. This ratio can be found by dividing the company’s total liabilities by its equity. Value investors typically look for a ratio of less than one.

Free Cash Flow (FCF)

This is the cash remaining after expenses have been paid (cash flow from operations minus capital expenditures equals free cash flow).

If a company is in good shape, it should have enough money to pay off debts, pay dividends, and invest in future growth. It can be useful to watch the ups and downs of free cash flow over a period of a few years, rather than a single year or quarter.

Over time, each value investor may develop their own formula for a successful stock search. That search might start with something as simple as an observation — a positive customer experience with a certain product or company, or noticing how brisk business is at a certain restaurant chain.

But research is an important next step. Investors also may wish to settle on a personal “margin of safety,” based on their individual risk tolerance. This can protect them from bad decisions, bad market conditions, or bad luck.

Long-Term Considerations and Patience

An important thing to remember when it comes to value investing is that investors are likely on the hook for the long term. Many value stocks are probably not going to see huge value increases over short periods of time. They’re fundamentally unsexy, in many respects. For that reason, investors may do well to remember to be patient.

Risks and Challenges in Value Investing

As with any investment strategy, value investing does have its risks. It tends to be a less-risky strategy than others, but it has its risks nonetheless.

For one, investors can mislead themselves by making faulty or erroneous judgments about certain stocks. That can happen if they misunderstand financial statements, or make inaccurate calculations when engaging in fundamental analysis. In other words, investors can make some mistakes and bad judgments.

Investors can also buy stocks that are overvalued – or, at least overvalued compared to what the investor was hoping to purchase it for. There are also concerns to be aware of as it relates to diversification in your overall portfolio (you don’t want a portfolio overloaded with value stocks, or any other specific type of security).


💡 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.

The Takeaway

Value investing is a type of investment strategy or philosophy that involves buying stocks or securities that are “undervalued.” In effect, an investor determines that a stock is worth more than the market has valued it, and purchases it hoping that it will accrue value over time. While it’s a strategy that has its risks, it’s been used by many high-profile investors in the past, such as Warren Buffett.

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

What are the pros and cons of value investing?

Pros of value investing include that it tends to be a less risky investing strategy, and that value stocks may experience less volatility. Some of the cons are that value stocks may not see sizable value increases over short periods of time, and that it’s possible investors can make a mistake and purchase an overvalued stock, rather than an undervalued one.

Is value investing high risk?

Value investing is generally considered to be a lower-risk investment strategy, as investors tend to buy securities that they perceive to be undervalued, rather than overvalued.

Can you make money value investing?

Yes, investors can make money utilizing a value investing strategy. Many of the most successful investors in history, such as Warren Buffett, used a value investing strategy to great success.

How do you do value investing?

Value investing involves purchasing stocks or other securities that an investor has determined to be “undervalued” by the market. Investors purchase those securities, with the hope that they’ll accrue value over time.

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.

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.

SOIN1023172

Read more
Jan
09
2024
Complete Guide to Investing in Foreign Currency

The Essential Guide to Investing in Foreign Currency

By | Growing Wealth, invest, Investing | Comments Off on The Essential Guide to Investing in Foreign Currency

Investing in foreign currency involves purchasing money, or currency, in another country. The market for foreign currency investing is the largest and most liquid in the world. There are some differences between investing in foreign currency and investing in stocks or bonds, though, that investors should be aware of.

Further, foreign currency investing can be somewhat confusing to new investors, and it also entails its own unique risks. For that reason, it can be beneficial to learn the basics before folding it into an investment strategy.

Understanding Foreign Currency Investment

As noted, investing in foreign currency means purchasing another country’s currency, or money, as a means of investment. You’re not planning on spending it, in other words, and are hoping that it accrues value to generate a return. It’s also different from exchanging foreign currency, though it may feel similar.

Foreign currency investment is often, or typically done via “forex” trading. Forex is short for “foreign exchange market,” and refers to trading fiat currencies, or those that are backed by the government that uses them. For example, an investor could trade their United States dollars (USD) for Euros. Or, they can trade their Japanese yen for New Zealand dollars.

Key Takeaways for New Investors

Forex trades can happen at any time throughout the day, since there’s always a foreign currency market open somewhere in the world. Foreign currency investors are typically institutional investors, although it is possible for individual investors to participate.

Investors should also know that currencies tend to trade in pairs — more on that below.

Alternative investments,
now for the rest of us.

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

Exploring the Benefits of Investing in Foreign Currencies

Like other types of investments, forex trading, or investing in foreign currencies, can offer up some benefits.

Diversification of Portfolio

For one, investing in foreign currencies can add a degree of diversification to an investor’s portfolio. That means that while an investor may have built a portfolio with a number of other investments, such as stocks, bonds, and ETFs, foreign currency can be another element in the mix. Note, though, that it’s likely foreign currency should only comprise a small portion of a portfolio’s overall holdings.

Convenience and Accessible Markets

The forex markets operate 24 hours per day, 365 days per year, unlike the standard stock exchanges. So, for investors who want to trade around the clock, the markets are almost always accessible.

There are four major forex trading sessions in a 24-hour period, split up by international region:

•   Sydney (Australia)

•   Tokyo (Asia)

•   London (Europe)

•   New York (The Americas)

There are minor sessions, too, but these are the four major sessions, and markets can be busy (when the Americas’ session overlaps with Europe’s), or less busy, depending on the time of day, and how many people are actively trading.

Hedge Against Domestic Currency Inflation

It’s possible that while a domestic currency is losing value due to inflation, foreign currencies could retain their value at the same time. That would, theoretically, provide investors with a hedge against inflation — but there’s no guarantee prevailing market forces would work to an investor’s advantage in such a scenario.

💡 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.

Ways to Invest in Foreign Currencies

Foreign currency investment doesn’t typically involve using physical money, so you’ll have to find something else to do with the foreign currency left over from your last international vacation. There are several ways to get started in currency exchange investment.

1. Standard Forex Trading Account

First, you can work with a foreign exchange brokerage to trade the currency you’re holding (such as U.S. dollars) for another currency (Euros, Yen, etc.). The goal is that the currency you’re trading for, or buying, will increase in value relative to the currency you’re trading away, or selling.

So, if you buy, or trade U.S. dollars for Euros, you’re hoping that in the future, you’d be able to trade the Euros back for more U.S. dollars than you originally used to make the purchase. You’re looking to make a profit, in other words.

While the goal is straightforward, the process can get more complicated. For instance, there are a few ways traders can execute trades, such as spot trading, forward trading, and future trading. Spot trading is an instant trade, whereas forward and future trading may involve settling on terms at a time in the future (similar to trading options).

Further, investors should understand the concept of the spread, which represents the difference between a trader’s cost and the dealer’s profits.

Beyond that, investors should also have a working knowledge of currency pairs, which is how much of the forex market trades. More on that below.

2. Currency CDs and Savings Accounts

Investors can also look into foreign currency CDs (certificates of deposit), which work more or less like traditional CDs but might offer higher yields. Foreign savings accounts are another potential option, and can serve as investment vehicles by accruing interest and currency appreciation, though nothing is guaranteed.

3. Foreign Bond Funds

Investors can look at the possibility of purchasing foreign bonds, which are issued in other countries by foreign governments or foreign companies. There are many types of foreign bond investment types, so investors would do well to do a bit of research to figure out if it’d be a good addition to their portfolio.

4. Currency ETFs

As mentioned, investors may want to look at currency ETFs. These ETFs are similar to foreign bond funds, there are also foreign currency ETFs on the market, which offer many of the same advantages of domestic or traditional ETFs, but can give investors exposure to the forex market. Likewise, exchange-traded notes, or ETNs, which are similar to bonds, are another potential investment investors can check out.

💡 Looking for other alternatives to invest in? Check out: 10 Types of Alternative Investments

The Risks Associated with Foreign Currency Investment

Foreign currency investment isn’t without risk, and in fact, can introduce some types of risk that investors may not otherwise encounter — such as political and interest rate risks.

Market Volatility and Political Risks

Since forex markets are so active, prices can change quickly, which means it’s a fairly volatile asset class. The news cycle (including economic, political, or social news) can cause sudden and drastic changes to prices. That means it may be a better fit for investors with a relatively high risk tolerance than those who are more risk averse.

Political risk is something to consider, too, as currencies are backed by governments. If a foreign government is unstable or otherwise involved in some sort of political drama, it can affect the price of a currency. That can pose a risk to investors.

Interest Rate Risk

Some investments incur interest rate risk, which is when an investment loses value due to a fluctuation in interest rates. Foreign currencies may be subject to such risk, though interest rate risk is more commonly associated with bonds.

Currency Conversion and Transfer Costs

There may also be additional costs associated with currency trading and investing, including currency conversion and transfer costs. These may not always be applicable, but are something that investors should at least be aware of in the event that they do encounter them.

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

How to Approach Foreign Currency Safely

In order to invest in foreign currency investing as safely as possible — remember, no investment is completely safe or risk-free — investors should brush up on the mechanics of the forex market, and know what they’re getting into.

Education is Key: Understanding the Mechanics of Currency Investment

A couple of things investors should also know about are “pips,” and the use of leverage in forex trading.

A “pip” is a unit of measure that represents the smallest unit of value in a currency quote. Using the above quote as an example, the difference between the “bid” (1.2100) and the “ask” (1.2104) is four pips.

Why does this matter? Because currency values fluctuate very slightly during the trading day, perhaps only several pips. That means that to make a significant return, traders deal with large quantities of currencies.

And as for leverage? To get to those large quantities, traders often use leverage. For example, you may give your broker $100 to trade with $10,000 on the markets (using, or borrowing the broker’s $9,900 to make trades is called “margin”). Most forex trading is done this way, using leverage and margin in order to generate returns.

That, of course, has its risks, since traders may incur losses, and end up owing money to their brokers. For beginners, it may be best to use lower margins for that very reason.

The Importance of a Bid-Ask Spread

Also noted previously, the bid-ask spread is another important concept to know and incorporate if you’re trading or investing in foreign currency. Effectively, the spread refers to the difference between a trader’s cost and the dealer’s profits. There’s a slight difference in what you’re willing to pay, and what a seller is willing to sell for. In forex trading, the spread can be important to calculating overall potential returns.

Evaluating Risks Versus Rewards

Above all, it’s critical that investors keep their own personal risk tolerances in mind, and weigh that against the potential gains they could see from foreign currency investing. It may not be a good fit for everyone’s investment strategy.

Currency Investment Strategies for Beginners

Forex trading is different from other types of investing or trading. Generally, investing in or trading foreign currency involves pairs of currencies. That’s because two different currencies are quoted based on their relative value to each other. On an exchange, that may appear as “USD/EUR,” or something similar, while a pairing of Japanese yen and Euros, it may be represented as such: “JPY/EUR.”

Some currencies are more widely traded than others and are “paired” with one another or grouped as “major” currencies:

•   U.S. dollars

•   Euros

•   Japanese yen

•   British pounds

•   Swiss francs

•   Australian dollars

•   Canadian dollars

•   New Zealand dollars

There are also “minor” and “exotic” currency pairs. These are not traded as widely as the majors, but are still often swapped on exchanges. They may include pairings with the Hong Kong dollar, the Mexican peso, the Singapore dollar, or the Norwegian krone, among others.

Additionally, investors should know about foreign currency quotes. These quotes are similar to stock quotes, which list the current value, or price of a stock. Forex quotes display the bid and ask prices for a currency pair, since one currency’s value is relative to another currency. Here’s an example of a quote for a common pairing, Euros and U.S. dollars:

EUR/USD = 1.2100

In this example, Euros are the “base” currency, and U.S. dollars are the “quote” currency. What does the quote say, exactly? That a single Euro is equal to 1.21 U.S. dollars. Or, €1 = $1.21.

So, in terms of a basic trading strategy for a beginner? It may be best to choose a pair and stick to it — at least for a while, until you get the gist of it. After that, you can look at other, more in-depth trading strategies.

Broadening Your Investment Horizon With Currency ETFs

As mentioned, investors may want to look at currency ETFs. These ETFs are similar to foreign bond funds, there are also foreign currency ETFs on the market, which offer many of the same advantages of domestic or traditional ETFs, but can give investors exposure to the forex market. Likewise, exchange-traded notes, or ETNs, which are similar to bonds, are another potential investment investors can check out.

Advanced Currency Investment Options

While investors can trade currency itself, they can also look at more advanced ways of investing in the forex markets. That can include trading futures and options, or other types of relevant derivatives.

Foreign Currency Futures and Options — An Introduction

First and foremost, investors should be aware of the unique risks that financial derivatives can introduce into their portfolios. Trading options contracts is a whole different beast from choosing stocks, so before you dive headfirst into forex options, it may be worth it to speak to a financial professional.

But at their core, currency options are derivatives, with currency itself as their underlying asset. There are calls, puts, and futures — if you’re not familiar with traditional options, it may be a good idea to review the basics before looking at forex options.

In effect, though, these options allow investors to hedge against unfavorable fluctuations of foreign currencies, or to speculate on volatility in the forex market. Again, it’s fairly high-level stuff, so if you feel like it’s over your head, it may be best to bone up on your investment knowledge before including options trading in your overall strategy.

The Takeaway

Trading or investing in foreign currency is yet another avenue that investors can explore in an attempt to generate returns. As discussed, it involves actually purchasing money with money — foreign currencies — with the hopes that the price differences will work in the investors’ favor, and they’ll generate returns. Foreign currency markets are also extremely liquid, which is another potential upside for some traders.

As always, though, there are risks to consider, and learning the ropes of the foreign currency markets may be tricky. If investors feel like they want to get their feet wet in the market, though, without diving straight in, it may be worthwhile to discuss their plans with a financial professional.

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.

Photo credit: iStock/anyaberkut


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.
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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN1223002

Read more
Jan
08
2024

Happiest Places to Retire in the US in 2024: A SoFi Study

By | Budgeting & Goals, invest, Preparing for Retirement | Comments Off on Happiest Places to Retire in the US in 2024: A SoFi Study

Where you live can play a major role in how enjoyable your retirement is. So, where do the happiest retirees reside? To determine which cities in the U.S. are the happiest places to retire, we studied the 200 largest metropolitan statistical areas (MSAs) using the latest U.S. Census Bureau population estimates, and consulted multiple sources, including the Sharecare Community Well-Being Index, Tax Foundation, Walk Score, Sperling’s Best Places, and County Health Rankings & Roadmaps.

By identifying key elements that contribute to happiness — social networks, financials, and health — and examining 13 pivotal rankings within them, such as community, cost of living, and healthcare access, we created the Happiest Places to Retire in the U.S. in 2024. Read on to learn about the 20 best places to retire in the U.S. to help you explore your options for where to live in retirement.

Key Findings on Retirees’ Favorite Cities

•   Barnstable, MA is the happiest city to retire to, ranking #1 of all 200 cities we analyzed. It has the highest ranking overall for community well-being, and one of the highest percentages of residents who are 65-plus. The other cities at the top of the list: Naples, FL at #2, and Ann Arbor, MI at #3.

•   Colorado has the highest number of happiest cities for retirees on our top 20 list, beating out Florida. Boulder, CO is the #5 happiest city for retirees, and Fort Collins and Denver also made the list.

•   Colder climates are now attracting retirees. Three of our top 5 cities for retirement (Barnstable, MA; Ann Arbor, MI; and Boulder, CO) have average high winter temperatures in the 30s or 40s.

•   Naples, FL residents live the longest. The city has the highest average life expectancy (86.1 years) of all 200 cities we analyzed.

•   Ann Arbor, MI, has the lowest tax burden for retirees on our top 20 list, followed by Myrtle Beach and Charleston in South Carolina. Meanwhile, Akron, OH has the lowest cost of living of the top 20 cities for retirees, 80.8% of the U.S. average.

Top 20 Happiest Cities to Retire

Looking for information on the happiest places to live after retirement? Whether you dream of an ocean breeze or mountain views, you have plenty of cities to consider.

The top 20 happiest cities for retirees offer a broad range of activities, amenities, and resources. They’re also located all across the nation, as shown in this map of the top 10, so you can find a place in the part of the country you’d most like to live in.

Happiest Cities to Retire

1. Barnstable, MA

Coming in at the top of the happiest cities to retire in the U.S. list is Barnstable. Located on Cape Cod, its beachside beauty attracts retirees, making it one of the top three cities for residents 65 and up. While living here can be expensive (the median household income is $91,438) and there’s less access to healthcare than the other top contenders have, residents enjoy a high level of social interaction and plenty of entertainment and activities.

2. Naples, FL

Those who want to live by the water and enjoy warmer weather can head south to Naples. The cost of living in this city is fairly reasonable, and there’s no state personal income tax, which means your retirement savings can go a lot further. Naples also has the highest life expectancy (age 86.1) of all 200 cities we analyzed.

3. Ann Arbor, MI

Want to enjoy city life without the high prices? Ann Arbor, a college town, has plenty of big city amenities at an affordable price point. Another draw for retirees: Ann Arbor residents enjoy the highest level of healthcare access of the cities on our list, and ranks #1 for health overall.

4. Durham, NC

Friendship and social interaction are important in retirement. Durham, one of the top cities to retire in the U.S., offers a strong sense of community and social well-being, according to the data. Residents will find plentiful healthcare in Durham as well. It ranks #2 out of the top 20 for healthcare access.

5. Boulder, CO

If you like to hit the slopes, Boulder may be the ideal location for your retirement years. The city is #3 on the top 20 list for housing and transportation, so you should be able to find the right place to live and get around easily.

6. North Port, FL

North Port is the second Florida city to make the top 20 list of the happiest places to live in the U.S. Community and social connection is high here, and there’s a sizable population of those aged 65 and up, making it easier to meet new friends. It also has one of the lowest tax burdens among the top 20 cities.

7. Olympia, WA

Retirees who want to live affordably on the west coast can check out scenic Olympia, WA. It ranks as #1 in the financial category, which takes into account factors such as cost of living and household income. It’s also one of the best states to retire in for taxes, which can help retirees stretch their savings. Olympia has the lowest number of residents living below the poverty level of all 200 cities we analyzed.

8. San Jose, CA

Retirees in San Jose enjoy the second-highest average life expectancy (after Naples, FL) of the 200 cities we studied, making it one of the top places for a long and healthy retirement. But there’s a tradeoff: The cost of living in San Jose is extremely high: a whopping 231% of the U.S. average.

9. San Luis Obispo, CA

If being in a comfortable environment is one of your top retirement priorities, look no further than San Luis Obispo. Along with San Jose, the city scored the highest level of comfort for retirees on our top 20 cities list, thanks to its temperate weather.

10. Madison, WI

A low average cost of living plus a high median household income ($83,214) make Madison not only one of the happiest places to live in retirement, but also one of the most affordable. In this relatively walkable city, you can save on transportation costs and live a healthier lifestyle.

Recommended: Average Retirement Savings By State

11. Honolulu, HI

Honolulu combines great weather, pristine beaches, and big city living. It gets high scores for comfortable weather and transportation. And Honolulu has some of the highest scores for social factors and community. Retiring in paradise comes at a price, however — namely, the city’s high cost of living (171.5% of the U.S. average).

12. Salisbury, MD

Salisbury, in the Eastern Shore area of Maryland, is a popular place for retirees. More than a quarter of the population is 65 and over, which means you should have plenty of peers to socialize and do activities with.

13. Washington, DC

If you’re interested in history and culture, Washington D.C. might be a good fit. And many of the city’s major attractions are free of charge. The nation’s capital is also the most walkable city on our top 20 list of the happiest places to live after retirement, so you’ll save on transportation as you get your steps in.

14. Portland, ME

In this city on the coast, you can enjoy all that the ocean has to offer plus metropolitan amenities. Portland ranks as one of the best cities to retire in when it comes to community, and it also has abundant options for art, recreation, and entertainment, which can help you stay happily busy in retirement.

15. Myrtle Beach, SC

Retirees settle down in this popular travel destination to take advantage of the reasonable cost of living and low tax burden. They also love the miles of beaches, plentiful golf courses, and comfortable weather. Myrtle Beach has the 4th highest population of people age 65-plus.

16. Harrisburg, PA

The capital city of Pennsylvania is an affordable place to retire. It has a low cost of living, which means the city’s average median income of $73,739 can go farther. Fewer people live below the poverty line here than in many other cities. Retirees can be active here as well: Harrisburg ranks as #2 of our top cities when it comes to walkability.

17. Fort Collins, CO

If you love the great outdoors, this city, located at the foot of the Rocky Mountains, has a lot to offer. All those outside adventures come with some nice health perks: Fort Collins has one of the higher life expectancies of our 20 top cities for retirees.

18. Denver, CO

Where is the happiest place to retire? It might just be the state of Colorado. Denver is the third Colorado city to make the top 20 list of happy places for retirees to live. Denver has a high level of community and social well-being, which could make retirement a lot more fulfilling. It’s very walkable, too, coming in at #5 out of the top 20 in the walking category.

19. Akron, OH

With the lowest cost of living (80.8% of the U.S. average) of the 20 best cities, Akron offers retirees affordability plus many opportunities for social and community connection. That can make it easier to make new friends in retirement.

20. Charleston, SC

A vibrant cultural scene, great food, ocean access, and lovely architecture make Charleston one of the best places to retire in 2024. Charleston ranks #2 for art, recreation, and entertainment out of the 200 cities studied, following only Los Angeles, so you’ll find plenty to do here in your golden years. And the tax burden is one of the lowest on our 20 happiest cities list.

Best Places to Retire for a Happy Retirement

Want to consider some of the different places that could make for a very happy retirement? The map below shows the top five cities out of the 200 analyzed in each of the three key categories that contribute to happiness: social, financial, and health.

Happiest cities for retirees by category

200 Cities Studied for Happiest Places to Retire

Reviewing the full list of 200 cities studied for the Happiest Places to Retire can reveal additional great options for retirement. For example, following Naples, FL, the next three cities with the highest life expectancy — San Jose, CA, San Francisco, CA, and New York, NY — are all bustling, well-populated cities that also rank highly for community and social factors. Take a look at what cities across the U.S. have to offer.

Overall Rank

 City

 Total Score

 Social rank

 Financial Rank

 Health Rank
1 Barnstable, MA 62.05 1 6 120
2 Naples, FL 61.43 2 18 32
3 Ann Arbor, MI 61.40 64 14 1
4 Durham, NC 57.56 57 13 2
5 Boulder, CO 56.95 21 16 13
6 North Port, FL 56.77 4 37 129
7 Olympia, WA 56.46 32 1 88
8 San Jose, CA 55.52 5 113 7
9 San Luis Obispo, CA 55.18 9 11 41
10 Madison, WI 55.13 84 5 11
11 Honolulu, HI 54.82 7 71 12
12 Salisbury, MD 54.70 11 3 177
13 Washington DC 54.33 23 17 19
14 Portland, ME 53.86 17 35 22
15 Myrtle Beach, SC 53.66 8 20 181
16 Harrisburg, PA 52.39 50 24 24
17 Fort Collins, CO 52.11 34 19 80
18 Denver, CO 52.03 86 9 33
19 Akron, OH 51.64 55 10 69
20 Charleston, SC 51.62 37 55 30
21 Manchester, NH 51.49 47 22 58
22 Seattle, WA 51.44 19 101 15
23 Minneapolis, MN 51.22 48 26 28
24 Richmond, VA 50.56 24 46 40
25 Bridgeport, CT 50.52 25 83 8
26 Daphne, AL 50.50 31 12 171
27 Des Moines, IA 50.49 106 2 158
28 San Francisco, CA 50.42 6 172 4
29 Santa Rosa, CA 50.11 14 81 43
30 Raleigh, NC 50.08 45 42 56
31 Prescott Valley, AZ 49.92 3 118 193
32 Oxnard, CA 49.38 16 78 49
33 Asheville, NC 49.35 10 125 57
34 Bremerton, WA 49.22 22 52 108
35 Boston, MA 49.18 33 139 6
36 Colorado Springs, CO 49.18 95 7 141
37 Pittsburgh, PA 49.14 35 82 47
38 Portland, OR 49.03 58 96 14
39 Hartford, CT 49.02 62 36 16
40 Omaha, NE 49.00 87 25 37
41 St. Louis, MO 48.88 56 73 36
42 Lancaster, PA 48.80 46 48 74
43 Chattanooga, TN 48.79 43 53 122
44 Appleton, WI 48.78 41 30 128
45 Sioux Falls, SD 48.48 92 34 83
46 Salt Lake City, UT 48.42 125 23 25
47 Charlotte, NC 48.40 38 61 90
48 Allentown, PA 48.35 52 43 42
49 Crestview, FL 47.95 61 15 183
50 Cape Coral, FL 47.88 13 119 110
51 New Haven, CT 47.81 73 65 9
52 Austin, TX 47.76 123 40 48
53 San Diego, CA 47.73 27 103 29
54 Peoria, IL 47.60 66 27 91
55 Tucson, AZ 47.56 69 59 67
56 Green Bay, WI 47.33 80 33 92
57 Lexington, KY 47.28 94 79 31
58 Deltonah, FL 47.24 18 58 198
59 Reno, NV 47.08 44 67 117
60 Tyler, TX 47.07 127 28 99
61 Ogden, UT 47.07 101 8 160
62 Santa Cruz, CA 46.99 12 147 27
63 Atlanta, GA 46.97 54 100 60
64 York, PA 46.96 53 49 112
65 Palm Baye, FL 46.89 20 84 182
66 Boise City, ID 46.89 96 32 98
67 Grand Rapids, MI 46.89 140 39 55
68 Cincinnati, OH 46.77 71 74 63
69 Wilmington, NC 46.53 40 105 79
70 Canton, OH 46.52 100 29 131
71 Fargo, ND 46.49 154 21 71
72 Savannah, GA 46.37 107 63 59
73 Provo, UT 46.20 135 4 175
74 Norwich, CT 46.08 49 31 115
75 Roanoke, VA 46.05 28 123 46
76 Baltimore, MD 45.92 29 120 68
77 Philadelphia, PA 45.91 63 109 44
78 Nashville, TN 45.89 99 68 105
79 Anchorage, AK 45.87 136 87 86
80 Indianapolis, IN 45.73 119 44 95
81 Sacramento, CA 45.72 42 98 50
82 Trenton, NJ 45.67 70 110 18
83 Lincoln, NE 45.63 103 38 93
84 Port St. Lucie, FL 45.51 15 126 173
85 Albany, NY 45.48 60 62 38
86 Vallejo, CA 45.16 36 97 89
87 Louisville, KY 45.03 117 47 106
88 Worcester, MA 44.90 82 94 51
89 Virginia Beach, VA 44.90 83 70 64
90 Huntsville, AL 44.81 77 60 142
91 Chicago, IL 44.70 79 107 26
92 Kalamazoo, MI 44.57 149 64 70
93 Poughkeepsie, NY 44.47 90 54 45
94 Spokane, WA 44.35 113 51 111
95 Eugene, OR 44.29 68 108 81
96 Columbia, SC 44.22 105 91 104
97 Kansas City, MO 44.13 75 88 103
98 Phoenix, AZ 43.94 89 104 85
99 Jacksonville, FL 43.71 67 102 152
100 Salinas, CA 43.70 85 86 66
101 Little Rock, AR 43.63 144 80 61
102 Dallas, TX 43.55 130 90 97
103 Cleveland, OH 43.47 139 142 10
104 Greenville, SC 43.41 118 106 75
105 Lansing, MI 43.35 150 56 125
106 Rochester, NY 43.26 114 93 20
107 Cedar Rapids, IA 43.25 104 50 161
108 Winston, NC 43.23 91 116 73
109 Greeley, CO 43.15 141 41 162
110 Detroit, MI 43.15 72 122 116
111 Reading, PA 42.88 76 117 87
112 Fort Wayne, IN 42.52 152 45 168
113 Dayton, OH 42.43 111 95 127
114 Davenport, IA 42.37 110 77 139
115 Atlantic City, NJ 42.26 39 131 100
116 Fayetteville, AR 42.17 122 75 151
117 Santa Maria, CA 42.11 59 134 53
118 Evansville, IN 41.59 161 57 144
119 Knoxville, TN 41.58 74 138 149
120 Oklahoma City, OK 41.21 148 89 150
121 Milwaukee, WI 41.18 98 141 54
122 South Bend, IN 41.14 145 85 167
123 Hagerstown, MD 40.26 81 112 179
124 Columbus, OH 40.23 166 72 137
125 Ocala, FL 40.11 26 153 199
126 Birmingham, AL 39.94 65 159 107
127 Montgomery, AL 39.91 134 92 189
128 Rockford, IL 39.80 143 76 157
129 Pensacola, FL 39.44 133 121 153
130 New York, NY 39.32 51 184 5
131 Syracuse, NY 39.27 137 124 35
132 Killeen, TX 39.26 186 69 114
133 Lynchburg, VA 39.22 155 66 174
134 Buffalo, NY 38.98 128 128 39
135 Wichita, KS 38.67 97 135 163
136 Tallahassee, FL 38.65 147 132 134
137 Providence, RI 38.62 112 167 34
138 Los Angeles, CA 38.60 30 187 23
139 Kennewick, WA 38.45 151 127 123
140 Flint, MI 38.34 171 111 156
141 Orlando, FL 38.33 153 155 72
142 Tulsa, OK 38.31 174 99 169
143 Las Vegas, NV 38.31 121 146 135
144 Salem, OR 38.25 138 130 133
145 Duluth, MN 38.21 116 136 126
146 Erie, PA 37.91 126 137 154
147 Springfield, MA 37.88 115 162 62
148 Hickory, NC 37.71 93 140 194
149 Tampa, FL 37.66 102 174 77
150 Albuquerque, NM 37.59 146 157 65
151 Gainesville, FL 37.58 178 182 3
152 Huntington, WV 37.41 88 161 159
153 Toledo, OH 37.11 168 144 82
154 Scranton, PA 37.05 109 156 143
155 Jackson, MS 36.89 175 148 76
156 Amarillo, TX 36.78 142 149 176
157 Kingsport, TN 36.67 158 133 190
158 Springfield, MO 36.65 164 129 165
159 Youngstown, OH 36.63 78 158 188
160 Houston, TX 35.66 179 164 52
161 Binghamton, NY 35.66 162 114 124
162 Charleston, WV 34.97 132 168 138
163 San Antonio, TX 34.88 184 152 94
164 Waco, TX 34.80 176 143 170
165 Greensboro, NC 34.68 108 175 148
166 Augusta, GA 34.56 120 176 145
167 New Orleans, LA 34.48 172 181 21
168 Utica, NY 34.17 167 115 155
169 Memphis, TN 34.17 182 160 130
170 Lubbock, TX 33.95 183 166 84
171 Lakeland, FL 33.94 124 173 178
172 Stockton, CA 33.82 156 154 146
173 Riverside, CA 33.53 129 169 121
174 Macon, GA 33.03 163 180 101
175 Spartanburg, SC 32.77 131 177 185
176 Longview, TX 31.85 185 150 191
177 Miami, FL 31.74 157 192 17
178 Baton Rouge, LA 31.69 181 170 136
179 College Station, TX 30.49 193 165 96
180 Tuscaloosa, AL 30.35 165 179 180
181 Clarksville, TN 30.17 189 145 200
182 Mobile, AL 29.95 170 185 113
183 Shreveport, LA 29.22 177 191 78
184 Fayetteville, NC 28.42 187 171 184
185 Fort Smith, AR 27.72 159 186 196
186 Beaumont, TX 27.36 197 151 195
187 Gulfport, MS 27.33 173 183 197
188 Fresno, CA 26.58 188 178 119
189 Corpus Christi, TX 26.09 192 189 102
190 Modesto, CA 26.05 169 190 147
191 Visalia, CA 25.28 196 163 166
192 Columbus, GA 24.08 160 193 192
193 Lafayette, LA 23.64 180 196 109
194 Bakersfield, CA 21.84 190 188 186
195 Merced, CA 18.10 191 194 187
196 Yakima, WA 17.32 195 195 164
197 El Paso, TX 8.56 194 198 118
198 McAllen, TX 3.30 200 197 132
199 Brownsville, TX 2.10 198 199 140
200 Laredo, TX -3.32 199 200 172

Tips for a Happy Retirement

You’ve worked hard, now it’s time to enjoy yourself! These smart strategies can help you find happiness in retirement.

•   Create a budget. You may have fewer expenses when you’re retired, but you’ll still need a roadmap for managing them. This is where retirement planning and a budget come in handy. If you are already retired, create a budget that works well for your retirement income. If retirement is still in the future, map out a plan to see how much you’ll need to save to be properly prepared.

•   Keep tabs on your retirement savings. Don’t forget to check on your retirement savings regularly to ensure that you’re on track financially. And, of course, make sure you have retirement savings accounts like a 401(k) or a traditional or Roth IRA to help you reach your goal.

Don’t yet have a retirement account? Learn how to open an IRA account.

•   Prioritize health and wellness. To be at your best, strongest, and happiest in retirement, prioritize your physical and mental health with regular exercise, a balanced diet, and lots of social interaction.

•   Pursue your passions. Don’t let retirement slow you down. You can pursue your favorite hobbies, work on fulfilling and meeting your top ambitions and challenges, and do the activities you’ve always wanted to try now that you have the time and freedom for them. When choosing among the best retirement cities, be sure to look for places that cater to your interests.

Methodology

To find the happiest cities for people to retire in the U.S., we looked at the 200 largest metropolitan statistical areas (MSAs) based on the U.S. Census Bureau’s 2022 population estimates for 13 ranking factors across three categories (Social, Finance, and Health).

We graded each factor on a 100-point scale, where 100 was the highest possible score. Each factor was weighted differently.

Socioeconomic Score Factors

•   Community well-being

•   Social well-being

•   Comfort index*

•   Percentage of population age 65 and over

•   Percentage of art, recreation, and entertainment businesses

Financial Score Factors

•   Housing & transportation

•   Cost of living index*

•   Median household income

•   Percentage of people aged 65 and over living below poverty level

•   Tax burden**

Health Score Factors

•   Healthcare access

•   Life expectancy

•   Walk Score*

*Data represents city proper data (excluding surrounding metro).
**Data represents state level data.

Sources: U.S Census Bureau, Sharecare Community Well-Being Index, Walk Score, Tax Foundation, County Health Rankings & Roadmaps, Sperling’s Best Places.

The Takeaway

When you’re ready to retire, choosing where to settle down is a big and important decision. Exploring our list of top 20 happiest places is a great place to start. You can look for cities that offer affordability, good access to healthcare, entertainment and cultural activities, and opportunities for making social and community connections.

And to ensure that your retirement is as happy and stress-free as possible, you’ll want to have your retirement savings in order. Contributing to your 401(k) or IRA can help you build the retirement nest egg you’ll need.

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.

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.

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.

SOIN1123001

Read more
Jan
03
2024

What Is an ETF? ETF Trading & Investing Guide

By | Growing Wealth, invest, Investing | No Comments

An exchange-traded fund, or ETF, bundles many investments together in one package so it can be sold as shares and traded on an exchange. The purchase of one ETF provides exposure to dozens or even hundreds of different investments at once, and there are numerous types of ETFs on the market.

ETFs are generally passive investments, i.e. they don’t have active managers overseeing the fund’s portfolio. Rather most ETFs track an index like the S&P 500, the Russell 2000, and so forth.

ETFs are an investment vehicle that allows even small and less-established investors to build diversified portfolios, and to do so at a relatively low cost. But before you start buying ETFs, it’s important to understand how they work, the risks of investing in ETFs, as well as other pros and cons.

What Is an ETF?

An ETF is a type of pooled investment fund that bundles together different assets, such as stocks, bonds, commodities, or currencies, and then divides the ownership of the fund into shares. Unlike mutual funds, ETFs give investors the ability to trade shares on an exchange throughout the day, similar to a stock.

Unlike investing in a single stock, however, it’s possible to buy shares of a single ETF that provides exposure to hundreds or thousands of investment securities. ETFs are often heralded for helping investors gain diversified exposure to the market for a relatively low cost.

This is important to understand: Just like a mutual fund, an ETF is the suitcase that packs investments together. For example, if you are invested in a stock ETF, you are invested in the underlying stocks. If you are invested in a bond ETF, you are invested in the underlying bonds. Thus you are exposed to the same risk levels of those specific markets.

Recommended: Active vs Passive Investing

Passive vs Active ETFs

Most ETFs are passive, which means to track a market index. Their aim is to provide an investor exposure to some particular segment of the market in an attempt to return the average for that market. If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a person or group makes decisions about what securities to buy and sell within the fund. Generally, active funds charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.


💡 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 Do ETFs Work?

As discussed, most ETFs track a particular index that measures some segment of the market. For example, there are multiple ETFs that track the S&P 500 index. The S&P 500 index measures the performance of 500 of the biggest companies in the United States.

Therefore, if you were to purchase one share of an S&P 500 index fund, you would be invested in all 500 companies in that index, in their proportional weights.

What Is the Difference Between an ETF and a Mutual Fund?

ETFs are similar to mutual funds. Both provide access to a wide variety of investments through the purchase of just one fund. But there are also key differences between ETFs and mutual funds, as well as different risks that investors must bear in mind.

•   ETFs and mutual funds have different structures. A mutual fund is fairly straightforward: Investors use cash to buy shares, which the fund manager, in turn, uses to buy more securities. By contrast, an ETF relies on a complex system whereby shares are created and redeemed, based on underlying securities that are held in a trust.

•   ETFs trade on an open market exchange (such as the New York Stock Exchange) just as a stock does, so it is possible to buy and sell ETFs throughout the day. Mutual funds trade only once a day, after the market is closed.

•   ETF investors buy and sell ETFs with other ETF investors, not the fund itself, as you would with a mutual fund.

•   ETFs are typically “passive” investments, which means that there’s no investment manager making decisions about what should or should not be held in the fund, as with many mutual funds. Instead, passive ETFs aim to provide the same return for the benchmark index they track. For example, an ETF for environmental stocks would mimic the returns of green stocks overall.

What Are the Advantages of ETFs?

There are a number of benefits of holding ETFs in an investment portfolio, including:

•   Ease of trading

•   Lower fees

•   Diversification

•   Liquidity

Trading

ETFs are traded on the stock market, with prices updated by the minute, making it easy to buy and sell them throughout the day. Trades can be made through the same broker an investor trades stocks with. In addition to the ease of trading, investors are able to place special orders (such as limit orders) as they could with a stock.

Fees

ETFs often have lower annual fees (called an expense ratio) — typically lower than that of mutual funds — and no sales loads. Brokerage commissions, which are the costs of buying and selling securities within a brokerage account, may apply.

Diversification

Using ETFs is one way to achieve relatively cheap and easy diversification within an investment strategy. With the click of a button, an investor can own hundreds of investments in their portfolio. ETFs can include stocks, bonds, commodities, real estate, and even hybrid funds that offer a mix of securities.

Liquidity

Thanks to the way ETFs are structured, ETF shares are considered more liquid than mutual fund shares.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

What Are the Disadvantages of ETFs

There are some potential downsides to trading ETFs, too, including:

Trading Might Be Too Easy

With pricing updated instantaneously, the ease of ETF trading can encourage investors to get out of an investment that may be designed to be long term.

Understanding ETF Costs

Even if ETFs average lower fees than mutual funds, a brokerage might still charge commissions on trades. Commission fees, plus fund management fees, can potentially make trading ETFs pricier than trading standalone stocks.

In addition, some ETFs can come with higher bid/ask spreads (depending on trading volume and liquidity), which can increase the cost of trading those funds.

Lower Yield

ETFs can be great for investors looking for exposure to a broad market, index, or sector. But for an investor with a strong conviction about a particular asset, investing in an ETF that includes that asset will only give them indirect exposure to it — and dilute the gains if it shoots up in price relative to its comparable assets or the markets as a whole.

What Are Common Types of ETFs?

The ETF market is quite varied today, but much of it reflects its roots in the equities market. The first U.S. ETF was the Standard & Poor’s Depository Receipt, known today as the SPDR. It was launched on the American Stock Exchange in 1993. Today, ETFs that cover the S&P 500 are one of the most common types of ETFs.

Since the SPDR first debuted, the universe of exchange-traded funds has greatly expanded, and ETF trading and investing has become more popular with individual investors and institutions. Although index ETFs — those that passively track an index — are still the most common type of fund, ETFs can be actively managed. In addition, these funds come in a range of different flavors, or styles.

Because of the way these funds are structured, ETFs come with a specific set of risk factors and costs — not all of which are obvious to investors. So, in addition to the risk of loss if a fund underperforms (i.e., general market risk), investors need to bear in mind that some ETFs might get different tax treatment; could be shut down (dozens of ETFs close each year); and the investor may pay a higher bid/ask spread to trade ETFs, as noted above.

With that in mind, ETFs can offer an inexpensive way to add diversification to your portfolio. Here are some common types of ETFs.

Index ETFs

These provide exposure to a representative sample of the stock market, often by tracking a major index. An index, like the S&P 500, is simply a measure of the average of the market it is attempting to track.

Sector ETFs

These ETFs track a sector or industry in the stock market, such as healthcare stocks or energy stocks.

Style ETFs

These track a particular investment style in the stock market, such as a company’s market capitalization (large cap, small cap, etc.) or whether it is considered a value or growth stock.

Bond ETFs

Bond ETFs provide exposure to bonds, such as treasury, corporate, municipal, international, and high-yield.

Caveats for Certain ETFs

A handful of ETFs may require special attention, as they may incur higher taxes, costs, or expose investors to other risks.

Foreign Market ETFs

These ETFs provide exposure to international markets, both by individual countries (for example, Japan) and by larger regions (such as Europe or all developed countries, except the United States). Note that ETFs invested in foreign markets are subject to risk factors in those markets, which may not be obvious to domestic investors, so be sure to do your homework.

Commodity ETFs

Commodity ETFs track the price of a commodity, such as a precious metal (like gold), oil, or another basic good. Commodity ETFs are governed by a special set of tax rules, so be sure to understand the implications.

Real Estate ETFs

Real estate ETFs provide exposure to real estate markets, often through what are called Real Estate Investment Trusts (REITS). Dividends from REITs also receive a different tax treatment, even when held within the wrapper of a fund.

Additional ETFs

In addition, there are inverse ETFs, currency ETFs, ETFs for alternative investments, and actively managed ETFs. (While most ETFs are passive and track an index, there are a growing number of managed ETFs.) These instruments are typically more complicated than your standard stock or bond ETF, so do your due diligence.

What Is ETF Trading?

ETF trading is the buying and selling of ETFs. To trade ETFs, it helps to understand how stocks are traded because ETF trades are similar to stock trades in some ways, but not in others.

Stocks trade in a marketplace called an “exchange,” open during weekday business hours, and so do ETFs. It is possible to buy and sell ETFs as rarely or as frequently as you could a stock. You’ll be able to buy ETFs through whomever you buy or sell stocks from, typically a brokerage.

That said, many investors will not want to trade ETFs frequently. The bid-ask spread — the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept — can add to the cost of every trade.

A simple ETF trading strategy is to buy and hold ETFs for the purpose of long-term growth. Whether you choose a buy and hold strategy or decide to trade more often, the ease of trading ETFs makes it possible to build a broad, diversified portfolio that’s easy to update and change.

Risks of Trading ETFs

As noted in the discussion about common types of ETFs, it bears repeating that some ETFs can expose investors to more risk — but all exchange-traded funds come with some degree of risk. For example, investing in one of the most common types of ETFs, an S&P 500 ETF which tracks that index, still comes with the same risk of loss as that part of the market.

If large-cap U.S. stocks suddenly lose 30%, the ETF will also likely drop significantly.

This caveat applies to other asset classes and sectors as well.

3 Steps to Invest in ETFs

If you want to start investing in ETFs, there are a few simple steps to follow.

1. Do Your Research

Are you looking to get exposure to an entire index like the S&P 500? Or a sector like technology that may have a different set of prospects for growth and returns than the market as a whole? Those decisions will help narrow your search.

2. Choose an ETF

For any given market, sector, or theme you want exposure to, there is likely to be more than one ETF available. One consideration for investors is the fees involved with each ETF.

3. Find a Broker

If you’re already trading stocks, you’ll already have an investment broker that can execute your ETF trades. If you don’t have a broker, finding one should be relatively painless, as there are many options on the market. Once your account is funded, you can start trading stocks and ETFs.

How to Build an ETF Portfolio

Are you willing to take on more investment risk to see more growth? Would you prefer less risk, even if it means potentially lower returns? How will you handle market volatility? Understanding your personal risk tolerance can help you choose ETFs for your portfolio that round out your asset allocation.

For example, if you decide that you would like to invest in a traditional mix of stocks and bonds at a ratio of 70% to 30%, you could buy one or several stock ETFs to gain exposure to the stock market with 70% of your money and some ETFs to fulfill your 30% exposure to the bond market.

The risk factors of equity and bond ETFs are relatively easy to anticipate, but if you venture into foreign stock ETFs, emerging markets, or gold and other commodities, it’s wise to consider the additional risk factors and tax implications of those markets and asset classes.

Once you’ve determined your desired allocation strategy and purchased the appropriate ETFs, you may want to take a hands-on approach when managing your portfolio throughout the year. This could mean rebalancing your portfolio once a year, or utilizing a more active approach.

The Takeaway

ETFs bundle different investments together, offering exposure to a host of different underlying securities in one package. There’s likely an ETF out there for every type of investor, whether you’re looking at a particular market, sector, or theme. ETFs offer the bundling of a mutual fund, with the trading ease of stocks, although the total costs and tax treatment of ETFs require some vigilance on the part of investors.

Though a DIY approach to investing using ETFs is doable, many investors prefer to have the help of a professional who can provide guidance throughout the investment process.

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.

SoFi Invest®

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


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

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.

SOIN0322044

Read more

CATEGORIES

  • All
  • No categories
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2024 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender