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Q: How Much Stock Market Fluctuation is Normal?

Our best guide for understanding what is normal (and what is abnormal) is to look at what has happened in the past. While past performance is never a guarantee of future financial success, it’s helpful to look at the data.

Q: Why Does the Stock Market Fluctuate?

Because investors are buying and selling stocks in such a way, and in such volume, that stock prices make a large move in one direction or another.

Aug

2023

Stock Market Fluctuations Explained

By Pam O’Brien | Growing Wealth, invest, Investing | No Comments

The stock market can go up or down based on a number of different factors, including consumer confidence, worries about inflation, and supply and demand. As an investor, it’s important to understand market fluctuation and how it works, and to know how much fluctuation is normal.

Why do stocks fluctuate? Read on to learn more about market volatility and stock fluctuation.

4 Top Causes of Stock Market Fluctuations

The stock market fluctuation definition is when stock prices rise or fall. So what causes this? The stock market can move up and down due to a variety of factors, including:

Supply and Demand

The prices of stocks depend on supply and demand. Supply is how much of a good — in this case, a share of stock — is available for sale. Demand is how much consumers want to buy that stock. Prices rise when the supply of shares of stock for sale is not enough to meet investors’ demands. When investors demand for shares falls, so does the price of the shares.

Overall, the stock market fluctuates because investors are buying and selling stocks in such a way, and in such volume, that stock prices make a large move in one direction or another.

Inflation

Concerns about inflation may cause investors to become bearish and stop buying stocks, which may make the market go down. That’s because during periods of inflation, consumer spending tends to slow, and corporate profits may suffer. Inflation can inject uncertainty and volatility into the market.

Economic Indicators

Economic indicators are data that analysts use to help judge the health of the economy. These indicators can, in turn, affect stock market fluctuation. They typically include such things as the Consumer Price Index, unemployment numbers, interest rates, and home sales. If prices, interest rates, and unemployment rise, chances are good that there may be stock fluctuation.

Company Performance

How well a company is doing can affect the price of its stock and potentially cause market fluctuations. If the company is expanding its operations and reporting a profit, for instance, investors’ demand for the stock may rise, along with the price of the stock. Conversely, if there are concerns about the company’s financial health, or it reports a loss, demand for the stock may drop, and so generally will the price.

Pros and Cons of Market Fluctuations

There are benefits and drawbacks to market fluctuations. These are some of the advantages and disadvantages to consider when the market becomes volatile.

Market Fluctuations
Pros	Cons
May be able to purchase stocks at lower prices	Could lose money by selling stocks at a loss
Opportunity to diversify assets	Risk of falling prey to financial scams may be greater

Pros of Market Fluctuations

• Chance to purchase shares at lower prices. When stock prices go down, it may be a good opportunity for investors to buy shares for less. Investing in a down market could be beneficial.

• Incentive to diversify your assets. When the market is volatile, it’s a prime time to look over your asset allocation and make any prudent changes. For instance, you may want to reduce some of your holdings in riskier assets and move them over to safer investments in case the market drops.

Cons of Market Fluctuations

• Might end up selling stocks at a loss. Instead of panicking, selling your shares, and losing money, you may be better off waiting out the fluctuations if you can. When the market goes back up, you may be able to recoup what you paid for the stock.

• There may be a greater risk of financial scams. During a time of market volatility you may receive offers that advertise risk-free returns on certain investments. Be alert to possible fraud, and don’t let your emotions get the better of you, or you could lose money.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Volatility Means the Stock Market Is Working

Although it’s difficult to watch the value of your portfolio drop, stock market volatility is a normal part of stock market investing. In fact, volatility is natural, and it shows that the stock market is working as it should.

Here’s why: The more investors weigh in — by actively buying and selling stocks — the more accurate the prices of stocks will ultimately be. Essentially, it’s a weighing of information about the “correct” price of a stock from many different investors.

It’s also helpful to remember that volatility doesn’t just relate to rising stock prices — it also refers to plummeting stock prices. When the stock market makes a surge upward, that is also considered stock market fluctuation.

What Is a Normal Amount of Stock Market Fluctuation?

This is a notoriously hard question to answer because really, almost any amount of market fluctuation is possible.

The best guide for understanding what is normal (and what is not) is to look at what has happened in the past. While past performance is never a guarantee of future financial success, it’s helpful to look at the data.

The most commonly cited pool of data is the S&P 500. The S&P 500 can give a good historical gauge of stock market movement.

Since World War II — the “modern” stock market era, the S&P 500 has seen 12 drops in the stock market of over 20%.

Peak (Start)	Return
May 29, 1946	-30%
August 2, 1956	-22%
December 12, 1961	-28%
February 9, 1966	-22%
November 29, 1968	-36%
January 11, 1973	-48%
November 28, 1980	-27%
August 25, 1987	-34%
July 16, 1990	-20%
March 27, 2000	-49%
October 9, 2007	-57%
February 19, 2020	33.93%

You’ll notice that a big drop in the stock market happens somewhat regularly. And smaller fluctuations of 5% or 10% down happen much more frequently than that.

💡 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.

What Does Stock Market Volatility Mean to You As an Investor?

How you deal with volatility as an investor depends on your tolerance for risk. What to know about risk is that if you can’t afford losses, volatility could be a time of fear and uncertainty for you. But if you have a higher tolerance for risk, you may see volatility as a potential opportunity.

Risk Tolerance in Investing

Risk tolerance is the amount of risk you’re willing to take with investments. Volatility in the market could directly affect your risk tolerance. For instance, if you have a higher risk tolerance, you may be willing to risk money for the possibility of high returns. If you have a lower risk tolerance, you’ll likely be looking for safer investments with more of a guaranteed return.

Your age, your financial goals, and the amount of money you have impact your risk tolerance. If you’re saving for retirement, and nearing retirement age, your risk tolerance will be lower. In this case, you’ll want to practice risk management with safer investments. If you’re in your 20s or 30s, however, you may have higher risk tolerance because you have more years to recoup any money you may lose.

Investing With SoFi

Choosing the right investment strategy depends on your goals, risk tolerance, and your personal situation. Every investor needs to manage their portfolio in a way that fits their needs during periods of market volatility and as well during times of stability.

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.

FAQ

Why does the stock market fluctuate?

The stock market fluctuates for a number of different reasons, but the biggest overall factor is supply and demand. Prices of stocks rise when the supply of shares for sale is not enough to meet investors’ demands. When investors’ demand for shares falls, so does the price of the shares. This causes volatility.

What is the average market fluctuation?

Markets fluctuate fairly frequently. The average fluctuation is about 15% during a year.

How long do market fluctuations last?

How long market fluctuations last depends on the reason for the fluctuations and how big the fluctuations are. Remember, it’s normal to have some periods of volatility in the stock market. Diversifying your portfolio may help you manage risk and stay on track with your investment goals during times of uncertainty.

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

Aug

2023

Investing for Retirement: Tips and Options to Consider

By Dan Miller | invest, Investing, Preparing for Retirement | Comments Off

Saving steadily for retirement is important, but how you invest that money also matters. Fortunately, today’s retirement saver has a number of options to consider — many of which can make the task of investing for the future less daunting.

These days, you can choose from DIY investing options like a portfolio of stocks and bonds or other securities you choose yourself. You can also invest in mutual funds or exchange-traded funds to help lower costs and add diversification. There are also certain types of pre-set retirement funds and automated platforms (i.e. robo advisors) that use technology to help manage your portfolio.

If you’re saving for retirement, it helps to understand the options that best suit your goals and your personality so that you’re more likely to stick with a plan for the long term.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

The Importance of Investing for Retirement

Retirement may be a long way off or a short way down the road, depending on your age and stage of life. Either way, developing an investment strategy that can help your savings to grow is essential. For many people, retirement might last 10, 20, 30 years — or even more. A solid long-term investment strategy can help you build up the amount you need for those years where you’re no longer in the workforce.

Remember that the longer your money is invested, the more time you have for potential gains to compound and help your money grow. Compounding simply means that if your money potentially sees a return, or a profit from various investments, that growth can compound over time, with both your savings and your earnings seeing gains.

Time can also help with losses. The longer your time horizon, the more volatility or risk it may be safe for you to assume. If you have a time horizon of 30 or 40 years before you retire, you can probably afford to weather some short-term losses, knowing that your investment returns will likely balance themselves out over time.

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

Understanding Retirement Accounts

While this article will focus on investment options, it’s worth a reminder that the type of retirement account you choose is also important. You may have a workplace retirement account like a 401(k) or 403(b). You may have opened an Individual Retirement Arrangement (IRA), like a traditional IRA, a Roth IRA, or a SEP IRA.

Different accounts have different contribution limits, and different tax implications. Since both the amount you can save and how it will be taxed can have a long-term impact on your nest egg, be sure to spend time strategizing about which types of accounts make the most sense for you.

With a suitable combination of accounts, you can then begin to choose the investments that will populate that account.

Remember: Just because you open an IRA or set up your 401(k) at work doesn’t mean it comes with any investments. Like moving into a new home, it’s up to you to furnish the account.

Recommended: 401(k) vs IRA: What’s the Difference?

Investment Options

While investing for retirement can seem overwhelming, it doesn’t have to be. Again, there are various retirement strategies that have stood the test of time, as well as a number of investment options that can make a retirement saver’s life easier.

Here are a few options for retirement investing that you can consider:

DIY Investing

For investors who feel confident in managing their own retirement portfolio, and the securities within it, taking a DIY approach is an option.

You can purchase stocks, bonds, commodities, mutual funds, or any other types of securities for your long-term portfolio. While the term active investing brings to mind day traders, active investing can also mean taking a hands-on approach to managing your own portfolio.

This approach isn’t for everyone. It’s time and energy intensive, and it requires a certain amount of expertise in order to be successful. In addition, if you go this route, bear in mind that the same rules apply to all long-term investors.

• Be mindful of the contribution limits and tax implications of the retirement account you choose.

• Consider the cost of your investments, as fees can reduce your earnings over time.

• Consider using a strategy that includes some diversification, as this may help mitigate certain risks over time.

Index Funds

Index funds offer a basic way to invest for retirement. An index fund is a type of fund that tracks a broad market index. One of the most popular types of index funds tracks the S&P 500 index, for example, which mirrors the performance of the 500 largest U.S. companies.

There are hundreds of indexes, and many have corresponding funds that track different sectors of the market, e.g.: smaller companies, technology companies; sustainable or green companies; various types of bonds, and more.

Index funds don’t rely on a live team of portfolio managers, so they tend to be less expensive than actively managed funds. However, they have a downside which is that your money is pegged to the securities in that sector.

Automated Options

In the world of investing there really isn’t a truly automated “set it and forget it” strategy that will work on its own, without any input, for decades. But there are some options that are more hands-off than others.

• Target Date Funds

One such option is a target date fund. A target date fund is designed to be an all-inclusive portfolio option for people that are looking to retire on or near a certain date. For example, a 2050 target date fund is intended for people that will be ready for retirement in 2050.

Target date funds use a set of calculations to adjust the portfolio’s asset allocation over time. When a target date fund is decades away from the specified date, it might invest 80% in equities and 20% in fixed income or cash/cash equivalents. As the date draws nearer, it will automatically move more of its investments away from equities towards bonds, cash, or other investments with lower risk. This automatic readjustment is referred to as the glide path.

• Robo Advisors

Another option is an automated portfolio, commonly known as a robo advisor (although these services are not robots, and don’t typically offer advice).

A robo advisor platform offers a questionnaire for investors to gauge their time horizon (i.e. years to retirement or another goal), their risk level, and so forth.

The platform then uses sophisticated technology to recommend a portfolio of low-cost exchange-traded funds (ETFs).

While these are two of the more hands-off options, and they do offer the convenience of managing a portfolio on your behalf, these options have some downsides. The cost can be higher than other types of investment options. And there is very little flexibility. Investors typically cannot adjust the securities in these funds (although there may be some hybrid options in the market).

Recommended: How Do Robo Advisors Work

Hire an Advisor

If you still are not feeling comfortable investing for retirement on your own, you may want to consider using a financial advisor. Talk with your trusted friends or family members to get a recommendation.

Because an advisor introduces a new level of cost, be sure to ask how the person is compensated. Some advisors charge a flat fee, or an hourly rate, or some earn commissions — or combinations of the above.

Tips When Investing for Retirement

As you start investing for retirement, here are a few things that you’ll want to keep in mind:

Ask About Fees

Many investments come with fees that are charged by the advisor or company that manages the investment. These investment fees may be explicitly charged to your account, or they may be captured as part of the investment’s returns. Make sure to check any fees that are charged before you invest. There are many low-cost mutual funds that offer investment fees under 0.1% as compared to a financial advisor who may charge 1% or more. Even a small difference in the fees charged can make a huge difference on your returns when compounded over decades.

Plan for Taxes

You’ll also want to account for how your retirement investments will be taxed.

• Tax-Deferred Accounts

If you contribute to a traditional 401(k) or IRA, you may be eligible for a tax deduction in the tax year that you make the contribution (i.e. a contribution for tax year 2023 can be deducted on your 2023 taxes).

These accounts are called tax-deferred because you will owe taxes on your withdrawals.

• After-Tax Accounts

If you contribute to a Roth 401(k) or Roth IRA, you won’t get a tax deduction when you contribute — because you deposit after-tax dollars — instead, your withdrawals will be tax-free.

There are other differences between tax-deferred and after-tax accounts that can impact your nest egg. For example, once you reach the age of 73, you’re required to withdraw a minimum amount from a traditional IRA or 401(k) every year (also called RMDs or required minimum distributions). That doesn’t apply to Roth accounts.

• Taxable Investment Accounts

On the other hand, if you invest for retirement in a non-retirement or taxable account, you will owe income taxes on your gains whenever you sell those securities, which will affect your portfolio’s overall performance.

How Often Should I Adjust My Investments?

It’s generally considered a good idea to periodically adjust your investments by rebalancing your portfolio. Portfolio rebalancing is a way to adjust the mix of your investments. It means realigning the assets of a portfolio’s holdings to match your desired asset allocation.

If you have a robo advisor or investment advisor, they likely have you set up with a specific target of different types of investments. Over time, the advisor will rebalance your portfolio to keep it in line with your target percentages.

If you’re managing your investments yourself, you might rebalance your portfolio monthly, quarterly or annually, depending on the type of investments that you have.

The Takeaway

Investing for your retirement is one of the smartest things that you can do as part of an overall financial plan. While it may seem overwhelming, there are a few things that you can do to help streamline your investment plan.

Make sure that you understand the fees and taxes that come with different investment options. If you don’t feel comfortable managing your own portfolio, consider working with an advisor or investing in an automated portfolio.

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

Help grow your nest egg with a SoFi IRA.

FAQ

Can I invest for retirement if I have limited funds?

It is possible to invest for retirement if you have limited funds. In fact, if you have limited funds, that is one reason it’s even more important to invest for retirement. Especially if you are younger and have a long time before retirement, even a small amount can grow to be a sizable nest egg when its returns are compounded over many decades.

Should I adjust my investment strategy as I approach retirement?

How you choose to invest will depend on a number of factors, one of which is how close you are to retirement. One common strategy is to be more aggressive with your investment strategy when you are years or decades away from retirement. This can possibly lead to higher overall returns while you have a long time to smooth out the ups and downs of a high-risk, high-reward strategy. Then, as you get closer to retirement, you start to be more conservative with your investments in an attempt to better preserve capital.

What investment options are suitable for conservative investors?

Choosing your investment options will depend on your overall financial situation and tolerance for risk. Some examples of more conservative investments include bonds, cash, CDs, or Treasury bills. As you get closer to retirement, it can make sense to choose more conservative investments. You may give up some possible returns, but you may also be better insulated against large losses.

Photo credit: iStock/monkeybusinessimages

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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

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Aug

2023

How to Rebalance Your 401(k)

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

Rebalancing is the process of buying and selling assets in a portfolio to bring your allocations back into line with your investment goals. If you’re new to rebalancing 401(k) savings, it helps to know how it works and how often you might want to do it.

Making 401(k) contributions can help you build retirement wealth while enjoying some tax advantages. Periodic 401(k) rebalancing can ensure that your asset allocation aligns with your risk tolerance and financial goals.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

What Is Rebalancing Your 401(k)?

When you’re talking about a 401(k) rebalance, you’re talking about buying or selling investments in your workplace retirement plan to bring them back into alignment with the original percentages you started with.

Example

If you started with 50% in equities (stocks) and 50% in bonds, over time that portfolio balance will drift as the value of those securities rises or falls. You can then rebalance your portfolio to restore the original 50-50 ratio. (Or you can adjust your allocation according to a new ratio that reflects what you’re comfortable with today.)

Rebalancing isn’t the same as changing your 401(k) contributions. That usually refers to increasing — or decreasing — the amount of your salary you defer into your plan. If you’re wondering can you change your 401(k) contribution at any time, the answer is usually yes, though it might depend on your plan administrator’s rules.

When you rebalance 401(k) assets, you’re changing where you invest the money you contribute. How you determine your retirement goals and your risk tolerance can shape your ideal asset allocation.

When to Rebalance Your 401(k)

How often should I rebalance my 401(k)? It’s a common question, but there’s no uniform answer, as every investor’s needs and goals are different. As a general rule of thumb, you might revisit your 401(k) allocation at least once a year. But rebalancing 401(k) savings could make sense at any time when your allocation no longer matches up with your investment goals.

Life changes might affect your decision of how often to rebalance 401(k) assets. For example, you might need to take a second look at your assets if you get married, have a child, or get divorced. Any of those situations can influence the way you approach investing, including how much risk you’re comfortable taking and how much you might need your 401(k) to grow to hit your retirement target.

Age is also a consideration for deciding when to rebalance a portfolio. When you’re younger with years ahead of you to ride out periodic ups and downs in the market, you might not be too concerned with rebalancing your 401(k) assets. You can afford to take greater risks at this stage to earn greater rewards with your investments.
As you get older, however, you might naturally begin to gravitate toward more conservative investments. If you find yourself growing less tolerant of risk, that’s a sign that it might be time for some 401(k) rebalancing.

Recommended: Average Retirement Savings by Age

Example of Rebalancing a 401(k)

Rebalancing 401(k) assets is a fairly straightforward process. First, you’d need to decide what you want your target asset allocation to look like. From there, you’d either buy or sell assets until your portfolio achieves the right balance.

Let’s say that you’re 35 years old and your target 401(k) portfolio allocation is 85% stocks and 15% bonds. Upon checking your latest statement, realize that your asset makeup is actually 75% stocks and 25% bonds. You could rebalance 401(k) investments by selling 10% of your bond holdings, then reinvesting the proceeds into stocks.

You can do that without any tax consequences as long as you’re not withdrawing money from your plan. Should you decide later that it makes more sense to move back to a 75%/25% split, you could sell off some of your stocks and purchase bonds instead.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement by opening an IRA online. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Benefits of Rebalancing Your 401(k)

What is rebalancing meant to do for you? A few things, actually, and there are good reasons to consider regular 401(k) rebalancing.

Here are some of the main advantages of paying attention to your 401(k) allocation.

• Manage risk. Rebalancing your retirement savings can help ensure that you’re not taking more risk with your investments than you’re comfortable with. At the same time, it allows you to see if you’re taking enough risk in order to reach your goals.

In the example above, rebalancing the portfolio so it has a higher percentage invested in stocks will increase the portfolio’s risk/reward ratio. Stocks tend to be higher-risk investments, with a higher risk of loss and a higher potential for rewards.

• Maximize returns. If your 401(k) allocation becomes too conservative, you could miss out on opportunities to earn greater returns. Rebalancing can prevent that from happening so that you have a better chance of achieving the level of returns you’re looking for.

• Keep pace with changing goals. As mentioned, life changes and age can influence your asset allocation preferences. Should your goals or needs change, rebalancing can help you adjust your financial plan both for the short- and long-term.

Is there a downside to 401(k) rebalancing? There can be if the investments you’re buying underperform and don’t deliver the level of returns you’re expecting. Another unintended consequence centers on cost. If you’re swapping out lower-cost investments in your 401(k) for ones with higher fees, that could offset any benefits you might realize in the form of better returns.

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

Steps for Rebalancing Your 401(k)

Ready to rebalance your 401(k)? The process itself isn’t that difficult, though you may want to spend some time researching the different investment options offered through your plan.

Calculate Current Asset Allocations

The first step in 401(k) rebalancing is figuring out what kind of asset split you currently have. In other words, what percentage of your account is dedicated to stocks, bonds, or other assets.

You may be able to do that by logging in to your 401(k) plan and checking your asset allocation. Many plan administrators offer online investment portfolio tracking so you can see at a glance how much you have invested in stocks, bonds, or other securities.

If your plan doesn’t automatically calculate your allocation, you can figure it out yourself by identifying the amount of money assigned to each investment, dividing it by the total value of your account, then multiplying by 100.

For example, say that you have $120,000 in your 401(k) and $72,000 of that is in stocks. If you divide $72,000 by $120,000, then multiply by 100, you get 60%. That means 60% of your 401(k) portfolio is stocks. You can perform the same calculation for each type of investment in your plan.

Compare to Target Asset Allocations

Once you know how your 401(k) assets break down, you can compare those percentages to your target percentages. For example, if you’ve got 60% of your 401(k) in stocks and your goal is 80% stocks, then you know you’ve got a 20% gap to close.

How you set your target allocations is entirely up to you and, again, it can depend on things like:

• Your age

• Risk tolerance

• Investment goals

• Time frame for investing

You might try using a basic rule of thumb like the rule of 100 or rule of 120 to find a starting point for allocating assets. These rules suggest subtracting your age from 100 or 120, then using that number as a guide for allocating your portfolio to stocks.

For example, if you’re 35, then based on the rule of 120, stocks should account for 85% of your portfolio. You could also look at how much you have saved versus what you need to save. This kind of retirement gap analysis can tell you how close or how far away you are to your goals and where you might need to adjust your savings strategy.

Sell Overweight Assets

Now that you know what your target allocation should be, you can take the next step and sell off overweight assets. These are the ones that are causing your asset allocation to skew away from your ideal alignment.

If you need more stocks, for example, then you’d sell off bonds. And if you want a more conservative allocation, you’d sell some of your stocks so you can use the money to buy more bonds.

Buy Underweight Assets

The last step is to buy underweight assets in order to bring your 401(k) portfolio back in line with where you want it to be. There are a couple of ways you can do this.

First, you could make a large, one-time purchase using the proceeds from the overweight assets that you sold. That might be easiest if you don’t want to make any changes to future allocations of your 401(k) contributions.

The other option is to change your allocations to direct future 401(k) contributions to underweight assets. What you have to keep in mind here is that once you reach your target allocation, you may need to change your future allocation preferences again so that you don’t accidentally end up overweight in one asset class.

One more possibility when considering how to manage 401(k) asset allocation is to check with your plan administrator to see if automatic rebalancing is an option. An automatic rebalance 401(k) feature could make keeping your allocation easier so you don’t have to spend as much time worrying about your assets.

Consider a Target Date Fund

If you want to skip rebalancing altogether, you might consider investing in a target date fund in your 401(k). Target date funds have an asset allocation that shifts automatically over time as you get closer to retirement.

You choose a target date fund based on your expected retirement date and the fund does the rest. Target date funds offer convenience since you don’t have to actively rebalance, but they might not be right for everyone. If the fund’s allocation doesn’t adjust in a way that’s consistent with your goals, you might be overexposed or underexposed to risk.

The Takeaway

When can I retire? It’s a big question, and if you’re contributing to a 401(k), it helps to know how to make the most of it. Rebalancing your 401(k) can help you stick to an asset allocation that makes the most sense for you. You also have the option of changing your allocation if your risk tolerance changes or your goals shift.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is it good to rebalance your 401(k)?

It’s a good idea to rebalance your 401(k) if you’re concerned about taking too much risk — or not enough — with your investments. Rebalancing 401(k) assets is usually recommended when you experience life changes that affect your retirement goals and as you get older.

Should I rebalance my 401(k) before a recession?

Whether it makes sense to rebalance a 401(k) before a recession can depend on your current asset allocation and what you perceive the biggest threat to be should a recession occur. If you’re heavily invested in securities that are typically recession-proof or tend to fare well in economic downturns, then rebalancing might not be necessary. On the other hand, you might need to make some shifts in your 401(k) assets if you think a recession could expose you to more risk than you’re comfortable with.

Does it cost money to rebalance 401(k)?

It shouldn’t cost you any money to rebalance a 401(k), since you’re buying and selling assets in the same plan. You may want to ask your plan administrator whether any transaction fees will apply before you move ahead with 401(k) rebalancing. Keep in mind that taking money out of your plan to buy investments could cost you, since early withdrawals are subject to tax penalties.

Should I rebalance my 401(k) in a bear market?

Whether you should rebalance your 401(k) in a bear market can depend on the type of assets you’re holding and where you think stocks might be headed next. Bear markets can be opportunities for investors who are comfortable taking more risk, as you might be able to find investments at bargain prices when the market is down. Once the market recovers, those discounted investments might pay you back in the form of substantial gains as prices rise again.

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

Aug

2023

How to Trade the Bullish Harami Candlestick Pattern

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

The bullish harami pattern consists of two candlesticks and is a sign of a potential bullish turn on a stock. When a downtrend has been in place, a harami can offer traders clues that an upward trend is forming.

Other technical analysis tools should be used alongside observation of the bullish harami pattern for better confirmation. The pattern is useful when analyzing assets other than stocks, for example, the bullish harami pattern is also applicable to cryptocurrency charts.

Period 1 of a bullish harami is a long bearish candle, often after a series of down days. Period 2’s candlestick has a smaller body, sometimes even a doji (a candle with little to no body due to opening and closing prices being very close.

What Is a Bullish Harami Pattern?

A bullish harami candlestick pattern indicates a bottom may be forming. This two-day candlestick pattern is a signal that a bullish reversal might be taking shape.

You can learn more about candlestick charts on SoFi Invest.

Period 1’s candle is a large red body (or black depending on your candlestick chart settings) which is bearish. It might be a bearish marubozu, a candle with no wicks — that means the opening price is the high of the day and the closing price is the low of the day. Period 1’s candle could also have small wicks.

An upper wick is price action above the opening price and closing price. A lower wick is trading activity below the opening and closing price.

Period 2 features a small green (or white) body. This candle is contained within period 1’s candle. This is also known as an inside day pattern. Period 2’s trading action includes a gap higher at the open and a closing price that is slightly higher than the opening price. The upper and lower wicks should be within the body of the first day’s candle.

Day 2 is often a minor increase in price that might seem unimportant, but the pause in the prior downtrend is taken as a signal of bearish exhaustion. Some traders further limit the size of period 2’s candle such that the candle body is no larger than 25% of period 1’s candle.

As with most candlestick patterns, it is important to know the context of the larger trend. With a bullish harami candlestick pattern, the existing trend is bearish.

A bullish harami is just one of many bullish technical indicators.

On the flip side, a bearish harami candlestick pattern happens after a bullish trend, and can indicate the start of a new bearish trend.

What Does a Bullish Harami Pattern Tell Traders?

A bullish harami pattern tells traders to be on guard against a quick change in trend. For bears, that means it might be prudent to cover short positions. For bulls, this type of harami candlestick pattern can be a signal to get long.

Before putting on big positions, the wise trader reviews other technical indicators for confirmation of a change in trend. Momentum tools such as oscillators, moving average crossovers, and subsequent bullish candlestick patterns can help confirm the predicted bullish reversal.

The crucial aspect of a bullish harami pattern is period 2’s gap up in price and higher close. A small body, sometimes a doji, shows indecision on a price chart. It indicates that bearish momentum could be slowing and perhaps the bulls are ready to take charge.

If period 2’s candle is a doji, traders refer to the pattern as a bullish harami cross. The “cross” refers to the doji candlestick.

Example of a Bullish Harami Pattern

It can be helpful to use an example of a stock’s price action to show how a bullish harami pattern works.

While the harami candlestick formation is frequently used and offers a favorable reward/risk ratio, it does not guarantee profits. It’s important to know the existing price trend and use other trading tools for better results.

Initially, you want to identify that a downtrend was in place before the harami pattern appeared. Let’s say a stock was trading at $100 one year ago, and it closed at $30 on the most recent trading day. You can use other technical tools like moving averages to help confirm the bearish price trend.

Next, look for clues that the bears are losing their stranglehold on the security — that could be seen with a bullish hammer or other candlestick patterns. This is not a requirement, but it can be a telltale signal that a reversal is not far off. What’s important is that a bearish trend is in place before day 1’s candle.

In our example, let’s say day 1’s candle opens with a small gap down to $29. Intraday price action is bearish. The stock closes at $26, near the low of the day. Bears are excited as a downward price trend seems to be continuing. The stock’s sentiment is likely very bearish.

Day 2 opens with a minor gap higher to $27. The low of the day and high of the day are tight — between $26.50 and $27.50. The stock settles up on the day at $27.20. That is also slightly above the opening price.

The entire session’s trading activity is within day 1’s range.

While other candlestick patterns require a third day to help confirm a reversal in trend, a bullish harami pattern does not. Traders use the two-day candlestick pattern to identify a bullish price reversal.

Other technical indicators, like the relative strength index, can be used to show that the market is in an oversold condition.

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

Does the Bullish Harami Pattern Work?

When researching stocks, technical analysis is used to help traders improve their chances of making profits over time. One indicator is never a sure thing, though.

It is helpful to analyze price action around the harami and to use other tools to spot key areas of support and resistance.

A bullish harami pattern has advantages and disadvantages. Let’s describe those.

Benefits of the Bullish Harami Pattern

An upshot to the bullish harami is that it can offer early long entry points when a bullish trend begins. That means the risk to reward ratio can be very favorable.

Moreover, it is an easy pattern to identify on a price chart.

Drawbacks of the Bullish Harami Pattern

There are some limitations, however.

You should not use the harami in isolation. You also must know the prevailing price trend when looking for a bullish harami pattern.

Finally, you should have a grasp of momentum indicators to help support the case for a bullish reversal.

How to Trade a Bullish Harami Pattern

You trade the bullish harami pattern by spotting a small bullish candlestick after a long bearish candle within an existing downtrend. You can use momentum oscillators and other technical indicators to help confirm a bullish reversal is taking shape.

A buy order can be executed after period 2’s candlestick. A trader might place a stop loss order below the low price over the 2-day harami pattern.

Since a new bullish trend pattern may be developing, look for multiple upside price targets to take profits based on prior support and resistance levels.

Bullish Harami Pattern in Crypto

Bullish harami candlestick patterns can be found on several timeframes and across many assets. It is a popular indicator among cryptocurrency traders. The tight risk range can lead to attractive risk-to-reward ratios.

A downside with crypto markets, since they trade 24/7, is that it is rare to see a price gap, so that is a limiting factor, but it can make the pattern even more important when it does appear on a crypto chart. Some traders also make allowances for no gap in price between periods, with all other factors in place.

The Takeaway

The bullish harami is a two-day candlestick pattern indicating a prior bearish trend could be reversing. A bullish harami candlestick pattern could signal that a bottom may be close, and that a bullish trend might be taking shape.

Period 1 of the pattern features a large bearish session with downward price action.

Period 2’s candle has a small body often with minor upper and lower wicks. The bullish harami candlestick pattern is used to spot signs of bearish exhaustion.

An upshot to the bullish harami is that it can offer early long entry points when a bullish trend begins. That means the risk to reward ratio can be very favorable, but this does have its limitations, and is best used by experienced investors when considering their goals.

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SoFi Invest®

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

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

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

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.

SOIN1021469

Aug

2023

Dividend Discount Model (DDM): Formula & Examples

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

The Dividend Discount Model (DDM) is a fundamental quantitative valuation tool used to help determine the intrinsic value of a stock. There are several variations of the model based on future cash flow assumptions of owning a stock.

The goal is to determine a stock’s fair value, then compare it to the market price. If a stock is found to be undervalued via the DDM, then an investor might buy shares. If the formula finds a stock is overvalued compared to the market price, it could be a candidate for a short sale.

The DDM has some shortcomings, and other valuation tools can be used in conjunction with it to help improve the accuracy of your fundamental analysis.

Additionally, traders can combine this fundamental analysis with technical analysis tools to determine optimal entry and exit points when buying and selling shares.

What Is the Dividend Discount Model (DDM)

The DDM uses a discounted cash flow approach to valuing a stock. The idea is that a stock’s value is simply the present value of future dividends when discounted back to the present. This equity valuation technique looks closely at the cash flows of a stock including future dividend payments and the sale of the stock itself at some future date.

You can think of it as a bottom-up investing approach. The dividend discount model is used to find stocks that are either under- or overvalued compared to the market price. Thus, it is used to find long and short ideas using fundamental analysis and equity valuation.

To better understand the DDM, it’s helpful to know how business fundamentals, and fundamental stock analysis, works.

When a firm earns profits, it can either retain those earnings or pay them out as dividends. The DDM can work best with companies that pay out a large proportion of its profits as dividends. The DDM does not work as well on firms that do not distribute dividends or on companies that pay very little out to shareholders.

The dividend discount model formula is also based on the notion of the time value of money, which says that a dollar today is worth more than a dollar in the future. For this reason, firms that have big dividends today are generally thought to be worth more than those that defer them to the future (per the calculation).

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Dividend Discount Model vs Discounted Cash Flow Model

The Dividend Discount Model (DDM) is closely related to the Discounted Cash Flow Model (DCF) but has distinct differences.

The DDM focuses on the cash flows associated with holding a stock, including dividends and cash received upon a stock sale.

The DCF model examines the cash flows in a company and determines the overall market value of the company. Cash flows include profits, depreciation, changes in accounts receivable, changes in accounts payable, etc. As you might imagine a DCF calculation is extremely detailed and requires some financial and accounting acumen to perform accurately.

Both models require determining future cash flows and forecasting the future requires a mix of art and science to develop accurate valuations.

Dividend Discount Model Formulas

There are several dividend discount model formulas. Each is based on the nature of future dividend distributions from the company to shareholders.

Gordon Growth Model

The Gordon Growth Model (GGM) is one of the most popular versions of the DDM. It is named after American economist Myron Gordon, who first developed the valuation technique. The GGM is also a rather straightforward spin on the DDM since it assumes a stock will pay dividends at a constant rate into perpetuity.

You might use the GGM when analyzing very stable businesses that have steady cash flows and a track record of consistent dividend payouts. Big, blue-chip companies and utility stocks are good examples. The GGM is expressed as:

Where:

• V₀ = The current stock price

• D₁ = The dividend payment one period from now

• r = The required rate of return on the stock

• g = The constant growth rate of the company’s dividends into perpetuity

Be aware that the model is extraordinarily sensitive to the dividend growth rate used.

One-Period Dividend Discount Model

The one-period DDM is used less frequently than the popular Gordon Growth Model. It is useful when an investor wants to calculate a stock’s fair value in order to trade it after one period (often one year). Since it is a one-period look, a single dividend is used along with the proceeds of the sale of the stock. Those are the only two cash inflows.

Where:

• V₀ = The current stock price

• D₁ = The dividend payment one period from now

• P₁ = The stock price one period from now

• r = The required rate of return on the stock

Multi-Period Dividend Discount Model

In contrast to the one-period DDM, the multi-period formula assumes that an investor plans to hold a stock over a period that features many dividend payments.

What makes this variation of the DDM tough is that you forecast several future dividends. There is no guarantee that a firm’s payout policy will match your forecast. Like other DDM models, a final return of capital is assumed — the sale price of the stock at the end of the holding period.

Each future dividend is discounted back to the present using a discount rate that is typically the firm’s estimated cost of equity.

Variable Growth DDM or Non-Constant Growth

You can get even more complex with the variable growth version of the dividend discount model formula. With this approach, you can divide growth into several stages.

Perhaps a firm will grow rapidly over the first year, slow down in year two, then finally transition into a steady grower into perpetuity. Some argue this is a more realistic way to value a stock versus other models. The variable growth DDM assumes non-constant growth by commonly using a two-stage or three-stage approach. Of course, even more stages can be applied.

Zero Growth DDM

A final approach is the zero growth dividend discount model. This is actually the simplest of all DDM variations. It is the same calculation you would use when valuing a perpetuity or preferred stock. It’s simply:

Dividend Discount Model Example

Let’s perform an example using the most common DDM method: the Gordon Growth Model.

Suppose a company pays a current annual dividend of $5 (D0) and will grow it at a steady rate of 3% per year into perpetuity. Shares currently trade at $60. We will also assume we used the Capital Asset Pricing Model to find the firm’s 10% estimated cost of equity. Here’s how the DDM would look:

Since we found the stock’s intrinsic value to be significantly higher than the market price, we might buy shares with the thought that eventually the market will realize how valuable the stock is and the price will move towards our valuation.

Interpreting DDM Results

Interpreting the results from the dividend discount model is straightforward, but it is getting to the output that can be tricky. The inputs to the calculation are often subjective and can change over time, so any interpretation should be taken with a grain of salt.

Dividends can be hard to forecast accurately, and valuations are sensitive to the growth and discount rates chosen. The analyst must also be open to the possibility that market forces can cause an over- or under-valued stock to further drift from intrinsic value.

How Investors Can Use DDM

The dividend discount model, and all its variations, can be used to calculate a stock’s fair value. In practice, that fair value is then compared to the market price.

Investors can choose to go long shares when they determine that a company’s intrinsic value is above the market price. They can also short shares if the DDM valuation method determines that a stock is overvalued compared to the market price.

The dividend discount model can be used to value stocks in different sectors to see which might be the best investment.

The use of the DDM is based on fundamental analysis and the notion that stock values ultimately revert to their intrinsic worth based on the present value of future cash flows.

Investors can use the DDM along with other valuation techniques to help form a better mosaic of a company’s value. Moreover, technical analysis indicators could be used for more precise buy and sell price points.

The Takeaway

The dividend discount model formula is one of the most widely used equity valuation techniques. Its premise is that firms pay out a large proportion of their profits as dividends to equity holders, thus an intrinsic value can be calculated using those predictable future cash flows.

There are several variations of the DDM based on the profile of a firm’s future dividends. There are drawbacks to the DDM, and using other valuation methods can help an analyst determine if a stock is over- or under-valued.

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

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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.

SOIN0221052

Stock Market Fluctuations Explained

4 Top Causes of Stock Market Fluctuations

Supply and Demand

Inflation

Economic Indicators

Company Performance

Pros and Cons of Market Fluctuations

Pros of Market Fluctuations

Cons of Market Fluctuations

Volatility Means the Stock Market Is Working

What Is a Normal Amount of Stock Market Fluctuation?

What Does Stock Market Volatility Mean to You As an Investor?

Risk Tolerance in Investing

Investing With SoFi

FAQ

Why does the stock market fluctuate?

What is the average market fluctuation?

How long do market fluctuations last?

Investing for Retirement: Tips and Options to Consider

The Importance of Investing for Retirement

Get a 1% IRA match on rollovers and contributions.

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

Understanding Retirement Accounts

Investment Options

DIY Investing

Index Funds

Automated Options

Hire an Advisor

Tips When Investing for Retirement

Ask About Fees

Plan for Taxes

How Often Should I Adjust My Investments?

The Takeaway

FAQ

Can I invest for retirement if I have limited funds?

Should I adjust my investment strategy as I approach retirement?

What investment options are suitable for conservative investors?

How to Rebalance Your 401(k)

What Is Rebalancing Your 401(k)?

When to Rebalance Your 401(k)

Example of Rebalancing a 401(k)

Benefits of Rebalancing Your 401(k)

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Steps for Rebalancing Your 401(k)

Calculate Current Asset Allocations

Compare to Target Asset Allocations

Sell Overweight Assets

Buy Underweight Assets

Consider a Target Date Fund

The Takeaway

FAQ

Is it good to rebalance your 401(k)?

Should I rebalance my 401(k) before a recession?

Does it cost money to rebalance 401(k)?

Should I rebalance my 401(k) in a bear market?

How to Trade the Bullish Harami Candlestick Pattern

What Is a Bullish Harami Pattern?

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What Does a Bullish Harami Pattern Tell Traders?

Example of a Bullish Harami Pattern

Does the Bullish Harami Pattern Work?

Benefits of the Bullish Harami Pattern

Drawbacks of the Bullish Harami Pattern

How to Trade a Bullish Harami Pattern

Bullish Harami Pattern in Crypto

The Takeaway

Dividend Discount Model (DDM): Formula & Examples

What Is the Dividend Discount Model (DDM)

Dividend Discount Model vs Discounted Cash Flow Model

Dividend Discount Model Formulas

Gordon Growth Model

One-Period Dividend Discount Model

Multi-Period Dividend Discount Model

Variable Growth DDM or Non-Constant Growth

Zero Growth DDM

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Dividend Discount Model Example

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