Ask Me Anything With Liz Young, SoFi’s Head of Investing Strategy
Got an investment question you’ve been afraid to ask? Liz Young, SoFi’s Head of Investing Strategy, hopped on a Zoom call with SoFi Members for a compelling and inspiring half-hour of AMA (“Ask Me Anything”).
During the Q&A, SoFi members posed questions about everything from investing acronyms (What’s an ETF?) to how to balance a portfolio when you’re a beginner.
Here are some highlights from the event, or check out the full video below.
How Do I Start Investing?
It’s not about how much you need to invest, Young explained. “The important thing is just getting started.” Investing even a little bit at time can go a long way, she noted.
These days, taking a slow but steady approach is easier than ever, Young said. For example, with features like fractional shares, a beginner investor can invest a specific dollar amount rather than paying for a full share. That means it’s possible to own just a slice of a single stock or exchange-traded fund (ETF) for, say, $5 — even though a full share might cost $500.
What Is a Good Investing Strategy for Beginners?
For those just beginning their investing journey, Young suggested the hub and spoke approach:
• The hub is the core or center of your portfolio. This is where you can think about investing in the U.S. stock market or even international equity markets. This could mean investing in an ETF that tracks a broad index like the S&P 500 or the Nasdaq.
• The spokes are more specific or smaller investments you decide to take on. That could mean investing in individual stocks you believe in, commodities investing, or a particular theme like clean energy.
The key to this approach is tackling the hub first, Young suggests. The hub is the keystone of your investing strategy, lending stability to the individual spokes that may be higher-risk investments — or investments that are more concentrated.
What’s the Difference Between Automated and Active Investing?
Another hurdle that may keep first-time investors out of the market is understanding the difference between automated and active investing.
With automated investing, technology does some or all of the work for the investor. Automated investing can range from simply setting up automatic deposits to an investment account — to investing in a so-called robo-advisor account that chooses investments for you.
Young began her own investment journey through auto-investing. At 21, she was working part-time during school as a bank teller. Though her paycheck was less than $100 every two weeks, Young said, her manager encouraged her to contribute 6% of her pre-tax income to the bank’s 401(k) retirement plan.
By the time she left that job, her 401(k) had $1,200 invested. Because the deposits were automated, she’d forgotten about them — and was surprised to see how much she’d saved without even trying. “It was exciting to start seeing money working for me and growing,” Young said.
Using a robo-advisor offers more in terms of automation because it helps investors to set up an account based on a questionnaire they answer to determine appropriate risk and return parameters. Then, the underlying algorithm not only helps select investments that can match those parameters, but over time the robo-advisor monitors and rebalances the portfolio, as well.
On the other hand, there’s active investing, which requires more time and attention from the investor, Young said. Active investors must select the investments themselves and rebalance their own portfolios. Still, this strategy does allow for more flexibility, and the ability to pick and choose specific investments, which isn’t always possible with auto-investing.
When you’re just starting to invest, auto-investing may eliminate some of the barriers to entry. However, if you want hands-on experience, active investing may be a better fit for you. Ultimately, choosing between active and auto-investing is personal and will vary from investor to investor, Young said.
What Are Short-term vs. Long-term Capital Gains?
Stimulus checks, the rise of meme stocks, and crypto assets have brought a lot of newcomers to the market in the past year. While beginner investors may see some payoff from their strategies, Young took time to clarify capital gains tax and how this can impact investors.
While many investors may lament having to pay capital gains, “if you’re paying capital gains tax, that means you made money on your investments,” Young said. So you could consider it a good thing, even if there are taxes involved.
Here’s how it works.
Short-term capital gains are triggered if an individual buys and sells the same investment in one year or less. For example, if you bought a stock at $50 and sold it six months later for $100, you would pay a short-term capital gains tax on the $50 you earned. Short-term gains are taxed like ordinary income, based on your tax bracket.
But when you sell an investment after holding it for longer than one year, you will pay long-term capital gains tax, which is a lower rate than short-term capital gains and depends on your income level. It can be 0%, 15%, or 20%.
If it sounds like tax law may work in favor of holding onto investments for the long term, that’s basically the deal, Young said. Buying and selling investments too frequently could present unnecessary risks, explained Young. “A more favorable long-term capital gains tax encourages investors to maintain a long-term view and stick to their plan.”
Is Investing Risky?
Young also touched on an important reality all investors must consider: the risk associated with investing. “Risk is the nature of the beast, but also why we do it,” she explained. Meaning: There’s typically a relationship between the amount of risk involved and the potential payoff.
There are several different aspects of investment risk, but Young focused on two that new investors should be aware of in particular:
This refers to having too many eggs in one basket. For example, if an investor pours all their money into tech stocks, they could potentially suffer an outsized loss if tech stocks drop in value. To mitigate that risk, Young suggests diversifying into different sectors: “You want investments that behave differently from each other throughout the market cycle.”
Timing risk is associated with how long an investor plans to keep their capital in the market. Ideally, the higher the risk of an investment, the longer your time horizon should be. This can help protect you from a scenario where you may need to sell your investments quickly, but you could end up taking a hit because the market is down at that moment.
Investing always has risk associated with it, and as an investor it’s important to be aware of the amount of risk you’re taking on.
Despite having just 30 minutes with SoFi Members for her recent “Ask Me Anything,” Liz Young covered some important ground. She addressed questions and cleared up misconceptions for investors on a range of key topics — including automated investing, understanding capital gains taxes, and risk.
Still have questions? Don’t be afraid to ask away. SoFi Members are eligible for complimentary sessions with a financial planner. From tackling debt to setting up a long-term investment strategy, these SoFi financial planners are here to offer customized advice at no additional cost.
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