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Dollar Cost Averaging is Back: Here’s What To Know

With all the new technology and strategy buzzing around us these days, there are a few old-school, tried-and-true investment methods that seem to work consistently over time. One of those is dollar cost averaging; it’s designed as a long-term plan that helps keep your emotions, irrationality, and fear out of the investing process, where it might not belong.

With dollar cost averaging, you buy a fixed dollar amount of an investment on a regular schedule. The share price is not relevant here; the focus is on a regularly scheduled buy.

How it’s done: you’ll be purchasing more shares when prices are low and fewer shares when the price increases, but even more importantly, you will be on a solid and determined road that keeps surging your investment ahead, even during the temporary low points that could otherwise make you itchy to sell.

The Logic of Dollar Cost Averaging

At first glance, dollar cost averaging may not sound like a sound plan, but there is a method to its madness. Here are just a few reasons why it’s smart:

It forces you to stay the course. By investing the same amount of money every month, you will buy more shares when the market is down and less shares when the market is up. The key is investing the same dollar amount every month no matter how you feel about the market that day. That’s a great practice of strength to learn when investing.

It allows you to set it and forget it. A regular dollar amount every month keeps it simple and uncomplicated. You don’t have to keep your eye on the investment or market volatility.

It lets you invest a small amount of money, or at least as much as you can afford. You don’t have to be wealthy in order to use the dollar cost averaging method. You can start small, but all the while, you will be contributing to and growing an investment portfolio.

It keeps you from trying to “time the market.” Dollar cost averaging changes your investment priorities from trying to time what the market is going to do to keep your head down and sticking with a consistent investment strategy.

You may be able to save yourself a lot of stress and heartache by avoiding the guessing game, and over the long term, the average investor will earn a higher return than if they tried to time the market.

It increases your chances of being in the right place at the right time. Without having to second guess when the market will reach its peak, and then having to buy and sell, you’ll already be where you need to be, without having to get there.

Think of it as a formula that adheres to the old expression “slow and steady wins the race.” The safety comes with time: you’re spreading the cost basis of the investment over a long period, protecting yourself against the ups and downs of the life of a typical investment. You’ll sometimes buy low and you’ll sometimes buy high, but the idea is to have it all even out in the end.

Say you can invest $100 every month. You won’t be able to buy as many shares when the market is up and your shares cost more. However, when the market goes down, that $100 will buy more shares. In the long run, your average cost per share could be lower than if you bought all of your shares at once.

Options to Invest In

You can use dollar cost averaging to invest in a variety of things, really; however, there are specific investments that really seem to thrive with this system:

Mutual Funds: Mutual funds allow you to purchase a share, which represents a very small allocation of the underlying investment portfolio. This means that you can diversify with much smaller dollar amounts than if you purchased the securities on your own.

ETFs (exchange-traded funds): Similar to mutual funds, ETFs provide an opportunity to diversify with smaller dollar amounts. Additionally, ETFs are available to trade throughout the day, generally have low expenses, no investment minimums, and offer greater tax-efficiency.

Dividend Reinvestment Plans. Rather than receiving dividends via check or direct deposit, some companies allow you to automatically buy additional shares with the dividends. This approach would purchase additional shares of the stock you already own, so it would not provide any additional diversification.

How To Set Up a Dollar Cost Averaging Plan

You can do it in three easy steps:

Determine your regular investment amount for each month. If this is going to be true dollar cost averaging, the time to make this decision is right at the very beginning, before you invest even one cent. Make sure it’s amount you can afford, even as life changes.

Determine the investment pattern. This could be weekly, bi-weekly, monthly, or quarterly. For the most convenience, you may want to consider setting up an automatic withdrawal from your checking or savings account. Find the right long-term investment.

You may want to consider a financial advisor to help arrive at a decision that makes you feel right. Think of this investment as long-term (a retirement or college fund, for instance). This should not be the kind of fund that you dip into for fun or for emergencies.

An Example of Dollar Cost Averaging

Here’s a very basic sample of dollar cost averaging:

Month

Amount

Price/Share

Shares

January $100 10 10.00
February $100 12 8.33
March $100 8 12.50
April $100 7 14.29
May $100 9

11.11
June $100 11

9.09
Total $600

65.32
Average Price Per Share: $9.19

As you can see in this example, the price per share will fluctuate up and down. By contributing the same amount every month, you simply bought more shares when the price was low and less shares when the price was high. The key to your success will be consistency: regular contributions.

Getting Your Dollar Cost Average Priorities Straight

It’s not about picking stocks. It’s about being disciplined and consistent. If you’re not a natural-born stock picker (and most people aren’t), it may be a good idea to get with a financial advisor who can help you or leverage an automated solution. This will save you from second guessing or going into a periodic panic mode; instead, you can focus on the real matter at hand; steady regular investments.

Seven Mistakes To Avoid When Dollar Cost Averaging

According to U.S. News and World Report , as simple as the method is, some investors don’t understand how to best use it to their advantage. The bottom line: the only way dollar cost averaging will work is if you follow the rules.

Here are the mistakes to avoid:

1. Failing to Recognize the Benefits at an Early Age

Dollar cost averaging instills investing discipline, which is a valuable lesson to learn early on. When you’re first starting out, it’s often difficult to take a long view of your future.

However, making dollar cost averaging a priority from the get go, and opting for regular, automatic investments that you don’t even have to think about, will get you on your way with a minimum amount of fuss.

2. Not Investing Consistently

Waiting for the market to change before taking action is going to make your contributions uneven and ultimately ineffective. A stop-and-start approach means that you will need to pay more attention to the investment, whether you have the time to do so or not. Plus, investing this way is a definite time suck.

3. Forgetting to Rebalance

In order to help reduce volatility, it may be a good idea to keep your stock portfolio diversified. As the market changes, your original game plan for your overall portfolio (as opposed to just one stock) may need to be reviewed and altered to adjust to changes in the market. Scroll down below; we talk all about portfolio rebalancing and how it can help keep your investment healthy and strong.

4. Having Second Thoughts About Dollar Cost Averaging

If you watch the market and you think it may be time to give dollar cost averaging a rest for a while, you automatically become a slave to trying to time the market. Most financial advisors discourage this and tell you to stay the course and stick to the system.

5. Confusing Dollar Cost Averaging With not Paying Attention to Your Investment

The dollar cost averaging strategy is not necessarily self-sustaining forever. You will need to periodically review your investment to see if you need to alter your plan.

Ideally, you should review your plan annually to make sure your investment strategy still aligns with the amount of risk you are comfortable taking and that you are saving enough to meet your goals.

6. Taking Too Long to Invest a Lump Sum

Invest a lump sum perhaps a bonus, tax refund or gift all at once, rather than divide it into 12 monthly installments. Cash not invested will not be working for you.

7. Ignoring Trading Costs and Transaction Fees

It depends on your broker or financial advisor, but pay attention to your trading and service fees. They certainly add up, and affect your final investment result.

A Word About Rebalancing Your Portfolio

The periodic rebalancing of your portfolio is easy to overlook, especially when the distractions of life get in your way. However, it’s recommended to do this once or twice a year.

The concept of rebalancing is actually very similar to dollar cost averaging. Dollar cost averaging is a disciplined, repeatable, and unemotional process to contribute money on a regular basis whether the market is up, down, or even. This results in a lower average cost per share over the long term.

Rebalancing is simply taking a similar approach but applying it to your overall investment portfolio as your investments go up and down in value as the market fluctuates.

Another term for this is asset reallocation, or adjusting the percentages of how much of your money is invested where. Typically this process starts by grouping investments together with other similar investments called asset classes.

That includes U.S. stocks, international stocks, high-yield bonds, real estate, and short-term treasury bonds. The money you put into these asset classes should be divided up according to your goals and comfort level.

That means that at the end of the day, your portfolio should ideally be sticking to your original plan and goals, and continuing to adhere to your risk tolerance and timeframe (like retirement, for instance). It’s simply a periodic fine tuning.

On the surface, the basic process of rebalancing just sounds wrong: selling off the asset classes that outperformed your expectations, and using that money to buy more of an asset class that didn’t do as well.

It seems to make no sense to sell off a winning stock to sink money into a weaker one, but that’s all part of having a diversified portfolio. But again, it’s all about evening it out and giving some love to the investments that may need a little more fuel to get going. This is similar to dollar cost averaging in which you simply bought more shares of a security when the price was lower.

You can work with an advisor to help you consider your rebalancing strategy, but check first to see if there is a fee for doing so. Also, if your investment is not part of a tax-deferred retirement account like a Traditional IRA or a 401(k), you may incur taxes when making changes to your investment strategy. That’s true even if you simply rebalance as described above.

About SoFi Invest®

You can get started implementing a disciplined approach to investing using dollar cost averaging with SoFi Invest. SoFi Invest offers an active solution for do it yourself investors who want to pick and choose their investments while paying no trading fees or commission.

SoFi Invest also offers an automated solution for investors who want a diversified strategy without having to make the decisions themselves while paying no management fees. Either way, you will have access to financial advisors who can help you along the way.

Ready to start dollar cost averaging? Learn more about SoFi Invest.


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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .

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Putting Goals-Based Investing Into Practice

Are your investments on track to help you achieve your goals? Are you putting your money in the right assets for what you want to spend it on down the road? Does your portfolio correspond with your future plans?

It’s hard to answer these questions. Making investment decisions can feel pretty personal, because it involves thinking about what you want to do with your money in the future. It also means considering where you want to put your money, which could mean pinpointing companies and stocks you like, and avoiding stocks that don’t align with your worldview.

And of course, it’s frustrating that no one actually knows what’s going to happen in the stock market. There are predictions galore, but no return is guaranteed, and no stock is a sure bet. That doesn’t mean you should let confusion keep you from investing, though. Investing earlier can give your money more time to benefit from compound returns (which is when your investment returns make their own returns).

If you’re just getting started investing, use our beginner’s guide to investing and make sure you understand how goals-based investing works.

What Is Goals-Based Investing?

Goals-based investing, also known as goals-driven investing, is exactly what it sounds like; it’s an investment approach focused on your goals, rather than on market benchmarks.

Traditionally, investment strategy focuses on portfolio returns and measuring risk tolerance—i.e., how much risk you want in your investments. Those factors would then determine your investment strategy and portfolio makeup. Investments can make money in a number of different ways, including yielding interest or dividends which translate to earnings for the investor.

What you choose to invest in, and how much, is known as your asset allocation. And your asset allocation is determined by what you want out of your investment returns and your investment timeline.

For example, your investment strategy might be different if you’re going to retire in five years compared to someone who plans to retire in 25 years.

Goals-based investing, by contrast, measures your portfolio against your goals. That allows you to plan for different goals with different investment strategies.

The Benefits of Goals-Based Investing

The benefit of goals-based investing is that you can adapt your investment strategy to meet your actual needs. Many households have far more goals than just retiring—and have not, historically, had a way to plan for them.
The other benefit of goals-based investing is a bit more psychological.

A number of recent studies and research also suggest goals-based investing can have a behavioral impact on how you act—including, how invested you are in your investments and how emotionally you react to market fluctuations. Having a goal helps you focus your efforts.

For example, if you know you’re saving money for a down payment on a house, then you’re less likely to spend it on a new jacket or a fancy dinner. You’re also less likely to overreact to a dip in the market and sell off your assets when the price is low if you know you’re aiming at a certain goal down the road.

Goals-based investing also gives you more buy-in as an investor, and more of a say in the process. However, the danger of goals-based investing is you might not fully know what your goals are—or, more likely, what your goals will be down the road. Studies have found that we often fail to predict how much we will change in the next decade, and in turn, that can have a distorting effect on our goals and how we plan for them.

For example, right now, you might think you want a low-key retirement in a rural woodsy cabin, but what happens if you only invest enough to purchase a small cheap plot of land and then you change your mind in 20 years and need more money? That’s also why you want to re-evaluate your goals regularly and change your investing strategy as appropriate.

How to Put Goals-Based Investing Into Practice

The key to goals-based investing is figuring out short-term and long-term goals. In the short term, goals could include saving for a vacation or a wedding; something like a down payment on a house might be a medium-term goal; and setting aside money for retirement—whatever kind of retirement you envision—is perhaps the longest-term goal.

Some common financial goals include: saving up an emergency fund; accumulating enough for a large purchase, like a car or a trip; paying for your kids’ colleges; putting a down payment on a house; caring for elderly parents and other loved ones; and planning for retirement. These all require different strategies and different timelines.

The first step is to determine your goals and then take a realistic look at your current financial situation.

Talking to a financial planner can help you refine and clarify your financial objectives. Then, create targets and separate accounts for your various goals.

The last step is actually figuring out the investment strategy for each of your investment accounts. For example, you might have a different investment strategy for savings you’re going to use in five years, versus your retirement savings that you’re going to use in 20 years.

Talk to a Professional About Goals-Based Investing

SoFi Invest® uses a goals-based approach to make sure you’re getting what you want out of your money. After talking to you about your investment goals, SoFi financial advisors can help you find strategies that might work for your goals, age, income, and assets, among other factors. While portfolios are diversified over many asset classes, SoFi primarily uses ETFs in our automated investment platform.

Although you can implement goals-based investing on your own, many people also find it helpful to talk to a professional to help hone in on the right strategy—especially if you have multiple goals over different time frames.

If you’re ready to talk about your financial goals and figure out a plan to make them reality, talk to a SoFi financial advisor at no cost.


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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .

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What Are Cash Equivalents?

When it comes to saving and investing, cash is controversial. Some say cash is king and key to financial security. Others say cash is trash, that cash and cash equivalents simply can’t earn enough over the long-term to protect against inflation risk.

What’s often lost in any kind of debate is that there can be a middle ground. And in this case, what works within an overall financial plan or provides peace of mind is different for everyone. It’s all about balance and what’s best for you.

For most people, cash equals comfort—it’s reliable and ready when you need it. You might not want to keep a stash of cash hidden under your mattress, but it can be a good goal to include it—in some form—in your savings strategy.

Types of Cash Equivalents

Cash equivalents are a type of asset that can easily be converted to cash, so they’re useful if you get in a pinch. It usually grows in value but at a much slower rate than less-conservative investments because your money is at far less risk. Here are some cash equivalent examples and their pros and cons:

Certificates of Deposit

With a CD, you agree to let a bank keep your money for a specified amount of time, from a few months to a few years. In exchange, the bank agrees to pay you a guaranteed rate of interest when the CD matures.

The longer the term of the CD, the more interest it pays—and that used to mean a pretty decent return on a safe investment. But when the U.S. is in a low-interest-rate environment —as it has been for nearly a decade—CDs aren’t nearly so appealing.

The reward may not be worth tying up your money for so long. And if you have to cash in your CD ahead of time, you’ll likely pay a penalty .

There are a few different kinds of CDs that offer different features. Some bank CDs have variable rates that allow you to change the rate once during the term. There are also Brokerage CDs, which are marketed as securities and sometimes sold by banks to investment companies.

U.S. Treasury Securities

U.S. Treasury Securities are another popular conservative investment. Treasury bonds usually mature in 10 years or more, but notes are issued for terms of two to seven years, and bills are payable in a year or less. All are considered safe because they’re backed by the U.S. government.

And because Treasuries are so popular, the market is active, so they’re easy to sell if necessary. Still, Treasuries are affected by other types of risk, including inflation and changing interest rates. In today’s rising-interest-rate environment, that could be a drawback.

While investors can expect to receive interest and principal payments as promised at maturity, if they attempt to sell the bond prior to maturity, they may receive more or less than the principal depending on current market conditions.

Money Market Funds

Don’t confuse these funds with money market deposit accounts. Money market funds invest your money, then pay a portion of the earnings to you in the form of dividends . Because the funds’ short-term investments generally mature in less than 13 months, they’re considered safe.

But unlike a savings or money market deposit account, they’re not federally insured. Which means there’s no guarantee you’ll make back your investment, and it’s possible to lose money in a volatile market.

Savings and Money Market Accounts: A savings account has long been an essential money management tool. (You might even have had one when you were a little kid.) When you deposit your money in a member-FDIC bank savings account, the Federal Deposit Insurance Corporation (FDIC) insures it up to the maximum amount allowed by law, so you can be sure your money is secure. Another bonus: You can make regular deposits and withdrawals (within federal limits) without committing to a term length or worrying about withdrawal penalties.

But a savings account is usually the low man on the totem pole when you compare the interest rate offered to those of other bank products. A money market account is also FDIC-insured, so it’s safe, and it pays interest like a savings account—but usually at a higher rate if you keep a higher balance. If your balance drops below a specified minimum, you might end up paying a monthly fee.

What’s Best for You?

How you decide to allocate the assets in your investment savings (401(k), IRA, or brokerage accounts), will be based on several factors, including your age, your tolerance for risk, and what your long-term goals are.
Conservative investors have come to rely on cash equivalents, especially if their primary goal is keeping their money safe. Aggressive investors, on the other hand, can’t imagine pulling money away from the bigger, faster, stronger potential of the stock market.

But many financial advisors agree that you also should hold an ample amount of cash outside your investment portfolio for monthly expenses (budgeted and otherwise) and an emergency fund.

Experts from Dave Ramsey to Suze Orman regularly preach about putting money away in case you hit a financial rough patch. How much that emergency fund should be depends on your income and other details unique to you. (The most-often cited rule of thumb is enough to cover six months of living expenses.)

Maybe it will pay for damage to your home or car. Maybe you’ll have your hours cut at work or lose your job. Maybe you or your pet will get sick and need treatment. Doesn’t matter. You’ll increase your chances of being ready.

•   And that means you’ll want your fund to be:
•   immediately accessible, no matter where you are;
•   in an account that’s safe;
•   that doesn’t have any minimums, limits, or fees;
•   but does have an interest rate that rivals less-flexible cash equivalents.

If that’s what you’re looking for, SoFi Money™ could be your answer. With this hybrid account, your money will be available when you need it for all your expected expenses (your car payment, cable bill, pizza on Friday nights) and any other little thing that comes along.

With SoFi Money, you’ll also have the same easy access for unplanned costs. Your money will be earning a competitive interest rate. And SoFi won’t charge account fees. You’ll also get other perks to help keep your finances on track—whether you’re spending or saving. With the SoFi app, you can monitor your weekly spending and how you’re doing with your budget.

Your SoFi Money debit card will work at any ATM and offers fraud protection to keep your money safe. And your account will be FDIC-insured. Plus, you can count on SoFi’s customer service reps to help you with any questions or concerns.

Financial security is all about balance and meeting your goals—including finding that sweet spot of having enough for daily expenses, monthly bills, a little fun, and those blindsiding worst-case scenarios that can throw your budget completely off track.

Whether you’re just starting out or you’re gearing down on the road to retirement, having a deposit account that’s flexible should be on your checklist. A SoFi Money account can be an important part of a financial plan that gets you where you want to go.

If you’re ready to take your emergency fund to the next level, consider a SoFi Money account.


The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .

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Stock Market Terms Every Trader Should Know

If you are new to trading stocks, the insider lingo of stock market terms can be off-putting. But learning some basic stock trading terminology is a great place to begin before investing any money. For any new investor just getting into trading, these are the top basic stock terms to know before you start.

Stock

Buying stock, also known as shares or equity, is like owning a piece of a company. You purchase stock in a company, and receive a proportional part of that corporation’s assets and earnings. The price of stock is different for each company and fluctuates over time.

This is why you hear the phrase, “Buy low, sell high” because if you invest in an organization when their stocks are priced lower, and then the company grows and makes money, you may be able to make a profit if you sell that stock at a higher price later on. (To be clear, that’s not advice we’re giving—it’s just an investment adage you might hear around town.)

Trade

To trade in the stock market means the buying and selling of a stock. For every seller, there is a buyer on the other side. This transfer, shares of stock in exchange for money, requires an agreement on price. People who trade can be small individual investors, or larger entities like banks and insurance companies, whose buy or sell orders might be executed for them by a stock exchange trader.

Stock Symbol

Also known as a ticker symbol, this short abbreviation helps traders identify stocks from various companies. The limit is usually one to five characters, made up of letters and numbers, and is often tied closely to the company’s own name—AAPL for Apple, for instance, or V for Visa.

Bid and Ask

Any potential buyer bids a certain price for stock, and the seller asks for a specific price for the same stock. Buying or selling at the market means you will accept any current bid or ask price, resulting in a market order.

When the bid and ask prices match, a sale takes place, on a first-come basis if there is more than one buyer. The bid-ask spread is the difference between the highest price a buyer is willing to bid, and the lowest price a seller is willing to ask.

Broker

Short for stockbroker, this is a professional who executes buy and sell orders on behalf of clients, typically for a fee or commission. Brokers usually work for a brokerage firm. This person can also serve as a financial advisor, understanding the markets and making investment decisions that will ideally lead to profit for their clients.

Dividend

The payment made from a company to its shareholders, often drawn from earnings. Usually, these are made in cash, but sometimes they are paid out as additional stock shares. They are typically paid on an annual or quarterly basis, and typically only come from more established companies, not startups.

Yield

A stock yield is the ratio of annual dividends divided by the share price. For example, if a stock is set to pay $1 in dividends over the next year, and is currently trading for $50, the yield would be 2%. Dividends and yield are both an important reflection of a company’s value, but only a piece of the puzzle.

Portfolio

Collectively, all of the financial assets, such as stocks, that an investor currently owns. Building up a diversified portfolio means investing in many different assets that perform differently so that if one asset falls in value, other assets will hopefully pick up the slack.

Exchange

A stock exchange can be a physical in-person location, like the NYSE, where transactions take place on a trading floor. Here, traders shout their bid and offer prices, known as open outcry. Other stock exchanges such as the NASDAQ are electronic only, where everyone uses computers to manage trades.

Market Cap

Market capitalization is the total dollar market value of a company’s outstanding shares—which is the stock currently held by all shareholders. The market cap is calculated by multiplying the number of outstanding shares by the share price.

Since it refers to the organization’s total value of all shares of stock, it is an important number to consider relative to future growth expectations or when comparing companies in the same sector.

Orders

Besides buying at face value, aka a market order, there are also limit orders, good til canceled orders, and day orders. More advanced traders, or with the help of a broker, can negotiate stock prices. A limit order will only allow someone to buy or sell stock at a specific price or better.

A day order is exactly what it sounds like—an order to buy or sell that automatically expires if it is not executed that same day. Good til canceled (GTC) orders can be good for investors who do not wish to consistently watch stock prices and can place buy or sell orders at specific price points, and keep them for many weeks. If the market price hits the price of the GTC before it expires, the trade will execute.

Volatility

Volatility really comes down to the range a stock price changes over time. If the price stays stable, then the stock has low volatility. If the price jumps from high to low and then back to high often, it would be considered more of a high-volatility stock.

Liquidity

Market liquidity is essentially how easily shares of stock can be converted to cash. The market for a stock is “liquid” if its shares can be sold quickly, and the act of selling only minimally impacts the stock price.

Trading Volume

For a stock trading on a stock exchange, the volume is typically reported as the number of shares that changed hands during any given day. It’s important to note that even with an increasing price, if it’s paired with a decreasing volume, that can mean a lack of interest in a stock.

A price increase or drop on a larger volume day (i.e., a bigger trading day) is a potential signal that the stock has changed dramatically.

Averaging Down

If an investor already owns some stock but then purchases additional stock after the price has dropped, this is known as averaging down. It results in a decrease in the overall average price for which you purchased the company stock. Investors can profit if the company’s price subsequently recovers.

IPO

The Initial Public Offering is the process by which a company first sells stocks to the public. A company’s goal is to sell a predetermined number of shares to the public at the best possible price. Not all large companies are public; IKEA and Mars Candy are still privately held, meaning they have a small number of shareholders and individuals aren’t able to invest in them. But going public offers the company a lot of money for it to grow, by raising a lot of money quickly with a new group of large investors.

Blue Chips

Sadly, not a fun stock market-themed snack. These are largely considered to be top-notch stocks you can invest in long term. These stalwarts of the stock market are well-established, large, and financially sound companies like Disney, Intel, and Coca-Cola.

Bull and Bear Markets

When someone refers to a bull market, it means broadly that the market is “up.” A bear market on the other hand, means the market is “down.” A bull market typically describes an economy that is growing and optimistic, while a bear market indicates the opposite, with loss on investments and general pessimism about the economy.

This can be as simple as the difference between rising and falling stock prices, but also takes into account things like job creation or loss, and unemployment rates.

No matter when you start investing, it’s always important to have a great team supporting you as you navigate the stock market. If you are looking for a smart, painless way to begin, SoFi offers wealth management using automated investing, with access to our human financial advisors.

SoFi Invest offers goal planning, working with individuals to achieve goals, and making a plan for your investments. We also focus on diversification, and we can help you choose from thousands of assets available for investing.

As a SoFi Invest member, you can start online investing with as little as $1 today.


Choose how you want to invest.

Ready to
do-it-yourself?

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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .

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Is Your 401k Enough For Retirement?

Planning for retirement can feel confusing and overwhelming. How is it possible to make financial plans for a time that is so far into the future? What will the future even look like, let alone cost?

Saving for the long run is so important, but is notoriously difficult to do. You may feel like you’re on track, saving and investing, but it’s hard to know for sure. Are you saving enough? Investing enough?

You’ve got a 401k and feel like overall, you’re making good decisions. Maybe you are even maxing the amount that you add to your 401k each year. But there’s still a lingering feeling of doubt.

That’s because you know that people are living deep into old age, enjoying longer retirements, and in general, not saving enough for these retirements. You want to be sure that you are not one of these people.

Here, we will walk through the mechanics of 401k investing (such as the 401k retirement age and a hypothetical 401k retirement withdrawal rate) and the proper use of a 401k account.

Then, we’ll dig into details for anyone who has ever wondered, “is 401k enough for retirement?” and “how much money in a 401k is enough to retire?” and give solutions for people who want to do and save more.

How Does a 401k Work?

A 401k is a retirement account that a person can access through their workplace, often offered as a workplace benefit that may provide an employer match. Though historically you could only access one through your job, nowadays a self-employed person can open up what is called a Solo 401k account.

A 401k is a qualified plan that offers several options to contribute money. The most common way that people contribute to their 401k is by making pre-tax contributions.

This means that you do not pay income taxes on the income that you contribute into the 401k, but you will pay them later, when you draw the money out to use in retirement. The idea is that you might be earning more as a working person than you will be spending as a retired person, and therefore in a lower tax bracket as a retired person.

Why is this important? When you are making retirement spending plans, you need to remember that you’ll have to account for income taxes coming out of any amount you plan to spend from tax-deferred plans such as a 401k. For example, if you are planning to take $80,000 from your 401k each year, plan to pay income taxes on this amount.

In addition to the tax savings when you contribute to a 401k, the money invested within a 401k is allowed to grow free from capital gains taxes. Capital gains taxes are levied on the growth of investments that are not in qualified plans, but your growth in a 401k avoids these taxes.

Each year, a person can contribute up to the allowable limits as designated by the IRS. The 401k contribution amount is reviewed each year. Sometimes, it is adjusted upwards for inflation. In 2018, the annual 401k contribution maximum was $18,500, but was increased to $19,000 in 2019 .

The catch with a 401k is that you typically can’t access the money without penalty until you are 59½ years, the 401k retirement age. At age 70½ a person is required to take a 401k retirement withdrawal in an amount calculated by the IRS, and that amount is called the Required Minimum Distribution.

How Much Do I Need to Save in Retirement?

Before we can talk about whether saving in a 401k alone is enough to retire from, one must assess, roughly, how much money is needed to live off of in retirement. As could be expected, this calculation is hard to do because it’s a moving target. Still, there is a general method you can use as a starting place.

To begin, determine your replacement rate . Your replacement rate is how much money you’ll need to live from, each year, in retirement. It’s called a replacement rate because it is the amount of money you will need to replace your working income. For example, you may want to live off $50,000 or $100,000 in retirement; it all depends on your wants and needs (and then add $5,000 per person which is roughly what the average retiree spends on healthcare expenses each year).

If you plan on receiving a pension or social security in retirement, then you should subtract that amount to get your overall replacement rate. To put social security in perspective, the average social security benefits replaces roughly 40% of pre-retirement earnings, but the more money you make the less of an impact social security will have.

Next, multiply the replacement rate by 25. This is how much money you should aim for in retirement. Why 25? Because it is the reverse of taking 4% from the total retirement amount. According to personal finance experts, 4% is the amount that you can withdraw from a retirement portfolio without running out of money over a 30+ year period of time. Your aim is to get to a place where you are living off the portfolio’s investment returns.

Here’s an example using a calculator and a pen. Let’s say you have $2 million saved for retirement. Using the 4% rule, you could take $80,000 from your account each year.

Next, let’s do that calculation in reverse. If you start from knowing that you want to spend $80,000 each year, then multiply that number by 25 to get $2 million.

It should be noted that the 4% rule is a great place to start but far from perfect in determining exactly how much money you need for retirement. For example, the 4% rule was based on historical returns.

This means that 4% withdrawals would not have resulted in running out of money assuming history repeated itself. Therefore, it’s always advantageous to work with a financial planner to determine your unique needs and how your plan would perform under various market circumstances.

Is Saving In A 401k Enough?

Is 401k enough for retirement? As you can see, it’s hard to say whether saving in 401k will be enough for every person in retirement, across the board. Every person is going to need a different amount in retirement, and so the number feels like a moving target.

There are three common reasons why people should consider supplementing their 401k savings with other types of accounts.

First, as discussed above there are contribution limits on 401k plans, so if you need or want to save more than the contribution limit you will need to save somewhere else. This is especially common for high income earners, workers who started saving later in life, or those trying to achieve financial independence at a younger age. Therefore, it might make sense to leverage a Traditional IRA, Roth IRA, or after-tax account to save beyond the 401k limits.

Second, many people contribute to their 401k plan by making pre-tax contributions. As discussed above, this means a tax break now but will lead to paying taxes when you take the money out.

The fact is that no one knows where tax rates will be in ten years let alone 30 years from now when you are retired. Therefore, it might make sense to leverage a individual retirement account so you have a pool of money that you can withdraw from in retirement that you would not pay taxes on.

Third, the idea of achieving financial independence at younger ages is gaining traction among younger employees. As discussed above, qualified plans have restrictions on when you can withdraw money without paying a penalty. Therefore, it might make sense to leverage an after-tax account so you have a pool of money that you can withdraw from, without having to worry about penalties if you access prior to 59.5.

So the simple answer is that saving in a 401k may be enough, but there are some very good reasons to leverage other vehicles.

What More Can I Do?

No one says that you can only save for the long-term in your 401k account. These accounts simply happen to have some tax advantages over saving and investing in a typical brokerage account.

As discussed above, there are some very common reasons to leverage a Traditional IRA, Roth IRA, of after-tax account. To get started, you should think through your goals and figure out which one of those account types make the most sense.

Next, you’ll need to decide how to invest the money. When you are saving for retirement, the typical fees that are charged by most finance companies really add up. That is why investing without fees with SoFi Invest® can be so valuable to younger investors.

You can open a Traditional IRA, Roth IRA, or after-tax account with SoFi Invest to supplement your 401k savings.

Ready to get serious about your retirement saving goals? Open a SoFi Invest account to start saving for your future.


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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Automated and advisory services offered through SoFi Wealth LLC, an SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .
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