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What to Know About Stock Market Corrections

It doesn’t matter if you’re a new or seasoned investor, when the stock market has a correction, it can be extremely stressful. Nobody likes to see their portfolio decline significantly in a single day.

Stock market corrections are normal and it’s important to be aware of why they happen and what you can do when the next one occurs. (It’s worth mentioning that the following is not financial advice, but instead is a way to broaden your knowledge about stock market corrections. Always consult with a professional before making decisions regarding your own stock investments.)

What Is a Stock Market Correction?

A stock market correction happens when the market reaches a new interim high and then falls by 10% . Some other stock market terms for market downturns include:

Dip

A dip is a temporary market downturn from a longer-term uptrend. This downturn could occur over a number of days or weeks.

Crash

A crash is a very fast and significant drop in the stock market which could occur on a single day or week. Crashes are very rare and typically happen after the market has been rising for a long period of time.

Bear Market

A bear market is a longer decline in the stock market. Once the market has gone down by 20% from its previous high this is considered to be a bear market.

These terms can also apply to individual stocks, but individual stocks can see much more volatility than the overall market.

The most severe stock market correction in history, in terms of points, happened in 2018, when the Dow declined 1,175 points in a single day. Previously the record had been a 777-point decline.

However, the 2018 4.6% drop wasn’t the biggest decline in terms of percentage. In 1987, on a day called Black Monday, the Dow dropped by 22%. That would be equivalent to 5,300 points in today’s market.

Stock Market Correction History

Since 1950, stock market corrections of 5% to 10% have typically happened three to four times every year . Although it’s nerve-wracking every time, these corrections are a normal part of the market cycle.

What Causes a Stock Market Correction?

Many different factors can cause a stock market correction. Essentially, something has to happen to motivate people to sell stocks rather than buy term. Here are a few things to look out for which may cause a market correction:

Fear

One factor is when investors have an emotional reaction to a news story which causes them to sell their stock holdings. It could be a story about the economy, a political situation, or other news.

Sometimes news is an actual indicator that the economy is heading into a recession or that the markets won’t perform well in the coming weeks or months, but sometimes people overreact to news or act based on fear. Once the news gets out that the stock market is falling, this fear typically only increases.

A Slowing Economy

A legitimate reason for investors to decide to sell their stocks is if the economy is slowing down or entering a recession. Although timing the markets isn’t usually a good investment strategy, many investors may not want to hold onto their stocks through an economic downturn cycle.

Outside Events

World events unrelated to the economy can also cause investors to sell their stocks. This could include things like a war, a terrorist attack, or an oil spill.

What Is a Circuit Breaker?

Following significant stock market declines in 1987 and 1989, the New York Stock Exchange imposed limits on trading in order to try and prevent panic selling.

The “circuit breaker” can be triggered in a few ways. All trading on the New York Stock Exchange pauses for 15 minutes if the S&P 500 goes down by 7% in a single day. When trading starts again, if the market continues to fall and reaches 13%, trading once again pauses for 15 minutes.

These circuit breakers both apply until 3:25 p.m. Eastern Time. After that time, if the market falls by 20% then all trading stops for the rest of the day.

How Long Do Stock Market Corrections Last?

Do you have a crystal ball?

When a correction occurs, you will likely see the media speculate whether it’s a crash or a correction, how long the correction will last, and perhaps, if the economy is going into a recession.

This speculation is just that. There is no way of knowing exactly how big a correction will be or how long it will last.

Focusing on your own portfolio rather than the news stories could help you feel more prepared for the next correction (which could mean having a chance to take advantage of cheaper stock prices).

A stock market correction is not typically the cause of a recession, nor is it a predictor of a coming recession. Stock market corrections can be stressful for investors and companies, but they are not necessarily signs of a poor economy.

Although there is no way of predicting how long a market correction will last, you can look to past data as some indicator of possible trends.

For example, since the 2008–09 financial crisis, the past four corrections have had an average decline of 15.3% over a time period of three and a half months.

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What to Do During a Stock Market Correction

First of all, remain calm.

Unless you exclusively own stocks in an S&P 500 index fund, your portfolio will perform differently from the overall market. When a stock market correction occurs, the percentage drop is generally referring to the performance of the S&P 500 index. This is an index of the largest U.S. companies in the stock market.

The stocks in your portfolio may fall in value more or less than the overall market. Some of your stocks may even go up in value. It’s important to remember that if your portfolio drops by a certain percentage, it will need to go up more than that percentage to recoup your losses.

The first step in knowing what to do during a stock market correction is to find out why it’s happening. Next, look into your individual portfolio and see how it’s being affected by the correction. This will help you decide whether to buy, sell, or hold on to the stocks in your portfolio.

Remember that stock market corrections are normal. If you have a long-term investing strategy, you will likely see market corrections, bear markets, and recessions during your years of investing. Try to stay calm and reconsider decisions that might be made based on fear or panic. It may not help to obsess over the value of your portfolio on any particular day.

Generally, if you don’t need access to the funds in the near term, the rule of thumb is to stay invested. If, for example, someone sells off their stocks during a panic, they could see them go back up in value again in a few days or weeks. If anything, depending on your strategy and goals, you may want to consider buying stocks during a market correction, because prices will have lowered.

The people who held on to their investments through the recent financial crisis not only recovered their losses, they saw significant growth to their portfolios within just a few years. The average annual return of the S&P 500 has been 8.6% each year from 2008 to 2017.

So you could consider whether you have available funds you’d like to invest during a downturn, and decide if you want to purchase more shares of stocks you already own or if you want to find new stocks to buy. Diversifying the stocks in your portfolio may help you weather the storm of a market correction.

If you do choose to purchase stocks during a market correction, be aware that their value may continue to decline before it recovers again.

Also remember that the market has bounced back from some severe corrections and crashes over the years. Corrections happen every year and can be healthy for the market. If the market doesn’t correct, stocks can become overvalued, but if it goes through minor corrections it can continue to grow sustainably.

Preparing for a Market Correction

With the proper planning and goal setting, it’s possible to build a portfolio which will grow over time and not be completely wiped out by market crashes. Here are a few principles to keep in mind when building a portfolio:

Having a Plan

Blindly buying stocks and then getting upset when they fall in value isn’t ideal. Know what your goals are and plan for them. Even when the market corrects, you can still reach your goals for the year if you plan properly. If you’re investing money to use in just a few months versus for your retirement, your strategy may look very different.

Diversifying

One way to protect yourself from significant market crashes is to spread out investments over different types of assets. This is called diversifying your portfolio, and this tactic may help lower your risk of losses while still exposing yourself to potential gains. You can diversify into many different types of investments, including bonds, real estate, commodities, and simply by holding cash.

One potential way to maintain a diversified portfolio is to rebalance your holdings when the market is at a high. Since certain stocks may have grown significantly more than others, you might choose to take some of that money and put it into other assets.

By moving some money from a stock into bonds or other potentially safer assets, you might be able to mitigate some of the risk of a crash.

Another way you can help protect your portfolio is via options. Options give you the right to buy or sell a security at a fixed price on a future date. This can give you some insurance on a valuable asset should the market rise or fall in the near future.

Considering Taking Profits

Investors can be afraid to cash out of a particular stock because it may continue to rise in value. If you own a stock which has gone up significantly, you may want to cash out some of the investment and diversify it into other investments.

Or you can keep some of your money in cash and wait until you see an opportunity to buy during a dip.

Knowing Your Risk Tolerance

If you are growing your portfolio for long-term use, you can likely handle a few ups and downs in the market cycle. However, if it causes you too much stress to see your portfolio go down in value a lot in one day, perhaps it’s better not having so much invested in stocks.

You could instead look into investing in other assets, such as bonds, which are less volatile. You could also keep some of your portfolio in cash.
Knowing what your investment goals are and planning your portfolio accordingly are key. If you plan to take your money out in just a few months or years, you may not want to risk losing it to a market correction.

Don’t Get Greedy

It can be hard to stand on the sidelines when the market is significantly increasing in value, but make sure to think through all of your choices before you invest.

Currently, the U.S. market is in a long bull run, as it’s been nearly a decade since the last recession. Although it isn’t wise to try and time the market, it’s common knowledge that stocks are hitting record highs and also that we may head into a recession some time in the next few years.

You may still choose to invest money into the market now, but you may not want to do so unless you talk through your plans with a financial advisor. This is always a great idea—licensed financial advisors have the experience and credentialed to offer guidance for your unique needs and wants.

Don’t Attempt to Time the Market

On the same note, selling off your investments because you think the market is going south may not be a great strategy. The stocks you’re holding may continue to go up in value, and even if they do crash, trying to time your reentry can be just as challenging as timing your exit.

Knowing exactly when to buy stocks is extremely complicated and very risky. Building your portfolio over time, rebalancing it, and holding on to it for the long run are hallmarks of a solid investment strategy.

Thinking Long Term

Day trading and short-term investing are risky. If you build a diversified portfolio which you plan to keep invested for a long time before using it, it may be able to withstand cycles in the market and still continue to grow.

Don’t Go It Alone

As you build your portfolio and mentally prepare for the next stock market correction, remember that you are not alone. Market crashes are stressful for everyone, and there are tools and specialists to help you navigate them.

Working with an investment advisor may help you stay calm throughout economic cycles. Planning your portfolio for diversification and long-term growth may also help you ride the waves of the market.

You can build a portfolio using comprehensive tools right from your phone.

If you use the SoFi Invest® platform you can get all the latest market news and information about each stock or ETF you may want to invest in. SoFi also offers complementary financial advisors to members, so you’ll have a professional to talk to through market corrections.

If you use SoFi active investing, you can hand-pick each stock that you add to your portfolio. Or, if you prefer a more hands-off approach, you can check out SoFi automated investing.

With the automated platform, you invest in preselected groups of stocks according to your goals and risk tolerance. For either option you’ll pay zero in SoFi fees and you only need a small amount of money to get started.

Plan ahead and start building a portfolio with SoFi Invest®.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: 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.
SoFi Invest®
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. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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9 Investing Strategies To Know

You don’t need to know a lot about investing to be an investor.

You can hire someone to do the work for you, and let a professional make a plan, choose the products, and sweat the small stuff for you.

You can …

… But you may find that you’re still sweating the big stuff. Literally sweating when you look at your statement every month and wonder if you’re getting the maximum return possible based on your age, risk tolerance, and goals.

A Strategy Sampler

It’s natural to be nervous about your nest egg. But a little knowledge about the methods that go into building and maintaining a successful portfolio could help reduce the worry and make you feel better about what’s going on with your accounts.

Here are a few strategies you might want to look into as your investing career evolves:

1. Investing in What You Know or Want to Know More About

Having some knowledge about, or an interest in, a certain industry, sector, or type of investment can offer a few advantages when looking at assets to build a portfolio.

•   It could help in deciding if a product or company has the potential for long-term growth or if it’s a short-lived trend.

•   It can help with understanding how a company makes money and how—or if— that money is used in a way that benefits stakeholders.

•   It can offer some insight into a company’s products, strengths and weaknesses, and overall reputation.

•   And it could help keep you more engaged with the investment as time passes.

If, for example, you’re into technology, and every new digital gadget grabs your attention, you may want to look at investment opportunities in that sector.

Do you feel you’ve found something that could have a meaningful impact on businesses and consumers and/or has long-term potential? It might be worth researching or talking to your advisor about investment possibilities.

2. Diversifying Across Different Industries and Asset Classes

Even if you’re new to investing, you’ve likely already been told many times to avoid “putting all your eggs in one basket.” When building a portfolio, that means spreading your money across different asset classes (cash and cash equivalents, stocks, bonds, commodities, real estate) and different industries or sectors (health care, tech, utilities, consumer goods, financial, etc.) to limit risk.

The idea is that if one investment goes down, the whole portfolio won’t be sunk. Portfolio diversification also offers the potential to catch the next hot stock or hot sector without taking unnecessary risks.

Buying a mutual fund or exchange-traded fund (ETF) can help an investor achieve diversification faster and with less expense than purchasing individual securities, but fund investors still have to be careful about concentration. Buying ten technology ETFs doesn’t necessarily mean you’re well-diversified.

Owning two (or more) different funds doesn’t necessarily equal diversification. If the funds own the same stocks—perhaps because they follow the same index—you might not be getting any more diversification than you would by investing in just one fund.

3. Giving Cash Some Credit

Compared to most other investments, cash doesn’t register much excitement.

It’s generally safe. It’s usually easy to access. And, yes, most financial advisors will tell you, it’s a good idea to have a decent amount of cash set aside in an emergency fund in case an unexpected expense comes up.

But even though interest rates have been on the rise—making the returns from online deposit accounts and CDs more appealing to savers—compared to stocks or mutual funds, the money to be made on cash and cash equivalents can seem pretty meager. Some wouldn’t call cash an “investment” at all.

But investors can still find it useful, because keeping some cash available at all times can allow them to take advantage of opportunities in the market. Investors can use it to hunt for deals during a bear market or correction, with the goal of purchasing high-quality investments at bargain prices.

That means flexibility and liquidity are key—so short-term investments and accounts that can be easily accessed tend to be more appropriate for the cash sidelined for this purpose than long-term CDs or annuities.

4. Taking a Contrary Approach to Typical Investor Emotions

You may have heard the old Warren Buffett quote about the best way to react to the stock market’s unpredictable movements: “Be fearful when others are greedy,” the Oracle of Omaha says, “and greedy when others are fearful.”

In other words, buy low sell high.

But that’s easier said than done. Fear, greed, excitement, and disappointment can override logic when making investment decisions.

According to research from Dalbar Inc., which has been tracking investor behavior since 1994 with its Quantitative Analysis of Investor Behavior (QAIB), the average market investor consistently earns below-average returns—and that’s in large part because of bad decisions driven by emotions.

When the markets are doing well, everybody wants in—even if it means buying high. When the markets get shaky, investors tend to jump out—and that means selling low.

Those who understand market cycles and take a contrary approach—buying when stocks are “on sale,” and selling when others in the market are buying high—may find they benefit. But they have to be ready to push down their emotions and stick to a disciplined plan.

5. Growth Stock Investing

There’s no telling which stocks will be the next big winners, but investors sure like to try to figure it out. Buying shares of a growth company early in its drive to greatness is the holy grail of stock picking.

The goal of this stock investment strategy is to hang on as revenue and earnings rise sharply, and then reap big returns as other investors catch on and jump aboard.

Growth investors look for stocks that are likely to produce market-beating returns by making educated choices based on information, not speculation. (See No. 1: Investing In What You Know.)

That means looking at a company’s historical earnings growth, but also its future growth potential. It also can help to research the company’s core values: What’s its reputation for innovation, how strong is its management, can it sustain its current momentum, what’s in the future for its industry, and what’s the stock’s short- and long-term potential?

People often think of growth stocks as being limited to small companies or companies in the tech sector. But these investments can come from any sector, and they can be small-, mid-, or large-cap stocks.

Growth stocks aren’t necessarily a fit for income investors, as they typically don’t pay dividends. Volatility is another factor to consider—higher potential upside comes with higher risk of downside. But the earnings growth rate can be dramatic, and growth stocks can be a worthy addition to a long-term portfolio if they fit within your strategy.

6. Value Investing

Value investors look for stocks they think the market has undervalued for some reason. Perhaps a scandal has temporarily damaged a company or industry’s reputation, or a company cut its dividend and the market overreacted to the news. Or it could be that no one is paying attention and other investors are missing out on a good thing.

Whatever the reason, value investors look for opportunities to buy stocks at what they believe is a discounted price.

One way to screen for value stocks is to look for a low price-to-earnings ratio (P/E ratio), which tells you how much you’re paying for each dollar of earnings. (Just remember: Past earnings don’t guarantee future results.) Some other metrics to consider might be price-to-book, debt-to-equity, and price-to-earnings-to-growth.

7. Playing Defense With Stop-Loss Orders

One way to help mitigate market risk in a portfolio is to set up a stop-loss order that will automatically sell all or part of a position in a stock or ETF if it falls below a predetermined price limit.

A stop-loss order strategy can be especially useful for new or nervous investors, because it can be an easy way to get some control over an investment without selling out too soon. When the preset level is reached—for example, you’ve asked your broker to sell if a stock drops to $150—the stop will become a market order and any shares held will be liquidated.

Stop-loss orders are considered a short-term trading strategy. They can be effective for investors who have concerns about a painful loss but can’t or don’t want to constantly monitor their holdings.

But they aren’t necessarily a fit for buy-and-hold investors who are thinking long-term. (Just because a stock drops in price doesn’t mean it won’t recover or that it should be sold.) The goal is to set the price low enough that the investment won’t be affected by a market blip, but high enough that in case of much larger drop, the stock is dumped before too much pain is inflicted.

8. Rebalancing on a Regular Basis

Rebalancing is a strategy that can help investors keep their investments in line with their target allocations as the markets move up and down.

For example, if a person wanted to have a moderate 60% stock allocation, and stock prices went up (yay!) over a period of months, that investor might end up with 70% or more in stocks instead. That might be a good time to sell some stocks to get back to the original allocation.

Portfolios can be rebalanced at regular intervals (e.g., quarterly, monthly, annually) or at set allocation points (when the assets change a certain amount). A popular rule of thumb is to rebalance when an asset allocation changes more than 5%.

Robo-advisors may offer an automatic rebalancing feature, or you may choose to make the changes on your own, when you see a need.

9. Starting Early and Staying Consistent

This is as basic as it gets: The longer money is invested, the more potential it has to grow. Investors who start saving early and stick to a plan are the most likely to see their nest egg thrive.

Saving any money at all can seem improbable when times are tight—when you want to buy a car, go to college, own a home, and—you know—just pay your bills every month.

But if you can commit to making investing a part of your monthly budget—whether it’s a 401(k) contribution that automatically comes out of your paycheck or an investment account you set up online through SoFi Invest®—your future self will thank you. Making investing routine can remove the temptation to spend the money elsewhere.

And those investments can be expected to compound over time; investors earn interest on the money they deposit and the interest that money accrues.

Someday, that money could provide retirement income, pay for vacations, and help take care of loved ones.

Picture Yourself at a Supermarket

Today’s investors have an overwhelming array of available products to choose from. It’s more than just the stock market—it’s a supermarket, and you can find just about anything you want there.

That’s not a bad thing. Investors can move down the virtual aisles and discover what works for them. Stocks, bonds, all kinds of funds, real estate, commodities—if they don’t like something, they can move on.

But if you’ve ever gone to the grocery store hungry and without a list, you know what can happen.

You can end up getting too little. Or too much. You might find some new things you end up liking—or decide your impulse buys were a total waste of money.

It’s the same with investment vehicles and types of investment strategies. It can’t hurt to do a little sampling, but it can help to have some understanding of what you want and how your choices will blend together into an overall portfolio plan. That just might be the best investment strategy of all.

Investing doesn’t have to be scary or overwhelming if you research your options carefully and start with an investment account that gives you as much control as you feel comfortable with.

With SoFi Invest, for example, you can trade stocks and ETFs yourself with active investing or let SoFi’s advisors build a portfolio for your long-term goals with automated investing. (SoFi members get one-on-one access to financial advisors at no cost.)

SoFi Invest is built to grow with you and your goals—no matter what your skill level is when you start. You won’t pay any transaction or management fees, which can eat up your hard-earned investment savings. And you don’t need a ton of money to get started–you can open an account with just $1.

Ready to develop your own investing plan? With SoFi Invest, you can be as hands-on or hands-off as you like.


External Websites: 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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
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. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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What is Active Investing?

Maybe you’re interested in learning more about the stock market. Perhaps you’re the kind of person who is willing to take a chance if it means a shot at beating the odds.

Or maybe you trust yourself or a professional to have the smarts to predict which stocks are likely to do well. If any of these are the case, you may be interested in giving active investing a try.

Active investing can sound scary, but it doesn’t have to be intimidating. The active investment strategy definition is pretty straightforward: The term refers to trading individual stocks or bonds in an attempt to beat the ‘market’.

You could be the one making these choices, or you could invest in mutual funds where managers actively make those decisions.

The alternative is passive investing, where you put your money in a group of stocks, such as an index fund or exchange-traded fund (ETF), and mostly sit back.

Active investing has grown less popular in recent decades, as passive investing has been on the rise. Since the first index fund—the S&P 500—launched in 1977, hundreds have followed.

In 2007, passive funds accounted for 20% of equity assets under management. In the decade since, that share has doubled, according to data from Morningstar.

While active investing has become less widespread, it’s still worth exploring. Here’s a guide the pros and cons of adopting an active investment strategy:

The Advantages of Active Investing

Active investing has its perks. If you are in the driver’s seat when it comes to buying and selling stock, it’s one way to build your investing chops. Rather than setting and forgetting, you can research individual companies, sectors, and geographies and put that knowledge to work by placing your bets.

It can be both fascinating and rewarding to invest in specific companies you know and believe in, especially if they align with your interests or social values. It can also be exciting to put your skills to the test and see if they get rewarded. Being in control can give you a thrill that some compare to gambling.

Another pro of active investing is the possibility of potentially outperforming the market. If you are passively investing in funds that mirror the market as a whole, such as the S&P 500, you can only do as well as the market performs.

And if there’s a major downturn, you are likely to see your losses reflect that directly as well. If you or a fund manager put your expertise to use and happen to pick stocks that do very well, there is a chance you can earn higher returns than you would otherwise.

It should be noted, though, that most active investors, including active mutual funds, have historically had a difficult time of beating the market, especially after factoring in fees and taxes paid.

Active investing also allows you to put in place a strategy that’s tailored to your preferences, goals, and risk tolerance.

Whether you’re willing to be speculative because you’re young, prefer to support companies that align with your values, or want a mix of stocks that you personally think are the most likely to do well, active investing allows you to build a completely customized portfolio.

Cons of the Active Approach

While active investing has its upside, it also comes with risks and disadvantages. Importantly, although an active strategy has the possibility of beating passive funds when it comes to returns, the likelihood of that happening is very low.

Between 2002 and 2017, actively managed funds produced returns that lagged behind 92% to 95% of index funds, depending on the type of fund, according to Standard & Poor’s.

That meant that the odds of an actively managed fund outperforming an index fund were about one in 20. And that’s when professional fund managers are the ones picking stocks!

The reality is that no one can precisely predict the direction of the market or an individual stock’s performance in the short term. The confusion has only amplified as the volume and speed of trading has increased dramatically.

Active investing can be challenging, and there is a real risk that you will earn lower returns than you would with the passive approach.

Another downside of active investing is that it takes time. Having a chance at success as an active investor means doing a lot of research on companies and market conditions, keeping tabs on news that could affect performance, and making decisions about whether to buy or sell.

The amount of information out there and the speed with which it’s transmitted is only growing. You probably have many other competing priorities. Unless investing is a passion of yours, the active approach may not be worth the time needed in order to reach the same or better results.

Another drawback of active investing is that it can encourage you to focus on the short term rather than the long term. Whereas passive investors typically look at the long-term potential of their holdings, many active investment strategies are focused on near-term gains, whether that be a matter of months or even minutes.

If you get lucky, that short-term focus has the potential to lead to quick profits. But more often, it also creates more opportunity for losses.

A short-term focus also usually means buying and selling stock more often. Trading frequently often comes with added costs, from the fees that you pay to trade to the adverse tax impacts, such as capital gains taxes.

If you’re saving for goals that are years away, such as retirement, or just prefer less risk and lower fees, you may want to think twice before adopting an active approach.

How to Get Started with Active Investing

If you want to pick your own stocks, it may be wise to prepare for a learning process. At a basic level, that could mean putting together a portfolio of 12 to 20 individual stocks.
That’s low enough that tracking the companies regularly is plausible but also allows for some diversification within the portfolio. Sometimes, it can be worth choosing to investing in companies that you have a solid understanding of, including how they make money and the risks they face.

Another way to add some diversification is to divide the investments in a portfolio across different industries and sectors, rather than sticking to a narrow mix.

If you are starting out on a limited budget and can’t purchase that many individual stocks, you might want to try buying fewer while balancing them with mutual or exchange-traded funds that have more diversified return streams.

When you’re going with a professional manager, it’s a good idea to vet him or her. Take a look at how long he or she has led the fund and review the fund’s performance over at least five years. That can help you evaluate returns in different market cycles.

Also consider the costs: Funds with lower expense ratios have a better chance of beating indices because a smaller share of the returns are getting eaten up. Looking for a fund that is tax-efficient can also be a good idea.

Some people suggest identifying managers who themselves invest in the fund, which ties their self-interest with those of investors.

Remember that deciding between active and passive investing doesn’t have to be an all-or-nothing deal. You could opt to invest some of your holdings in passive funds or with an automated investment tool, while setting aside another portion to invest more actively.

Investing with SoFi

If you’d like to dip your toes into active investing, opening an account with SoFi Invest® can be a good way to get started. There are no account minimums, meaning you can learn and grow as an investor without putting a lot on the line.

The platform makes it easy to track performance and stay up to date with the latest news.

And you’ll be able to buy and sell stock without paying any fees or commissions to SoFi. You can choose to invest in companies that you know and believe in or find new possibilities curated based on your interests.

Since active investing isn’t for everyone, you can also take the automated investing approach by having SoFi create and manage your portfolio, without paying a management fee. SoFi can help you identify your goals.

With a SoFi Invest account, your portfolio will be automatically adjust on a quarterly basis to make sure it’s on track with your goals and risk tolerance.

Whether you’re taking the active approach or sitting back, investing with SoFi also gets you member benefits, such as access to exclusive events, discounts on other financial products, and complimentary time with licensed financial advisors. You can set up an account online in just two minutes. Whether you want to take the reins or go the automated route, it’s easy to put your money to work with SoFi Invest.

Learn more about how SoFi Invest can help you reach your financial goals.


External Websites: 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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
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. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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Ways to Make Financial Freedom a Reality

Ever dream of walking out of your job, free to pursue a project you’ve always dreamed of starting? Or going back to school without taking out student loans? Or having the financial freedom to leave an unhealthy relationship or location?

What about the option to retire at age 45 or 50 instead of at age 65 (or 80)? And upon retiring, dedicating your life to humanitarian work, raising your family, or tucking yourself away in your mountain cabin with hundreds of books?

Each of these opportunities could be afforded with financial freedom. Just as it sounds, financial freedom is typically defined as having the resources to do exactly as you please.

(It’s important to mention that not only does everyone’s definition of financial freedom differ, but that the time it takes to achieve it, and ways you may go about achieving it, will be unique to you.

The following are just some tips to achieving your goals, are in no way exhaustive, and may not work for you. You should always consult a licensed financial advisor.)

What is Financial Freedom?

While everyone’s financial freedom definition will be slightly different, it’s generally understood as being in the financial position to step away from traditional work. This is usually done by creating income streams from investments or a business.

Essentially, the notion of financial freedom implies that the person has the financial independence to live for the entirety of their life without traditional income.

Currently, there is a movement that is gaining in popularity called FIRE, which stands for “financial independence, retire early.” Self-proclaimed members of the FIRE movement often dedicate a great deal of energy to creating the terms of their financial freedom.

Whether or not you associate with the FIRE movement, the idea of financial freedom is useful for anyone who is curious in ditching the 9-5, who wants to stop living paycheck-to-paycheck, or who wants to step up their money game.

Even those who simply want a traditional retirement will probably want to become familiar with the concepts of financial freedom, as most people will be investing for their retirements themselves.

Financial freedom is generally achieved through amassing income-producing assets or creating income streams to cover your cost of living expenses. Another word for this is “passive income,” or income that is generated without you having to exchange your time for that dollar. The goal is to stop trading your time for money.

While it is feasible to save enough money simply to live off that cash into perpetuity, this means saving an incredible amount of money—and not running out. While you can aim for this, you may feel more comfortable building out one or more income streams, especially as you take into consideration the erosive powers of inflation.

Achieving Financial Freedom

Achieving financial freedom will not happen overnight. It is certainly possible and it is within your capability, but it requires putting together a financial freedom plan.

A good first step is to determine how much money you’ll likely need to cover your costs once you achieve financial independence.

Once you determine what you need, which in and of itself can feel like a moving target, you can think about ways to create new streams of income or how you might rearrange your financial life to make it possible.

Next, you could consider exploring ways to create those income streams. There are many ways to do it, and no one way is right for everyone, but here are some popular methods for your consideration:

Investing in the Stock Market

Whether you own individual stocks or stock funds (mutual funds or exchange-traded funds), the stock market can be used to generate passive income. It helps to understand that a stock can make money in two ways.

First, through price appreciation, which is a stock growing in value over time. Second is through dividend payments, which are cash payments made by some (but not all) stocks and funds.

Both trimming gains—various means of alleviating capital gains taxes, such as using the “year and a day rule” or selling some other assets to generate a loss—off the top of securities (such as stocks and bonds) that have grown in value and collecting dividend payouts are methods for creating income from securities such as stock market investments.

As with many of the methods of creating passive income sources discussed below, investing in the stock market can be unpredictable. Though stocks have experienced a high historical rate of return, stock market returns are notoriously volatile, so you may want to gain some comfort before diving in headfirst as a strategy for financial freedom—whether through your own research or by consulting a licensed financial advisor.

Other Investment Securities

In addition to the stock market, there are investments such as bonds and REITs that can be used to create income and potentially diversify away from the stock market.

Bonds are fixed investments in the debt of a corporation or government, whether federal or local. You are essentially loaning them your money, and they pay you a stated rate of return, called interest, to use that money.

How much you earn in a bond will likely depend on interest rates in the prevailing economy.

A REIT, or Real Estate Investment Trust, is a way to invest in real estate within your portfolios without having to actually own the real estate itself.

REITs are investment companies that manage rental properties like malls, office buildings, and apartment complexes. They pay out dividends when profits are earned.

Investment Properties

Investing in rental real estate—such as single-family homes and multi-family units—is another way to create a stream of income. Generally, the goal with rental property investing is to collect rent payments that create cash flow beyond what is needed to cover all of the costs of owning a home, like a mortgage and property taxes.

This method of generating passive income generally relies on leveraging your financial position—taking on debt in order to generate a profit on borrowed money.

In this way, rental properties can be a risky endeavor and require plenty of research into the process, best practices, and into finding the right properties.

Passive Business Income

Though passive income has become a catchall for all sorts of different income streams, it can also be used specifically to describe income that is generated from a business venture that you’ve created on your own. Generally, the more passive the income stream the better—otherwise, it’s just another job.

Many of these passive income streams have been created thanks to the far reach of the internet, which has unlocked the possibility of tapping into all sorts of different markets. Passive income can be created by selling physical products, downloads, online courses, and so on.

When creating passive business income, there is generally a start-up period that requires work to establish the business, create the processes, and deploy capital.

Because there is always some risk involved in establishing a new business—mistakes will be made, that’s how we learn—folks may find it helpful to do this step while they are earning a steady income through traditional employment.

What’s Holding You Back from Financial Freedom?

As with achieving any money-related goal, you may experience some setbacks on the route to financial freedom. Here are some pitfalls to avoid (or at least, to minimize as best you can) as you pursue financial independence.

Mental Barriers

If you can’t envision yourself untethered from traditional employment, you certainly aren’t alone. This is not something that we are taught in schools or even by our parents.

One of the first steps in your journey towards financial freedom may be to explore your beliefs about money and work. This may mean digging deep and learning about your relationship with concepts like worth, scarcity, and abundance.

Debt

A bunch of debt can make it very hard to become financially free. Debt not only reduces your overall net worth by the amount you’ve got in loans or lines of credit outstanding but also increases your monthly expenses.

To reduce debt, you may want to focus on expediting your payment of high-interest sources like credit cards and student loans. To make the process move faster, you can try to get a lower interest rate on your debts.

It’s worth noting that, typically, a lower interest rate may mean that your loan term will be extended. With student loans or a home loan, you could look into options like refinancing. For instance, with credit card debt, it may be possible to lower your interest rate by calling your credit card company.

Additionally, you’ll likely want to take on any new debt strategically. Debt can certainly be a useful tool for a future goal of building wealth, like using loans to finance an education in order to get a higher paying job or as an outlay on a business. But debt can also be misused, so be careful not to take out more debt than you absolutely need.

Income

You can clip coupons all you want, but if you’re not earning enough to cover your bills, you aren’t going to be able to save enough to retire early and pursue your passions. For many people, figuring out how to earn more money in order to increase savings will be a crucial step in the journey towards financial freedom.

There are many ways to increase your income. First, you might want to think about ways to get paid more for the job that you’re already doing.

Many ask for a raise or more responsibility at work, or have a conversation with managers about establishing a path towards a higher salary. Second, you could consider picking up a “side hustle” or another way to earn money outside of work.

Third, you could consider establishing a passive income stream via your own business, as discussed above. This may require more work upfront but could be beneficial as you’re ultimately trying to create income streams independent from your traditional employment, anyway. It may also be a useful tool to get in the mindset of separating the idea of creating income from that of having a traditional 9-5 job.

Budgeting

It can feel hard to get in the groove of budgeting. In fact, there are people at every level of income that struggle to keep a budget on track and end up living paycheck to paycheck. But spending less—and potentially a lot less—than you earn is essential to achieving financial freedom. For most, budgeting is an absolute necessity.

Start by simply tracking your cash flow. How much is coming in versus how much is going out? You can’t set a budget that you can reasonably expect to stick to if you don’t even know how much you’re spending in each category.

Budgeting may take some trial and error as well as experimenting to find what works for you. If what you’re doing right now isn’t working, it may be time to try something different.

You could look into doing pen and paper tracking, the cash envelope method, or using finally getting used to tracking expenses in a spreadsheet.

Working With SoFi Invest

Do you need help creating a plan to achieve financial freedom? SoFi Invest® gives you access to complimentary financial planners. You can speak one-on-one with a financial planner to set your financial goals and create a plan of action to help achieve those goals.

Whether you’re saving for retirement, a down payment, or just investing for later, SoFi can help you make a plan to tackle multiple goals.

Get started with SoFi Invest and make moves towards financial freedom.


External Websites: 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.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
SoFi Invest®
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. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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IRA Rollover Rules

Say you’re leaving your job. There are numerous things you must attend to before you clock out for the last time: clean out your desk, train your replacement, have an exit interview, attend your going-away pizza party.

One task that may not be top of mind, but is important, is figuring out what to do with the retirement account you have set up through the company you’re leaving. Once you separate from your employer you will have a few options to choose from when deciding what to do with your retirement savings and we want to make sure you’re well informed to make the best decision.

If you’re simply moving from a company with a 401(k) to another company with a 401(k), you may choose to complete a 401(k) rollover from the old account to your new one.

What if your new company doesn’t offer the same type of retirement account as your old one? Perhaps you’ve had a 401(k) for the past 10 years, but your new company provides a SEP IRA or SIMPLE IRA. How do you move your assets from your old retirement account to this new IRA?

Maybe your new employer doesn’t have a retirement account option at all. Or you could be leaving one job before having another one lined up. In these cases, you may want to open your ira investment account.

What’s an IRA Rollover?

An IRA rollover is the movement of funds from a qualified plan, like a 401(k) or 403(b), to an IRA. This scenario could come up when changing jobs or when switching accounts for reasons such as wanting lower fees and more investment options.

The concept of an IRA rollover is simple enough, but there are several factors that people should be aware of regarding what an IRA rollover is and how it works.

People generally roll their funds over so that their retirement money doesn’t lose its tax-deferred status. But, let’s say you leave your job and want to withdraw the money from your 401(k) so you can use it to pay some bills. In this case, you’d be taxed on the money and possibly receive a penalty for withdrawing funds before age 59 ½.

However, if you roll your money over instead of withdrawing it, you don’t have to pay taxes or fees for an early withdrawal. Plus, you can keep saving for retirement and accruing compound interest on that money.

When you roll funds over to a new IRA, you should follow several IRA rollover rules that can help ensure you do everything legally, don’t have to pay taxes, and don’t pay fines for any mistakes.

8 IRA Rollover Rules to Know

Rule 1: Decide What Type of Rollover You Want

You can choose between two types of rollovers and it’s crucial to know the differences between each.

First, you may choose a direct rollover, which is the moving of funds directly from a qualified retirement plan to your IRA, without your ever touching the money. Your original company may move these funds electronically or by sending a check to your IRA provider. With a direct rollover you don’t have to pay taxes or early distribution penalties since your funds move directly from one tax-sheltered account to another.

The second option is an indirect rollover. In this case, you withdraw money from your original retirement account by requesting a check made out to your name, then deposit it into your new IRA later.

Some people choose an indirect rollover because they need the money to accomplish short-term plans, or they haven’t decided what they want to do with the money upon leaving their job. Other times, it’s because they simply don’t know their options.

Many people prefer a direct rollover to an indirect rollover, because the process is simpler. With a direct rollover, you aren’t taxed on the money. With an indirect rollover, you are taxed, and if you’re under 59 ½ years old, you have to pay a 10% withdrawal fee, unless you follow specific IRA rollover rules. You should consult with a tax professional to understand the implications of an indirect rollover prior to making this election.

Keep in mind that a transfer is different from a rollover: A transfer is the movement of money between the same types of accounts, while a rollover is the movement of money from a qualified plan into a new plan or individual retirement account one type of retirement account to a different kind of retirement account, as would be the case when moving funds from a 403(b) to a traditional IRA.

Rule 2: Complete an Indirect Rollover Within 60 Days

If you do choose an indirect IRA rollover, your employer must withhold rollover 10–20% in taxes. If you later decide to deposit the funds into an IRA within the 60 day window, IRS rules require you to make up the taxes withheld with outside funds. Otherwise, you will be taxed on the withholding as income.

If you deposit the full amount…the amount you received plus the withheld taxes, you will report a tax credit of the withheld amount. The withholding will not be returned to you, but rather settled up when you file that years taxes.Keep in mind that this is a 60-day rule, not a two-month rule, so be sure to do the math correctly.

Rule 3: Don’t Forget the Same-Property Rule

When you withdraw assets from your retirement account for an indirect rollover, it’s beneficial to deposit those exact same assets into your IRA.

For example, if you take out $10,000, then $10,000 must go into your IRA, even if some of the original withdrawal was withheld for taxes. If you withdraw stocks, those same stocks must go into the new IRA, even if their value has changed.

This means that when you withdraw money, you can’t use the cash to invest, then put the money you earn from those investments into the IRA. That money would be considered regular income, so you’d be taxed on it.

If you break this rule, not only will you have to pay taxes, but you may also be required to pay a penalty.

Rule 4: You Can Only Do a Rollover Once per Year

If you’re rolling funds over from an IRA, you can only complete a rollover once every 12 months . There are many exceptions, such as trustee-to-trustee transfers, rollovers from a 401(k) plan to an IRA—and vice versa—and rollovers from a traditional IRA to a Roth IRA, which are commonly referred to as conversions.

Remember that the one-rollover-per-year rule refers to once every 12 months, not once every calendar year.

Rule 5: You Should Only Roll Assets Over From Same-Kind Accounts

Unfortunately, you don’t always have the ability to transfer funds directly from one type of retirement account to another. You can roll over from certain types to others, but not every kind of account is compatible with every other account. For example: You can roll funds from a Roth 401(k) into a Roth IRA, but not into a traditional IRA; and you can roll funds from a traditional IRA into a SIMPLE IRA, but only after two years.

These rules can be tricky to keep up with, so the IRS has put together a chart to make it easier. Most importantly, you want to transfer funds from one account to another with the same type of tax treatment, like a pre-tax 401(k) balance to a traditional IRA or a ROTH 401(k) balance to a Roth IRA.

When in doubt, consult the government’s official chart, and always discuss your plans with a tax advisor to confirm you’re making the right moves.

Rule 6: You Don’t Have to Transfer Everything

No, you are not required to roll your full balance over to your new IRA.

Granted, if you’re leaving a job and moving money from your retirement account with that company to an IRA, you may not want to leave any money behind.

But if you’re moving money from one IRA to another, it might be helpful to know that you can leave some assets in the original account if you want to.

Rule 7: You Can Roll Over Inherited Funds From Your Spouse

Rules for inherited funds differ depending on whether you’re inheriting assets from your spouse or from someone else, and sometimes they vary depending on what type of account you’re inheriting.

If you’re inheriting an account from your spouse, you can usually roll the money from their retirement account over to your own.

On the other hand, you may choose to assume the inherited IRA as your own—or you might name yourself the beneficiary and just leave all funds in their original accounts.

If you’ve inherited an account from someone other than your spouse, things are a bit more complicated. Unfortunately, you cannot treat the inherited account as your own, so rollovers aren’t an option. Some people may prefer to set up a separate inherited IRA or cash out the account and pay taxes on the money.

Rolling money over from an inherited account is complicated, so you may want to research and talk to a professional before taking action.

Rule 8: Keep the Aggregation Rule in Mind

The aggregation rule states that all your IRAs must be aggregated, or lumped together, when determining how much you owe in taxes.

This rule mainly affects people who are trying to make a backdoor Roth contribution , which is a funding process high-income earners may leverage to fund Roth IRAs. They use this method because although people aren’t allowed to contribute to a Roth IRA once they hit a certain income, there’s no income limit for people to convert a traditional IRA to a Roth IRA.

The aggregate rule makes pursuing backdoor Roth contributions trickier, because you could end up paying much more in taxes than you expected. If you want to make a backdoor Roth contribution , be sure to scrutinize all the rules, especially the aggregation rule, and speak to a tax advisor so that you don’t wind up with a larger tax bill than expected.

How to Do an IRA Rollover

Now that you know the IRA rollover rules, actually completing a rollover should be relatively easy.

First, decide which type of IRA you want to set up. If your employer provides you with an IRA, it will be a SEP or SIMPLE IRA, but if you set one up yourself, you’ll choose between a Roth and traditional IRA. There are pros and cons to each, but be sure to double-check that you can roll funds over from your original retirement account to whichever new type of account you select.

If you want to do a direct rollover, your employer can move your assets by making out a check to your IRA provider or by sending the money electronically. If you want to complete an indirect rollover, request to have the check made out to you.

If you don’t already have an IRA provider, choose the one you want to use to open your new IRA. It’s often a good idea to speak with your IRA provider if you have any questions along the way, whether you’re wondering about rollovers, transfers, or investments.

Consider SoFi as your IRA provider. SoFi offers both traditional and Roth IRAs, and you have many investment options—and zero transaction fees. With SoFi Invest®, you make the choice as to how active you want to be in the investing process. And with SoFi you always have a credentialed financial planner there to help.

Schedule a complimentary appointment with a SoFi Financial Planner.


External Websites: 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.
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.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
SoFi Invest®
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. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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