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2021-2022 Capital Gains Tax Guide: Short and Long-Term

What Is Capital Gains Tax?

Capital gains taxes are the taxes you pay on any profits you make from selling investments, like stocks, bonds, properties, cars, or businesses. The tax isn’t applied for owning these assets — it only hits when you profit from selling them.

It’s important for beginner investors to understand that a number of factors can affect their capital gains tax rate: how long they hold onto an investment, which asset they’re selling, the amount of their annual income, as well as their marital status.

Here’s a guide on how to calculate stock profits, and below are some basic facts about capital gains taxes.

Capital Gains Tax Rates Today

Whether you hold onto an investment for at least a year can make a big difference in how much you pay in taxes.

When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.

💡 hRecommended: Short-Term vs Long-Term Investments

Short-Term Capital Gains Tax Rates (2021-2022)

The short-term capital gains tax is taxed as regular income or at the “marginal rate,” so the rates are based on what tax bracket you’re in.

The Internal Revenue Service (IRS) changes these numbers every year to adjust for inflation. You may learn your tax bracket by going to the IRS website, or asking your accountant.

Here’s a table that breaks down the short-term capital gains tax rates for the 2021–2022 tax year , or for tax returns that are filed in 2022.

Marginal Rate

Income — Single

Married, filing jointly

0% Up to $9,950 Up to $19,900
12% $9,951 to $40,525 $19,901 to $81,050
22% $40,526 to $86,375 $81,051 to $172,750
24% $86,376 to $164,925 $172,751 to $329,850
32% $164,926 to $209,425 $329,851 to $418,850
35% $209,426 to $523,600 $418,851 to $628,300
37% More than $523,600 More than $628,300

Long-Term Capital Gains Tax Rate By Income (2021-2022)

Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates fall into three brackets: 0%, 15%, and 20%.

The following table breaks down the long-term capital-gains tax rates for the 2021–2022 tax year by income and status.

Capital Gains Tax Rate

Income — Single

Married, Filing Separately

Head of Household

Married, Filing Jointly

0% Up to $40,400 Up to $40,400 Up to $54,100 Up to $80,800
15% $40,401 to $445,850 $40,401 to $250,800 $54,101 to $473,750 $80,801 to $501,600
20% More than $445,850 More than $250,800 More than $473,750 More than $501,600

An additional 3.8% may be applied to individuals who earn at least $200,000 or married couples making at least $250,000. This tax came into effect in 2013 to fund the U.S. health-insurance program, known commonly as Obamacare. A higher 28% is also applied to transactions involving art, antiques, stamps, wine and precious metals.

Tips For Lowering Capital Gains Taxes

Hanging onto an investment for more than a year can lower your capital gains taxes significantly.

Capital gains taxes also don’t apply to so-called “tax-advantaged accounts” like 401(k) plans, IRAs, or 529 college savings accounts. So selling investments within these accounts won’t generate capital gains taxes. Instead, 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529 plans are tax-free.

💡 Recommended: Benefits of Using a 529 College Savings Plan

Single homeowners also get a break on the first $250,000 they make from the sale of their primary residence, which they need to have lived in for at least two of the past five years. The limit is twice that for a married couple.

For newbie investors, it might be helpful to know that you may deduct as much as $3,000 in losses from an investment to help offset the amount of taxes on your income.

How US Capital Gains Taxes Compare

Generally, capital gains tax rates affect the richest taxpayers, who make a bigger chunk of their income from profitable investments.

Here’s a closer look at how capital gains taxes compare with other taxes, including those in other countries.

Compared to Other Taxes

The maximum long-term capital gains taxes rate of 23.8% is lower than the highest marginal rate of 37%.

Proponents of the lower long-term capital gains tax rates say the discrepancy exists to encourage investments as well as risk-taking. It may also prompt investors to sell their profitable investments more frequently, rather than hanging on to them.

Comparison to Capital Gains Taxes In Other Countries

In 2021, Bloomberg News reported that compared with capital gains taxes in other countries — like the 37 countries in the Organization for Economic Cooperation and Development (OECD) — the U.S.’ maximum rate of 23.8% is roughly midway on the spectrum of comparable capital gains taxes.

In comparison, in France the maximum rate is at 30%. Switzerland has no specific capital gains tax, but it taxes sales at the same rate as ordinary income.

Compared With Historical Capital Gains Tax Rates

Because short-term capital gains tax rates are the same as those for wages and salaries, they adjust when ordinary income tax rates change. For instance, in 2018, tax rates went down because of the Trump Administration’s tax cuts. Therefore, so did short-term capital gains rates.

As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 23.8% started in 2013, when the Obamacare 3.8% tax was added.

For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.

Going back in time, in the 1920s the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high, at around 28%, in the late 1980s and 1990s. Then, between 2004 and 2012, they dropped to 15%.

Tax Loss Harvesting

Tax loss harvesting is the strategy of purposely selling some investments at a loss to offset the taxable profits from another investment. It’s a way to delay paying taxes, not to eliminate paying them at all.

Using short-term losses to offset short-term gains is a good way to take advantage of tax loss harvesting — because, as we discussed above, short-term gains are taxed at higher rates. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.

Investors can also apply losses from investments of as much as $3,000 to offset income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year.

💡 Recommended: Is Automated Tax Loss Harvesting a Good Idea?

The Takeaway

Capital gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year to adjust for inflation.

It’s important for investors to know that capital gains tax rates can differ significantly based on whether they’ve held an investment for at least a year. An investor’s income level also determines how much they pay in capital gains taxes.

An accountant or financial advisor can suggest ways to lower your capital gains taxes. When you open a SoFi Invest® brokerage account, you’ll gain access to a team of financial advisors who can help you set financial goals and determine your tolerance for risk. With as little as $1, investors can also sign up for a robo-advisor service that automatically builds and rebalances portfolios for members.

Learn more about SoFi Invest.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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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 . 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.
1) 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).
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

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Guide to Term Deposits

Guide to Term Deposits

A term deposit, also known as a certificate of deposit (CD) or time deposit, is a low-risk, interest-bearing savings account. In most cases, term deposit holders place their funds into an account with a bank or financial institution and agree not to withdraw the funds until the maturity date (the end of the term). The funds can earn interest calculated based on the amount deposited and the term.

This guide explains what a term deposit is in more detail, including:

•   How term deposits work

•   What a time deposit is

•   Different types of term deposits

•   How to open and close a term deposit

•   The pros and cons of terms deposits.

What Is a Term Deposit or Time Deposit?

Time deposit, term deposit, or certificate of deposit (CD) are all words that refer to a particular kind of deposit account. It’s an amount of money paid into a savings account with a bank or other financial institution. The principal can earn interest over a period that can vary from a month to years. There is usually a minimum amount for the deposit, and the earned interest and principal are paid when the term ends.

One factor to consider is that the account holder usually agrees not to withdraw the funds before the term is over. However, if they do, the bank will likely charge a penalty. Yes, that’s a downside, but consider the overall picture: Term deposits typically offer higher interest rates than other savings accounts where the account holder can withdraw money at any time without penalties.

Compared to stocks and other alternative investments, term deposits are considered low-risk (they’re typically insured by the FDIC or NCUA), and the returns are correspondingly conservative.

How Does a Bank Use Term Deposits?

Banks and financial institutions can make money through financing. For example, they likely earn a profit by issuing home, car, and personal loans and charging interest on those financial products. Thus, banks are often in need of capital to fund the loans. Term deposits can provide locked-in capital for lending institutions.

Here’s how many bank accounts work: When a customer places funds in a term deposit, it’s similar to a loan to the bank. The bank will hold the funds for a set time and can use them to invest elsewhere to make a return. Let’s say the bank gives the initial depositor a return of 2% for the use of funds in a term deposit. The bank can then use the money on deposit for a loan to a customer, charging a 6% interest rate for a net margin of 4%. Term deposits can help keep their financial operation running.

Banks want to maximize their net interest margin (net return) by offering lower interest for term deposits and charging high interest rates for loans. However, borrowers may choose a lender with the lowest interest rate, while CD account holders probably seek the highest rate of return. This dynamic keeps banks competitive.

Recommended: Breaking Down the Different Types of Bank Accounts

How Interest Rates Affect Term Deposits

Term deposits and saving accounts in general tend to be popular when interest rates are high. That’s because account holders can earn a high return just by stashing their money with a financial institution. When market interest rates are low, though, people are more inclined to borrow money and spend on items like homes and cars. They may know they’ll pay less interest on loans, keeping their monthly costs in check. This can stimulate the economy.

When interest rates are low (as checking account interest rates typically are), the demand for term deposits usually decreases because there are alternative investments that pay a higher return. For example, stocks, real estate, precious metals, or cryptocurrency might seem more appealing, although these are also higher risk.

The interest rate paid on a term deposit usually depends on the amount deposited and the time until maturity. So, a CD of $10,000 with a maturity date of six months might pay 0.05% annual percentage yield (APY), while a certificate of deposit of $10,000 with a maturity date of five years might pay 0.15% APY. Also, if you have a larger deposit with which to open a CD, you will likely have more options; these may include higher APY earning.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


Types of Term Deposits

There are two main types of term deposits: fixed deposits and recurring deposits. Here’s a closer look.

Fixed Deposits

Fixed deposits are a one-time deposit into a savings account. The funds cannot be accessed until the maturity date, and interest is paid only on maturity.

Recurring Deposits

With a recurring deposit, the account holder deposits a set amount in regular intervals until the maturity date. For example, the account holder might deposit $100 monthly for five months. Each deposit will earn less interest than the previous installment because the bank holds it for a shorter period.

In addition to these two types, you may see banks promoting different kinds of CDs, whether they vary by term length or by features (such as penalty-free, meaning you aren’t charged if you withdraw funds early).

Opening a Term Deposit

To open a term deposit account, search online for the best interest rates, keeping in mind how much you want to deposit, how often, and for how long. Most banks will ask you to fill in an online application. Make sure you read and agree to the terms of the agreement. For example, check the penalties that apply if you decide to withdraw your funds early as well as the minimum amount required to earn a certain interest rate.

Closing a Term Deposit

A term deposit may close for two reasons — either the account reaches maturity or the account holder decides to end the term early. Each bank or financial institution will have different policies regarding the penalties imposed for breaking a term deposit. Read the fine print or ask a bank representative for full details.

When time deposit accounts mature, some banks automatically renew them (you may hear this worded as “rolled over” into a new account) at the current interest rate. It would be your choice to let that move ahead or indicate to the bank that you prefer to withdraw your money.

If you want to close a term deposit before the maturity date, contact your bank, and find out what you need to do and the penalties. The penalty will depend on the amount saved, the interest rate, and the term. The fee may involve the loss of some or all of interest earned.

Term Deposits and Inflation

Term deposits may not keep up with inflation. That is, if you lock into an account and interest rates rise over time, your money won’t earn more. You will likely still earn the same amount promised when you funded the account. Also, once tax is deducted from the interest income, returns on a fixed deposit may fall below the rate of inflation. So, while term deposits are safe investments, the interest earned can wind up being negligible. You might investigate whether high-yield accounts or stocks, for instance, are a better option.

Term Deposit Pros

What are a term deposit’s advantages versus regular high yield bank account and other investments? Here are some important benefits:

•   Term deposit accounts are low-risk.

•   CDs or time deposits usually pay a fixed rate of return higher than regular savings accounts.

•   The funds in a CD or deposit account are typically FDIC-insured.

•   Opening several accounts with different maturity dates can allow the account holder to withdraw funds at intervals over time, accessing money without paying any penalties. This system is called laddering.

•   Minimum deposit amounts are often low.

Term Deposit Cons

There are a few important disadvantages of term deposit accounts to note, including:

•   Term deposits can offer lower returns than other, riskier investments.

•   Term deposits and CDs usually have fixed interest rates that do not keep up with inflation.

•   Account holders likely do not have access to funds for the length of the term.

•   Account holders will usually pay a penalty to access funds before the maturity date.

•   A term deposit could be locked in at a low interest rate at a time when interest rates are rising.

Examples of Bank Term Deposits

Here’s an example of how time deposits can shape up. Bank of America is the second-largest consumer bank in the United States, according to the Federal Reserve. As of May 2022, the bank offered a Standard Term CD account and a Featured CD account.

•   The Standard Term CD: A 12-month CD with a minimum deposit of $1,000 pays 0.03%.

•   The Featured CD: A 12-month Featured CD with a minimum deposit of $10,000 pays 0.05%.

As you see, the premium account, with a significantly higher minimum deposit, earns almost twice as much interest as the regular version. Still, neither earns what might be deemed a high rate.

Recommended: How Do You Calculate Interest on a Savings Account?

The Takeaway

Term deposits, time deposits, or CDs are conservative ways to save. Account holders place a minimum amount of money into a bank account for a set term at a fixed interest rate.

The principal and interest earned can be withdrawn at maturity or rolled over into another account. If funds are withdrawn early, however, a penalty will likely be assessed.

While these accounts typically have a low interest rate, they may earn more than standard bank accounts. What’s more, their low-risk status can help some people reach their financial goals.

If you’re looking for security plus a great interest rate, see what SoFi offers. When opened with direct deposit, our Checking and Savings pays 1.25% APY, which is 41 times the current national average checking account rate. What’s more, we don’t charge any fees, so your money can grow faster.

Bank smarter with SoFi.

FAQ

Can you lose money in a term deposit?

Most term deposits or CDs are FDIC-insured, which means your money is safe should the bank fail. However, if you withdraw funds early, you may have to pay a penalty. In a worst-case scenario, this could mean that you receive less money than you originally invested.

Are term deposits and fixed deposits the same?

There is usually no difference between a term deposit and a fixed deposit. They both describe low-risk, interest-bearing savings accounts with maturity dates.

Do you pay tax on term deposits?

With the exception of CDs put in an IRA, any earnings on term deposits or CDs are usually subject to federal and state income taxes. The percentage depends on your overall income and tax bracket. If penalties are paid due to early withdrawal of funds, these can probably be deducted from taxes if the CD or term deposit was purchased through a tax-advantaged individual retirement account (IRA) or 401(k).


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: 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.

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Guide to the CD Barbell Strategy

Guide to the CD Barbell Strategy

With the CD barbell strategy, you invest in short-term and long-term certificates of deposit, and don’t invest any of your money in medium-term CDs — a strategy that can help maximize income and minimize risk.

CDs have different terms, and generally the longer the term, the higher the interest rate. When you invest money in a longer-term CD, you can take advantage of their higher rates. The downside with a long-term CD is that your money is tied up for a longer period of time. You have more liquidity with a short-term CD, but you will typically earn a lower return.

By splitting your money between short-term and long-term CDs, the idea is to capture the best of both worlds. Here’s how a barbell CD strategy works, and whether it makes sense for you.

What Is a Certificate of Deposit (CD)?

A certificate of deposit, or CD is a time deposit account that offers a guaranteed return that’s typically higher than a savings or money market account.

With a CD, you invest a lump sum upfront (called the principal). The bank promises a specified interest rate that you’ll earn for a specific period of time (known as the term). Most CDs are insured against loss by the FDIC (Federal Deposit Insurance Corporation) or the NCUA (National Credit Union Association) for up to $250,000. Certificates of deposit are considered a type of cash equivalent.

CDs typically pay a higher rate than standard deposit accounts because the account holder agrees not to withdraw the funds until the CD matures. If you deposit $5,000 in a 5-year CD, you cannot withdraw the $5,000 (or the interest that you’ve earned) without incurring an early withdrawal penalty until the end of the five years.

If you do need access to your money before the end of the term, you might consider a certificate of deposit loan, where the bank gives you a loan with the money in the CD serving as collateral.

What Is the Certificate of Deposit (CD) Barbell Strategy?

The longer the term of the CD, the higher the interest rate you’ll earn, but the longer your money will be tied up. The CD barbell strategy is one way that you can attempt to get the benefits of both long- and short-term CDs. By dividing your money between long-term and short-term CDs, you will blend the higher interest rates from long-term CDs with the accessibility of short-term certificates of deposit.

In addition to the CD barbell strategy, there are a variety of different strategies for investing in CDs, including the bullet strategy and the CD ladder strategy. So if you’re wondering where to store short term savings, you have several different options to choose from.

Real Life Example of the CD Barbell Strategy

If you want to start investing in CDs and are interested in learning more about the CD barbell strategy, here is one example of how it could work. Say you have $10,000 that you want to invest using the CD barbell strategy.

•   You invest $5,000 in a 3-month CD earning 0.50%

•   You invest $5,000 in a 5-year CD earning 2.50%

Your total return would be 1.50% (the average of 0.5% and 2.5%). That’s less than you would get if you put all of your money in a long-term CD, but more than if you put it all in a short-term CD. Depending on your financial goals, you can adjust the terms of your CDs and the amount you put in each half of the barbell.

Typically with the CD barbell strategy, when your short-term CD expires, you’ll take the proceeds and reinvest it in a new short-term CD.

Ready for a Better Banking Experience?

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Benefits of the CD Barbell Strategy

Here are a few of the benefits of the CD barbell strategy:

Higher Returns Than Investing Only in Short-Term CDs

Because half of your money is invested in long-term CDs that pay a higher return, you’ll get a higher return than if you invested only in short-term CDs. This can make it a viable investment strategy if you need access to some of your money but also want higher returns.

More Liquidity Than Investing Only in Long-Term CDs

Another benefit of the CD barbell strategy is that you have easier access to your money than if you invested only in long-term CDs. Half of your money is in short-term CDs, which means that if you need access to your money after a couple of months, you can withdraw the money in your short-term CD when it matures without penalty.

Drawbacks of the CD Barbell Strategy

Here are a few of the drawbacks of the CD barbell strategy:

Excludes Medium-Term CDs

The barbell CD strategy focuses solely on short-term and long-term CDs, excluding medium-term CDs. Depending on your financial situation, you might find it worthwhile to include medium-term CDs as part of your investment strategy.

Ties Up Some of Your Money

When you invest in a long-term CD that won’t mature for several years, you won’t have penalty-free access to that money until the end of the CD’s term. While long-term CDs do usually come with higher returns than CDs with shorter terms, you need to make sure that you won’t have a need for that money until the CD matures.

Barbell CD Strategy vs CD Laddering

Barbell CD Strategy

CD Laddering

Includes only short-term and long-term CDs Uses short-term, medium-term, and long-term CDs
Insured by the FDIC or NCUA up to $250,000 Insured by the FDIC or NCUA up to $250,000
You’ll have access to some of your money each time your short-term CD expires Access to your money varies depending on the terms of the CDs you ladder with

When Should I Use a Certificate of Deposit Strategy?

If you decide you need a long-term savings account, you might want to consider a certificate of deposit strategy like the CD barbell strategy.

CDs with different terms come with different interest rates, so there can be advantages to splitting up your money. Rather than putting all of your savings into one CD, you can distribute your money to a few different CDs as a way to diversify your risk and reward.

The Takeaway

CDs come with different lengths or terms, and the longer the term, usually the higher the interest rate that you’ll earn. A CD barbell might make sense if you want the benefit of having some of your money in a higher-interest CD, while keeping the rest of it more liquid (although at a lower rate) — hence the barbell analogy.

Using a CD strategy like the CD barbell strategy is one way to capture some of the higher returns with long-term CDs while still being able to access some of your money by using shorter-term CDs as well. You’ll also have your money tied up for a longer period of time, so there is a tradeoff that you’ll need to consider.

If you’re looking for better interest rates for your cash while maintaining easy access to your money, you might consider a SoFi high yield bank account. Eligible account holders can earn 1.25% APY if you sign up for direct deposit. Also, SoFi doesn’t charge account fees or management fees.

Open a SoFi Checking and Savings account today!

FAQ

Why is it called a barbell strategy?

The CD barbell strategy is so named because you are investing in CDs at either end of the spectrum of possible terms, with nothing in the middle. This is similar to the shape of a barbell that has weights on either end but nothing in the middle.

Does the CD barbell strategy make more money than CD laddering?

With CD laddering, you usually invest an equal amount of your money in CDs that mature each year. Which strategy makes more money will depend on exactly how you divide your money into different CD terms, as well as how interest rates change over the life of your CD strategy.

Does the CD barbell strategy make more money than the bullet CD strategy?

The bullet CD strategy is an investment strategy where you buy CDs that all mature at the same date. Which of these two CD strategies makes more money will depend on a couple of factors. The first is how interest rates change over time, and the second is exactly how you divide up your investments.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Photo credit: iStock/hachiware
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Bear Market Investing Strategies

It can be scary for investors to see their portfolios decline in value because of market turmoil. During periods of steep market declines, known as bear markets, it may seem like the best thing to do is sell to stop further losses. But by doing this, investors could miss out on potential gains if they utilized bear market investing strategies instead.

For investors with a long-term wealth-building goal, it’s important to remember that bear markets are often relatively short. Rather than panic, it can help to look for potential investment opportunities that may help your portfolio survive during bear market downturns.

What Is a Bear Market?

Investors and market watchers generally define a bear market as a drop of 20% or more from market highs. When investors refer to a bear market, it usually means that multiple broad market indexes, such as the Standard & Poors 500 Index (S&P 500) or Dow Jones Industrial Average (DJIA), fell by 20% or more over at least two months.

The term can also be used to describe a specific security. For example, when a particular stock drops 20% in a short time, it can be said that the stock has entered a bear market.

Bear markets are usually associated with economic recessions, although this isn’t always the case. As economic activity dries up, people lose jobs, consumer spending falls, and business earnings decline. As a result, many companies see their share prices tumble as investors shift their risk tolerance.

Recommended: What Is Flight to Quality?

History of Bear Markets

The S&P 500 Index entered a bear market in the first half of 2022. As of June 14, 2022, the index was down 22% from its high on January 3, 2022.

Prior to the most recent bear market, the S&P 500 Index posted 12 drops of more than 20% since World War II. The table below shows the S&P 500’s returns from the highest point to the lowest point in a downturn. Bear markets average a decline of 34%, lasting a little more than a year. Bear markets have occurred as close together as two years and as far apart as nearly 12 years.

Peak (Start) Trough (End) Return Length (in days)
May 29, 1946 May 17, 1947 -29% 353
June 15, 1948 June 13, 1949 -21% 363
August 2, 1956 October 22, 1957 -22% 446
December 12, 1961 June 26, 1962 -28% 196
February 9, 1966 October 7, 1966 -22% 240
November 29, 1968 May 26, 1970 -36% 543
January 11, 1973 October 3, 1974 -48% 630
November 28, 1980 August 12, 1982 -27% 622
August 25, 1987 December 4, 1987 -34% 101
March 27, 2000 October 9, 2002 -49% 926
October 9, 2007 March 9, 2009 -57% 517
February 19, 2020 March 23, 2020 -34% 33
Average -34% 414

How to Invest in a Bear Market

Some investors may be tempted to sell assets during a bear market, content to keep their money in cash while the markets seem to slide. However, there are some investing strategies investors may want to consider rather than avoiding a bear market altogether.

Invest Defensively

The first of these bear market investing strategies involves buying assets that may increase in price when the overall financial markets decline. Many factors influence which investments perform well during a bear stock market.

Investors generally tend to be risk-averse during downturns and seek safe-haven assets rather than risky ones. Investors will likely put money into value stocks rather than growth-oriented companies.

Recommended: Value vs. Growth Stocks

Investors may shift their portfolios to defensive stocks, like dividend-yielding stocks, large and mature companies, and companies working in sectors with constant demand such as utilities and food. These may be good assets to hold during bear markets.

These investments often provide consistent income through reliable dividend payouts while experiencing less volatile share price action during market downturns. Buying assets like these at the beginning of a downturn can be beneficial.

Recommended: The Pros and Cons of a Defensive Investment Strategy

Use Short Strategies

One of the more sophisticated bear market trading strategies is placing bets that will rise in value when other investments lose value. This might involve, for example, purchasing put options contracts on stocks that may decline in value. A put option allows investors to benefit from falling share prices.

Shorting stocks to speculate on falling stock prices is another strategy investors can utilize. When investors short a stock, they sell borrowed shares and hopefully repurchase them at a lower price. The investor profits when the price they buy back the shares is lower than the price at which they sold the borrowed shares.

Alternatively, investors might consider inverse exchange-traded fund (ETF) as the overall market declines. An inverse ETF tracks a market index and, through complex trading strategies, looks to produce the opposite result of the index. For example, if the S&P 500 index declines, an inverse ETF that tracks the index will hopefully increase in value.

However, using put options, inverse ETFs, and other short strategies involves many nuances that may be complicated for some investors. They are very risky trading strategies that could compound losses if the bets do not work out. Interested investors ought to conduct additional research before considering this strategy.

Hold for the Long Haul

During a bear market, it’s not always necessary to do anything special. Investors with a long-term time horizon in mind sometimes choose to hold on and stay the course, even when a portfolio declines in value. Taking a long-term perspective may pay off well over many years, as the market as a whole trends upwards over time.

For example, the bear market that began in December 2007 was over by March 2009, lasting about a year and a half. But the bull market that followed lasted almost eleven years; the S&P 500 index recouped its losses from the bear market by March 2013, and from March 2009 through February 2020, the S&P 500 increased just over 400%

It also helps that investors have a well-diversified portfolio during any market. Diversifying typically ensures that all of an investor’s eggs are not in one basket, spreading risk around and reducing it overall. One easy way to accomplish this might be to buy structured securities like ETFs or index funds.

One way to hold assets for the long-term and not be too concerned about short-term market fluctuations is to make regular investments regardless of what’s happening, possibly through dollar-cost averaging.

Bear Market Investing vs. Bull Market Investing

For those investing for the long term, the only real difference between a bear market and a bull market will be a temporary dip in the value of their portfolio. The main goal will be to stay the course. As mentioned, long-term investors often make regular, recurring purchases of financial assets.

During bull markets, a common investment strategy is to buy and hold. This tends to work because bull markets are characterized by most asset classes rising in unison.

However, investors may have to be a little more active with their portfolios during bear markets. Some investors choose to increase the amount of money they put into their investments during market downturns. Their overall strategy remains the same, but buying more assets at lower prices lets them acquire a larger number of assets overall.

For those with a higher risk tolerance looking to make short-term gains (often referred to as speculators), a mix of strategies might be employed. Speculators may look to short the market using puts or inverse ETFs, or research assets likely to increase in value due to current bear market trends.

The Takeaway

When the financial markets are in turmoil and your portfolio is in the red, it can be tempting to panic. You may want to sell off your assets to mitigate further losses, content to pocket the cash. However, this sort of strategy may be short-sighted for most investors. You may be setting yourself up to miss a potential rally by getting out of the markets. After all, bear markets are often relatively short-lived and are followed by bull markets.

Investing during a bear market doesn’t have to involve anything fancy. Sometimes it just means making additional investments or finding new ones. And SoFi Invest® can help. With SoFi’s Active Investing platform, investors can trade stocks and ETFs with no commissions for as little as $5.

Open an investment account with SoFi Invest.


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 . 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.
1) 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).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

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What Is Your Risk Tolerance?

Investing is a lot like riding a roller coaster. Some love the thrill of taking big risks with the possibility of getting even bigger rewards. Others get anxious with every market dip and downturn.

Knowing yourself and your risk tolerance is an essential part of investing. Of course, it’s good to have a diversified portfolio built with your financial goals in mind. Still, the products and strategies you use should ideally fall within guidelines that make you feel comfortable—emotionally and financially—when things get rough.

Otherwise, you might resort to knee-jerk decisions—selling at a loss or abandoning your plan to save—that could cost you even more.

What is Risk Tolerance?

Risk tolerance is the amount of risk an investor is willing to take to achieve their financial goals. Risk tolerance level comprises three different factors: risk capacity, need, and emotional risk.

Recommended: What Every New Investor Should Know About Risk

Risk Capacity

Risk capacity is the ability to handle risk financially. Unlike your emotional attitude about risk, which might not change as long as you live, your risk capacity can vary based on your age, your personal financial goals, and your timeline for reaching those goals. To determine your risk capacity, you need to determine how much you can afford to lose without affecting your financial security.

For example, if you’re young and have plenty of time to recover from a significant market loss, you may decide to be aggressive with your asset allocation; you may invest in riskier assets like stocks with high volatility or cryptocurrency. Your risk capacity might be larger than if you were older and close to retirement.

For an older investor nearing retirement, you might be more inclined to protect the assets that soon will become part of your retirement income. You would have a lower risk capacity.

Additionally, a person with a low risk capacity may have serious financial obligations (a mortgage, your own business, a wedding to pay for, or kids who will have college tuition). In that case, you may not be in a position to ride out a bear market with risky investments. As such, you may use safer investments, like bonds or dividend stocks, to better protect your portfolio.

On the other hand, if you have additional assets (such as a home or inheritance) or another source of income (such as rental properties or a pension), you might be able to take on more risk because you have something else to fall back on.

Recommended: Savings Goals by Age: Smart Financial Targets by Age Group

Need

The next thing to look at is your need. When determining risk tolerance, it’s important to understand your financial and lifestyle goals and how much your investments will need to earn to get you where you want to be.

The balance in any investment strategy includes deciding an appropriate amount of risk to meet your goals. For example, if you have $100 million and expect that to support your goals comfortably, you may not feel the need to take huge risks. When looking at particular investments, it can be helpful to calculate the risk-reward ratio.

But there is rarely one correct answer. Following the example above, it may seem like a good idea to take risks with your $100 million because of opportunity costs — what might you lose out on by not choosing a particular investment.

Emotional Risk

Your feelings about the ups and downs of the market are probably the most important factor to look at in risk tolerance. This isn’t about what you can afford financially — it’s about your disposition and how you make choices between certainty and chance when it comes to your money.

Conventional wisdom may suggest “buy low, sell high,” but emotions aren’t necessarily rational. For some investors, the first time their investments take a hit, fear might make them a little crazy. They may lose sleep or be tempted to sell low and put all their remaining cash in a savings account or certificate of deposit (CD).

On the flip side, when the market is doing well, investors may get greedy and decide to buy high or move their safe investments to something much more aggressive. Whether it’s FOMO trading, fear, greed, or something else, emotions can cause any investor to make serious mistakes that can blow up their plan and forestall or destroy their objectives. A volatile market is a risk for investors, but so is abandoning a plan that aligns with your goals.

And here’s the hard part: it’s difficult to know how you’ll feel about a change in the market — especially a loss — until it happens.

Types of Risk Tolerance

Generally, investors fall into one of three categories regarding investment risk tolerance: aggressive, moderate, and conservative.

While the financial industry tends to use labels like conservative, moderate, or aggressive to describe risk in the context of investments and investors, those terms are subjective. What they mean to you may differ from what they mean to someone else.

It can put things into better perspective to think of a potential loss in terms of dollars, not percentages. A 15% loss might not sound so bad, but if you think of it as having $10,000 one month and $8,500 the next, that’s a little more daunting.

Aggressive Risk Tolerance

People with aggressive risk tolerance tend to focus on maximizing returns, believing that getting the largest long-term return is more important than limiting short-term market fluctuations. If you follow this philosophy, you will likely see periods of significant investment success that are, at some point, followed by substantial losses. In other words, you’re likely to ride the full rollercoaster of market volatility.

Moderate Risk Tolerance

An investor with a moderate risk tolerance balances the potential risk of investments with potential reward, wanting to reduce the former as much as possible while enhancing the latter. This investor is often comfortable with short-term principal losses if the long-term results are promising.

Conservative Risk Tolerance

A person with conservative risk tolerance is usually willing to accept a relatively small amount of risk, but they truly focus on preserving capital. Overall, the goal is to minimize risk and principal loss, with the person agreeable to receiving lower returns in exchange.

The Takeaway

Each investor may have a unique level of risk tolerance, though generally, the levels are broken down into conservative, moderate, and aggressive. The fact is, all investments come with some degree of risk—some greater than others. No matter your risk tolerance, it can be helpful to be clear about your investment goals and understand the degree of risk tolerance required to help meet those goals.

Investors may diversify their investments into buckets — some safer assets, some intermediate-term assets, and some for long-term growth — based on their personal goals and timelines.

Ready to take steps toward your financial future? With SoFi Invest®, investors can set up an online brokerage account to trade stocks and exchange-traded funds (ETFs) with no commissions.

Find out how to get started with SoFi Invest.


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 . 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.
1) 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).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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