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APY vs. Interest Rate

When you want to borrow money, perhaps for a car loan or home mortgage, you may research and compare rates among financial institutions to get the best deal. If so, you can be provided with interest rates and annual percentage rates (APRs) of current loan programs being offered by the institution.

If you want to save money, you might shop around for the best interest-bearing account. In that case, you’ll likely be given the interest rate for an account, along with the annual percentage yield (APY).

When given these numbers, you might think that there isn’t much of a difference, numerically speaking, between the interest rate and APY, or the interest rate and APR. Those differences, though, can be significant difference-makers when you want to maximize your money.

With a loan, the interest rate is a percentage charged by a lender for the use of money, with calculations based upon the loan’s principal. In the context of a savings account, a financial institution agrees to pay you a certain amount of interest based upon the money you have deposited in that institution.

Now, here’s more about how APRs and APYs are calculated, and much more!

High-Level Definitions

If you deposited money into an interest-bearing account, then you would earn an annual percentage yield on those dollars. The APY calculation takes into account the interest rate being offered, and then factors in any account fees and costs, as well as whether the financial institution offers simple interest or compounded interest—if the latter, then it also matters how often the financial institution compounds that interest—perhaps monthly or quarterly.

If the bank offers simple interest, then the interest is simply calculated on the principal balance. If, for example, you invested $10,000 at an interest rate of 1.5%, at the end of the year, you’d earn $150. Compound interest, meanwhile, is interest calculated on the principle, plus any accrued interest—so, when compound interest is paid, it includes interest paid on interest.

Switching gears, when you borrow money from an institution and are quoted an annual percentage rate, this figure factors in the interest rate charged, along with fees and costs, but compounded interest is not part of the APR calculation.

One of the key differences in how APY and APR are calculated, then, is that one takes compounded interest into account, while the other one doesn’t.

The APY Formula

Figuring what you could earn on, say, your savings or certificate of deposit using simple interest is a reasonably straightforward calculation. The APY, meanwhile, provides a picture of what you would earn on a deposit-based, interest-earning account over a period of one year.

The actual formula for APY calculation is as follows: (1 + r/n)ⁿ – 1.

The “r” stands for the interest rate being paid, while the “n” represents the number of compounding periods within a year. If, for example, the interest rate paid was 1.5%, then that’s what you’d use for the “r.” If interest is compounded quarterly, then “n” would equal four.

So, the frequency of interest compounding can cause savings accounts with the same interest rates to have different APYs. For example, if two different banks offered a CD with the same interest rates, and one of them compounded annually, that institution would have a lower APY than the institution that compounded quarterly, or daily.

The good news is that if you want to compare savings rates from one financial institution to another, you don’t need to perform these in-depth calculations. Each institution would need to provide you with the APY and you could simply compare the figures. And, here’s the heart of it all: the higher the APY, then the more quickly the money you deposit can grow.

More About the APR vs. APY

Like the APY, calculating interest on a loan is fairly straightforward, with the APR providing a better snapshot of the true cost of the loan to you on an annual basis. It may take into account the points you paid, for example, to get a mortgage loan, and/or other fees and loan-related costs.

However, here’s where APR calculations differ from APY ones. The APR does not take into account how often interest is compounded on a loan. And, the more often it’s compounded, the more you’ll ultimately pay back on your loan.

So, besides comparing APR to APR from different institutions, to get a better understanding of what would be a better deal, also ask how often interest compounding takes place at each one.

Here’s how an APR might be calculated: Fees and interest paid over the loan’s life would be divided by the original loan amount. Take that answer and then divide it by the number of days in the term of the loan. Multiply that number by 365, and then by 100. Ta-dah! That’s your APR.

Although that’s the basic calculation, there’s one more factor to consider—how APR is calculated can differ by loan type. Credit cards, for example, can have different APRs for purchases vs. for cash advances.

Summing Up the Main Differences

In short, here’s the answer to this question: “What is APY vs. APR?”:

•  APY calculates money paid to you on depository bank accounts such as savings and certificates of deposit. It factors in the interest rate, plus any fees, costs, and compounding interest frequency.
•  APR calculates the money you would owe to pay back loans, such as car loans and house mortgages. It factors in the interest rate, plus any fees and costs, but it does not take into account the impact of compounding interest.

When your goal is to maximize your dollars, a good foundational step can be to get the most interest on your savings dollars.

Types of High Interest Accounts for Savings

When you’re saving money, perhaps to buy a house or go on an ocean cruise, there are several types of interest-bearing accounts that may be the right choice for your goals, with different APYs, fees, ready access to cash, and withdrawal terms.

Traditional checking and savings accounts don’t usually fit the bill when you’re looking for a high-yield account, although there are interest-bearing ones that might fit your needs quite well. Other choices can include money market accounts, certificates of deposits, and other forms of investments.

With a money market account, your money is typically invested in a reasonably safe way, perhaps in government securities. If you don’t need regular access to this money, this could be a good choice, as there are often limits on how many withdrawals you can make monthly.

You typically need at least $1,000 to open a money market account—for higher investments, incentives might be offered.

Certificates of deposits (CDs) are investments with fixed maturity dates, ranging from one month to 20 years—typically, you can’t easily withdraw money before that date. Some CDs are traded on the market as securities. Others are offered by banks, and aren’t securities. Interest rates tend to be higher on longer-termed CDs than ones with shorter terms.

Some CDs require a minimum deposit, while others don’t. Some CDs don’t charge penalties for early withdrawals, but many do, so read the fine print. A penalty can put a real dent in any APY earned.

If you want easy access to your CD dollars, you might seek out one with fewer withdrawal restrictions, or invest in CDs at regular intervals, helping to ensure that one will mature when you need funds.

High Interest Checking Accounts

These are accounts designed to give you the flexibility of a traditional checking account, but with high-interest returns. Rates vary, but are typically much higher than savings accounts. Many of these accounts, unfortunately, come with fine print, perhaps limitations on monthly debit card usage, or on minimum balances required, or mandated bill-pay automation.

What you really want to look for in the fine print, though, is whether or not there’s a balance cap on your interest earnings. This would basically limit how much money you can earn at the high interest rate. For example, perhaps a bank would pay 3% on checking accounts, but you’d only earn that interest on the first $2,000.

What SoFi Money Offers

If you don’t want your interest-earning potential to come with a ceiling, you might want to look at SoFi Money®, a cash management account where you can spend, save, and earn all in one place. We work hard to give you high interest and charge zero account fees. With that in mind, our interest rate and fee structure is subject to change at any time.

You’ll have the ability to write and deposit checks and you can use a debit card, send and receive money, and use ATMs, with the added benefit of earning interest.

SoFi Money is a great way to spend and save. Get started today.


SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.
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.
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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What Are Actively Managed ETFs?

Exchange-traded funds (ETFs) are securities made up of any number of other securities—stocks or bonds most commonly. Some ETFs track a specific underlying index like the S&P 500 or the Nasdaq, but these funds can be structured to fit almost any investment needs.

ETFs generally fall into two categories: actively managed and passively managed.

Passively managed funds follow the principle of a “buy and hold” investment strategy. Rather than trying to beat the market, these funds simply track and index or invest in particular assets regardless of short-term market fluctuations.

Actively managed ETFs, by contrast, employ a portfolio manager or team of portfolio managers who personally track the investments held by a fund and make decisions to buy, hold, or sell, the assets held within it.

The goal of these portfolio managers is to outperform the broader market indexes. They often measure their success by using a certain index as their benchmark.

If their portfolios provide a higher return than those indexes, then the managers can claim success. If they return less than their benchmark index, then they did not beat the market, and their investors would have been better off with some kind of passive investment strategy.

How Actively Managed ETFs Work

Many of the most well-known ETFs are passively managed, meaning they intend to perform similarly to a particular index, asset, or group of securities. However, there are now two specific types of actively managed ETFs as well: transparent and semi-transparent funds.

Until late 2019, only transparent actively managed ETFs were allowed. These funds were required to disclose their holdings on a daily basis. Investors would then know exactly what was happening to their money.

Semi-transparent funds, by contrast, don’t have the same disclosure requirements. They either reveal the contents of their portfolio less often or communicate their true holdings by using various accounting methods like proxy securities or weightings.

The main reason investment managers want the option for this kind of ETF structure involves concealing their methods from competitors. The small percentage of active managers who outperform the market don’t want others to know how they did it.

From an investor’s perspective, the only noticeable difference between these two kinds of active ETFs would be the frequency with which they receive information disclosing the fund’s holdings. Both kinds of funds, and also passive funds, trade on exchanges at prices that change constantly during trading days.

Pros and Cons of Actively Managed ETFs

As with any investment vehicle, these funds have their benefits and disadvantages. Both the pros and cons tend to stem from the fact that a person or group manages the fund’s assets on a constant basis.

Pros

Higher Returns

The biggest advantage of an actively managed ETF is the potential for gains that could exceed those of the market at large. While very few investment management teams beat the market, those who do tend to produce outsized gains over a short period.

Greater Flexibility and Liquidity

Active ETFs could also provide greater flexibility amid market turbulence. When world events rattle financial markets, passive investors can’t do much other than go along for the ride.

A fund with active managers might be able to adjust to changing market conditions, however. Portfolio managers could be able to rebalance investments according to current trends, reducing losses, or even profiting from panics and selloffs.

Like passive ETFs, active funds also trade throughout the day (as opposed to some mutual funds who only have their price adjusted once daily), allowing investors the opportunity to do things like short shares of the fund or buy them on margin.

Professional Management

The premise of these funds relies entirely on the experience and capability of the fund’s management. Those who invest in actively managed ETFs don’t personally see these things happening. They will be reflected in the ETF’s share price and net asset value (NAV) , of course, and funds send out a prospectus periodically to update investors on new events and asset allocation changes.

Cons

High Expense Ratios

One of the biggest cons to holding shares of an actively managed ETF involves what’s known as the expense ratio.

All ETFs come with a cost—the costs associated with maintaining the investments of the fund. The portion of this cost that gets passed onto investors is calculated by dividing the sum of a fund’s costs by its total assets. This number, expressed as a percentage, is the fee that investors pay for the privilege of holding ETF shares.

Active funds tend to have higher expense ratios. The costs associated with paying a professional or entire team of professionals combined with the fees that result from additional buying/selling of investments adds up to a larger expense burden.

Each purchase or sale might come with a brokerage fee, especially if the securities are foreign-based. These costs exceed those of passive funds, resulting in higher expense ratios.

Higher Risk

While active ETFs could provide higher returns, most of them don’t. It’s a widely known fact in the investment world that the vast majority of managed funds (as well as most individual investors) do not outperform the market over the long-term.

So, while an active ETF may have the potential for greater returns, the risk can also be significant. The chances of choosing an active fund that fails to outperform the market are greater than the odds of choosing one that succeeds.

The responsibility to manage the risks and rewards of an actively managed ETF lies in the hands of a fund’s managers, not the retail investor buying shares. This might not sit well with investors who want to have control over their investments and the ability to choose when to buy or sell. Holding shares of this type of fund requires putting faith into those who manage the investments.

One of the risks inherent in this kind of investing, although remote, might be that fund managers choose to misallocate investor’s funds or otherwise engage in deceitful practices.

It’s not unheard of for financial regulatory enforcement agencies like the Securities and Exchange Commission (SEC) to catch people in the act of overtrading (placing excessive amounts of buy/sell orders), making misleading marketing claims regarding a fund’s past performance, or gambling with the funds that investors have entrusted to them.

Deviation from Net Asset Value

Another reason why investors might not like a fund being managed by someone else is the fact that this arrangement can lead to the ETFs share trading at a price that is higher or lower than the fund’s net asset value (NAV). In other words, sometimes the tradable shares don’t accurately reflect the price of the assets the fund actually holds. This can happen with passive ETFs as well, but the deviation in active funds can be much higher due in part to the other factors discussed above.

In addition, even if the fund outperforms, that might not be reflected in the share price. The individual investment holdings of the fund might do well, but investors holding shares could see little to no profits due to the high expense ratios and potential deviation from NAV.

Investing in Actively Managed ETFs

It begins with choosing a fund that fits an investor’s wants and needs and then finding an exchange where that security can be traded. Once an investor opens an account at their chosen brokerage, they can begin buying shares or fractional shares of actively managed ETFs.

Historically, brokerages have required investors to buy a minimum of one share of any security, so the minimum investment will most often be the current price of one share of the ETF plus any commissions and fees (most brokerages eliminated fees for buying or selling shares of domestic stocks and ETFs in 2019).

Some newer brokerages now offer fractional shares, however, which allow for investors to purchase quantities of stock smaller than one share. This option may appeal to those looking to get started investing with a small amount of money.

It’s important to note that most ETFs pay dividends. Investors can choose to have their dividends deposited directly into their accounts as cash or automatically reinvested through a dividend reinvestment program (DRIP).

Investors with a long-term plan in mind might do well to take advantage of a DRIP, as it allows for gains to grow exponentially. For those only looking for income, DRIP might defeat the purpose of holding securities that yield dividends, however.

Learning About ETFs First-Hand

One way to get started with an actively managed ETF, should an investor decide to do so, would be to buy shares of a chosen fund. With SoFi Invest®, investors of all experience levels can gain experience by picking investments suited to their interests and financial ability. SoFi makes it easy for investors to diversify their portfolios and invest in what makes sense for their financial situation.

Learn more about investing with SoFi.


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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns.. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

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.

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Reading a Profit & Loss Statement as an Investor

Curious investors have a lot to consider before taking the plunge and buying a stock. One such consideration is a company’s financial standing. Luckily, there are several key documents that are made publicly available for anyone who wants a glimpse into a company’s financial operations.

Investors may be particularly interested in a company’s profit and loss statement. A profit and loss statement reveals how much a company earned over a designated period, like a quarter or year. As the name suggests, the statement details both the revenue and expenses that led to either a profit or a loss.

At first, looking at financial statements can feel like reading another language. Investors who want to learn how to read a profit and loss statement will find it only gets easier with practice. Here’s how to get started.

What is a Profit and Loss Statement?

Ever heard someone ask, “what’s the bottom line, here?” Though this adage is now used euphemistically to inquire about only the most important details of any matter—financial or not—the phrase is borrowed from the literal “bottom line” of a profit and loss statement.

When running a business, profitability is the ultimate goal. A profit and loss statement shows how much revenue a company earned over a specific period, and then subtracts how much it spent, which results in a net profit figure. It’s the final line in the grand calculation.

A profit and loss statement is also called an “income statement.” Understandably so, as it presents both the income and expenses that ultimately created profitability—or loss—for the period.

The profit and loss statement is one of a business’s most important accounting tools. It’s also one of a handful of financial statements officially filed by public companies. Companies will also file a balance sheet, cash flow statement, and statement of shareholders’ equity. Filings are made quarterly (called 10-Q filings) and annually (10-K filings) with the Securities and Exchange Commission (SEC). Investors can find this information by searching for the company within the SEC’s EDGAR database .

It can be useful to think of each of the accounting statements as individual pieces in an overall puzzle. For example, compare the profit and loss statement to a balance sheet, which details information about a company’s assets and liabilities. The balance sheet alone may not indicate whether the company is operating at a profit, and a profit and loss statement may not provide an accurate picture into a company’s indebtedness. But together, both statements provide important context for further analysis.

How to Read a Profit and Loss Statement

Profit and loss statements are a particularly useful tool for looking into the operations of a company. They are perhaps most useful when used to compare two or more different periods, or when comparing companies within the same industry. As with almost any accounting report, context can help to anchor the information. What changed from last year (or last quarter)? What has improved? What has not?

In particular, has the company been able to decrease expenses or increase revenue in order to secure more profit? Or, are there any additional clues as to the financial inner workings of the company?

For example, perhaps a company is profitable in one period and not the next, because of an increase in research and development (R&D) costs. This is valuable information to a potential investor. In fact, such a discovery may shift their line of questioning altogether. Instead of asking about the profitability of the company right now, they might focus on the value of this one-time R&D expenditure into the future.

When learning how to read a profit and loss statement, investors should know that they generally follow a similar format. Each begins, at the top of the page, with revenue. This is how much money a company earned through sales. Next, costs are subtracted. And at the end, at the bottom of the page, is the company’s bottom line: profit or loss. Although a company’s “top line” revenue is a compelling figure, a company’s bottom line may actually be a better indicator of whether it will be an enduring, successful business.

To illustrate the point, consider a simple example of two companies. The first company posted revenue of $10,000,000 last year, but incurred the same amount in expenses. They had high revenue, but earned no profit. The second business earned $1,000,000, but incurred just $100,000 in expenses—resulting in a $900,000 profit. The second company brought in less revenue, but was more profitable than the first.

Profit and Loss Statement Overview

There are other relevant line items an investor might encounter on a profit and loss statement. To recap, one would find the total revenue at the top. This number is also called gross sales. (A gross figure is one calculated before expenses are taken out.)

On certain sales, a company may ultimately receive a modified amount. For example, items that are returned or are discounted must be accounted for. Therefore, the next line in the statement may include a figure that represents what a company does not expect to collect on overall sales.

The result is net revenues, which is likely the next line in the statement. (Net refers to a figure after the necessary deductions are made.) This is a more accurate picture of what incoming cash flow looks like.

Moving down the statement, expenses come next. Although there is no required order, it is common to list the cost of sales as the first expense. This is the amount of money that the company spent to produce the goods or services that were sold during that period. For example, if a company produces shoes, it would include money spent on supplies, labor, packaging, and shipping.

Next, there may be a line titled gross profit or gross margin. This indicates the profit made on the goods sold before operating expenses. (“Gross” indicates that there are still expenses to consider.)

Operating expenses come next. They are the general costs of running a business, such as maintaining payroll, office buildings, and marketing and research fees. Here, depreciation may also make an appearance as a line item. Depreciation is defined as the reduction in the value of an asset with the passage of time, due in particular to wear and tear. Businesses are able to treat this depreciation as an expense.

Once all operating expenses are subtracted, the result is operating profit, or “income from operations.” This figure represents the income before interest and tax expenses are accounted for. That comes next.

Interest income is money earned in interest-bearing bank accounts or other investment vehicles. Interest expense is the cost of borrowing money and paying a rate of interest on that debt. These numbers may or may not be combined into one figure.

Finally, income tax is deducted. Typically, this is the last deduction before the final line in the statement: the bottom line. The bottom line represents the net profit or the net loss, and answers the question: During this accounting period, was this company able to turn a profit, or did they operate at a loss?

Earnings Per Share

A profit and loss statement may also include an earnings per share (EPS) calculation. This is a representation of how much money each shareholder would receive if all net profit was paid out. EPS is calculated by dividing the total net profit by the number of shares a company has outstanding.

The EPS is a hypothetical calculation used by investors to assess the amount of profit created by a company. Do companies actually distribute total earnings? Not generally. Companies will typically keep some or all profits, and may make some payments to shareholders in the form of dividend payments. (The profit and loss statement may also include information on dividend payments.)

A large or a growing EPS is generally preferable but yet again, this metric alone is not sufficient in deciding whether a stock is a good investment. EPS should also be compared to the price of that stock. A company could boast a robust EPS, for example, but if the cost of the stock is relatively expensive, it might not be a good value. For a deeper look into the correlation between earnings and price, investors can consider the price-to-earnings (P/E) ratio, which divides the price of a stock by the EPS.

The Takeaway

A profit and loss statement can give an investor a look at a company’s bottom line in terms of earnings—and also allows them to compare statements from companies in the same industry, as well as statements from the same company over different time periods. Learning how to read a profit and loss statement can be an important part of researching a company in which one might want to invest.

While a profit and loss statement provides contextual insight into a company’s financials, these figures only tell us what has happened in the past, and not what will happen in the future. Given that, this information alone is not able to determine which is the “better” investment, but it is one of the many pieces of information needed to value a stock.

Once an investor has done their research, a typical next step is finding the right place to buy, sell, and trade. SoFi Invest® has made investing accessible and affordable with the SoFi app. It costs nothing to open an account, and there is no commission to buy and sell stocks. Also, SoFi Invest offers fractional shares, so investors can get started with whatever dollar amount they have available.

Find out how to open an account and buy stocks fee-free with SoFi Invest.


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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 . 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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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 to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
For additional disclosures related to the SoFi Invest platforms described above, please visit http://www.sofi.com/legal.
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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A Guide to Alternative Investments

Usually when people talk about investing they are referring to assets such as stocks or bonds. While these are good investments for building a diversified portfolio, there are many other different types of investments to consider as well. An alternative investment is an asset that isn’t included in a 401(k) account or traded on the public stock market. Common alternative investments include gold, art, and real estate.

Investors frequently include alternative investments in their portfolio to increase diversification and reduce risk. Alternative investments are generally not strongly correlated with the stock market, and may even be negatively correlated, so by holding them investors can reduce their risk of losses during economic downturns and potentially create more opportunities for growth.

Let’s look into some popular alternative investment options, their potential benefits and downsides.

Types of Alternative Investments

There are many types of alternative investments, from more traditional options to some truly surprising ones! The following is not a full list of alternative investment options, but some of the more common options.

Real Estate

This could include owning a home, owning a rental property, flipping a house, investing in commercial real estate, industrial real estate, or other options. Investors can also buy into Real Estate Investment Trusts, or REITs. The reason real estate is so valuable is that there is only so much of it available on the planet. Investing in real estate requires some knowledge, skill, and luck, but this popular alternative investment generally does well in all economic cycles.

Precious Metals

Precious metals such as gold and silver are popular alternative investments. They are considered a safe store of value and a good hedge against inflation, they’re highly liquid, and they don’t tend to have the volatility of the stock market. Investors can buy precious metals directly online or through exchange-traded funds (ETFs) and mining stocks.

Commodities

Individuals can invest in natural resources, including agriculture, metal, and energy. This includes raw materials such as coffee, sugar, beef, and corn. Generally, investors purchase commodities using futures contracts or ETFs.

Tax Liens

When property owners can’t pay property taxes and default on their loans, some municipal governments sell tax liens in auctions. This allows them to collect the taxes owed plus additional interest. Investors can purchase these tax liens and earn income from them or even end up owning the foreclosed home.

Equity Crowdfunding

Investors can buy a slice of startup companies through equity crowdfunding platforms such as AngelList and SeedInvest. This differs from traditional crowdfunding in that investors actually own equity in the company. This is considered a risky investment, because if the startup fails, investors may lose all of their money. On the other hand, if a startup does well, investors can see significant gains.

Art

Investing in art has traditionally been something only available to high net worth individuals, but there are some new ways to buy into this market through shares and crowdfunding. Interested investors can also buy into index funds that track with the art market.

Wine

Yes, wine. The reason that wine is an investment is there are a limited number of bottles produced each year by any particular winery. As the years go by, the number of bottles of each particular type of wine decreases, making each bottle more valuable.

Private Equity / Angel Investing

Individuals can invest in private companies through angel investing or private equity. This may be done individually or through a private equity firm. This is considered a high-risk investment, but if a private company goes public or gets acquired, these investments can do quite well.

Cryptocurrencies

A newer addition to the list of alternative investments, buying cryptocurrency is becoming widely accepted as a potential growth asset. As the cryptocurrency market matures, the regulatory environment is improving and more mainstream institutions are getting on board. For investors who don’t want to only invest in Bitcoin, there are now cryptocurrency ETFs available.

Collectibles

Collectible investments include coins, Beanie Babies, baseball cards, comic books, and other items that are only available in limited quantities. The thing about collectibles is that they are only worth what someone else is willing to pay for them.

So although a particular baseball card or vintage toy in its original box technically might be worth a certain amount, an investor will only make money if they can find someone willing to pay. Most collectibles are too common to actually have much value, but they can be fun to have.

Burial Plots

People interested in an alternative to traditional real estate can buy and sell burial plots in cemeteries for a profit.

Hedge Funds

A hedge fund is a pooled investment fund that invests in different public equities. They tend to invest in riskier assets, and sometimes they sell short— actually betting against a company’s success—which can be risky.

Some hedge funds require investors to be accredited, while others are available to all investors. The funds available to non-accredited investors are called funds of funds, because they are funds of hedge funds. This is an indirect way to invest in hedge funds.

Mineral Rights

People who own properties that have minerals on them can sell the rights to mine those minerals to mining companies. Minerals can include things like rock, diamonds, coal, or oil. Investors can also buy mineral rights and turn them into an income source.

Farmland

Like any real estate, farmland tends to increase in value over time. Owners of farmland can also sharecrop or lease out the land to earn income. This tends to be a long-term investment.

Equipment Leasing

This long-term investment option allows investors to buy into funds that own equipment that gets leased out to companies. This could include medical supplies, construction equipment, or other types of equipment.

Oil and Gas LPs

Oil and gas companies need ongoing investment to continue operating. Investors can buy into oil and gas LPs for exploration, land development, income, services, and support.

Timberland

The value of trees rises every year, so investors can buy into timberland and typically expect to earn a profit when those trees get harvested.

Trade Finance

When materials and products are shipped across borders, there are import and export fees that must be paid, and these can add up to significant amounts. In order to finance these costs, companies take out loans or get private investment. Investors can help finance these trades and get paid back with interest.

Marine and Aviation Finance

It’s extremely expensive to build and purchase ships and planes, so companies take out loans or get private investment to finance these operations. This type of investment can be risky, since changes in tariffs or the global economy can affect the market, but there is also significant potential for gains.

Film

A risky but fun investment, films have the potential to make a lot of money if they do well, but countless factors go into making them a success. Without an in-depth knowledge of the industry, film investing is very challenging to get into, though there are hedge funds and private equity funds that invest in films.

Franchise

One way for investors to bring in steady income and make a profit from growth is by buying a franchise. A few well-known franchises are McDonald’s, Taco Bell, and Dunkin’ Donuts. Investors can buy one or more locations, giving them an instant business with brand recognition. These franchises can bring in income and also make money when they’re sold. However, investing in franchises is a lot of work and not a passive investment.

Distressed Debt

Investing in distressed debt means buying up a company’s debt and hoping that they will be able to pay it back. This is extremely risky because companies with distressed debt are failing or near bankruptcy, so the likelihood is fairly low that they will be able to pay it back. However, if they do, the returns are typically high.

Intellectual Property

Intellectual property (IP) includes things like images, inventions, and names. IP has the potential to continue increasing in value forever, but it’s challenging to figure out exactly what intellectual property to invest in. One way of going about it is seeking out the next big brand, which is known as brand investing.

How Much Should go Towards Alternative Investments?

It is really up to each individual to decide how much they want to allocate to alternative investments. Financial experts generally recommend a range of 7-12 percent of one’s portfolio. That said, there are many different types of alternative investments, so investors will need to decide which ones to invest in and how much of each.

Alternative Investment Strategies

There are several ways that investments can make money. Each alternative investment is different, so investors should consider what their goals are when choosing assets to buy. Alternative investments can fall into one of three categories:

•  Income: Some alternative investments can provide a steady source of income, such as a rental property or a franchise.
•  Growth: This type of investment can appreciate in value significantly over time. Growth investments include assets like art and wine.
•  Balance: Some investments can provide a balance of growth and income, such as real estate that acts as a rental property but also increases in value over time.

Pros of Alternative Investments

There are many reasons investors should consider adding alternative investments to their portfolio. They offer protection from the volatility of the stock market and potential for high returns. Below are some of the benefits of alternative investments.

•  Increased portfolio diversification
•  Reduced risk exposure
•  Potential for higher-than-average returns (for example, hedge funds aim for returns between 25-30 percent)
•  They’re a good hedge against inflation and rising interest rates
•  May have lower transaction costs
•  Accessible to non-accredited investors through alternative mutual funds and exchange-traded funds
•  Appeal to an individual’s personal areas of interest, such as art or wine

Cons of Alternative Investments

Like any investment, alternative investments come with their share of downsides. It’s important for investors to do their due diligence when researching and considering alternative investments. They can come with a high degree of risk, so investors should be aware of those risks and how to handle them.
These are a few cons to consider:

•  Often limited to accredited investors (net worth of at least $1 million or an individual income of at least $200,000) and qualified purchasers who are allowed to invest in riskier securities that are not registered with financial regulators
•  Can be less liquid than traditional investments due to limited availability of buyers and lack of a convenient market. Sometimes investors are required to hold their money in the asset for five or more years.
•  May have high minimum investment requirements
•  May have high upfront investment fees
•  Less available data and transparency about performance
•  Potential for higher loss
•  May lack a clear legal structure since they aren’t required to register with the SEC
•  It can be difficult to determine value if the asset is rare and has few transactions
•  Vulnerable to fraud and investment scams since they are unregulated

The Takeaway

Alternative investments have the potential for high returns and are a good way to diversify your portfolio and reduce risk. And the sheer scope and variety of these investments means investors can look for one (or more) that suits their investing style and financial goals.

The first step for any investor who plans to add alternative investments to their portfolio is deciding which ones are of personal interest, and which work with their risk tolerance and investing goals. It’s important to research and do due diligence on any alternative investment option in order to make the best purchasing decisions and reduce risk. While some alternative investments are less accessible, others can be purchased through funds and ETFs.

One way to start investing in alternative investments is by using an online platform like SoFi Invest®. The trading platform lets members research and track their favorite stocks and assets, and build their portfolio right from their phone—buying and selling stocks, ETFs, cryptocurrencies, and more with a few clicks.

Ready to learn more about investing with SoFi Invest?


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”).

For additional disclosures related to the SoFi Invest platforms described above, please visit http://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 to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns.. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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Pros & Cons of the 60/40 Portfolio

There are many different strategies when it comes to building an investment portfolio, but each involves investing in a certain percentage of various assets, and some also involve buying and selling assets at particular times. One of the most popular strategies recommended by financial advisors is called the 60/40 portfolio, which involves building a portfolio which contains 60% equities (stocks) and 40% bonds.

Like any investment strategy, this simple long-term approach has both upsides and downsides. Let’s look into the details of the 60/40 portfolio, its pros and cons, and who it’s best suited for.

What is the 60/40 Portfolio?

Investment holdings divided as 60% stocks and 40% bonds is commonly understood to be a “60/40 portfolio”. The strategy behind the 60/40 portfolio is that when the economy is strong, stocks perform well, and when it’s weak, bonds perform well. By holding more stocks than bonds, investors can take advantage of growth over time, and the bonds mitigate the risk of losing a huge amount of their portfolio during downturns. The 60/40 portfolio is designed to withstand volatility and grow over the long-term.

60/40 Portfolio Historical Returns

Over the past century, the 60/40 portfolio was very popular because of its reliable returns. Although it hasn’t always performed as well as an equity-only portfolio, it carries less risk and is less volatile. However, historical returns aren’t necessarily an indicator of how the 60/40 portfolio will perform in the future.

Since 1928, a 60/40 portfolio containing 10-year U.S. Treasuries and the S&P 500 has had an average annual return of 9%. With inflation factored in, that return decreases to 5.9%.

The 60/40 portfolio grew 7000% since the 1970s, with only a 30% maximum decline.

Unfortunately, returns on the 60/40 portfolio are predicted to be lower in the coming decades than they have been in the past. This is due to a few factors:

•  Inflation: As inflation increases, purchasing power decreases. Currently, a lot of bond yields aren’t even keeping up with the rate of inflation, with rates under 2%, and this may continue for a long time.
•  Real GDP Growth: Real GDP is the amount of national economic growth minus inflation. As the economy has matured in recent years, the GDP has been growing more slowly than in decades prior.
•  Dividend Yields: The amount that companies pay out through dividends is typically much lower now than it used to be.
•  Valuation: Companies are valued much higher than they used to be, and large companies are growing more slowly. Investors can expect slower growth in stock earnings.

How to Build a 60/40 Portfolio

The simplest way to build a portfolio with 60% equities and 40% bonds would be to purchase the S&P 500 and U.S. Treasury Bonds. This portfolio would include mostly U.S. investments, though some investors might choose to diversify into international investments by purchasing foreign stocks and bonds.

Financial advisors putting together a 60/40 portfolio for investors generally include high-grade corporate bonds and U.S.government bonds, along with index funds, mutual funds, and blue-chip stocks. This combination avoids taking on too much risk— which is a possibility if they purchase an unknown stock and it fails—and typically yields steady growth over time.

Investors may also choose to invest in exchange-traded funds (ETFs), which are mutual funds that are traded on an open market exchange (like the New York Stock Exchange), just like stocks. By investing in funds, investors increase their exposure to different companies and industries, thereby diversifying their portfolio. There are many types of ETFs. Some of them are groups of stocks within a particular industry, while others are grouped together by company size or other factors.

If an investor were looking to generate income from their investments, they might choose to buy dividend-paying stocks and real estate investment trusts (REITs).

In terms of bonds, there are also a number of options. Investors might choose to buy municipal bonds which earn tax-free interest, or high-yield bonds which earn more than other bonds but come with increased risk.

It’s recommended that investors rebalance the portfolio annually to ensure the percentages remain on track.

Pros of the 60/40 Portfolio

The 60/40 portfolio is a simple strategy which has several upsides:

•  It can be very simple to set up, especially by purchasing the S&P 500 and U.S. Treasury Bonds
•  It’s a “set it and forget it” investment strategy, needing only yearly rebalancing
•  Holding bonds helps balance the risk of equity investments
•  It typically offers steady growth over time

Cons of the 60/40 Portfolio

Of course, as with any investing strategy, the 60/40 portfolio strategy comes with some downsides. The 60/40 portfolio used to be the standard choice for retirement, but people are living longer now and need a portfolio that will continue growing steadily and quickly to keep up with inflation. Here are some other factors to consider:

•  If investors buy individual stocks, they can be volatile
•  Mutual funds and ETFs can have high fees
•  Bonds tend to have low yields
•  The strategy doesn’t take into account personal goals and factors such as age, income, and spending habits
•  Limited diversification: Investors can also add alternative investments, such as real estate, to their portfolio
•  There is potential for both stocks and bonds to decline at the same time
•  Over time, a 60/40 portfolio won’t grow as much as a portfolio with 100% equities. This is especially true over the long-term because of compounding interest earned with equities.

Who Might Use the 60/40 Portfolio Strategy?

Some investors can’t sleep at night if they’re afraid their stock portfolio is going to crater overnight. Using the 60/40 strategy can take some of that anxiety away.

The 60/40 strategy is also a viable choice for those who don’t want to make a lot of decisions and just want simple rules to guide their investing. Beginner investors might decide to start out with a 60/40 portfolio and then shift their allocations as they learn more.

Additionally, those who are closer to retirement age may choose to shift from a stock-heavy portfolio to a 60/40 portfolio, in an effort to reduce risk and ensure they have enough savings to fund their retirement.

Investors who have a high risk tolerance and are looking for a long-term growth strategy might not gravitate toward a 60/40 plan, and instead choose to allocate a higher percentage of their portfolio to stocks.

Alternatives to the 60/40 Portfolio

In recent years, some major financial institutions have declared that the 60/40 portfolio is dead, and have been recommending that investors shift more towards equities, since bonds have not been returning significant yields and don’t provide enough diversification. Some suggest holding established stocks that pay dividends rather than bonds, to get a balance of growth and stability.

However, these recommendations are partly based on the fact that the current bull market is over, and they aren’t necessarily looking at the long-term market.

There are many other investment strategies to choose from, or investors might create their own rules for portfolio building. Here are a few common strategies:

Permanent Portfolio

This portfolio allocates 25% each to stocks, bonds, gold, and cash.

The Rule of 110

This strategy uses an investor’s age to calculate their asset allocation. Investors subtract their age from 110 to determine their stock allocation. For example, a 40-year-old would put 70% into stocks and 30% into bonds.

Dollar-cost average

Using this strategy, investors put the same amount of money into any particular asset at different points over time.

This way, sometimes they will buy high and other times buy low, and over time the amount they spent on the asset averages out.

Alternative Investments

Investors may consider allocating a portion of their funds to alternative investments, such as gold, real estate, or cryptocurrencies. These investments can help increase portfolio diversification, mitigate risk, and may generate significant returns.

The Takeaway

The 60/40 portfolio investing strategy—where a portfolio is comprised of 60% stocks and 40% bonds—is a popular one, but it’s not right for everyone. Though it carries less risk and is less volatile than a portfolio that contains only stocks, making it a traditionally safe choice for retirement accounts, experts worry that the current and expected future rate of return isn’t enough to keep up with inflation.

For investors who want a simple “set it and forget it” investment strategy, the 60/40 portfolio can be appealing. Other investors may decide to investigate alternative strategies, including the permanent portfolio or the rule of 110.

As always, the first step in building a portfolio is creating personal goals. Investors can make a plan based on their expected income, how much time they plan to spend on investing, and other personal factors. With a plan in place, it usually makes sense to stick with it, rather than switching strategies every time the market changes.

One easy way to get started building a portfolio is by using an online investing platform like SoFi Invest®. The investing platform makes it simple to buy and sell stocks and other assets right from your phone, with just a few clicks. There are zero transaction, membership, or hidden fees. Using the platform you can research and track your favorite stocks and set up personal investing goals.

SoFi offers both automated and active investing, so you can either choose each stock you want to buy, or choose from pre-selected groups of stocks and ETFs. If you need help getting started, SoFi has a team of professional advisors available to answer your questions and help you create a personalized financial plan to reach your goals.

Find out more about how SoFi Invest can work for you.


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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
For additional disclosures related to the SoFi Invest platforms described above, please visit http://www.sofi.com/legal.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns.. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

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