Rule of 72 Explained

Consider this fantasy: A person strides into a Las Vegas casino, slaps a stack of money down at the roulette table, putting it all on black. The wheel starts to spin, the ball lands on black, and boom, that money is doubled.

If only making money with investments were so easy, but it often takes years before investment gains reach that point.

The Rule of 72 is a shortcut equation to help you figure out just how long it will take to double an investment at a given rate of return. Best of all, the math is easy to do without the help of a calculator.

What Is the Rule of 72?

The Rule of 72 helps investors understand how different types of investments might figure into their investment plans. The formula for the rule is:

Number of years to double an investment = 72 / Interest rate.

In the case of investing, the interest rate is the rate of return on an investment. And that return compounds regularly.

For example, an investor has $10,000 to invest in an investment that offers a 6% rate of return. That investment would double in 72 / 6 = 12 years. Twelve years after making an initial investment, the investor would have $20,000.

Notice that when making this calculation, investors divide by six, not 6% or 0.06. Dividing by 0.06 would indicate 1,200 years to double the investment, an outlandishly long time.

This shorthand allows investors to quickly compare investments and understand whether their rate of return will help them meet their financial goals within a desired time horizon.

Where Did the Rule of 72 Come From?

The Rule of 72 is a shortened version of a logarithmic equation that involves complex functions you would need a scientific calculator to calculate. That formula looks like this:

T = ln(2) / ln(1 + r / 100)

In this equation, T equals time to double, ln is the natural log function, and r is the compounded interest rate.
This calculation is too complicated for the average investor to perform on the fly, and it turns out 72 divided by r is a close approximation that works especially well for lower rates of return. The higher the rate of return—as the rate nears 100%—the less accurate the Rule of 72 gets.

What is Compound Interest?

To understand how the Rule of 72 works, it’s important to get a clear idea of how the interest rate in the equation functions. There are two types of interest rates: simple interest and compound interest.

Simple interest is calculated using only the principal or starting amount. For example, an individual opens an account with $1,000 and a 1% simple interest rate. At the end of the year, they will have $1,010 in their bank account. But they’ll only earn 1% each year on their principal, aka that initial $1,000.

So even over a longer time period, the individual isn’t earning very much—after 10 years, for example, they will have accumulated a total of $1,100.

Simple interest may be even easier to conceptualize as a savings account from which an individual withdraws the interest each year.

In the example above the individual would withdraw $10 at the end of the year and start again with $1,000 the next year. Every year after that, they would start over with the same principal and earn the same amount in interest.

Compound interest, on the other hand, can help investments grow exponentially. That’s because it incorporates the interest earned on an investment in addition to the initial investment. In other words, an investor earns a return on their returns.

To get an idea of the power of compound interest it might help to explore a compound interest calculator , which allows users to input principal, interest rate, and compounding period.

For example, an individual invests that same $1,000 at a 6% interest rate for 30 years with interest compounding annually. At the end of the investment period, they will have made more than $5,700 without making any additional investments.

That fact is important to consider when conceptualizing the Rule of 72, because compound interest plays a big role in helping an investment double in value within a given time frame. It can help achieve high reward with relatively little effort.

What Can Be Learned From the Rule of 72?

For a relatively simple equation, the Rule of 72 can help investors figure out a lot of helpful information. For one, it can help them compare different types of investments that offer different rates of returns.

For example, an investor has $25,000 to invest and plans to retire in 20 years. In order to meet a certain retirement goal, that investor needs to at least double their money to $50,000 in that time period.

The same investor is presented with two investment options: One offers a 3% return and one offers a 4% return. The investor can quickly see that at 3% the investment will double in 72 / 3 = 24 years, four years past their retirement date. The investment with a 4% return will double their money in 72 / 4 = 18 years, giving them two years of leeway before they retire.

The investor can see that when choosing between the two options, choosing the 4% rate of return will help them reach their financial goals, while the 3% return will leave them short.

Higher returns are often correlated with higher risk. So this rule can help investors gauge whether their risk tolerance—or their return on investment—is high enough to get them to their goal. Depending on what their time horizon is, investors can easily see whether they need to bump up their risk tolerance and choose investments that offer higher returns.

By the same token, this rule can help investors understand if their time horizon is long enough at a certain rate of return. For example, the investor in the above example is already invested in the instrument that offers 3%.

The Rule of 72 can illustrate that they may need to rethink their timeline for when they will retire, pushing it past 20 years. Alternatively, they could sell their current investments and buy a new investment that offers a higher rate of return.

It’s important to understand that the Rule of 72 does not take into account additional savings that may be made to the principal investment. So if it becomes clear that the goal won’t be met at the current savings rate, an investor will be able to consider how much extra money to set aside to help reach the goal.

For example, if a 401(k) plan includes investments that offer a 6% return, the investment will double in 12 years. Is that fast enough according to the investor’s time horizon? If not, they may need to take a closer look at their retirement plan to figure out how to make up the difference.

Digging a Little Deeper

The Rule of 72 is really just a convenient short-hand that can give investors an idea of the effects of compounding interest over time.

In addition to an initial investment, interest rate, and compounding period, these calculators allow investors to input a monthly contribution rate. The resulting calculation will be an accurate picture of how much the investor will save over that given period.

For example, an investor makes an initial investment of $1,000 and a subsequent investment of $100 per month for the next 30 years. At a 6% rate of return compounded monthly, the investor would have saved more than $106,000.

Their total contribution would only have been $37,000, meaning through returns and the power of compound interest, the investor would have made about $69,000 in returns.

These tools can help investors understand how much to change their monthly contribution to reach higher savings goals.

What Else Can the Rule of 72 Be Used For?

The Rule of 72 can be used in other scenarios that use the principle of compounding interest. For example, a borrower that has credit card debt can figure out at what point their debt will double.

If the borrower owes $1,000 on their credit card with a 14% interest rate, they will double what they owe in a little over five years—and that’s if they stop using their card altogether in the interim.

The Rule of 72 can also be used to see the effects of things like inflation or fees that can take a bite out of an individual’s buying power.

For example, at an inflation rate of 2%, an individual’s money will lose half its buying power in 36 years (72 divided by 2). Bump the inflation rate up to 3% and it would only take 24 years for the value of an individual’s money to be cut in half.

Similarly, the Rule of 72 can help you understand the effects of investment fees. If you invest in a mutual fund that charges 3% fees, after 12 years (72 divided by 3), your investment principal will theoretically be cut in half.

Note, this is just the principal, the amount you initially invested, and does not account for gains in value or compounded returns the investment might have achieved.

Finally, the Rule of 72 doesn’t have to be used just for money. It can be used to help understand anything that grows exponentially, such as populations.

Hypothetically speaking, if a country’s population is growing at a constant 2%, the population would double in 72 divided by 2, or 36 years. Of course, this calculation is only an estimate and doesn’t take into account other factors, such as birth rate, that might affect population growth.

Variations on the Rule of 72

The Rule of 72 is only an approximation and depending on what you’re trying to understand there are a few variations of the rule that can make the approximation more accurate. One variation is the Rule of 69.3.

The rule of 72 is most accurate at 8%, and beyond that at a range between 6% and 10%. You can, however, adjust the rule to make it more accurate outside the 6% to10% window.

The general rule to make the calculation more accurate is to adjust the rule by one for every three points the interest rate differs from 8% in either direction.

So for an interest rate of 11%, individuals should adjust from 72 to 73. In the other direction, if the interest rate is 5%, individuals should adjust 72 to 71.

Some people prefer to use the Rule of 69.3, especially when interest compounds daily, to get a more accurate result. That number is derived from the complete equation ln(2) / ln(1 + r / 100). When plugged into a calculator by itself, ln(2) results in a number that’s approximately 0.693147.

Investors may find this calculation more difficult to do without a calculator than the Rule of 72.

Ready to Start Investing?

As we’ve seen, the Rule of 72 works best at interest rates between 6% and 10% , which individuals are likely to achieve through investment accounts. Investors may consider applying the Rule of 72 to an existing account to help estimate the future value of the investment.

For those who don’t already have an investment account, they might consider opening one through their bank or a brokerage firm. Some firms may have minimum deposit requirements to open an account, while others may not.

After a brokerage account is funded, an investor can then start placing orders to buy and sell investments online or through a stock broker who will execute trades on behalf of the investor.

Consider SoFi Invest® and get started with as little as $1 and trade stocks and exchange-traded funds with no management fees.


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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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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Is Mobile Banking Safe?

People are increasingly relying upon mobile banking apps. A study shows how they are among the most widely used apps in the United States today, along with social media ones and apps providing weather reports.

Mobile usage in North America has climbed over the past year, with nearly 57 million consumers saying they use mobile banking. This is an even more common practice for Millennials.

However, another research shows that almost one third of Americans distrust mobile banking. And, younger Americans are nearly as worried as older generations with hacking and malware as two of the top concerns.

So, is mobile banking safe? Are mobile banking apps secure? How concerned should you be when banking online? Are all apps equally safe/unsafe? How can you improve your online security when you conduct transactions? Are mobile banking and online banking the same? If not, which type is safer to use?

This post will dive into these types of questions. But, first, no—not all banking apps are the same or come with the same degree of security sophistication. Some choices, then, are safer than others.

How is Mobile Banking Different from Online Banking?

At its simplest, mobile banking occurs when a person makes a financial transaction through the use of a mobile device, such as a cell phone or tablet.

Transactions range from pretty simple ones, like signing up to have your bank send you informational text messages, to bill paying, sending money to other people in the United States or internationally, receiving funds, and so forth.

Traditional, brick-and-mortar financial institutions are increasingly offering internet-based services, and there are now mobile lenders that don’t even have an actual building for customers to use. Their mobile devices and apps are their branches.

Here’s something else to consider. Not all internet-based banking transactions are mobile ones. Mobile banking is a form of online banking, but it’s not the only type. You could, for example, conduct financial transactions on your home computer. That’s online banking, but it’s not mobile banking.

Is Mobile Banking Safer?

Some may believe that mobile banking is safer than online banking, while others disagree.

Ways in which mobile banking can be safer include how well-designed apps don’t store data, which makes that data harder to illegally obtain.

Plus, you’re less likely to need to deal with a smartphone virus than a computer one. And, overall , “Mobile phones have more security natively…the apps are more protected than the open website experience.”

To toss in another factor when comparing safety, not all banks use the same security procedures across channels. For example, some financial institutions may use multi-factor authentication technology on their mobile apps, but they don’t use the same level of security on their websites.

Protecting Yourself

A couple of quick and easy things you can do to protect yourself include to:

•   create a strong password for your accounts
•   avoid conducting transactions on a public computer
•   avoid using public WiFi for your transactions
•   make sure your bank is FDIC-insured
•   keep your phone updated to take advantage of the latest security measures available

The good news is that technology continues to improve in ways that boost security. A security measure being used by many financial institutions today is two-factor authentication, also called 2FA, or two-step verification. In authentication processes, there are typically three factors:

•   something you know (your password, for example)
•   something you have (such as your smartphone)
•   something you are (which could be your fingerprint, face, or retina)

In two-factor authentication, users must provide at least two forms of ID, such as the password and a fingerprint.

Or, the secondary authentication could be a numeric code that the user requests and receives via text. This code can only be used one time, preventing it from having value to hackers in the future.

Activity monitoring or user activity tracking can also boost security. In general, this involves software that monitors user behavior on devices to identify suspicious behavior.

Then, risk management can take place to help prevent data breaches or minimize damages. Another security measure is the ability to freeze an account if malicious activity is suspected.

If you’re unsure about what measures your bank takes to protect your data, it’s reasonable to ask the question. If you’re not satisfied with the answer, it can help to explore other options.

Online-Only Account Options

Traditional banks, credit unions, and so forth often provide internet-based services for customers. This section, though, will take a look at the pros and cons of online-only banking, meaning online institutions with no physical locations.

When there are no brick-and-mortar locations, banks can keep overhead costs low—which, in turn, allows them to offer perks over traditional banks, such as higher savings account rates.

Often, though, these online savings accounts limit how many transactions a customer can make a month, which is another way that online banks may cut costs. Limits vary by institution.

Traditional banks may require minimum balances, or require automatic deposits. If those conditions aren’t met, they may charge you a monthly fee. Some online financial institutions, though, don’t make that a requirement.

Online banks have convenient hours, typically open 24 hours a day. This can be helpful for people who can’t necessarily bank during regular hours. Typically, online banks participate in a network of ATMs, perhaps Allpoint or MoneyPass.

These ATMs usually don’t have fees. And, if an online bank isn’t part of an ATM network, the institution may offer to refund related fees up to a certain amount.

With mobile banking, you can deposit a check into your account using your smartphone or tablet camera. Usually, you need to endorse the check, and take a photo of the front and back—some institutions may have additional requirements.

Mobile depositing can be quite convenient, and you can generally use the service 24/7, with deposits typically showing up that day or the next, depending upon the bank’s rules and the time of your deposit.

This service saves you from making as many trips to ATMs—you can deposit checks from anywhere you have a mobile device, and funds are available quickly.

Banks may have limits on how much you can deposit in a day or month, and they will have a funds availability policy that will help you to know how long the institution will place a hold on a particular check, either partial or in total.

Although most online banks provide a customer service line, they usually don’t provide access to a personal banker who can help you to set up accounts, apply for loans, or discuss an issue you’re having. Another challenge associated with many online banks: They keep fees low by limiting the range of services offered, and may not offer checking accounts.

Finding a Mobile Banking Solution

SoFi Money is a cash management account has no account fees. With SoFi Money you can spend, save, and earn all in one place. We work hard to charge zero account fees. With that in mind, our fee structure is subject to change at any time.

Additionally, SoFi takes protecting your account seriously. If you see unusual or suspicious activity on your account, or lose your SoFi Money card, you can freeze your card instantly online or by using the app. If unauthorized activity takes place, simply contact us and we’ll help you to resolve the situation.

•   Each card chip generates a unique transaction code—making it hard to copy.
•   We provide two-factor authentication. To sign into your account, you’ll need your passcode, along with either a security code or fingerprint recognition.
•   We provide activity monitoring. If there is suspicious account activity, we’ll contact you and, if needed, restrict the account until the concern is addressed.
•   If you travel, you can set a notice to help prevent usage interruption. To set the travel notice, simply call SoFi Money® Customer Service at 1-855-456-7634, one-two days ahead of your travel, and let us know the location and timeframe of your travel.

Getting started with SoFi Money is fast and easy!


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.
Each business day, cash deposits in SoFi Money cash management accounts are swept to one or more sweep program banks where it earns a variable interest rate and is eligible for FDIC insurance. FDIC Insurance does not immediately apply. Coverage begins when funds arrive at a program bank, usually within two business days of deposit. There are currently six banks available to accept these deposits, making customers eligible for up to $1,500,000 of FDIC insurance (six banks, $250,000 per bank). If the number of available banks changes, or you elect not to use, and/or have existing assets at, one or more of the available banks, the actual amount could be lower. For more information on FDIC insurance coverage, please visit www.FDIC.gov . Customers are responsible for monitoring their total assets at each Program Banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. The deposits in SoFi Money or at Program Banks are not covered by SIPC.
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Neither SoFi nor its affiliates is a bank.

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A Guide to High-Risk Stocks

Investing always comes with risk. The question for most new investors will be how much risk they are willing to take on.

Conventional wisdom often says that younger investors tend to be able to afford greater risks, since they will, in theory, have the rest of their working lives to earn back any potential losses in most cases. That assumes that a young investor doesn’t have other debt, which would otherwise eat away at profits.

Investors who are closer to retirement, however, typically choose to focus on safer investments that tend to produce more predictable and reliable, albeit smaller, gains.

Such low-risk investments may include things like government treasury bonds, stocks of large companies, and cash held in certificate-of-deposit (CD) savings accounts. Investments like these tend to yield relatively small amounts of interest or dividends while often having reduced risk and volatility.

Investments that carry higher-than-average risk, such as junk bonds, leveraged ETFs, cryptocurrencies and penny stocks, can yield much higher returns. They may also lead to bigger losses.

If you’re looking to take on substantial risk, this article may be a good starting guide. Of course, the more you are willing to risk, the more you stand to potentially lose.

Why would anyone want to invest in high-risk stocks and other securities with similar risk profiles?

First, very few people put 100% of their portfolio into investments like these (unless they really like to gamble and don’t mind potentially going broke). Instead, risk tends to be considered as part of a broader asset allocation strategy.

That’s a fancy term for figuring out how best to invest your money to get the most returns with the least risk.

Ideally, investors take on just enough risk to potentially increase their returns without ruining their long-term prospects should they lose up to 100% of their allocation to high-risk assets. The balance between safe and risky assets tends to be determined by individual investor goals, as mentioned.

Investors with high risk tolerance have no shortage of investment vehicles to choose from.

Definition of High-Risk Investments

What makes an investment “high risk?”

First, note that there is no widely-agreed upon definition as far as what makes an asset “high risk.”

However, there are different ways to attempt to measure risk. Some of them are objective measurements of aspects of a specific investment while others are more generic insights. Penny stocks are riskier than stocks of big companies, for example, because their underlying businesses generally aren’t nearly as stable or profitable.

Statistically-based measurements of risk, such as variance, seek to assign some kind of mathematical value to the risk involved in a particular investment.

An important thing to note is that riskier types of investments are generally considered to be ones that have greater volatility and greater chances to see negative returns.

In other words, when investing in the types of things described here, investors will be likely to see their money take large up-and-down swings in price, and will also be more likely to lose a significant portion of their investment, even if it’s just temporary.

When it comes to high-risk stocks and other investments involving significant risk, wise investors often follow the adage “never invest more than you can afford to lose.”

Let’s really hammer that last point home: high-risk investors must be prepared for the possibility of losing a significant amount or the entirety of their funds.

Types of High-Risk Stocks and Investments

Stocks with high risk and other risky investments come in many shapes and sizes.

There are too many investments of this type to list. And new ones are always being created.
The allure of big profits in a short time has led to the creation of many investment vehicles of questionable quality.

It’s not all that different from the gambling industry. Entire businesses, and even entire cities, have been built up around the glitz and glamor of potentially getting rich quick.

Investors would do well to be wary of anything promising a guaranteed large return on investment in the immediate future. Promises like these might be scams at worst, and when true, tend to involve significant risk.

That said, all investing involves some risk.

Here are several types of high-risk investments.

Hedge Funds

Think of hedge funds like high-risk funds. A pool of investor money gets invested in different assets. The goal of a typical hedge fund is to get high rates of return for investors by any means possible. That means taking on lots of risk.

There is no established definition of what a hedge fund can invest in. There are hedge funds specializing in all kinds of asset classes, including things like:

•   Junk bonds
•   Real estate
•   Cryptocurrencies
•   Stocks related to a specific industry

In general, hedge funds are only available to “accredited investors.” That means investors have to fit specific criteria, such as making more than $200,000 per year if the investor is an individual. Certain financial entities like trusts and corporations can also be accredited investors .

Part of what makes hedge funds risky is that they are not subjected to the same government regulations that are designed to offer protection to everyday investors. The reasoning behind this is that only sophisticated investors should be involved in the first place.

Cryptocurrencies

Bitcoin, the first cryptocurrency, gave birth to an entirely new asset class when it was created in 2009 by a pseudonymous programmer or group of programmers called Satoshi Nakamoto.

Cryptocurrencies are based on blockchain technology, which allows for a distributed network of computers to work together on the same thing.

The entire cryptocurrency market is only worth a few hundred billion dollars, which is tiny when compared to something like the gold market, which is worth well over $7 trillion. Or the real estate market, the largest asset market in the world, which is worth over $200 trillion.

The thin market makes cryptocurrencies very volatile and highly speculative. Bitcoin has the largest market cap and longest track record, making it somewhat less speculative than the hundreds of other cryptocurrencies (many of which have gone to zero or close to it).

What attracts most investors to this market is the potential for outsized gains. During the years of 2017 and 2018, some tokens saw their value increase by huge amounts in short timeframes.

And some hedge funds specializing in cryptocurrencies reported returns of 10,000% or more. By comparison, the average annual return of the S&P 500 index over the past 90 years is about 10%.

Cryptocurrency markets are mostly unregulated and full of potential pitfalls, including many scams and a high rate of failure for most projects.

Venture Capital

Venture capital refers to a form of investing that targets a new company and seeks to help it grow.

The requirements for companies to have access to the public equity markets, meaning they raise money by selling their shares on an exchange where any average investor can purchase them, are quite high. The vast majority of corporations aren’t eligible for this kind of funding, so some of them turn to venture capitalists.

Venture capital funds often receive much of their funding from large institutions like pension funds, university endowments, insurance companies, and financial firms.

The term “venture capital” has become closely associated with the tech industry, as many entrepreneurs in technology that believe they have promising ideas turn to venture capitalists to fund their startups.

Traditional business loans often require real assets as collateral, and with many modern companies being information-based, that kind of loan isn’t always an option.

Most new businesses fail, making venture capital investing full of risk. But the possibility of getting an early investment in the next big tech company means the potential reward can also be high.

Angel Investing

Angel investing is similar to venture capital in that both refer to a form of equity financing—a way for businesses to fund their operations in exchange for a stake of ownership in the company.

The term “angel investor” is a more generic term that applies to anyone willing to take a gamble on a new startup. Angel investors are most often high net worth individuals looking for big returns on their investment. If you’ve ever seen the show Shark Tank, then you’ve witnessed a form of angel investing.

Crowdfunding is a newer form of angel investing whereby many people contribute small amounts of money to a cause. Go Fund Me campaigns are an example of crowdfunding.

Spread Betting

Spread betting refers to making a bet on the direction of the price of an asset without actually holding it. Investors can make bets on things like currencies, bonds, commodities, or stocks. In spread betting, you make money if the asset moves in the way you predicted, and you lose if it moves the opposite way.

Spread betting is often offered as a leveraged product, meaning investors can trade on margin. If the margin requirement were 10%, for example, a bet of $10,000 could be made with as little as $1,000. This amplifies both losses and gains. When trading on margin, investors can lose more than they initially invest.

It’s basically like flipping a coin with a friend while you make bets on whether it will come up heads or tails, although spread betting is a little more complicated in practice and much riskier.

In fact, spread betting is so speculative that it’s even considered gambling by law in some places. That means realized gains might not be subject to the same capital gains tax that profits on other investments typically are.

Penny Stocks

Penny stocks are broadly defined as any stocks that trade at a market value of less than five dollars per share.

These are considered to be high-risk stocks because they:

•   Have a small market cap, which means higher volatility in their share price.
•   The companies tend to be younger and have had less of a chance to prove themselves.

The term “penny stocks” is broad and applies to stocks across all industries. Penny stocks might represent shares of companies in utilities, energy, gold mining, technology, or anything else.

Like other high-risk, high-reward stocks, penny stocks can yield high returns in a short amount of time. This is partly due to the fact that a small company might see rapid growth, and partly due to the fact that many investors speculate in penny stocks.

Along with cryptocurrencies, penny stocks might be among the most easily accessible risk assets listed here. Anyone can trade them—the only thing required is a brokerage account.

Leveraged ETFs

The thing that makes a leveraged ETF risky is the word “leveraged.” A leveraged investment vehicle is one that offers returns or losses several multiples higher than what someone has to invest, as we just described in the section on spread betting.

A leveraged ETF might not necessarily invest in high-risk stocks. No matter what assets they invest in, though, being leveraged involves a higher amount of risk than a similar ETF with no leverage.

Using debt or derivatives, leveraged ETFs attempt to generate, on average, two or three times the daily performance of a given index.

There are leveraged ETFs that rise in price along with the assets they track (bull ETFs) and those that rise in price when the assets they track go down in price (bear ETFs, also known as inverse ETFs).

Unregulated Collective Investment Schemes

If there ever were a great example of a high-risk investment, unregulated collective investment schemes (UCIS) would be it.

A UCIS functions similarly to a mutual fund in that a pool of investor money gets collected and invested in different assets.

However, as the name suggests, there are no regulations in place to safeguard consumers. Investors have to place all of their trust in the people managing the scheme.

Investing in High-Risk Stocks Yourself

While high-risk stocks are, of course, risky, that might not necessarily mean everyone needs to avoid them all the time. As noted before, some experts believe younger investors may have a higher-than-average tolerance for risk.

Financial advisors can recommend a balanced approach to investing based on a person’s individual circumstances and goals. With SoFi Invest®, financial planners are available to talk to members—at no charge—about their financial goals, plans, and risk tolerance.

Additionally, with SoFi Invest, new investors have access to higher risk investments such as crypto, as well as the ability to be hands-on with active investing or hands-off with automated investing.

And members also get access to current trends and news updates on the financial markets, all through the SoFi app.

Ready to start investing, high risk or otherwise? Check out SoFi Learn.


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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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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What is Value Investing?

If you’re the type of person who researches every big purchase, hoping to get the highest quality merchandise or service for the least amount of money possible—whether it’s a TV, a smartphone, or a car—you’re a value shopper.

Value investors bring that same concept to building a stock portfolio. They seek out stocks they believe are worth more than the current prices reflect.

Value investing is an investment philosophy that takes an analytical approach to selecting stocks based on a company’s fundamentals—such as earnings growth, dividends, cash flow, book value, and intrinsic value. Value investors don’t follow the herd when it comes to buying and selling, which means they tend to ignore tips and rumors they hear from coworkers and talking heads on TV.

Instead, they look for stocks that seem to be trading for less than they should be, perhaps because of a negative quarterly report, management scandal, product recall, or simply because they didn’t meet some investors’ high expectations.

That doesn’t mean value investors are looking for the cheapest stocks out there.

Their goal is to find stocks the market may be underestimating and, after doing their own in-depth analysis, decide whether those stocks have the potential to pay off over the long term.

Who Made Value Investing Popular?

Billionaire Warren Buffett , the CEO of Berkshire Hathaway, also known as the “Oracle of Omaha,” is probably the most famous (and most quoted) value investor of all time.

From 1965 to 2017, Buffett’s shares in Berkshire Hathaway had annual returns of 20.9% compared to the S&P 500’s 9.9% return.

Buffet is often quoted as saying, “The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.”

Buffett’s mentor was Benjamin Graham , his teacher at Columbia Business School and later his employer, who is known as “the father of value investing.” Columbia professor David Dodd , another Graham protegee and colleague, is recognized for helping him further develop several popular value investing theories.

Billionaire Charlie Munger , vice chairman of Berkshire Hathaway Corp., is another super-investor who follows Graham and Dodd’s approach.

And billionaire investor Seth Klarman , chief executive and portfolio manager of the Baupost Group, is a longtime proponent.

Joel Greenblatt , who ran Gotham Capital for over two decades and is now a professor at Columbia Business School, is the co-founder of the Value Investors Club .

How Does Value Investing Work?

Value investing is an investing strategy, but it’s similar to how a value shopper might operate when hoping to buy a certain brand of a smartwatch for the lowest price possible.

If that shopper suddenly saw the watch advertised at half the price, it would make them happy, but it also might make them wonder: Is there a new version of the watch coming out that’s better than this one? Is there something wrong with the watch I want that I don’t know about? Is this just a really good deal, or am I missing something?

Their first step would likely be to go online and do some research. And if the watch was still worth what they thought, and the price was a good discount from a reliable seller, they’d probably go ahead and snap it up.

Investing in stocks can work in much the same way. The price of a share can fluctuate for various reasons, even if the company is still sound. And a value investor, who isn’t looking for explosive, immediate returns but consistency year after year, may see a drop in price as an opportunity.

Value investors are always on the lookout to buy stocks that trade below their intrinsic value (an asset’s worth based on tangible and intangible factors).

Of course, that can be tricky. From day to day, stocks are worth only what investors are willing to pay for them. And there doesn’t have to be a good reason for the market to change its mind, for better or worse, about a stock’s value.

But over the long run, earnings, revenues, and other factors—including intangibles such as trademarks and branding, management stability, and research projects—do matter.

Or, as Buffett’s mentor Graham, put it: In the short run, the market is like a voting machine, tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine—assessing the substance of a company.

What Factors Are Worth Considering?

Value investors use several metrics to determine a stock’s intrinsic value. A few of the factors they might look at (and compare to other stocks or the S&P 500) include:

Price-to-Earnings Ratio (P/E)

This ratio is calculated by dividing a stock’s price by the earnings per share. For value investors, the lower the P/E, the better; it tells you how much you’re paying for each dollar of earnings.

Price/Earnings-to-Growth Ratio (PEG)

The PEG ratio can help determine if a stock is undervalued or overvalued in comparison to another company’s stock. If the PEG ratio is higher, the market has overvalued the stock. If the PEG ratio is lower, the market has undervalued the stock. The PEG ratio is calculated by taking the P/E ratio and dividing it by the earnings growth rate.

Price-to-Book Ratio (P/B)

A company’s book value is equal to its assets minus its liabilities. The book value per share can be found by dividing the book value by the number of outstanding shares.

The price-to-book ratio is calculated by dividing the company’s stock price by the book value per share. A ratio of less than one is considered good from a value investor’s perspective.

Debt-to-Equity Ratio (D/E)

The debt-to-equity ratio measures a company’s capital structure and can be used to determine the risk that a business will be unable to repay its financial obligations. This ratio can be found by dividing the company’s total liabilities by its equity. Value investors typically look for a ratio of less than one.

Free Cash Flow (FCF)

This is the cash remaining after expenses have been paid (cash flow from operations minus capital expenditures equals free cash flow).

If a company is in good shape, it should have enough money to pay off debts, pay dividends, and invest in future growth. It can be useful to watch the ups and downs of free cash flow over a period of a few years, rather than a single year or quarter.

Over time, each value investor may develop their own formula for a successful stock search. That search might start with something as simple as an observation—a positive customer experience with a certain product or company, or noticing how brisk business is at a certain restaurant chain.

But research is an important next step. Investors also may wish to settle on a personal “margin of safety,” based on their individual risk tolerance. This can protect them from bad decisions, bad market conditions, or bad luck.

Determining Margin of Safety

Solid research is the value investor’s first line of defense against losing money on a stock purchase. But while most investors may have access to the same basic information, their valuations could differ greatly.

Just in case that valuation is wrong (because intrinsic value is subjective), investors also can minimize their loss by building in a safety cushion. The idea of using a margin of safety, or leaving some room for error, is a core principle of value investing.

Or, as this Warren Buffet quote puts it: “You build a bridge that 30,000-pound trucks can go across, and then you drive 10,000-pound trucks across it.”

The greater the margin of safety—the difference between the stock’s prevailing market price and its estimated intrinsic value—the higher the potential for high-return opportunities and the lower the downside risk. What’s a good margin of safety? It’s different for everyone.

It all comes down to how much an investor is willing to lose. For example, an investor who uses a 20% margin of safety as a personal guide might buy a stock with an intrinsic value of $100 a share but a price of $80 per share or less. Another investor may feel more comfortable with a 30% to 40% margin of safety.

That investor might have to wait longer for the stock to drop to their price, or they might not ever get the opportunity to add it to their portfolio, but they’re doing what works for him.

Avoiding Herd Mentality

Doing what feels right on a personal level instead of going with the flow is a big part of value investing. And it isn’t always easy.

If everyone around you is talking about a particular stock, that enthusiasm can be contagious. Which is why a typical investor’s decision making is often heavily influenced by relatives, co-workers, friends, and acquaintances. (Beware the dangers of a chatty neighbor at the yearly barbecue!)

For an investor who believes the pursuit of market-beating performance is more about randomness than research, emotions (fear, greed, FOMO) can be their worst enemy.

According to the research firm DALBAR ’s latest Quantitative Analysis of Investor Behavior (QAIB), investors lost 9.42% of their investment over the course of 2018, compared with a 4.38% loss by the S&P 500.

“Judging by the cash flows we saw, investors sensed danger in the markets and decreased their exposure, but not nearly enough to prevent serious losses,” DALBAR’s chief marketing officer, Cory Clark, noted in a press release when the study came out in 2019.

“Unfortunately, the problem was compounded by being out of the market during the recovery months,” Clark said. “As a result, equity investors gained no alpha, and in fact trailed the S&P by 504 basis points.”

And that isn’t all that unusual. Over a 20-year period, from 1999 to the end of 2018, while the S&P 500’s average annual return was 5.62%, DALBAR found the average equity investor’s return was 3.88%.

Behavioral biases can lead to knee-jerk reactions, which can result in investing mistakes. It takes patience and discipline to stick with a value investing strategy.

Value investors don’t follow the herd. They eschew the Efficient Market Hypothesis (EMH ), which states that stock prices already reflect all known information about a security.

Value investors take the opposite approach. If a well-known company’s stock price drops, they look for the reasons why the company might be undervalued. And if there are strong signs the company could recover and even grow in the future, they consider investing.

What Are Some Strategies Value Investors Use?

Value investing isn’t about finding a big discount on a stock and hoping for the best, or making a quick buck on a market trend.

Value investors seek companies that have strong underlying business models, and they aren’t distracted by daily price fluctuations. Their decisions are based on research, and their questions might include:

•   What is the potential for growth?
•   Is the company well managed?
•   Does the company pay consistent dividends?
•   What is the company doing about unprofitable products, projects, or divisions?
•   What are the company’s competitors doing differently?
•   How much do I know about this company or the business it’s in?

Investors who are familiar with an industry or the products it sells (either because they’ve worked in that business or they use those goods or services) can tap that knowledge and experience when they’re analyzing certain stocks.

The same line of thought can be applied to companies that sell products or services that are in high demand. That brand might be expected to remain in demand into the future because the company has a reputation for evolving as times (and challenges) change.

Investors who are time-crunched or still learning the basics might find the homework daunting. Deep diving into earnings reports, balance sheets, and income statements, and pondering what the future might hold isn’t for everyone.

But those investors can still pursue a value strategy by putting their money into mutual funds or exchange-traded funds (ETFs) that follow the same principles.

Whether an investor is DIYing it or getting help from a professional, value investing is a long-term strategy. Which means it’s usually part of an overall financial plan.

And if all the pieces of that plan align, an investor may be able to better control when and if they want to sell certain shares to help with a home purchase or some other big expense, or for income in retirement.

Want to Give Value Investing a Try?

If you’d like to try value investing, opening an investment account with SoFi Invest® can be a good way to get started.

There are no account minimums, so you can take your time choosing the investments that feel right. And with SoFi Active Investing, you can be as hands on as you like, creating and managing your own portfolio. But you still can ask SoFi’s credentialed financial advisors for help at any time.

If active investing doesn’t suit you—or if it just isn’t a good fit right now—you can use SoFi Automated Investing and have SoFi help make and manage your portfolio without paying a management fee.

Ready to get started? Check out what SoFi Invest can do to help you work on growing your wealth.


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.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party 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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The Bottom Up Investing Approach

The types of strategies or philosophies investors use to grow their portfolios might be as varied as the types of investments they have to pick from—growth vs. value stocks, conscience-based investing or industry trends, to name a few.

More or less, however, stocks are commonly analyzed two different ways: top-down vs. bottom-up investing.
The top-down strategy starts with researching the big investing picture, including world economic news, market trends and other macroeconomic indicators.

Stocks are chosen based on how investors believe the market as a whole will perform. Individual stocks might play a role, but they aren’t the central focus. Mutual funds and exchange-traded funds (ETFs), that choose a group of stocks based on common factors, are more popular with top-down investors.

The bottom-up strategy focuses on microeconomic factors that influence individual businesses.

Investors research individual companies they believe to be good investments by digging deep into their financial reports, historical trends, profit margins and customer base.

Although industry trends and market factors do play some role, bottom-up investing is about picking companies that an investor believes will perform well no matter what the market does.

Theoretically, bottom-up investing is the notion that a handful of solid, handpicked companies will bring better returns over the long run than jumping on bandwagons or trying to time the market.

Strategically, it’s a long-term, buy-and-hold proposition. And philosophically, it’s making a well-educated bet on a company’s future profits based on thorough research of its inner workings and history.

How Bottom-Up Investing Works

A bottom-up investment strategy starts with research into individual companies, but that’s a lot easier than it sounds when there are around 630,000 publicly traded companies around the world.

To narrow down that field, some investors begin with public companies that either have long and successful track records or that they already know and love. From there—and thanks to the web—the amount of information they can gather is virtually limitless.

Useful Documents for Investment Research

In the United States, companies who trade on the stock exchanges must file a number of documents with the U.S. Securities and Exchange Commission (and the public) that outline a number of financial benchmarks, such as profit margin, cash flow, and income. All public documents held by the SEC are searchable via its EDGAR database .

Here are some of the most common:

•   Registration Statements: These documents are the first to be filed when a company wants to undergo an initial public offering (IPO), or “go public.” They include a prospectus, which summarizes the organization’s planned share quantity, size and price, and details on the company’s history, management, operations, current financial state and any insight into future risk.
•   10K Report: This is a company’s official (and lengthy) annual report , and it’s due to the SEC within 90 days of the end of its fiscal year. It lays out the company’s financial growth and change over the previous 12 months, as well as information about products or services, operations reviews, major markets or headlines. Often they’re accompanied by an earnings call, where the business’ top financial executive gives more details about the reports and takes questions from business reporters.
•   10Q Report: This truncated version of the 10K is filed quarterly, so it fills in the gaps between annual reports. They’re a bit less formal than the 10K reports and often review not only what’s happened in a company during the past three months.
•   Forms 3, 4 and 5: Company executives who become “insiders”—directors, officers, or anyone who holds more than 10% of any class of a company’s securities, for example—are required to report any transactions they make regarding their company’s own stock. Form 3 is for new insiders and must be filed within 10 days of the appointment, Form 4 documents actual securities transactions, and Form 5 catches any transactions that didn’t meet the threshold for Form 4. For some investors, these forms give good insight into how the company’s executives feel about their own position in the market.
•   Proxy Statements: This form is how investors get an inside look at a company’s executive and management salaries, potential conflicts of interest, and other perks of life in the C-suite. Shareholders aren’t allowed to vote on members of the board or approve other company actions until it’s filed with the SEC.
•   Schedule 13D: If any individual or entity acquires more than 5% of a company’s shares, this form introduces them to investors and includes information like the major shareholder’s contact information, background (including criminal), the type of securities they purchased, how they purchased them, and their relationship to the company. Sometimes a 13G, an abbreviated version of the 13D form, can be filed instead, but this depends on specific circumstances.

Crunching the Numbers

An annual report is pages and pages (and pages) of pie charts, graphs, equations, and numbers, all in small font. It can be dizzying just to look at, much less to decipher.

To separate the most important information, investors employ a number of investment ratios and key indicators when evaluating a stock.

Some key ratios and values include:

•   Price-to-Earnings (P/E) Ratio: The company’s market price divided by its earnings per share. It can predict how many years it will take for a company to have enough value to buy back its stock.
•   Price-to-Sales (P/S) Ratio: A company’s market capitalization (the dollar value of all the company’s outstanding stock) divided by its revenue. Ideally, the P/S ratio should be one, or as close to one as possible. If the value is lower than one, that indicates an even stronger P/S ratio.
•   Earnings per Share (EPS): Net income, minus any preferred stock dividends, divided by the total number of outstanding shares of common stock. An EPS on the rise over time means the company might have more money to either distribute to its shareholders or re-invest into the business.
•   Return on Equity (ROE): Find this number by dividing the company’s net income by shareholder equity, times 100. For many analysts, ROE is a major indicator of a company’s growth in profit over time.
•   Profit Margins: These come in three varieties: gross, operating, and net. Each measure the company’s profitability based on whether certain figures, such as operating costs and overhead expenses, are considered. These numbers give insight into a company’s efficiency and how it uses its resources.
•   Future Expected Earnings: This formula which considers annual dividends and their growth rates, can’t predict the future, but it can create an educated guess on where a company’s stock might go, especially one that has historical data to draw from.
•   Financial Statements: Analyzing financial statements can provide important insight into how a company operates. Common documents included in a company’s financial statements are; a balance sheet, which provides a snapshot of assets, liabilities and shareholder equity as they currently stand; a profit-and-loss statement (P&L), which looks at money coming in vs. money going out; and a cash-flow statement, which is a key indicator of whether the company is over or undervalued (a high valuation with little cash flow is a red flag.)

Yep—that’s a lot of math. But taken together, the numbers can paint a solid picture of not only a company’s past and current performance, but also it’s potential for the future as well. All of these factors can help investors as they decide which stocks to invest in.

Business News

Especially in today’s online-first world, all the good valuation in the world can’t help a company if its CEO is the star of a scandalous viral video.

For this reason, it’s just as important to keep an eye on the outside factors involving companies of interest, including personnel changes, headlines, new products or services, or marketing campaigns.

The financial world has its go-to publications, including the Wall Street Journal, Bloomberg and Investor’s Business Daily, along with a host of industry-specific publications.

Online tools employ tech to help investors play around with different scenarios, and even setting up a simple Google search on a business name can help interested investors stay in the loop.

Bottom-Up Investing: An IRL Example

Here’s a hypothetical example of how bottom-up investing works in action.

Jane is a loyal follower of The Widget Co. She’s used its products for years, is brand loyal and thinks the CEO is a visionary leader. She’s interested in purchasing Widget stock, but knows that being a shareholder is a lot different than being a consumer.

Although she likes what she has seen so far, she wants a peek behind the curtain—who holds leadership positions, its operational philosophy and how it manufactures those products she loves so much.

Her first step is Widget’s financial documents, where she looks for things like consistent upward trends in stock prices and a favorable P/E ratio. She compares Widget’s trends over time to the overall market to see its individual performance against market ups and downs.

Next, she takes to the web and discovers that The Widget Co. has a YouTube channel with behind-the-scenes tours of its manufacturing processes.

She checks LinkedIn profiles and Googles the names of the CEO and senior leadership to see their resumes, and whether they’ve ever made the news—for better or worse—and sets up news alerts with the company’s name so she doesn’t miss anything new.

Finally, to get a feel for the overall industry and the public’s feelings toward the company, she checks social media. Do other people love these products as much as she does? What are the ratings and reviews? She understands that just because one sector is popular at the moment doesn’t necessarily mean that The Widget Co. is a part of that trend.

Jane likes what she sees, but after running some numbers to determine the stock’s real value, she decides that it’s a bit too expensive to buy, for now. But if it hits her target number, she’s in.

Strategies for Success

Think of top-down investing vs. bottom-up investing as the tortoise vs. the hare (with the bottom-up approach, you’re the tortoise.) Finding success with the bottom-up investing approach is a long (long) game, so it can be important to come to the table with a double dose of patience.

It’s one reason long-term stock picks are often referred to as value stocks vs. growth stocks. Growth-stock investors go for the big risks and the big wins, while value investors (also called income investors) take a more calculated approach in hopes of steady growth over the long term.

One thing bottom-up investing is not, however, is set-it-and-forget-it. Things do change over time, and even the most seasoned companies can endure hardships—especially in the face of a changing economy and changing tech (brick-and-mortar shopping, for example.)

For that reason, it’s important for a bottom-up investor to periodically check in on their stock picks to ensure they’re still a good decision.

Things to Consider

No matter which type of investing approach is taken, it’s important to consider risk tolerance. How much would it be okay to lose if the market crashed?

Are you more fight or flight? For some investors, any dip in the stock market scares them into pulling out, and potentially missing out on even bigger returns in the future.

It’s also important to keep in mind that even the most solid companies now might see trouble in the future. What are the signs that a company is no longer a good investment?

Changes like a slowdown (or full stop) in profits, the accumulation of debt or cutting dividends are all potential watch-out for trouble, as well as any type of investigation.

Get Started With Stock Bits

Imagine finding the perfect stock, and then experiencing sticker shock at the price of one share.

That used to be the minimum buy-in for a stock purchase, but just like ETFs have made it possible to invest into little bits of business at a time, fractional shares allow investors to buy just a portion of even the most expensive stocks out there.

Fractional Share Investing allows investors to claim a sliver of their favorite stocks, for as little as $1 with no fees. Investing with SoFi Stock Bits, is as easy as opening and funding an online investing account with SoFi and selecting from stocks like Amazon, Apple, Facebook, Netflix, and Tesla.


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.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party 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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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