How to Trade ETFs: X Strategies for Retail Investors

How to Trade ETFs: Strategies for Retail Investors

Conventional wisdom suggests investors are limited in what they can do with an exchange-traded fund (ETF). An investor can certainly buy into a fund based on portfolio needs and unique investment preference, with the goal hanging on to a good ETF for the long haul. That’s called taking a “buy and hold” strategy, which is common with mutual funds and ETFs.

But ETFs offer investors more options than that. For instance, it’s possible to trade an ETF, too, just like one would a stock, commodity, or cryptocurrency.

Let’s take a closer look at trading ETFs, and dig into the components, strategies, and trading formulas that can work with a fund.

ETFs, Explained

An exchange-traded fund is a popular investment vehicle that enables investors to buy a group of stocks in one bundle, thus promoting investment diversity and efficiency. They’re widely available, usually through major investment fund companies.

ETFs aren’t mutual funds, although they originate from the same fund investment family. The primary differences between the two is that mutual funds are usually more expensive than exchange traded funds. Another benefit of ETFs is that whereas mutual funds can only be traded after the end of the market day, ETFs can be traded during open market sessions at any point in the day.

ETFs have become wildly popular: According to the Investment Company Institute, the combined assets of the nation’s exchange-traded funds totaled $6.49 trillion in June, 2021.

Different Types of ETFs

ETFs are represented in all of the main stock categories, as follows:

Stock ETFs: This type of ETF is composed of various equity (stock) investments.

Bond ETFs: Bond funds hold different types of bond vehicles, like U.S. Treasury bonds, utility bonds, and municipal bonds.

Commodities: Commodity ETFs are popular with investors who want gold, silver, copper, oil, and other common global commodities.

International ETFs: Global-based ETFs usually include country-specific funds, like an Asia ETF or a Europe ETF, which are made up of companies based in the country featured in the ETF.

Emerging market ETFs: This type of ETF is composed of stocks from up-and-coming global economies like Indonesia and Argentina.

Sector ETF: A sector ETF focused on an economic sector, like manufacturing, health care, climate change/green companies, and semiconductors, among others.

Recommended: Tips on How to Choose The Right ETF

4 Reasons to Consider Trading ETFs

Trading ETFs offers the same advantages (and risks) associated with trading common stocks. These features and benefits are at the top of the list.

1. ETFs Provide Liquidity

In a $6.49 trillion market, there is likely no shortage of investors looking to buy and sell ETFs. By and large, the bigger the market, the more liquidity it provides, and the easier it is to move in and out of positions.

2. There are Different Investment Options

With ETFs widely available in popular categories like stocks, bonds, commodities, and more recently, green industries and cryptocurrencies, ETF traders have plenty of investment choice.

Recommended: Investing in Bitcoin ETFs

3. ETFs Offer Portfolio Diversity

Investment experts often extol the virtue of a diverse portfolio, i.e. one made up of both conservative and more aggressive investments that can balance one another and help reduce risk. With so many classes of ETFs available, it’s relatively easy to build an ETF trading portfolio that has different asset classes included.

4. ETFs Are Relatively Inexpensive to Trade

Exchange-traded funds are typically inexpensive to buy — the average fee for buying an ETF is just under 0.20 percent of the total asset purchased. Some brokerage platforms may offer commission-free ETFs.

What Are the Risks of Trading ETFs?

The main risk associated with trading ETFs is the same as with trading stocks — you could lose money. While shedding cash is always a threat when trading any security, the liquidity associated with exchange-traded funds makes it relatively easy to sell out of a position if needed. A candid conversation with a financial advisor may help investors deal with ETF investment trading risks.

How to Trade ETFs

Just as you can trade stocks, you can trade ETFs, too, by taking these steps.

Step 1. Choose a Trading Platform

Traditionally, investors trade stocks through a brokerage house or via an online broker more recently, on alternative trading platforms where investors can buy partial shares of a stock. As with most things in life, it’s generally a good idea to look around, kick some proverbial tires, and choose a broker with the best ETF trading services for you.

Investors can choose from different categories of ETF trading accounts, ranging from standard trading accounts with basic trading services to retirement accounts, specialty accounts, or managed portfolio accounts that offer portfolios managed by professional money managers. When looking for a good ETF trading platform, seek an account that offers the ability to regularly track market performance, create a unique portfolio trading plan, and “test” sample portfolios before you start trading for real.

Step 2. Select an ETF Trading Strategy

The path to successful ETF trading flows through good, sound portfolio construction and management.

That starts with leveraging two forms of investment strategy — technical or fundamental analysis.

Technical analysis: This investment strategy leverages statistical trading data that can help predict market flows and make prudent ETF trading decisions. Technical analysis uses data in the form of asset prices, trading volume, and past performance to measure the potential effectiveness of a particular ETF.

Fundamental analysis: This type of portfolio analysis takes a broader look at an ETF, based upon economic, market, and if necessary, sector conditions.

Fundamental analysis and technical analysis can be merged to build a trading consensus, typically with the help of an experienced money manager.

Any trading strategy used to build ETF assets will also depend on the investor’s unique investment needs and goals, and will likely focus on specific ETF portfolio diversification and management. For example, a retiree may trade more bond ETFs to help preserve capital, while a young millennial may engage in more stock-based ETF portfolio activity to help accumulate assets for the long haul.

Step 3. Make the Trade

Executing ETF trades is fairly straightforward for retail investors. It may be best to consider starting out with small positional trading, so that any rookie mistakes would be smaller ones, with less risk for one’s portfolio.

Here are two trading mechanisms that can get you up and running as an ETF trader:

Market order. With market order trading, you buy or sell an ETF right now at the current share price, based on the bid and the ask — the price attached to a purchase or a sale of a security. A bid signifies the highest price another investor will pay for your ETF and the ask is the lowest price an ETF owner will sell fund shares. The difference between the two is known as the trading “spread.”

A word of caution on market trades. ETFs tend to have wider trading spreads than sticks, which could complicate you’re getting the ETF shares at the price you want. Share trading spreads of 10% are not uncommon when trading ETFs.

Limit trade orders. An ETF limit order enables you to dictate terms on an ETF purchase or sale. With a limit order, you can set the top price you’ll pay for an ETF and the lowest price you’ll allow when selling an ETF.

For investors who have qualms about buying or selling an ETF at a fixed price, limit orders can be a viable option, as they allow the investor to set the terms for a trade and walk away from an ETF trade if those terms aren’t met.

The Takeaway

Historically, exchange traded funds have been used primarily as passive, “buy and sell investments.” But as asset trading grows more exotic in the digital age, trading ETFs has become increasingly popular.

As with any investment, a smart investor will perform their due diligence, tread cautiously, and work with a financial professional as needed. Ready to start investing in ETFs? With a SoFi Invest® online brokerage account, investors can choose from ETFs that are intelligently diversified and auto-rebalanced.

Find out how to get started with SoFi Invest today.

Photo credit: iStock/PeopleImages


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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Will Dogecoin Ever Be Capped?

Will Dogecoin Ever Be Capped?

When evaluating a cryptocurrency, such as Dogecoin, it’s important to know whether it has a supply cap, since that can have an impact on the long-term value of the coin.

Bitcoin, the first and largest cryptocurrency by market cap, is known for having a 21 million coin hard cap, meaning there will only ever be 21 million BTC in existence. However, all cryptocurrencies are different and many do not have a supply cap.

Here’s what you need to know when it comes to Dogecoin.

What Is a Cap in Crypto?

A supply cap, or cap, refers to an upward limit on the amount of new cryptocurrency coins that can be created.

Once miners have mined a certain amount of coins, the protocol will stop distributing block rewards, and miners will only collect transaction fees. For Bitcoin, this point is estimated to be reached by about the year 2140.

Recommended: How Many Bitcoins Are Left?

Does Dogecoin Have a Cap?

No, Dogecoin does not have a cap.

This means that whenever the price of DOGE rises, more people will have an incentive to mine for Dogecoins. After they mine Dogecoin, they can move it from their wallets onto a crypto exchange where other investors can buy it. As more miners come online, more of them will dump new coins onto the market, causing the price to fall.

For this reason and others, some have argued that coins like DOGE tend to function as somewhat of a pump-and-dump scheme. Of course, others believe that it’s an important cryptocurrency that can add diversity to a portfolio.

Recommended: Crypto Diversification: Can You Diversify with Crypto?

Will Dogecoin Ever Have a Cap?

Sometimes the crypto community decides to alter the protocol of a currency. An active cryptocurrency needs periodic upgrades to its software to remain functional, relevant, and secure.

But it’s hard to say for certain whether or not Dogecoin will ever have a cap. In theory, DOGE developers could choose to implement a cap on the creation of new coins, but to date there hasn’t been much discussion on this.

For now, it seems reasonable to work from the assumption that there might never be a Dogecoin cap limit.

Has Dogecoin Ever Been Capped?

In the eight years since Dogecoin’s creation, there’s never been a cap on the crypto. In fact, for much of those eight years, no one thought much about DOGE at all and it traded for less than a penny. The meme featuring a Shiba Inu dog was popular in 2014 and 2015, so Dogecoin had some popularity back then.

In 2017 when cryptocurrency began reaching the masses in a big way, the valuation of DOGE hit $1 billion. Many investors considered this a sign of frothiness and irrational exuberance in the crypto markets, as DOGE had no special features (it’s simply a clone of Litecoin, which is a clone of Bitcoin) and hadn’t had a developer update in three years at the time.

It wasn’t until early 2021 that DOGE became ultra-famous amid a wave of high-profile celebrity endorsements, including Elon Musk, Mark Cuban, and Snoop Dogg. Dogecoin then took a seat among the top 10 cryptocurrencies by market cap, a feat few would have thought possible just a year earlier.

3 Reasons Why Dogecoin Doesn’t Have a Cap

Rumor has it that the decision to not cap the supply of DOGE was intentional on the part of developers. They wanted to create a currency that people would be more likely to spend. DOGE was created as a joke, but it was also intended to be used for transactional purposes.

The DOGE developers set out to create a cryptocurrency that would differ from Bitcoin in several key ways. Most if not all of those ways stem from the fact that there is no Dogecoin max supply.

Here are three reasons that are thought to have been big factors contributing to the decision to never implement a cap on Dogecoin.

1. Cheap Transactions

Dogecoin is an altcoin that developers created for spending meant to be spent, so they intentionally made it inflationary.

By contrast, Bitcoin is deflationary, which makes its value relative to inflationary currencies likely to continue rising. As a result, BTC has become more of a store of value investment, making many investors want to HODL it.

If you think your Bitcoin might be worth twice as much next year, you’re less likely to use it to make purchases in the short term. But a currency like DOGE with no supply cap is more likely to be spent. People will use it today, while it still has value, and be less likely to hold it for the long-term as they know it’s unlikely to increase in price.

2. New Coins Forever

It’s estimated that about 20% of all the Bitcoins mined to-date have been lost forever. This happens when people forget their wallet password or lose a piece of physical hardware they used to store Bitcoin. This makes the supply of BTC even more deflationary, as those coins won’t be replaced.

With Dogecoin, there will always be plenty of new coins. Even if someone loses millions of DOGE, the long-term impact is minimal, since there are constantly new coins going into circulation. With no supply cap, lost coins don’t matter as much.

3. Mining Longevity

At some point, there will be no more Bitcoins left to mine. When that happens, the only monetary incentive for mining BTC to keep the network secure will be transaction fees.

But with Dogecoin, there will always be a block reward of 10,000 DOGE. The idea is that this will keep people mining Dogecoin forever.

The large block reward also keeps transaction fees on the DOGE network very low, as miners don’t need to charge high fees for transactions. They know their odds of getting a good block reward are high.

How Many Dogecoins Are in Circulation?

According to CoinMarketCap data, there are about 131 billion DOGE in circulation at this time. Keep in mind, 10,000 new DOGE are mined every minute, so the number will be higher by the time you read this.

It’s also worth noting that more than half of DOGE’s total supply is held by only about 20 different wallet addresses, making it one of the most unevenly distributed of the different types of cryptocurrency.

How Much Dogecoin is Left?

There is an unlimited amount of DOGE left to be mined. Just like U.S. dollars or any other national fiat currency, there’s no upward limit on the creation of Dogecoins. There are some key differences between DOGE and fiat currencies, of course, like the fact that anyone can mine Dogecoin, but only central banks can print money.

The Takeaway

The answer to the question “Will Dogecoin ever be capped?” is likely a “no.” Nothing is for certain, as developers could decide to alter the protocol, but the history of the coin and the ethos of the community surrounding it suggest that they will not enact a cap.

Just as the Bitcoin community tends to value scarcity and a fixed supply cap, the Dogecoin community tends to value low transaction fees, large block rewards, and the other benefits that can arise from not having a supply cap. For investors, there may be a place for both types of cryptocurrency in their portfolio.

Whether you’re interested in a deflationary crypto like Bitcoin or an inflationary crypto like Dogecoin, a great way to get started buying crypto is by opening a brokerage account on the SoFi Invest trading platform. In addition to Bitcoin and Dogecoin, you’ll have access to Ethereum, Litecoin, Cardano, and others to create your crypto portfolio.

Photo credit: iStock/Amax Photo


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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​​Explaining Asset Allocation by Age

Asset allocation is an investment strategy that helps you decide the ratio of different asset classes in your portfolio, to ensure that your investments align with your risk tolerance, time horizon, and goals.

In other words the way you allocate, or divide up the assets in your portfolio helps to balance risk, while aiming for the highest return within the time period you have to achieve your investment goals.

So what is asset allocation, exactly, and how do you set your portfolio allocation so that it works for you at every age and stage? Let’s start with a quick discussion of different assets.

Understanding Assets and Asset Classes

At its heart, a financial asset is anything of value that you own, whether that’s a piece of property or a single stock. When you invest, you’re typically looking to buy an asset that will increase in value.

The three broad groups, or asset classes, that are generally held in investment accounts are stocks, bonds, and cash. When you invest, you will likely hold different proportions of these asset classes.

Asset Allocation Examples

What are some asset allocation examples? Well, your portfolio might hold 60% stocks, 40% bonds, and no cash — or 70% stocks, 20% bonds, and 10% in cash or cash equivalents. But how you decide that ratio gets into the nuts and bolts of your actual asset allocation strategy, because each of these asset types behaves differently over time and has a different level of risk and return associated with it.

Stocks. Stocks typically offer the highest rates of return. However, with the potential greater reward comes higher risk. Typically, stocks are the most volatile of these three categories, especially in the short term. But over the long term, the return on equities (a.k.a. stocks) has generally been positive. In fact, the S&P 500 index, a proxy for the U.S. stock market, has historically returned an average of 10% annually.

Bonds. Bonds are traditionally less risky than stocks and offer steadier returns. A general rule of thumb is that bond prices move in the opposite direction of stocks.

Recommended: Bonds vs. Stocks: Understanding the Difference

When you buy a bond, you are essentially loaning money to a company or a government. You receive regular interest on the money you loan, and the principal you paid for the bond is returned to you when the bond’s term is up. When buying bonds, investors generally accept smaller returns in exchange for the security they offer.

Cash. Cash, or cash equivalents, such as certificates of deposit (CDs) or money market accounts, are the least volatile investments. But they offer very low (or zero) returns.

What Factors Determine Your Asset Allocation?

There are three basic factors that will affect your asset allocation — your goals, your risk tolerance, and your time horizon.

Goals. Your goals may be short term, such as adopting a child, starting a business, or saving for a down payment on a house in the next year or two. Or they may be long term, like planning ahead for that child’s education or saving for your retirement.

Risk tolerance. Your risk tolerance is how much volatility — i.e., the ups and downs in the market — you can tolerate. This factor is important to get right. If you take on more risk than you’re comfortable with, and the market starts to drop, you might panic and sell investments at an inopportune time.

Time horizon. Finally, your time horizon is the amount of time you have to invest before you need to achieve your goal. This factor can help you determine how much risk you’re comfortable with and influence your portfolio allocation. For example, if you have a long horizon there is more time to ride out the ups and downs in the market — as a result, your risk tolerance may be higher.

You can see how these three factors come together to determine your asset allocation. If you have a short-term financial goal and will need your money relatively quickly — for example, if you’re about to buy that house you’ve been saving for — your risk tolerance will likely be lower, as you don’t want a market downturn to take a bite out of your investments just when you need to cash them out.

On the other hand, if you have a greater tolerance for risk — and if you think you may need more money for a down payment — you may choose a more aggressive allocation (e.g., tilting toward stocks) — in the hope of seeing more growth.

How Do Diversification and Rebalancing Fit In?

The old adage, “Don’t put all your eggs in one basket,” is apt for a number of concepts in investing.

Putting all of your money in one investment may expose you to too much risk. When it comes to asset allocation, you can manage risk by spreading money out over different asset classes that are then weighted differently within a portfolio.

Here is a possible asset allocation example: If your stock allocation was 100%, and the stock market hit a speed bump, your entire portfolio could lose value. But if your allocation were divided among stocks, bonds, and cash, a drop in the value of your stock allocation wouldn’t have the same impact. It would be mitigated to a degree, because the bonds and cash allocation of your portfolio likely wouldn’t suffer similar losses (remember: bond prices generally move in the opposite direction of stocks, and cash/cash equivalents rarely react to market turmoil).

Diversification

Portfolio diversification is a separate, yet related, concept. Simple diversification can be achieved with the broader asset classes of stocks, bonds, and cash. But within each asset class you could also consider holding many different assets for additional diversification and risk protection.

For example, allocating the stock portion of your portfolio to a single stock may not be a great idea, as noted above. Instead, you might invest in a basket of stocks. If you hold a single stock and it drops, your whole stock portfolio falls with it. But if you hold 25 different stocks — when one stock falls, the effect on your overall portfolio is relatively small.

On an even deeper level, you may want to diversify across many types of stock — for example, varying by company size, geography, or sector. One way some investors choose to diversify is by holding mutual funds, index funds, or exchange-traded funds (ETFs) that themselves hold a diverse basket of stocks.

Rebalancing

What is rebalancing? As assets gain and lose value, the proportion of your portfolio they represent also changes. For example, say you have a portfolio allocation that includes 60% stocks and the stock market ticks upward. The stocks you hold might have appreciated and now represent 70% or even 80% of your overall portfolio.

In order to realign your portfolio to your desired 60% allocation, you might rebalance it by selling some stocks and buying bonds. Why sell securities that are gaining value? Again, it’s with an eye toward managing the potential risk of future losses.

If your equity allocation was 60%, but has grown to 70% or 80% in a bull market, you’re exposed to more volatility. Rebalancing back to 60% helps to mitigate that risk.

The idea of rebalancing works on the level of asset allocation and on the level of asset classes. For example, if your domestic stocks do really well, you may sell a portion to rebalance your dometic allocation and buy international stocks.

You can rebalance your portfolio at any time, but you may want to set regular check-ins, whether quarterly or annually. There may be no need to rebalance if your asset allocation hasn’t really shifted. One general rule to consider is the suggestion that you rebalance your portfolio whenever an asset allocation changes by 5% or more.

What is Age-Based Asset Allocation?

The mix of assets you hold will likely shift with age. When you’re younger and have a longer time horizon, you might want to hold more stocks, which offer the most growth potential. Also, that longer time horizon gives you plenty of years to ride out volatility in the market.

You will likely want to shift your asset allocation as you get older, though. As retirement age approaches, and the point at which you’ll need to tap your savings draws near, you may want to shift your allocation into less risky assets like bonds and cash equivalents to help protect your money from downturns.

In the past, investment advisors recommended a rule of thumb whereby an investor would subtract their age from 100 to know how much of their portfolio to hold in stocks. What is an asset allocation that follows that rule? A 30-year-old might allocate 70% of their portfolio to stocks, while a 60-year-old would allocate 40%.

However, as life expectancy continues to increase — especially for women — and people rely on their retirement savings to cover the cost of longer lifespans (and potential healthcare expenses), some industry experts and advisors now recommend that investors keep a more aggressive asset allocation for a longer period.

The new thinking has shifted the formula to subtracting your age from 110 or 120 to maintain a more aggressive allocation to stocks.

In that case, a 30-year-old might allocate 80% of their portfolio to stocks (110 – 30 = 80), and a 60-year-old might have a portfolio allocation that’s 50% stocks (110 – 60 = 50) — so, just a bit more aggressive than the previous 40% allocation.

These are not hard-and-fast rules, but general guidelines for thinking about your own asset allocation strategy. Each person’s financial situation is different, so each portfolio allocation will vary. Following are some additional asset allocation examples for different ages.

Asset Allocation in Your 20s and 30s

For younger investors, the rules of thumb suggest they may want to hold most of their portfolio in stocks to help save for long-term financial goals like retirement.

That said, when you’re young, your financial footing may not be very secure. You probably haven’t built much of a nest egg, you may change jobs relatively frequently, and you may have debt, such as student loans, to worry about. Setting up a potentially volatile, stock-focused allocation might feel nerve-wracking.

If you have a 401(k) at work, this might be your primary investment vehicle — or you may have set up an IRA. In either account you can invest in mutual funds or ETFs that hold a mix of stocks, providing some low-cost diversification without sacrificing the potential for long-term growth.

You could also invest in a target date fund, which is designed to help to manage your asset allocation over time (more on these funds below).

When choosing funds, it’s important to consider both potential performance and fees. Index funds, which simply mirror the performance of a certain market index, may carry lower expense ratios but they may generate lower returns compared to, say, a growth fund that’s more expensive.

Remember that the younger you are, the longer you have to recover from market downturns or losses. So allocating a bigger chunk of your 401(k) to growth funds or funds that use an active management strategy could make sense if you feel their fees are justified by the potential for higher returns.

And of course, you can counterbalance higher-risk/higher-reward investments with bonds or bond funds (as a cushion against volatility), index funds (to help manage costs) or target date funds (which can do a bit of both). Just be aware that the holdings within some funds can overlap, which could hamper your diversification strategy and require you to choose investment carefully.

Asset Allocation in Your 40s and 50s

As you enter middle age you are potentially entering your peak earning years. You may also have more financial obligations, such as mortgage payments, and bigger savings goals, such as sending your kids to college, than you did when you were younger. On the upside, you may also have 20 years or more before you’re thinking about retiring.

In the early part of these decades, one approach is to consider keeping a hefty portion of your portfolio still allocated to stocks. This may be useful if you weren’t able to save much for your retirement in your lower-earning years because you’d be able to add potential growth to your portfolio, and still have some years to ride out any volatility.

Depending on when you plan to retire, adding stability to your portfolio with bonds as you approach the latter part of these decades might be a wise choice. For example, you may want to begin by shifting more of your 401(k) or IRA assets to bonds or bond funds at this stage. These investments may produce lower returns in the short term compared to mutual funds or ETFs. But they can be useful for generating income once you’re ready to begin making withdrawals from your accounts in retirement.

Asset Allocation in Your 60s

Once you hit your 60s and you’re nearing retirement age, your allocation will likely shift toward fixed-income assets like bonds, and maybe even cash. A shift like this can help prepare you for the possibility that markets may be down when you retire.

If that’s the case, you might be able to use these fixed-income investments to provide income during the downturn, so you can avoid selling stocks while the markets are down — as doing so would lock in losses and might curtail future growth in your portfolio. Thus, leaning on the fixed-income portion of your portfolio allows time for the market to recover before you need to tap into stocks.

If you haven’t retired yet, you can continue making contributions to your 401(k) to grow your nest egg and take advantage of any employer match. But you may want to keep the bulk of your 401(k) allocation in bonds, cash, or cash equivalents at this stage, to minimize the odds of suffering losses as you draw closer to your target retirement date.

And if you chose to invest in a target date fund within your retirement account when you were younger, it’s likely that fund’s allocation would now be tilting toward fixed-income assets as well.

Asset Allocation in Retirement

Once you’ve retired it may seem like you can kick back and relax with all of your asset allocation worries behind you. Yet, your portfolio allocation is as important to consider now as it was in your 20s.

When you retire, you’ll likely be on a fixed income — and you won’t be adding to your savings with earned wages. Your retirement could last 20 to 30 years or more, so consider holding a mix of assets that includes stocks that might provide some growth. Keeping a modest stock allocation might help you avoid outliving your savings and preserve your spending power.

While that may sound contrary to the suggestion above for pre-retirees to keep more of their assets allocated to fixed-income, the difference is the level of protection you might want just prior to retirement. Now as an official retiree, and thinking about the potential decades ahead, you may want to inject a little growth potential into your portfolio.

It might also make sense to hold assets that grow faster than the rate of inflation or are inflation-protected, such as Treasury Inflation-Protected Securities, or TIPS, which can help your nest egg hold its value.

These are highly personal decisions that, again, go back to the three intersecting factors that drive asset allocation: your goals, risk tolerance, and time horizon. There’s no right answer; the task is arriving at the right answer for you.

What’s the Deal with Target Date Funds?

One tool that some investors find useful to help them set appropriate allocations is a target date fund. These funds, which were described briefly above, are primarily for retirement, and they are typically geared toward a specific retirement year (e.g. 2030, 2045, 2050, and so on).

Target funds hold a diverse mix of stocks and fixed-income investments. As the fund’s target date approaches, the mix of stocks and bonds the fund automatically adjusts to a more conservative allocation — a.k.a. the fund’s “glide path.”

For example, if you’re 35 and plan to retire at 65, you could purchase shares in a target-date fund with a target date 30 years in the future. While the fund’s stock allocation may be fairly substantial at the outset, as you approach retirement the fund will gradually increase the proportion of fixed-income assets that it holds.

Target-date funds theoretically offer investors a way to set it and forget it. However, they also present some limitations. For one, you don’t have control over the assets in the fund, nor do you control how the fund’s allocation adjusts over time.

Target funds are typically one-size-fits-all, and that doesn’t always work with an individual’s unique retirement goals. For example, someone aggressively trying to save may want to hold more stocks for longer than a particular target date fund offers. Also, as actively managed funds, they often come with fees that can take a bite out of how much you are ultimately able to save.

What is Risk Tolerance–Based Asset Allocation?

Risk tolerance–based asset allocation involves shaping your portfolio based on the level of risk you’re most comfortable with. For example, if you fit into the aggressive investor risk tolerance profile, that means you may commit a larger share of your portfolio to stocks and other higher-risk investments.

On the other hand, you may have a smaller asset allocation to stocks if you lean more toward the conservative end of the spectrum. The style of investor you are will likely shift throughout your lifetime. As discussed above, different life stages bring new concerns and priorities to mind, and this will naturally change how you view your asset allocation.

One thing that’s important to understand when basing asset allocation on risk tolerance is how that aligns with your risk capacity. Your risk capacity is the amount of risk you must take to achieve your investment goals. This is important to understand for choosing assets based on risk tolerance to find the right portfolio allocation.

If you have a low risk tolerance, but a higher risk capacity is required to achieve the investment goals you’ve set, then you may be at risk of falling short of those goals.

Meanwhile, having a higher risk tolerance but a lower risk capacity could result in taking on more risk than you need to in order to achieve your investment goals. Finding the right balance between the two is key when using a risk tolerance based asset allocation strategy.

The Takeaway

While many investors spend time researching complex issues like bond yields and options trading, understanding and executing a successful asset allocation strategy — one that works for you now, and that you can adjust over the long term — can be more challenging than it seems.

Although asset allocation is a fairly simple idea — it’s basically how you divide up different asset classes in your portfolio to help manage risk — it has enormous strategic implications for your investments as a whole. The three main factors that influence your asset allocation (goals, risk tolerance, and time horizon) seem straightforward enough as separate ideas, yet there is an art and a science to combining them into an asset allocation that makes sense for you.

Like so many other things, arriving at the right asset allocation is a learning process, and one way to get started is by opening a brokerage account with SoFi Invest®. As a SoFi Member, you will have access to different tools and investments that can help you set your portfolio allocation — and you’ll have complimentary access to financial advisors.

If you’re ready to start investing your way, check out SoFi Invest today.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Should You Open an IRA If You Already Have a 401k?

Can you contribute to a 401(k) and IRA? The short answer is yes, it’s possible to have a 401(k) or other employer-sponsored plan at work and also make contributions to an individual retirement plan, either a traditional or a Roth.

If you have the money to do so, contributing to both 401(k) and IRA plans could help you fast track your retirement goals while enjoying some tax savings. But your income and filing status may affect the amounts you are allowed to contribute, in addition to the tax benefits you might see from a dual contribution strategy.

Before you ask yourself, “Can I contribute to a 401(k) and IRA?”, learn more about the guidelines and restrictions when combining these two types of accounts.

Can You Have Both a 401(k) and an IRA?

Can you contribute to 401(k) and IRA plans simultaneously to save for retirement? It’s a legitimate question to ask if you’re just getting started on your retirement planning journey. For example, if you’re already contributing to a plan at work, you may be wondering if you can also save money in an IRA.

Or maybe you opened an IRA in college but now you’re starting your career and have access to a 401(k) for the first time. You may be unsure whether it makes sense to keep making contributions if you’ll soon be enrolled in your employer’s retirement plan.

Having a basic understanding of 401(k)s and IRAs can help you make the most of these accounts when planning your retirement strategy, and answer the pressing questions: Can you have a 401(k) and a Roth IRA, and/or can you have a 401(k) and an IRA that’s traditional?

Can I contribute to a 401(k) and IRA account?

Traditional IRAs offer the benefit of tax-deductible contributions. The money you deposit is pre-tax (meaning, you don’t pay taxes on those funds), and contributions grow tax-deferred so you pay tax when making qualified withdrawals in retirement.

Opting for the tax deduction these tax-deferred plans provide might appeal to you if you’re in a higher tax bracket during your working years and want to minimize your tax liability now.

So, can you contribute to 401(k) and IRA plans at the same time? It’s possible to make contributions to a 401(k) at work and a traditional IRA. The IRS doesn’t have any rules that prevent you from making contributions to both. But there are limits on the amount of IRA contributions you can deduct in this scenario.

Specifically, a full deduction of the amount you contribute to an IRA is allowed if:

• You file single or head of household and your modified adjusted gross income (MAGI) is $66,000 or less

• You’re married and file jointly, or a qualifying widow(er), with an MAGI of $105,000 or less

A partial deduction is allowed for incomes over these limits, though it does eventually phase out entirely.

What about Roth IRAs?

Can you have a Roth IRA and a 401(k)? Roth IRAs allow you to make contributions using after-tax dollars. This means you don’t get the benefit of deducting the amount you contribute from your current year’s taxes. The upside of Roth accounts, though, is that you can make qualified withdrawals in retirement tax-free.

You might choose to contribute to a Roth IRA and a 401(k) if you anticipate being in a higher tax bracket when you retire, because of the tax-free benefit. But there’s a catch: Your ability to contribute to a Roth IRA is based on your income. So how much you earn — not necessarily your enrollment in a retirement plan at work — could be a deciding factor in answering the question, can you have a Roth IRA and 401(k) at the same time.

For 2021, you can make a full contribution to a Roth IRA if:

• You file single or head of household, or you’re legally separated, and have a modified adjusted gross income of less than $125,000

• You’re married and file jointly, or are a qualifying widow(er), and your MAGI is less than $198,000

Similar to traditional IRA contributions, the amount you can contribute is reduced as your income increases until it phases out altogether.

Retirement Dreams

As you work your way through the nuts and bolts of retirement funding, it’s important to keep why you’re doing this at the forefront. Quality planning for retirement can help you to meet your lifestyle goals in your post-working years.

As you get started planning your retirement savings, it’s a good idea to determine the estimated age you can or would like to retire, as the timing can influence other choices — like how much you choose to save and what investments you might pick.

For some people, the idea of retiring early is attractive. If that’s true for you, factor that into your planning. Others plan to work into their 70s — but on their own terms, perhaps involving part-time hours, telecommuting, or consulting. You might want to rough out a couple of different scenarios to see which one feels most comfortable.

There are plenty of resources available online, including SoFi’s retirement calculator to help you determine potential retirement timelines.

Differences Between IRA and 401(k) Funds

Although both IRAs and 401(k)s are retirement savings accounts, there are some important differences to know. The main one is that a 401(k) is an employer-sponsored retirement plan that allows both the employee and employer to contribute to the account. IRA are Individual Retirement Accounts that anyone can set up for themselves. There are two main types of IRAs: Traditional and Roth.

Sometimes employers offer matching contributions to 401(k) accounts up to a certain percentage point or dollar amount. If your company offers a 401(k) option, it is worth taking advantage of it — after all, a matched contribution is essentially extra money for retirement at no cost to you.

If you are self-employed, you can open a solo 401(k), with similar guidelines to a traditional 401(k).

Here’s a closer look at key differences between 401(k) plans and IRAs.

Contributions

A 401(k) plan can be funded by employer and employee contributions. Here are the annual 401(k) contribution limits for 2021:

• $19,500 for employee contributions

• $6,500 in catch-up contributions for employees age 50 or older

• $58,000 limit for total employer and employee contributions ($64,500 for catch-up contributions)

IRAs are funded solely by individual contributions. Here are the annual contribution limits for traditional and Roth IRAs for 2021:

• $6,000 for regular contributions

• $1,000 catch-up contributions for savers aged 50 and older

These limits apply to total IRA contributions. So if you have more than one IRA, the most you could add to it in a single year is $6,000 or $7,000 if you’re 50 or older.

Tax Benefits

Both 401(k) plans and IRAs can offer tax benefits. Here are the key tax benefits to know when contributing to these plans:

• 401(k) contributions are tax-deductible

• Traditional IRA contributions can be tax-deductible for eligible savers

• Roth IRA contributions are not tax deductible, but Roth plans allow you to make tax-free withdrawals in retirement

Contributions to a 401(k) plan at work qualify as above-the-line deductions. That means you can deduct those contributions on your taxes even if you don’t itemize.

Withdrawals

Both 401(k) plans and IRAs are designed to be used for retirement, which is why the taxes you pay are deferred (and why these accounts are typically called tax-deferred accounts). As such, early withdrawals from 401(k) plans are discouraged and you may trigger taxes and a penalty when taking money from these plans prior to age 59½.

Here are the most important things to know about withdrawing money from 401(k) plans or traditional and Roth IRAs:

• Withdrawals from 401(k) and traditional IRA accounts are subject to ordinary income tax at the time you withdraw them. If you withdraw funds before age 59½, you would owe taxes and a 10% penalty — although some exceptions apply (e.g. an emergency or hardship withdrawal).

• Roth IRA contributions and earnings are treated somewhat differently. Withdrawals of original contributions (not earnings) to a Roth IRA can be made tax- and penalty-free at any time.

• If you withdraw earnings from a Roth account prior to age 59½, and if you haven’t owned the account for at least five years, the money could be subject to taxes and a 10% penalty. This is called the five-year rule. Special exceptions may apply for a first-time home purchase, college expenses, and other situations.

• After age 59½, thought, qualified withdrawals from a Roth IRA are 100% tax-free.

Penalties

A 10% early withdrawal penalty can apply to withdrawals made from 401(k) plans or IRAs before age 59½ unless an exception applies. But the IRS does allow for several exceptions. In terms of what constitutes an exception, the IRS waives the penalty in these scenarios:

• Permissive withdrawals from a plan with automatic enrollment features.

• Corrective distributions.

• Death of the plan participant or IRA owner.

• Total and permanent disability of the plan participant or owner.

• Payments made under a Qualified Domestic Relations Order (QDRO) — usually during a divorce.

• Payment for qualified higher education expenses (helpful to know when saving for your child’s college tuition).

• Dividend pass through from an ESOP.

• Withdrawals of up to $10,000 toward the purchase of a first home.

• Payment of unreimbursed medical expenses.

• Certain distributions to military members.

• Returned distributions.

• Rollovers.

You might also avoid the penalty with 401(k) plans if you meet the rule of 55. This rule allows you to withdraw money from a 401(k) penalty-free if you leave your job in the year you turn 55, although you would still owe ordinary income taxes on that money. This scenario also has some restrictions, so you may want to discuss it with your plan administrator or a financial advisor.

Required Minimum Distributions (RMDs)

Required minimum distributions or RMDs are minimum amounts you’re required to withdraw from 401(k) plans and traditional IRAs. These rules apply to:

• Traditional IRAs

• SEP and SIMPLE IRAs

• 401(k) plans

• 403b plans

• 457b plans

• Profit-sharing plans

• Other defined contribution plans

The IRS generally requires you to begin taking RMDs from these plans at age 72 (or age 70½, if you turned 70 before July 1, 2019). The amount you’re required to withdraw is based on your account balance and life expectancy, and many retirement plan providers offer help calculating the exact amount of your required distributions.

This is critical, because if you don’t take RMDs on time you may trigger a 50% tax penalty. This tax applies to the amount you were required to withdraw.

If your employer doesn’t offer a 401(k) plan, you may want to set up an IRA, either traditional or Roth depending on your personal financial situation. And if you’re already contributing to a 401(k), you may still want to think about opening an IRA. Next, a discussion of the benefits of having both types of accounts in your retirement plan.

Benefits of Having Both a 401(k) and an IRA

Instead of investing in only an IRA or your company’s retirement plan, consider how you can blend the two into a powerful investment strategy. One reason this makes sense is that you can invest more for your retirement, with the additional savings and potential growth providing even more resources to fund your retirement dreams.

Since employers often match 401(k) contributions up to a certain percentage (e.g., your company might match the first 3% of your contributions), this supplement boosts your overall savings. The employer match is essentially free money that you could get simply by making the minimum contribution to your plan. Every company is different, so check with your employer to determine their policy on matching 401(k) contributions.

Now imagine adding an IRA to the picture. One of the best things about an IRA is the flexibility you have when investing. With a 401(k), you have limited options when it comes to investment funds. With an IRA, you’re able to decide what you’d like to invest in, whether it be stocks, bonds, mutual funds, ETFs, or other options.

By investing in both a 401(k) and IRA, you are taking advantage of employer-matched contributions and diversifying your retirement portfolio which can help manage risk and potentially improve the overall performance of your investments in aggregate.

That said, if you choose to invest in both types of accounts, it’s important to make sure your investment choices don’t overlap.

Should I Have Both a 401(k) and an IRA?

Can you have a 401(k) and IRA is a good question to ask. But it’s also important to consider whether it makes sense for your financial plan. Whether you can deduct contributions to a traditional IRA or save in a Roth IRA can also make a difference in deciding where to save for retirement.

Yes, if you can max out both accounts

Here’s a simple question to ask yourself: Can I contribute to 401(k) and IRA plans up to the annual limits, based on my income and spending? If so, this can go a long way in funding your dreams for retirement.

This assumes, of course, that you can realistically afford to contribute $19,500 to a 401(k) each year (or more if you’re 50 or older) along with up to $6,000 to an IRA. If you’re trying to pay down debt, save for your child’s college expenses, or reach other financial goals, then fully funding multiple retirement accounts may not be realistic.

If you are planning to contribute the maximum to both a traditional IRA and a 401(k), consider your budget and spending. And you’ll need to do some research into how that may affect your retirement tax deductions.

If you can’t max out both accounts, maybe

Not everybody is able to max out both retirement fund options, but even if you can’t, you can still create a powerful one-two punch by making strategic choices. So, first, think about your company-matching benefit for your 401(k). This is a key benefit (especially since these matching funds don’t count toward what you can personally contribute), and it makes sense to take as much advantage as you can.

So, let’s say that your company will match a certain percentage (say, 3%) of the first 6% of your gross earnings. Calculate what 6% is and consider contributing that much to your 401(k) and opening an IRA with other money you can invest this year.

And, if you end up having even more money to invest? Consider going back to your 401(k), because all you’ve done with this strategy is to contribute what could be matched. There still may be value in contributing to your 401(k) beyond the amount that can be matched — for the simple reason that company-sponsored plans allow you to save more than an IRA does.

Now, let’s say you have a 401(k) plan but your employer doesn’t offer a matching benefit. Then, consider contributing to an IRA first. You may benefit from having a wider array of investment choices. Once you’ve maxed out what you can contribute to your IRA, then contribute to your 401(k).

There’s No ‘One-Size-Fits-All’ Answer

The guidelines we’ve provided should help you to start creating your own unique retirement plan. But the reality is a retirement plan that might work for one person may not be right for the next. You need a personalized plan with just the right diversified portfolio. Items that you should consider when refining your retirement plan include:

• Your current income

• Anticipated future earning potential

• Your current expenses

• Anticipated future expenses (perhaps college for your children)

• Your risk tolerance

• Your timeframe

To take this information and craft it into a strategic plan, consider consulting a financial advisor.

The Takeaway

Not only is it possible to have a 401(k) and also fund a traditional or Roth IRA, it might offer you tremendous benefits, depending on your circumstances. The chief upside, of course, is that having two accounts gives you the option to save even more for retirement — which is a smart idea for most of us (given the statistics indicating that many people aren’t saving enough).

The chief downside of deciding whether to fund a 401(k) and a traditional or Roth IRA is that it’s a pretty complicated question: You have to consider your ability to save, and the tax implications of each type of account, as well as your long-term goals. Then it’s an easy next step to open a SoFi Invest® retirement account. SoFi doesn’t charge any management fees, and we can help you take a look at your current 401(k) plans to see what you are getting charged. We can also help you rollover your 401(k) into an IRA with SoFi when you’re ready.

When you’re ready to take control of your retirement savings, SoFi will be here to help. See how a SoFi Invest account can help you reach your financial goals.


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SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Financial Planning

Should I Invest if I Still Have Debt?

As you start to establish yourself financially, you may come to a crossroads: should you pay off debt or invest in your future? It can be confusing to know what to do in this situation, especially if you have multiple financial goals you’re saving toward.

The first step is to look at the numbers, then to consider your preferences. There is no one “right” answer to this question. Let’s start by taking a look at the numbers around major financial milestones like your student loan, buying a home, and saving for retirement.

Let’s say your student loan is $75,000. Buying a new home might cost $350,000, and you might plan to need $2,000,000 for a comfortable retirement. Everyone’s numbers will look a bit different, so feel free to take some time to calculate yours.

Once you’ve put your estimated numbers on a page, what jumps out at you? It’s hard not to notice that retirement is quite a bit more expensive than the others. This isn’t too much of a surprise if you consider what retirement is: living for decades with no salary.

While you might be tempted to put all your extra income immediately into your retirement fund, it’s not necessarily the winning decision when it comes to whether to pay off loans or invest. Let’s look deeper.

How Important is Paying Off Your Student Loans?

If you’re like the average student, you’ve borrowed $30,000 or more to pursue a bachelor’s degree . If you went on to graduate school, your student loan debt may be even higher.

Most federal student loans have a repayment period of 10 to 30 years. You may opt to make the minimum payment each month for the duration of your loan repayment plan, or you might decide to pay yours off early.

One benefit to paying off a student loan early is that you reduce your debt to income ratio (that’s how much debt you have compared to how much income you have). This might raise your credit score and help you qualify for other financial solutions.

Or, you might decide to continue paying your student loan while investing in other areas of your life, like retirement or buying a home.

Know Your Student Loan Interest Rates

Before you can decide whether to pay off student loans or save for other things, look at what you’re paying in interest for your student loans. If the rate you locked in when you took out your loan is higher than current rates, you might consider refinancing. If you have multiple student loans, you could potentially consolidate and refinance them for a lower interest rate.

Of course, it’s important to keep in mind that refinancing federal student loans means you’re no longer eligible for federal benefits and protections, like income-driven repayment or loan forgiveness programs, so it makes sense to weigh the potential benefits and risks of refinancing before taking the plunge.

Comparing interest rates is an exercise in opportunity cost. Any decision to pursue one goal means you’re missing out on something else, but ideally, we look to minimize opportunity costs when assessing financial trade-offs. In this instance, the opportunity cost is leaving potential investment earnings on the table.

Let’s say you recently refinanced your student loan from 5% to 3.5%. Given the competitive rate on your newly refinanced student loan, you could consider continuing to make the monthly payment on your loan and allocating the extra cash flow elsewhere — like investing for retirement or buying a home.

Remember, we want to think about interest rates in terms of opportunity cost. What would it look like if you paid off your loan early? Your student loan costs you 3.5% annually, and that’s what you’ll “save” if you accelerate your payoff by $500 per month.

Once you paid off the loan early, you could invest your money in an asset class — such as the stock market — with the potential to earn a rate of return that’s higher than 3.5%. Historically, the stock market has returned an average of 10%. This investing can be done within a retirement account, whether a 401(k) or an IRA.

That said, stock market returns are erratic, and the annualized return figures you often hear quoted are just that — an average. Investing is risky, and there is always a chance that returns over the next five, 10, or 20 years will not outpace the interest that you are currently making on your student loan payment.

No one, not even a financial planner, has a crystal ball and can see into the future. This is why we also need to take into account your personal preferences.

If you feel like you are truly missing out on investing in an IRA or saving for a home, then investing in those things might be the right path for you. If your student debt makes you feel burdened and miserable, you could focus on that instead.

Paying Off Student Loans vs. Investing

“So, should I pay off student loans or invest,” you ask.

The answer is…it’s complicated.

Student loans often come with low interest rates, which means you’re not paying a huge amount of extra money over the years (like you would with a credit card, for example). So it’s low-cost debt. That means that if you want to invest in other areas of your life, such as saving for retirement or to buy a house, you may be able to do both.

Contributing to a Retirement Account

Many Americans are vastly under-saving for retirement, and with so many employers offering a 401(k) matching program, not contributing is like throwing money down the drain.

There is no standard for match programs — they can range from meager to generous. Between your contributions and your employer’s, it is often recommended that you save between 15% and 20% of your salary for retirement. You can do this by contributing the full allowable amount to your 401(k), which is $19,500 in 2021.

If you don’t have access to a 401(k) — perhaps you’re self-employed — you can save for retirement with other investment accounts like an online IRA or a brokerage account. No matter which account you use, you might want to consider putting that money to work with a long-term investment strategy. For example, you might choose to deploy a strategy of low-cost mutual funds that invests in stocks and bonds.

Buying a Home

Financial planners don’t all agree on whether a home is a good investment. That is not to say that a home is not a good financial goal; if it’s a priority to you, then it’s great. This is simply a commentary on whether a home produces a good return on investment.

Although a house may not have as high an investment return as other asset classes, such as the stock market, a house provides something that a stock or bond cannot — immediate utility. You cannot sleep and eat inside a stock or a bond.

While home values do typically grow over time, you must also take into consideration the costs of buying and owning a home, such as the interest paid on the mortgage, property taxes, and repairs and maintenance. That said, homeownership can be rewarding, and can pay major dividends down the line. One big benefit is having no monthly housing expenses (like rent or a mortgage) in retirement.

The Takeaway

There is no hard and fast rule when it comes to investing while juggling debt. Undoubtedly, the biggest ticket item you’ll need to invest for is retirement — but whether you invest in retirement before or after paying down debt depends on your personal preferences and situation.

One thing to remember: Financial tradeoff decisions don’t always have to be all-or-nothing. You might choose to split the difference by putting a little here and a little there. For example, you might contribute $300 per month to your 401(k) and $200 to a high-yield savings account for your down payment for a house, all while paying off student loans.

With SoFi Invest®, you can invest in traditional and Roth IRAs, crypto, or ETFs, with hands-on active investing or automated investing. The choice is yours — based on your personal situation, goals, and preferences.

Find out how to invest for your future with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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