Feb
28
2025
What Is Broker Call, or Call Money Rate?

What Is Broker Call, or Call Money Rate?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Broker Call, or Call Money Rate?

The broker’s call – also called “call money rate” or “call loan rate” — refers to the interest rate that brokerage firms pay to banks when they borrow money. Brokerage firms borrow money from banks in the form of call loans in order to offer loans to traders and investors with margin accounts. As such, the interest rate that brokerages pay banks is what’s referred to as the broker’s call, or call money rate.

Banks can call those loans back from brokerages at any time (hence the name “call loans”), which may cause brokerages to call the money they lent to traders or investors (in the form of margin). That’s one example of what’s referred to as a “margin call.”

Key Points

•   The broker call rate is the interest rate brokerage firms pay to banks for borrowed money.

•   This rate is based on benchmarks like LIBOR or SOFR and changes daily.

•   Brokerages lend borrowed money to margin account holders at a higher rate, including the broker call rate and fees.

•   Higher broker call rates increase interest charges for margin traders, potentially reducing returns.

•   Leverage in margin trading can amplify both gains and losses, increasing risk.

Broker Call Rate Definition

The broker call rate is the interest rate that brokerage firms pay banks for borrowing money that they, in turn, loan to traders and investors to pursue margin trades. Since many brokerage firms allow investors to trade “on margin,” the brokerages need to have access to a pool of money that they can borrow from.

In effect, banks lend money to brokerages, and the brokerages lend money to investors – each loan carries a different rate. The broker call rate, again, is the interest rate that the brokerages pay to the banks.

Investors and traders that are using margin to trade will be on the hook for interest payments to the brokerages, and the applicable interest rate for those traders are called margin rates.

But, in terms of a broker call rate, that is only referring to the interest rates that brokerages pay to banks, not the margin rates traders pay to brokerages for their margin accounts.

In addition, although the broker call rate is quoted as an annual rate, these loans are typically for much shorter periods of time. As such, the fees are assessed daily. If the annual rate is 5%, the overnight rate is 5% divided by 365 days or roughly 0.014% per day. Margin rates, or the rates charged to traders, would be higher.

Explaining Call Money Rate

Although the terms sound quite different, the broker call rate and the call money rate are essentially the same thing: it’s the interest rate that brokers pay to banks for borrowing money. That typically comprises short-term loans that the brokers then turn around and lend to traders or investors for use in margin accounts.

Brokerages will typically include a service charge, expressed as a percentage, on top of the call money rate to get their margin rates. So, in effect, traders or investors using margin accounts pay a premium, plus interest, to trade with margin loans.

As an investor is deemed capable of borrowing more money, the gap between the broker call rate and the margin rate narrows. Brokerages may drive extra revenue by exploiting the difference in interest rates, just as investors do the same via interest rate options.

The Use of the Term ‘Call’

A quick side note: You may have noticed that the term “call” is a common financial term with various meanings, including:

1.    A brokerage issuing a “margin call” requiring a borrower to increase the cash in their account or sell assets to raise cash for their account.

2.    A lender “calling a loan” on a borrower, requiring them to repay their debt.

3.    Yield to call is another example of the word that in this phrase refers to bonds.

What Is a Call in Options Trading?

A “call” is also a common type of option (the two main types of options are puts and calls), but the sense of the word here is quite different. A call option is a derivative contract that gives investors the right, but not the obligation, to buy a certain number of shares of an underlying asset.

While options trading and margin trading are similar in that they use leverage, margin trading specifically involves borrowed funds. A margin account is not required for options trading.

How Is the Broker Call Rate Calculated?

The broker call rate in the U.S. fluctuates continuously, but generally increases along with interest rates across the board due to the Federal Reserve lifting benchmark rates. Conversely, as the Federal Reserve cuts rates, the broker call rate falls as well.

The broker call rate and the Federal Reserve funds rates are tightly linked, but they are not required to be the same.

It’s also important to know that the broker call rate fluctuates on a daily basis, much like other interest rates. With that in mind, the broker call rate’s calculation is less of a calculation, and more based on a benchmark, such as the London InterBank Offered Rate, or LIBOR rate.

LIBOR served as a benchmark interest rate that lenders around the world used when they lent to another financial institution on a short-term basis. As such, it makes sense that it would serve as the benchmark for the broker call rate. But LIBOR was phased out in 2023, and was replaced in most instances by the Secured Overnight Financing Rate (SOFR).

How Does It Affect Margin Traders?

Margin traders utilize leverage to attempt to supercharge their returns. That is, they’re borrowing more money than they actually have in order to make bigger trades. This increases their investing risk, but can also increase their gains.

And, as discussed, it’s pretty obvious how the broker call rate can affect margin traders. Since brokerages need to borrow money from banks, and pay the associated costs for doing so (in the form of interest), they need to turn a profit through their own lending activities. Lending to margin traders, by charging interest plus a service fee or other related cost, helps them cover those costs.

So, the higher the broker call rate, the more interest brokerages need to pay banks in interest charges. That gets passed down to margin traders, who, in turn, end up paying more in interest charges to brokerages when they use margin. This is one of the drawbacks when using a cash account versus a margin account — there are additional costs to consider for using margin, which can eat into returns.

Broker Call Rate Example

Here’s an example of how the broker’s call rate may come into play in the real world:

Brokerage X needs to offer margin funds for its clients with margin accounts, but doesn’t have the money to cover its needs. So, it borrows the money from Bank Y at a predetermined broker call rate. Bank Y decides that the rate will be the current SOFR rate, plus 0.1%. So, if the SOFR rate is 3%, for example, the broker call rate is 3.1%.

Brokerage X then uses the borrowed funds to offer margin funds to its clients, for which it charges a margin rate of 4%, plus a $10 service fee. By doing so, Brokerage X drives a little extra revenue through its lending activities, and when the traders pay the margin funds back, it can return them to Bank Y, paying the 3.1% broker call rate for the privilege of borrowing.

Current Call Money Rate

The current call money rate is published daily by the Wall Street Journal, and others. As it fluctuates often, margin traders, or others who may be subject to those fluctuations, can or should make a habit of looking at the current rate in the event that it changes their strategy. As of mid-February, 2025, the call money rate was around 6.25%.

The Takeaway

The broker call rate is the interest rate that brokerage firms pay banks for borrowing money that they, in turn, loan to traders. Since many brokerage firms allow investors to trade “on margin,” the brokerages need to have access to a pool of money that they can borrow from.

Brokerages typically charge a fee, expressed as a percentage, on top of the call money rate to get their margin rates. So, in effect, investors using margin accounts pay interest to trade stocks with margin loans — plus a little extra.

Leveraged trades are complicated and can be risky. While using borrowed money lets traders place bigger bets, and possibly see bigger gains, they also risk steep losses.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 4.75% to 9.50%.*

FAQ

Who decides the call rate for margin trading?

A brokerage ultimately decides the costs associated with margin trading for investors. But as far as what determines the broker call rate, it goes back to the rate as determined by the prevailing benchmark interest rate, such as the Secured Overnight Financing Rate (SOFR).

What is the overnight call rate?

The overnight call rate refers to the interest rate that banks use when lending or borrowing overnight. Again, since the call money rate is constantly fluctuating, the overnight call rate may or may not be different from the call money rate during normal trading hours.

Photo credit: iStock/YakobchukOlena

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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28
2025
Performance Charts

5 Bullish Indicators for a Stock

By | Growing Wealth, invest, Investing | Comments Off on 5 Bullish Indicators for a Stock

When it comes to figuring out when to buy a stock, there are two main schools of thought: fundamental analysis and technical analysis. Fundamental analysis involves all the material aspects of a company: its sales, revenue, profits, and so on — the day-to-day details of operations. Technical analysis, on the other hand, involves only looking at charts. A stock chart is a visual representation of the price movement of a particular security over time.

Using different mathematical technical indicators, it’s thought that traders can sometimes anticipate future price movements based on previous patterns. And fundamentals need not be at odds with technical analysis — some investors often use both methods.

Key Points

•   Understanding both fundamental and technical analysis is essential for making informed stock purchases, with each offering unique insights into market behavior.

•   The Relative Strength Index (RSI) serves as a momentum indicator to assess whether a stock is overvalued or undervalued, guiding potential buying opportunities.

•   The cup-and-handle pattern is a recognized bullish signal, characterized by a specific price movement that often precedes upward trends in stock prices.

•   A golden cross occurs when a short-term moving average crosses above a long-term moving average, indicating potential bullish momentum and future price increases.

•   Combining multiple technical indicators enhances accuracy in predicting stock movements, as relying on a single indicator can lead to misleading conclusions.

Technical Indicators of a Bull Trend

Before getting into the specifics of technical analysis, it’s important to understand the difference between bullish indicators and bullish patterns.

Indicators represent information generated by a computer based on a dataset. That dataset comes from the price action of a security over a set time period (one hour, one day, one month, six months, one year, etc.).

Patterns, on the other hand, are identified by human eyes when charts take on a certain shape (head and shoulders, cup and handle, etc.). Some traders even program their own computer scripts to try to identify patterns automatically, leading to a kind of hybrid of patterns and indicators.

All of these methods are broadly referred to as technical analysis — the process of using charts to try to predict which way a security will move next. A pattern or indicator that tends to appear when prices are getting ready to move higher is referred to as a bullish one.

Here are five examples of bullish indicators and bullish patterns.

RSI Weakness

The Relative Strength Index (RSI) is a technical indicator that gives investors an idea of how overvalued or undervalued a security might be. This momentum indicator gauges the significance of recent price changes. The higher the RSI, the more likely the stock is overvalued, and the lower the RSI, the more likely the stock is undervalued.

The RSI is represented by a simple line graph that goes up and down between two extremes (also known as an oscillator). When the line dips below a certain level, it can indicate potential undervaluation. Meanwhile, when it rises above a certain level, it can indicate overvaluation.

RSI values range from 0 to 100 but rarely fall below 20 or go higher than 80. Between 30 and 60 is a shaded area sometimes referred to as the “paint” area. An RSI within this range can still provide some insight, but it is not as reliable an indicator as an RSI that has extended to more extreme levels.

An RSI of 50 is considered neutral, whereas an RSI of 30 and lower is considered undervalued (bullish). Meanwhile, an RSI of 70 and above is considered overvalued (bearish). In other words, the lower the RSI, the more of a bullish indicator it could be.

Cup-and-Handle Pattern

The cup-and-handle pattern is among the most bullish patterns known to stock traders. There are two main parts, as the name implies: a cup and a handle.

The cup is formed when a stock moves downward, then sideways, and then upward. Once the cup has been formed, the handle can be formed by a period of slow decline. This kind of price action leads to a chart with one part resembling the bottom half of a circle (cup) followed by a slanted line at the top edge (handle).

The pattern has a long list of nuances. Many lengthy articles have been dedicated to the cup-and-handle pattern alone. Here are quick notes about identifying the pattern:

•   Ideally, the cup should be about 30% deep (having declined about 30% from its start to its lowest point).

•   The handle should form over a period of at least five days to several weeks.

•   Trading volume should surge when the handle finishes forming, at which point traders will often seek to enter into a position.

•   Conversely, an inverted cup and handle can be a sell signal. This pattern has the same shape, only it appears upside down, with the handle slanting up and the top half of a circle forming the cup.

Moving Average Golden Cross

Moving averages (MA) are another common technical indicator. A moving average is the mean of a stock’s daily closing price for a certain number of trading days. Moving averages smooth out the trend of a stock’s price and highlight any moves above or below the trend.

A moving average is denoted by a line that overlays on a price chart. While these averages don’t contain a whole lot of information in and of themselves, sometimes key averages interacting with one another can serve as major buy or sell signals.

The 50-day MA and the 200-day MA are of particular importance when they cross paths. Most of the time, the 200-day MA will be higher than the 50-day MA. But when the 50-day crosses above the 200-day, the move can be seen as a bullish indicator signifying a trend toward upward price movement.

This indicator is known as the “golden cross,” and it is regarded as relatively rare and reliable. Prices often, but not always, move up after a golden cross happens.

Golden crosses can occur with moving averages of time frames shorter than 50 or 200 days as well, but longer time frames carry more weight.

Bollinger Bands Width

Bollinger Bands combine a simple moving average with an additional metric — a measure of price extending one standard deviation above or below the average.

When Bollinger Bands get very close together, it often indicates that a trend change lies on the immediate horizon. That means the price might be likely to break out either higher or lower in the near future in most cases.

While this indicator is a little vaguer than the others, combining it with a few other bits of information can sometimes make it a bullish indicator.

For example, an investor might choose to look at Bollinger Bands alongside one of the other indicators mentioned here. If the RSI for a particular stock were at 40 at the same time that Bollinger Bands were close together, that might give an investor further assurance that an upward move could be on the horizon.

Piercing Pattern

The piercing pattern is simpler than most others. It marks the possibility of a short-term reversal from downward price action to upward price action based on only two days of trading.

The pattern occurs when the first day opens near its high point, closes near the low, and has an average or larger-than-average price range. Then the second day begins trading with a gap down, opening near the low and closing near the high. The close ought to form a candlestick covering at least half of the length of the first day’s red candlestick.

A piercing pattern rarely appears in perfect form. As with other patterns, the closer to perfection the setup looks, the more likely it is to be accurate. When bullish patterns like this one coincide with other bullish indicators, like a low reading on the RSI, the potential for price gains becomes strengthened.

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Other Technical Analysis Factors to Consider

It’s important to remember that technical indicators should be used together when possible. Looking at only one indicator may not always give as accurate a picture of which direction price action will head next.

Another concern is time frame. These indicators and patterns need to be looked at over a sufficient amount of time to prove effective — the longer the better, in general. Looking at price movements on a daily chart might lead to one impression, but zooming out and looking at six months or a year might result in a different (and often more accurate) assessment for the simple reason that there is more data included.

Finally, when thinking about bullish patterns and indicators, realize that most investors have access to the same public knowledge. When a bullish development occurs, millions of stock traders use technical analysis to try to identify the pattern at more or less the same time. This can lead the charts to become self-fulfilling, as everyone can buy at the same bullish point or sell at the same bearish point, regardless of anything else happening.

The Takeaway

Technical analysis, which involves only looking at stock charts, is one of the two main schools of thought when it comes to figuring out when to buy a stock. Investors using this form of analysis may look at both bullish indicators and bullish patterns to determine when it appears that prices are preparing to move higher.

There are a number of these patterns and indicators investors might look at — from RSI weakness to piercing patterns — though it’s generally best to use technical indicators together and also take time frame into consideration.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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28
2025
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Signs a Stock Is Underperforming

By | Growing Wealth, invest, Investing | Comments Off on Signs a Stock Is Underperforming

“Underperform” ratings are assigned when a stock isn’t expected to do as well as the overall market. Some of the signs that a stock is underperforming include a drop in earnings or underperformance compared with the company’s industry or the benchmark index.

It’s important to keep in mind that underperforming stocks are not necessarily bad investments, and the concern over the potential downside doesn’t always justify a “sell” rating.

Key Points

•   Underperform ratings indicate stocks will likely perform worse than the market.

•   Falling earnings suggest a company’s profitability is declining.

•   Declining dividends may signal financial difficulties or lack of confidence.

•   Insider selling can indicate a negative outlook on the company’s future.

•   A death cross pattern shows weakening stock momentum.

What Is an Underperforming Stock?

When an investment analyst assigns an “underperform” rating to a stock this is thought to be less bearish than an outright “sell” rating. A rating of “underperform” is also sometimes referred to as “weak hold” or “moderate sell.”

In this sense, stocks that have underperforming prices might be considered buying opportunities.

That said, the general definition is a bearish one, similar to the downward trends in a bear market. Meaning: an underperforming security is often one that most investors might want to keep an eye on, and possibly consider selling at some point.

Indicators of Underperforming Stocks

Just as “underperforming” can have slightly different interpretations, depending on the context, there are also many ways to determine whether or not a stock might be underperforming. Underperforming stocks could be those that have more sluggish prices than their peers, the overall market, or a particular index.

Underperformance could be measured by earnings that lag behind competitors, dividends that haven’t increased, or any number of other economic metrics pertaining to the operations of a business.

And finally, technical or fundamental analysis indicators (those that appear on price charts) could indicate imminent underperformance.

Here are seven signs a stock could be underperforming — which are important criteria to understand when investing in stocks.

1. Falling Earnings

When a company’s earnings are declining instead of growing, this could be a sign of underperformance.

And even when earnings are growing, a stock could still be considered an underperformer if competitors in its industry are seeing greater earnings growth.

Alternatively, an earnings-positive stock could also be labeled “underperform” if a related index has outperformed the price of the stock.

For example, a tech stock listed on the Nasdaq exchange might have had earnings growth of 5% during the last quarter. But if the Nasdaq as a whole gained 10% during that time, an individual stock with 5% growth could be considered an underperformer.

The criteria of underperforming earnings can be compared to a stock’s industry, its competitors, or a related index. And earnings are not the only way to measure underperformance, although they are a common one.

2. Underperformance vs Industry

Stocks can also be said to be underperforming relative to their own industry. This method of gauging performance is often used with stocks that are in a new or highly specialized area of business.

One common way to measure performance in an industry is to look at a related exchange-traded fund that has a large market cap.

3. Underperformance vs Index

A common sign of underperforming stocks is their lack of gains compared with the broader market indices. After all, if a stock doesn’t outperform the market, what’s the point in holding it? Buying a simple index-based fund, e.g. a passive exchange-traded fund (ETF), aims to give the investor market returns over time.

It makes sense to qualify underperforming stocks by comparing them with an index that has some relation to their industry. For tech stocks, that might be the Nasdaq. A broader market index of large-cap U.S. companies would be the S&P 500.

Underperforming in comparison with an index might be the broadest interpretation of the word. A more specific metric of performance has to do with a company’s competitors.

4. Underperformance vs Competitors

Perhaps the most targeted metric of underperforming stocks might be their performance relative to industry peers. If a stock is seeing growth metrics that don’t meet or exceed those of some or all of its competitors, then it can be said that the stock is underperforming.

Companies that have a competitive edge that would be difficult for others to overcome are said to have an “economic moat” — a take on the literal moat, which makes it harder for people to enter a place.

In financial terminology, having an economic moat means that a company should be insulated from the possibility of its competitors stealing market share and reducing profits.

An example might be a company in the telecommunications or media industry that has the market cornered for a particular service like streaming entertainment or new wireless tech (meaning the business has a lot of customers in a certain area or little real competition). This could be considered an economic moat.

If a company has no moat and is underperforming relative to its competitors, this could spell trouble.

5. Declining Dividends

Another negative thing that tends to happen to underperforming stocks is when they cut or suspend their dividend (for dividend-yielding stocks, of course). This can happen when something called the payout ratio of a stock becomes unsustainable.

The payout ratio is simply the relationship of a company’s earnings per share with how much of those earnings get paid out to shareholders. If a company’s earnings per share are $1, for example, and the stock pays a dividend of 10 cents per share, the payout ratio is 10%.

When a company increases its dividend too much too fast, or earnings fall precipitously, the payout ratio might rise to a level that eats up all of the company’s profits (possibly as high as 100%, meaning all profits go to shareholders as dividends).

When this happens, companies might have to reduce their dividend, or in uncertain times suspend the dividend altogether.

During the market chaos resulting from the pandemic in 2020, many companies in some of the hardest-hit sectors like real estate investment trusts and retail wound up slashing or suspending their dividend payments.

6. Insider Selling

There’s no one more intimately familiar with the operations of a company than those who spend their days running it. So when insider executives sell shares, it might indicate that something about the company has taken a turn for the worse.

Of course, there are times when executives simply need to raise cash for personal or business reasons. Insider selling doesn’t always mean that a company is underperforming.

Still, looking at the actions of insiders who hold large amounts of shares can be an easy way to judge whether the near-term outlook for a stock will be bullish or bearish.

Most brokerages give users access to this data in a simple bar graph format. The amount of shares and their dollar value attributed to insider buying and selling will be displayed for each month, usually going back several years or more.

7. Moving Average Death Cross

While so far, the signs of underperforming stocks covered here have focused on fundamental factors, this final sign is purely technical (meaning it’s based on charts, not economic numbers).

The so-called death cross pattern happens when a short-term moving average (often the 50-day) moves below a long-term moving average (often the 200-day). This is the opposite of a “golden cross,” which involves a long-term moving average moving below a short-term one, which is a bullish signal.

A technical pattern like this suggests that a stock’s momentum may be faltering and that traders have taken a more pessimistic view toward the security. Once an indicator like this is confirmed, it doesn’t take much time for traders around the world to recognize and act on it.

A Common Denominator

These aren’t the only signs that a stock might be underperforming. There are many relevant economic and technical indicators not mentioned here. A common theme ties them all together, though.

Underperforming stocks are those that are not doing as well as some other related benchmark, or those that have been performing worse than their own historical precedent.

The Takeaway

Underperformance could be a sell signal or a buying opportunity. It depends on the context, but most analysts assign an “underperform” rating to stocks they think might not have a compelling reason to be bought at the moment.

Signs of underperformance can include a drop in earnings, lower performance when compared with industry averages or a benchmark index, as well as other factors like declining dividends. All that said, however, an underperforming stock doesn’t automatically signal that it’s a loser — buying underperforming or undervalued securities can sometimes present an opportunity.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Feb
28
2025
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Pros & Cons of the 60/40 Portfolio

By | Growing Wealth, invest, Investing | Comments Off on Pros & Cons of the 60/40 Portfolio

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

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

Key Points

•   The 60/40 portfolio, combining stocks and bonds, has historically provided an average annual return of 9%, adjusted to 5.9% after inflation.

•   This portfolio is easy to manage and generally delivers consistent growth, appealing to hands-off investors.

•   It may not effectively combat inflation and lacks broader diversification, which can limit long-term performance and risk reduction strategies.

•   Advantages include simplicity, steady growth, and risk mitigation, making it suitable for investors seeking a balanced approach.

•   Alternatives like dollar-cost averaging, Rule of 110, and the Permanent Portfolio, may offer investors some additional diversification and risk management options.

What Is the 60/40 Portfolio?

An investment portfolio divided as 60% stocks and 40% bonds is commonly understood as a “60/40 portfolio.”

The 60/40 portfolio is designed to withstand volatility and grow over the long-term. The strategy is that when the economy is strong, stocks perform well, and when it’s weak, bonds perform well. By holding more stocks than bonds, investors can take advantage of growth over time. Meanwhile, the bonds mitigate the risk of losing a huge amount during downturns.

60/40 Portfolio Historical Returns

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

Since 1997, a 60/40 portfolio containing 10-year U.S. Treasuries and the S&P 500 has had an average annual return of around 7%.

The 60/40 portfolio grew 7000% since the 1970s, with only a 30% maximum decline. Unfortunately, returns on the 60/40 portfolio are predicted to be lower in the coming decades than they’ve been in the past. This is due to a few factors:

•   Inflation: As inflation increases, purchasing power decreases. Currently, a lot of bond yields aren’t even keeping up with the rate of inflation, and this may continue for a long time.

•   Real GDP growth: Real GDP is the amount of national economic growth minus inflation. As the economy has matured in recent years, the GDP has been growing more slowly than in decades prior.

•   Dividend yields: The amount that companies pay out through dividends is typically much lower now than it used to be.

•   Valuation: Companies are valued much higher than they used to be, and large companies are growing more slowly. As such, investors can expect slower growth in stock earnings.

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How to Build a 60/40 Portfolio

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

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

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

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

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

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

Pros of the 60/40 Portfolio

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

•   It can be very simple to set up, especially by purchasing the S&P 500 and U.S. Treasury Bonds.

•   It’s a “set it and forget it” investment strategy, needing only yearly rebalancing.

•   Holding bonds helps balance the risk of equity investments.

•   It typically offers steady growth over time.

Cons of the 60/40 Portfolio

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

•   If investors buy individual stocks, they can be volatile.

•   Mutual funds and ETFs can have high fees.

•   Bonds tend to have low yields.

•   The strategy doesn’t take into account personal investment goals and factors, such as age, income, and spending habits.

•   Diversification is limited, as investors can also add alternative investments, such as real estate, to their portfolio.

•   There is the potential for both stocks and bonds to decline at the same time.

•   Over time, a 60/40 portfolio won’t grow as much as a portfolio with 100% equities. This is especially true over the long-term because of compounding interest earned with equities.

Who Might Use the 60/40 Portfolio Strategy?

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

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

Additionally, those who are closer to retirement age may choose to shift from a stock-heavy portfolio to a 60/40 portfolio. This could help to reduce risk.

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

Alternatives to the 60/40 Portfolio

In recent years, some major financial institutions have declared that the 60/40 portfolio is not ideal for many investors. They’ve instead been recommending that investors shift more toward equities, since bonds have not been returning significant yields and may not provide enough diversification. Some suggest holding established stocks that pay dividends rather than bonds in order to get a balance of growth and stability. However, these recommendations are partly based on the fact that the current bull market is over, and they aren’t necessarily looking at the long-term market.

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

Permanent Portfolio

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

The Rule of 110

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

Dollar-Cost Averaging

Using this strategy, investors put the same amount of money into any particular asset at different points over time. This way, sometimes they will buy high and other times they’ll buy low. Over time, the amount they spent on the asset averages out.

Alternative Investments

Investors may consider allocating a portion of their funds to alternative investments, such as gold, real estate, or cryptocurrencies. These investments may help increase portfolio diversification and could generate significant returns (although the risk of loss can also be significant).

The Takeaway

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

Still, for investors who want a simple “set it and forget it” investment strategy, the 60/40 portfolio can be appealing. Other investors may decide to investigate alternative strategies. Regardless of which direction investors go, the first step in building a portfolio is determining personal goals and then creating a plan based on expected income, time horizon, and other personal factors.

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