Feb
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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Feb
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.

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.

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Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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Feb
28
2025
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Investing as a HENRY (High Earner, Not Rich Yet)

By | Growing Wealth, invest, Investing | Comments Off on Investing as a HENRY (High Earner, Not Rich Yet)

Coined in 2003, the term HENRY, or “High Earner Not Yet Rich,” refers to people who make an above-average salary but still don’t manage to accumulate much wealth. The term is said to apply to one of two groups of people: 1) millennials who make between $100,000 and $200,000 per year, or 2) families that make roughly $250,000 to $500,000 per year.

But no matter their personal situations, HENRYs share something: namely, they make high incomes but aren’t saving a sizable chunk of their earnings. Despite taking home higher-than-average salaries, HENRYs’ expenditures leave little money left each month for either savings or income-producing investments.

Key Points

•   HENRYs, despite earning high incomes, face challenges in being able to save or invest effectively.

•   Relocation to regions with lower living expenses can significantly enhance HENRYs’ savings.

•   Contributions to retirement accounts can effectively lower taxable income, benefiting HENRYs.

•   Eliminating high-interest debt increases financial flexibility for more investment opportunities.

•   Diversification of investments, incorporating income-generating assets, can strengthen HENRYs’ financial portfolios.

How HENRYs Can Reduce Their Expenses

HENRYs are sometimes referred to as the “working rich.” If they were to stop working, they wouldn’t continue to be high earners since they make money mainly from their jobs. This is in contrast to ultra-high net worth individuals, who frequently own significant income-producing assets (like real estate holdings, revenue-creating businesses, or dividend-yielding stocks).

HENRYs tend to face challenges in accumulating wealth since much of their income goes to expenses, such as education costs, housing, and debt payments. There are a few ways that HENRYs could potentially pull themselves out of their situation, though. Here’s a look at how.

Relocating to a More Affordable Area

One important factor for HENRYs to consider is location. Where an investor lives can make a huge difference in their ability to accumulate wealth. The cost of living can vary dramatically from region to region — as can state taxes.

The state of California, for example, has a state income tax rate of up to 13.30%. Meanwhile, Utah has a flat income tax rate of 4.65%, while Texas residents pay zero state income tax.

Living costs can have an even bigger impact on expenses than taxes. The median price of a home in Hawaii is multiple times higher than in West Virginia, for instance.

HENRYs also tend to live in metro areas with higher costs of living, which may make growing assets harder. Choosing to relocate to a more affordable area might be an appealing option for those who can work remotely or transfer locations at their current jobs. Savings from a reduced cost of living could add up significantly over time.

It is worth noting that the average annual salary in more affordable areas is often lower as well, so HENRYs may want to investigate whether their jobs can be done remotely or if their skills are in high demand in other towns, cities, and states.

While moving may not be easy or simple, it could be one way for a high earner not rich yet to cut income-consuming costs and begin setting aside more money for wealth-aimed investments or savings.

Examining Tax Deductions

On top of local living expenses, another expense burden that tends to weigh heavily on many individuals, especially HENRYs, is taxes. Employees who earn higher salaries tend to pay more in income taxes. This is especially true in states that have state tax brackets that tax individuals at higher rates if they earn more money, as opposed to states with flat tax rates.

One common way to reduce income tax burdens is by contributing to a traditional individual retirement account, such as a 401(k) or IRA. (Contributions to Roth IRAs aren’t deductible). Some HENRYs might already have a retirement account through their employers. In that case, they may opt to make the maximum contribution, especially if their employer will match it.

Certain amounts of donations to qualifying charitable organizations can also be tax-deductible. Of course, if a high earner not rich yet has little disposable income left at the end of each month, sizable cash or non-cash property donations might not be a viable option for some.

For HENRYs who own a home, energy-efficiency tax benefits could be something to look into as well. Installing solar panels and solar-powered water heaters are among the most common items that can qualify for this kind of tax deduction. Others that are less common include geothermal heat pumps, renewable-energy fuel cells, and wind turbines. Energy-efficiency tax deductions can apply to a primary residence. And, where applicable, they can be claimed on other properties an individual might own.

HENRYs who have children and live in a state that allows it might be able to deduct 529 savings plan (aka a college fund) contributions from their state income taxes. Opening a 529 plan can address both how to pay for a child’s college expenses and, potentially, reduce state income tax liability.

A high earner not rich yet with no children could still open a 529 plan for friends, nieces, nephews, or even for themselves if they plan on going to college in the future. While 529 contributions aren’t tax-deductible on the federal level, the funds can grow tax-free. Plus, many states allow for the deduction of funds deposited into these accounts from state income taxes.

Paying Down Debt

It’s common for HENRYs to carry heavy debt burdens. Most often, this comes from student loans, a mortgage, auto loans, and credit card debt.

One reliable way to pay down debt is to make higher-than-minimum payments on debts carrying the highest interest rates. In this way, individuals can pay less in interest than if the higher rate debts were to continue compounding. Credit cards typically have the highest interest rates of any debt that most people carry (payday loans and some other types of unconventional loans might have higher rates still, but let’s assume HENRYs aren’t relying on these services).

For many borrowers, student loan debts can quickly become a problem. Interest rates on student loans can vary — especially if borrowers have a mix of federal and private student loans. And, when large enough payments aren’t made toward the principal or on already capitalized student loan interest, borrowers might get stuck with a lot of their monthly payments going toward accruing interest. In turn, this may make it difficult to quickly pay off outstanding educational debts.

Becoming as debt-free as possible can help individuals not relinquish income to interest payments.

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Diversifying Investments for the Future

Once the above items are taken care of, HENRYs could invest the extra income saved in ways that will help their money grow. Even investors in their 20s may want to research ways to start investing. Here’s a look at the types of investments HENRYs might consider.

Income-Producing Assets

Wealth, understood as an expanding total net worth, is the kind of thing HENRYs are aiming for but can have difficulty achieving — despite their high-earner incomes. Breaking this cycle could involve first cutting certain expenditures (i.e., cost of living or high-interest debt).

Then, individuals may opt to take some of their newly freed-up funds and invest in income-producing assets. Income-producing assets may span securities that bear interest or dividends, such as bonds, real estate investment trusts (REITs), and dividend-yielding stocks.

Recommended: Income vs. Net Worth: Main Differences

Dividend Reinvestment Programs (DRIPs)

HENRYs can take advantage of the power of compounding interest by utilizing what’s known as a dividend reinvestment program (DRIP). Enrolling eligible securities into a DRIP means that any dividends paid out will automatically be used to purchase shares of the same security.

With the DRIP approach to investing, the next dividend payment will be larger than the last. This is due to the fact that more shares will be held, and payments are made to shareholders in proportion to how many shares they own.

Exchange-Traded Funds

Given that some HENRYs might not have a lot of non-work time to actively manage their investments, passive investment vehicles like exchange-traded funds (ETFs) might be an additional investment option.

Many ETFs yield dividends, although those dividends tend to be somewhat smaller than those offered to individual shareholders of company stocks.

Real Estate

HENRYs often own their own home. As such, mortgage payments combined with interest can make up a substantial portion of their regular monthly expenses.

While some people opt to buy a home as an investment, hoping that the property will grow in value over the years, buying real-estate does not always guarantee a profitable return. Some HENRYs may decide to switch or downsize to a less expensive apartment or home, assuming the cost of rent or a new mortgage is less than their current house payments. In some areas, rentals can be quite pricey, so it’s worth doing your homework to compare the pros and cons of renting vs. buying where you live.

When individuals can cut back on monthly housing expenses, it may then be possible to invest some of their freed-up income into additional assets. If an investor still wants to have exposure to property, they could choose to invest in REITs, which are known for having some of the highest dividend yields in the market.

Since REITs are required by law to pay a certain percentage of their income to investors in the form of dividends, it’s not surprising that they’re a favorite among investors seeking potential earnings. Naturally, as with any real estate investment, fluctuations in interest rates and demand may impact an REIT’s market performance.

The Takeaway

When it comes time to start investing, there’s no need to wait until retirement is nigh. After all, the longer certain securities are owned, the more time they could potentially accrue value or that dividends could be paid out.

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

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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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2025

401(k) Withdrawal Rules to Know

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on 401(k) Withdrawal Rules to Know

If you’re enrolled in a 401(k) plan and you need to get your hands on some money, you may have wondered, when can you withdraw from a 401(k)?

It’s a common question, and there are some important rules to be aware of, as well as tax implications and possible penalties. Read on to find out about the rules for withdrawing from a 401(k).

Key Points

•   Withdrawals from a 401(k) can be made penalty-free starting at age 59 1/2.

•   Aside from some possible exceptions, early withdrawals before 59 1/2 face a 10% penalty and are taxable.

•   The rule of 55 permits penalty-free withdrawals at 55 or older for those who separate from their employer at 55 or older.

•   Hardship withdrawals without penalty are available for urgent financial needs for those who qualify, but the withdrawals are subject to income taxes.

•   Some 401(k) plans allow for 401(k) loans, which must be repaid in full with interest within five years.

What Are The Rules For Withdrawing From a 401(k)?

Because 401(k) plans are retirement savings plans, there are restrictions on when investors can make withdrawals. Typically, plan participants can withdraw money from their 401(k) without penalty when they reach the age of 59 ½. These are called qualified distributions. But if an individual takes out funds before that age, they may face penalties.


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At What Age Can You Withdraw From a 401(k) Without Penalty?

There are certain circumstances in which people can take an early withdrawal from their 401(k) without penalty before age 59 ½.

Under the Age of 55

If a 401(k) plan participant is under the age of 55 and still employed at the company that sponsors their plan, they have two options for withdrawing from their 401(k) penalty-free:

1.   Taking out a 401(k) loan.

2.   Taking out a 401(k) hardship withdrawal.

If they’re no longer employed at the company that sponsors their 401(k), individuals might choose to roll their funds into a new employer’s 401(k) plan or do an IRA rollover.

Between Ages 55–59 1/2

The IRS provision known as the rule of 55 allows account holders to take withdrawals from their 401(k) without penalty if they’re age 55 or older and leave or lose their job at age 55 or older. However, they must still pay taxes on the money they withdraw.

There are a few guidelines to consider regarding the rule of 55:

•  A 401(k) plan must permit early withdrawals before age 59 ½ for individuals to take advantage of the rule of 55.

•  The withdrawals must be from the 401(k) the person was contributing to at the time they left their job, and not a previous employer’s 401(k).

•  The rest of the funds must remain in the 401(k) until the individual reaches age 59 ½.

•  If someone rolls their 401(k) plan into an individual retirement account (IRA) such as a traditional IRA, the rule of 55 no longer applies.

After Age 73

In addition to penalties for withdrawing funds too soon, you may also face penalties if you take money out of a retirement plan too late. When you turn 73 (as long as you turned 72 after December 31, 2022), you must withdraw a certain amount of money every year, known as a required minimum distribution (RMD). If you don’t, you’ll face a penalty of up to 25% of that distribution.

The RMD amount you need to take is based on a specific IRS calculation that generally involves dividing the account balance of your 401(k) at the end of the prior year with your “life expectancy factor,” which you can find more about on the IRS website.

Withdrawing 401(k) Funds When Already Retired

If a 401(k) plan holder is retired and still has funds in their 401(k) account, they can withdraw them penalty-free at age 59 ½. The same age rules apply to retirees who rolled their 401(k) funds into an IRA.

Withdrawing 401(k) Funds While Still Employed

If a 401(k) plan holder is still employed, they can access the funds from a 401(k) account with a previous employer once they turn 59 ½. However, they may not have access to their 401(k) funds at the company where they currently work.

401(k) Hardship Withdrawals

Under certain circumstances, some 401(k) plans allow for hardship distributions. If your plan does, the criteria for eligibility should appear in the plan documents.

Hardship distributions are typically offered penalty-free in the case of an “immediate and heavy financial need,” and the amount withdrawn cannot be more than what’s necessary to meet that need. The IRS has designated certain situations that can qualify for hardship distributions, including:

•  Medical expenses for the employee or their spouse, children, or beneficiary

•  Cost related to purchasing a principal residence (aside from mortgage payments)

•  Tuition and related educational expenses

•  Preventing eviction or foreclosure on a primary residence

•  Funeral costs for the employee or their spouse, children, or beneficiary

•  Certain repair expenses for damage to the employee’s principal residence

Hardship distributions are typically subject to income taxes.

Recommended: What is Full Retirement Age for Social Security?

Taking Out a 401(k) Loan

Some retirement plans allow participants to take loans from their 401(k). The amount an individual can borrow from an eligible plan is capped at 50% of their vested account balance or $50,000 — whichever is less.

The borrower has to pay the money back plus interest, usually within five years. As long as they repay the money on time, they won’t have to pay taxes or penalties on a 401(k) loan. However, if a borrower can’t repay the loan, that’s considered a loan default and they will owe taxes and a 10% penalty on the outstanding balance if they are under age 59 ½.

IRA Rollover Bridge Loan

If you need money for a short period of time and you also happen to be doing an IRA rollover, you may be able to use that money as a loan — provided that you follow the 60-day rule. In short, the 60-day rollover rule requires that all funds withdrawn from a retirement plan be deposited into a new retirement plan within 60 days of distribution, Thus, within that 60-day window, you could potentially use the money you’re rolling over as a “bridge” loan.

401(k) Withdrawals vs Loans

While it’s generally wise to keep your retirement funds in your 401(k) for as long as possible to keep saving for your future, withdrawals and loans are possible if you need money. If you find yourself considering a 401(k) withdrawal vs. a loan, be sure to weigh the choices carefully. You’ll need to repay a loan plus interest within five years, and with an early withdrawal, you’ll either need to qualify for a hardship withdrawal and then pay income taxes on the withdrawal, or if you’re age 55, you may be able to take advantage of the rule of 55.

Cashing Out a 401(k)

Cashing out a 401(k) occurs when a participant liquidates their account. While it might sound appealing, particularly if an individual needs money right now and has no other options, cashing out a 401(k) has drawbacks. For example, if they are younger than 59 ½, the cashed-out funds will be subject to income taxes and an additional 10% penalty. That means a significant portion of their 401(k) withdrawal might be paid in taxes.

Rolling Over a 401(k)

If you’re leaving your job you may choose to roll over your 401(k) to continue saving for retirement.

This strategy allows you to roll the money into an IRA that you open and manage yourself by choosing investments — which may be things like stocks, mutual funds, and exchange-traded funds (ETFs) — and you won’t have to pay taxes or early withdrawal penalties.

With an IRA rollover, you might have a wider range of investment options than with an employer-sponsored plan (think of it as a kind of self-directed investing), and your money has a chance to potentially continue to grow tax-deferred.

The Takeaway

While it may be possible to withdraw money from a 401(k), certain factors like age and hardship distribution eligibility determine whether you can make a withdrawal without incurring taxes and penalties. You might also consider a 401(k) loan, but you’ll need to repay the money you borrow plus interest within five years.

If you are leaving or changing your job, you could opt to roll over your 401(k) into an IRA to continue saving for retirement. With a rollover, you won’t pay penalties or taxes.

Review your options carefully to decide the best course for your situation.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

Can you take out 401(k) funds if you only need the money short term?

It’s possible to take out 401(k) funds if you only need the money short term. For example, you could take out a 401(k) loan if your plan allows it. There are limits on how much you can take out, however, and you need to repay the amount you borrow plus interest within five years. Just be sure you can repay the loan so it doesn’t go into default.

How long does it take to cash out a 401(k) after leaving a job?

The length of time it takes to cash out a 401(k) after leaving a job depends on your employer and the company that administers your 401(k) plan. The process generally takes anywhere from a few days to a few weeks.

What are other alternatives to taking an early 401(k) withdrawal?

One alternative to taking an early 401(k) withdrawal is to take out a 401(k) loan instead. You will need to repay the amount you borrow plus interest within five years. As long as you do that, you won’t owe taxes on the money you borrow with a 401(k) loan.

At what age can I withdraw from my 401(k) without penalty?

You can withdraw from your 401(k) without penalty at age 59 ½. However, if you are 55 or older, and you leave or lose your job in the same calendar year that you’re 55 or older, you may be able to take out money without taxes or penalties if your 401(k) plan allows it. This is thanks to a provision called the rule of 55.

When can I access my 401(k) funds if I’m already retired?

If you are already retired, you can access your 401(k) funds anytime you like as long as you are at least 59 ½ years old. Just remember that you will owe income tax on the money you withdraw, so plan accordingly.


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.

Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA(www.finra.org)/SIPC(www.sipc.org). For all 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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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