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May

2025

Understanding Lower-Risk Investments in Today’s Market

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

There’s no such thing as a safe investment, but some types of investments may be less risky than others. For instance, bonds tend to be less risky than stocks, though that’s not always the case. Depending on an individual investor’s risk tolerance, knowing which investments tend to be more conservative and which tend to be riskier, can be important to forming an investment strategy.

The Essence of Conservative Investing

It’s difficult to identify the least-risky investments on the market since they’re all subject to different types of investment risk. Your personal risk tolerance as an investor also comes into play, as you may have a much higher or lower appetite for risk compared to someone else. When viewed through that lens, an investment that seems relatively conservative to you might seem risky to someone else.

Defining Lower-risk Investment

You might assume that it simply means any investment that carries zero risk — but that’s not necessarily a definitive answer, or a realistic one, since all investments have risk. As such, when constructing a portfolio, it’s important to look at the bigger picture which includes an individual investment’s risk profile as well as an investor’s risk tolerance, as mentioned. Risk capacity, or the amount of risk required to achieve a target rate of return, can also play a part in investing decisions, and which can help investors define lower-risk investment options.

The Appeal of Fixed Income

Fixed-income securities can be particularly attractive to risk-averse investors. These types of securities tend to have lower associated risks, guaranteed returns, and maybe even tax benefits — but that’s balanced out by lower potential returns, and other types of risk. With that in mind, it may be a good idea to look at fixed-income investments right out of the gate for relatively conservative investment options.

Evaluating Risk in Investments

It’s not necessarily easy to evaluate an investment’s relative risk or risks. But investors can likely do well by learning about the types of risks that an investment may be associated with, and how those risks can line up with their strategy or portfolio.

Key Principles for Secure Investments

Perhaps the most important method involved in discerning how risky an investment is the specific type of risks it introduces to a portfolio.

Investors who choose products and strategies to avoid market volatility leave themselves open to a variety of risks. When researching less-risky investments, it’s important to consider how different risk factors may affect them. Here are some of the most common types of risk you might encounter when building a diversified portfolio.

• Inflation risk. This is the risk that your purchasing power can erode over time as inflation increases.

• Interest rate risk. Fluctuating interest rates can influence returns for less-risky investment options such as bonds.

• Liquidity risk. Liquidity risk refers to how easy (or difficult) it is to liquidate assets for cash if needed.

• Tax risk. Task risk can influence an asset’s return, depending on how it’s taxed.

• Legislative risk. Changes to investing or tax regulations could affect an investment’s return profile.

• Global risk. Certain investments may be more sensitive to changing geopolitical events or fluctuations in foreign markets.

• Reinvestment risk. This risk refers to the possibility of not being able to replace an investment with one that has a similar rate of return.

Risk vs Return: Finding the Balance

There’s a reason the sayings “nothing ventured, nothing gained” and “no risk, no reward” have been around so long. But having some knowledge of where various investments fall on that range of risks — as well as the types of risks to which a particular investment could be exposed — may help investors find the returns they need while still holding on to some sense of control.

Netting bigger potential rewards often means taking on more risk, investors may benefit from understanding the degree of risk they’re comfortable with and capable of enduring. That’s why it’s important to research every asset they add to their portfolio — or get help from a professional advisor when choosing between the riskiest and least-risky options.

Lower-risk Investment Options in 2025

Among lower-risk investments on the market in 2025, here is a sampling of what investors might want to choose from, or research further.

High-yield Savings Accounts

Typically offered via online banks, high-yield savings accounts pay a higher interest rate than other types of deposit accounts. That said, since current interest rates are extremely low, these accounts are providing scant returns.

High-Yield Savings Accounts Pros

• You’re unlikely to lose your principal in a savings account.

• High-yield savings accounts are FDIC insured, so you won’t lose your deposit if your bank closes.

• Savings accounts are highly liquid, meaning you can access your money quickly at any time.
High-Yield Savings Accounts Cons

• Since interest rates on these accounts are lower than inflation, your money could lose purchasing power over time.

• High-yield savings accounts offer a lower rate of return compared to other conservative investments or those with moderately higher risk.

• Some banks place limits on the number of withdrawals that you can make from a savings account each month.

Bonds and Treasury Securities

Investors typically consider savings bonds one of the least-risky investment options. Investors can purchase EE savings bonds (the most common type of savings bond) from the U.S. Treasury Department for half the face value and accrue interest monthly based on a fixed rate.

The interest rate is set for the first 20 years after purchase, and the Treasury guarantees an EE bond will be worth at least its face value when those 20 years have passed. After that, the Treasury resets the interest rate and extends the maturity by 10 more years.

Investors don’t have to hold onto a savings bond for the entire 30 years, but they do have to wait at least a year before redeeming it. And they’ll forfeit three months’ interest if they redeem a savings bond during the first five years after its purchase. The current rate for EE bonds is 2.70%. The return may be more conservative, but it’s also offers stable, low-risk growth.

Further, Treasury securities (bills, notes, and bonds) provide funding for the government in exchange for a fixed interest rate. So, they are sold and backed by the “full faith and credit” of the U.S. government.

Because the government has the means to repay its investors (by printing more money or raising taxes), it’s highly unlikely it will default on these obligations, so investors get a practically guaranteed return of their principal and any interest they have coming, as long as they hold onto the security until its maturity date. For those reasons, Treasury securities land in the less-risky investments category.

Different types of government securities come with different lengths of maturity, and their interest rates reflect those term lengths. Treasury bonds have a higher interest rate in exchange for a longer term (30 years), but that lengthy term can be a drawback.

US Treasuries Pros:

• Since they’re backed by the government, securities are among the least-risky investment options.

• Varying maturity terms allow for flexibility when using securities to diversify a portfolio.

• Interest is guaranteed if investors hold U.S. securities to maturity.

US Treasuries Cons:

• Though conservative, you likely will not see sizable gains from this type of investment.

• Once you buy a Treasury security the terms won’t change, even if newer bonds are paying higher rates.

• Selling a bond before it matures could be difficult if there are bonds with more favorable terms on the market.

Certificates of Deposit (CDs)

A certificate of deposit account or CD is a time deposit account. These accounts require you to save money for a set time period, during which you can earn interest. Once the CD matures, you can withdraw your original deposit along with the interest earned. You can open CD accounts at brick-and-mortar banks and credit unions or online financial institutions.

CDs are similar to a savings account, and they’re FDIC-insured, which means the government will cover the depositor’s principal and interest (up to $250,000) if the bank or savings association issuing the CD fails. But unlike other bank accounts, savers must leave their money in the account for a designated period of time — usually from a few months to a few years. The longer the term, the higher the interest rate. And if savers take out the money early, they might have to pay a penalty (although there are some exceptions).

CD Pros:

• Lower-risk as interest rates can be guaranteed for the CD’s maturity term.

• FDIC coverage minimizes the risk of losing money if your bank closes.

• The ability to earn interest on funds you don’t need to use for the near term.

CD Cons:

• Withdrawing money from a CD before maturity can trigger an early withdrawal penalty.

• When interest rates are low, CD interest earnings may not keep pace with inflation.

• Some CDs may require larger minimum deposits to open.

Money Market Funds & Accounts

Money market funds are fixed income mutual funds that invest in short-term, lower-risk debt securities and cash equivalents. You may find them offered by banks though you’re more likely to encounter them at an online brokerage. They’re not to be confused with money market accounts, which are on demand deposit accounts also offered by banks and credit unions. Money market funds must comply with regulatory requirements regarding the quality, maturity, liquidity, and diversification of their investments, which can make them appealing to investors looking for a conservative and steady security that pays dividends.

But the less-risky and short-term nature of the investments within these funds means that returns are generally lower than those of stock and bond mutual funds with more risk exposure. That means they may not keep pace with inflation.

Money Market Fund Pros:

• Money market funds are a conservative investment that carry less risk than traditional mutual funds or exchange-traded funds (ETFs).

• Unlike CDs, savings bonds or U.S. Treasury securities, you’re not necessarily locked in to money market funds for a specific time period.

• Money market funds can generate returns above high yield savings accounts or CDs.

Money Market Fund Cons:

• A lower risk profile also means a lower return profile compared to other mutual funds or ETFs.

• Risk doesn’t disappear entirely; you could still lose money.

• Certain money market funds may offer greater liquidity than others.

Corporate Bonds

Corporate bonds may not be as conservative as CDs or government bonds, but investors generally consider them a lower risk than stocks. The term “investment grade” lets investors know a bond is a lower risk based on ratings received by either Standard & Poor’s or Moody’s. You can purchase corporate bonds through some online brokerage accounts.

Investors expect that a higher-quality investment-grade bond — rated AAA, AA+, AA, and AA- by Standard & Poor’s — will perform consistently and pay interest on a regular basis. Bonds rated A+, A, and A- also are considered stable, while those rated BBB+, BBB, and BB- may carry more risk but are still considered capable of living up to their debt obligations. Like other types of bonds, corporate bonds are susceptible to interest rate risk, and with a longer commitment, there’s typically more exposure to that risk.

Corporate Bond Pros:

• Investors can earn interest from corporate bonds for reliable income.

• May offer higher yields than other types of bonds, with longer terms generally producing higher yields.

• Higher-grade bonds generally have a lower default risk, making them relatively less-risky investments with high returns.

Corporate Bond Cons:

• Default risk could mean losing money if the bond issuer fails to uphold their end of the bargain.

• Interest rate risk can negatively impact a corporate bond investor’s return profile.

• Longer bonds may carry a higher degree of risk compared to bonds with shorter terms.

Preferred Stocks

Preferred stocks, or preferreds, may be an appealing option for conservative investors looking for a higher yield than CDs or treasuries have to offer. Preferreds are often referred to as a “hybrid” investment, because they trade like stocks but are like bonds in that they provide income. You can trade shares of preferred stock in some online brokerage accounts.

These investments generally pay quarterly dividends that you can use as income or reinvest for more potential growth. In a worst-case scenario, if a company can’t pay its preferred dividends for a while, the money owed accumulates as backpay. And when the company resumes payments, preferred shareholders get their accumulated dividends before those who own common stocks.

You can sell preferreds at any time, but they’re typically used as a long-term investment. Just as with corporate bonds, companies that are more financially stable will receive higher marks from credit ratings agencies, so investors can have some idea of what they’re getting into.

Still, the ins and outs of buying preferred shares can be complicated, so beginners may want to work with a financial professional who is experienced in this type of investment.

Preferred Stock Pros:

• Preferred stock can offer consistent income in the form of dividends.

• Preferred stock shareholders take priority for debt repayment in the event that the company goes bankrupt.

• Investors can realize capital gains when selling preferred stock if shares have appreciated in value.

Preferred Stock Cons:

• Companies that offer preferred stock can reduce or eliminate dividends so payouts are not necessarily always guaranteed.

• Like other stocks, preferred stocks can be riskier investments than bonds or similar securities.

• Preferred stock shareholders are not assigned voting rights.

Blue Chip Stocks

Stocks issued by big companies that have a reputation for performing well in good times and bad are typically known as blue chips. They aren’t immune from big losses, but they tend to handle market drops better than other stocks. You can purchase blue chip stocks through an online brokerage account.

These companies have a history of dependable growth and paying consistent dividends. Investors who want to do some research can get insight on blue chips by checking out the “Risk Factors” section of a company’s annual 10-K filing.

Companies must list their most significant risks, usually in order of importance. Some risks apply to the entire economy, some to that particular industry, and a few may be specific to that company.

Blue Chip Stock Pros:

• Blue chip stocks are typically associated with stable companies, making them less susceptible to market volatility.

• Some Blue chip stocks pay regular dividends

• Blue chip stocks have the potential for long-term, steady growth which can allow investors to reap the benefits of capital appreciation.

Blue Chip Stock Cons:

• Blue chip stocks are not entirely insulated against market volatility or its accompanying downside risk.

• Blue chip stocks may have limited growth potential, as these are companies that are already well-established.

• Investors interested in adding innovative companies to a portfolio may be disappointed by blue chips, as these are usually older companies with a set business model.

Investment Strategies for the Conservative Investor

An investor who takes a defensive posture, or attempts to stick to less risky investments is often referred to as “conservative” – which is different from a conservative political leaning. Conservative investing is, as noted, defensive, and seeks to preserve wealth by reducing risk in a portfolio.

The opposite of conservative investing is aggressive investing. Investors in one camp or another can and will use different strategies and assets that align with their risk tolerances and time horizons. Generally, a conservative investor is perhaps more likely to stick to a buy-and-hold strategy than, say, one that involves a lot of day-trading or options trading. That’s because, over time, a buy-and-hold strategy may prove less risky as the market tends to rise over time.

Balancing Your Portfolio with Lower-risk Investments

Along with a longer-term investment strategy, conservative investors may lean into less risky investments, which can include bonds, index funds, mutual funds, and more. They may still add some riskier investments or assets to the mix, in order to provide a little bit of additional growth potential, but the balance between the risk of some investments and the lower risk of others is what a conservative investor is aiming for.

How to Identify and Select Lower-risk Investments

Investors doing their best to seek out and choose relatively lower-risk investments for their portfolio will need to do their homework. That includes looking at some key metrics that may help discern how volatile an asset’s value could be.

A good place to start is by looking at an asset’s standard deviation, which can help determine the volatility associated with an investment. Experienced investors can go even deeper, looking at Sharpe ratios, Betas, and Alphas – which are fairly high-level metrics.

Due Diligence and Diversification

When deciding how much risk to take, investors typically consider several factors, including their age, personality, and purpose. Investors who can’t handle a lot of risk for any or all of those reasons may wish to lean toward those investments that are typically the most conservative.

But another way to help protect a portfolio is through diversification: choosing investments from different asset classes, in different sectors, and with different risk factors. For example, you may choose to invest in a mix of conservative investments such as bonds or U.S. Treasury securities alongside higher risk investments, such as individual stocks or cryptocurrency.

Having some lower-risk assets in a portfolio can minimize the impact of volatility in other assets. Typically, investors with a long time horizon (such as young investors saving for retirement) can take on more risk in their portfolios, while those with shorter-term goals may want a more conservative approach. Investors with a low tolerance for risk may prefer conservative investments during times of uncertainty.

Diversification can help to balance risk so you don’t have to make an either-or choice with regard to a risky investment or conservative investment. The various assets in your portfolio can counterbalance one another as the market moves through changing cycles.

Special Considerations for Lower-risk Investments in 2025

As noted throughout, there are some special considerations investors will want to make when looking at their lower-risk investment options.

For one, depending on market trends, returns on lower-risk investments may be disappointing to some investors. As discussed, assets with lower associated risks tend to be associated with lower growth or returns. Conversely, higher-risk investments may have higher associated gains. Think about the difference in how the value of a stock might increase compared to the value of a bond – assets accrue value in different ways and at different rates.

Another thing to think about is inflation, which is the tendency of money to lose value over time. One of the reasons that many people invest is to try and see their wealth grow faster than the rate of inflation (which is, traditionally, around 2% annually, but may be higher or lower). If they’re successful, their wealth grows, rather than erodes, over time.

There’s a lot to consider when trying to outpace inflation, including the balance of risks and rewards, as mentioned. But many investments that can offer relatively high yields or dividends (like certain bonds) can also be at risk of interest rate changes. During times of high inflation (as experienced in the U.S. and much of the world in 2021, 2022, and 2023), central banks may increase interest rates to slow the economy.

That change in interest rates may cause some investments to lose value. Again, this is a consideration many investors, especially in 2023 and 2024, should be aware of.

Next Steps for the Prudent Investor

For conservative investors, or even those who are merely looking to add a dimension of lower risk to their portfolios, there are a lot of potential strategies and investment types out there. But, again, there’s no single “correct” thing to do for every investor – you’ll need to give some serious thought to your risk tolerance, time horizon, overall financial goals, and weigh the pros and cons of conservative investing accordingly.

As for next steps? It may involve speaking with a financial professional for some guidance. It may also just entail taking a look at your existing holdings, looking for areas where you can mitigate risk, and rebalancing or reallocating your resources accordingly.

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.

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About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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May

2025

What Is Panic Selling & How Does it Work?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Panic selling is when a large number of investors want to sell their holdings at the same time, and it creates a drop in prices. That drop scares other investors into selling, which causes prices to fall still further, which frightens more investors, and so on. The resulting panic can erase vast amounts of wealth. It can take weeks or even years for the markets to recover from a serious panic-selling event.

The popular advice on panic selling for most investors is simple: Don’t panic. The logic being that over time, and through major financial crises, the equity markets have tended to rebound and rise. Investors may also take steps to minimize their exposure to panic selling, however, such as by routinely reviewing and adjusting their holdings in view of their investment horizon and risk tolerance.

Key Points

• Panic selling leads to market drops, causing more fear among investors.

• Major events or asset overvaluation can spark panic selling in the market.

• Margin calls, stop-loss orders, and algorithms can exacerbate market declines.

• Long-term investors can benefit from dollar-cost averaging during downturns.

• Panic selling creates buying opportunities, but timing the market is uncertain.

Panic Selling and Stock Market Crashes

Stock markets — and the market for anything from housing to basic commodities — go down when there are more people selling than buying. And sometimes in the stock markets, the sellers outnumber the buyers to such a degree that sellers panic and are willing to take almost any price to get cash for their investment.

When panic grips enough investors, the markets can crash. Panic occasionally sets in. Sometimes it’s a major global event that sets it off, like what happened with the stock markets in March of 2020 as the global COVID-19 pandemic picked up speed.

Other times, it’s a matter of a given asset — like housing and real estate in 2008 — being bid up to unrealistic levels, followed by the mass consensus of what it’s worth changing seemingly overnight. The history of U.S. recessions is full of emotionally charged market changes.

What Causes Panic Selling?

While panic is a very human response to the prospect of major financial loss, there are also other factors that can trigger investors to start panic-selling stocks, including: margin calls, stop-loss orders, and algorithms.

Panic Selling and Margin Calls

In the Great Crash of 1929, there were many investors who had borrowed heavily to invest in the stock market. When the markets dropped, they received something known as a margin call, requiring that they pay back the loans they took out to invest.

Those margin calls required that they sell potentially even more stock to pay back the loans, which caused the markets to fall even further.

Panic Selling and Stop-loss Orders

Similarly, there are trading programs that can throw fuel on the fire of a bout of panic selling. These can be as simple as a stop-loss order, a standing order to buy or sell a particular security if it ever reaches a predetermined price, which investors commonly use in their brokerage accounts.

A stop-loss order can be a way to take advantage of price dips to buy a stock at a discount. But during a sudden drop in the markets, stop-loss orders often lead to automatic sales of stocks, as investors try to lock in their gains.

These automatic sales — in large enough numbers, can accelerate the decline in a market, and contribute to the panic.

Panic Selling and Algorithms

There are algorithms employed by major financial institutions and professional investors that will automatically sell if the price of a given stock falls to a certain level. The crash of 1987 was caused in part by some of the first computerized trading programs.

And in 2010, one trader who lost control of his highly sophisticated trading software was responsible for the “flash crash,” which caused roughly a trillion dollars of market capitalization to disappear in under an hour.

The system-wide risk presented by these tools is one reason that most major stock exchanges have installed a series of trading curbs and “circuit breakers” in place to slow down panic selling, and give the traders who use these programs a chance to recalibrate them before a full-fledged selling spree can run out of control.

The Risks of Panic Selling

When markets drop suddenly, it can be scary for investors. And one of the biggest risks may be to give into that fear, and join in the selling.

But one thing to remember is that markets go up and down, but an investor only loses money when they sell their holdings. By pulling their money out of the stock market, an investor not only accepts a lower price, but also removes the chance of participating in any rebound.

Loss is a big risk of panic selling. People who invest for goals that are years or decades away can likely weather a panic. But if a person is investing for retirement, a sudden panic just before they retire can create a major problem, especially if they were planning to live off those investments.

The danger of sudden, panic-driven drops in the market is one reason it makes sense for investors to review their holdings on a regular basis, and adjust their holdings away from riskier assets like stocks, toward steadier assets like bonds, as they get nearer to retirement.

That risk is also why most professionals recommend people keep 6-12 months of expenses in cash, in case of an emergency. That way, even if a financial crisis causes a person to lose their job, they can stay in the market. It’s a way to protect their long-term plans from being jeopardized by everyday expenses.

Finding Opportunities in Panic Selling

During a panic, there are typically enough scared people making irrational decisions to create valuable buying opportunities. The stock-market crashes in 1987 and in 2008, for instance, were each followed by a decade in which the S&P 500 rewarded investors with double-digit annual returns. (As always, however, past performance is no guarantee of future success.)

The problem is that there’s no way to know when a panic has reached its end, and when the market has fallen to its bottom. Professional traders with complex mathematical models have had mixed results figuring out when a market will rebound. But for most investors — even savvy ones — it’s a guessing game at best.

There are two ways an investor can try to take advantage of a bout of panic selling:

1. The first is not to panic.

2. The other is to keep investing when the market is down, while stocks are selling for much lower prices.

Dollar Cost Averaging

One way to take advantage of panic selling is with dollar cost averaging. With this long-term plan, an investor buys a fixed dollar amount of an investment on a regular basis — say, every month. It allows an investor to take advantage of lower purchase prices and limits the amount they invest at when valuations are higher.

As such, it’s a strategy for all seasons — not just during a panic. Most investors already employ some form of dollar-cost averaging in their 401(k) plans.

The Takeaway

Steep drops in the stock market are usually headline news. The causes aren’t always clear or easy to understand. So it makes sense that a sudden drop in the markets can cause even seasoned investors to make mistakes. This is a real risk. But it can also create opportunities.

That’s why it’s important for investors to revisit their financial plan regularly, to make sure they can weather the storm, and still be on track to reach their goals — even if a market decline means they have to take a few steps back.

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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Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

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May

2025

Mortgage-Backed Securities, Explained

By Matthew Warholak | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Mortgage-backed securities are bond-like investments made up of a pool of mortgages. When you purchase a mortgage-backed security, you’re buying a small portion of a collection of loans that a government-sponsored entity or a financial institution has packaged together for sale.

Investors may refer to these loans as MBS, which stands for mortgage-backed securities. Investing in mortgage-backed securities allows investors to get exposure to the real estate market without taking direct ownership of properties or making direct loans to borrowers. Mortgage-backed securities offer benefits to other stakeholders as well, namely loan-issuing banks, private lenders, and investment banks who issue them.

Key Points

• Banks originate loans, sell them to entities that bundle and securitize them, then issue mortgage-backed securities to investors.

• Main entities in the mortgage-backed securities market include government-sponsored entities and private financial institutions.

• Types of mortgage-backed securities include pass-through, residential, commercial, and collateralized mortgage obligations, among others.

• Risks associated with mortgage-backed securities include prepayment, default, housing market fluctuations, and liquidity risk.

• Increased regulation and scrutiny require mortgages from regulated entities and investment-grade ratings.

What Is a Mortgage-Backed Security?

Mortgage-backed securities are asset-backed investments, in which the underlying assets are mortgages. Government entities and some financial institutions issue mortgage-backed securities by purchasing mortgages from banks, mortgage companies, and other loan originators and combining them into pools, which they sell to investors.

The financial institution then securitizes the pool, by selling shares to investors who then receive a monthly distribution of income and principal payments, similar to bond coupon payments, as the mortgage borrowers pay off their loans.

How a Mortgage-Backed Security Works

When dealing with mortgage-backed securities, banks essentially become middlemen between the homebuyer and the investment industry.

The process works as follows:

1. A bank or mortgage company originates a home loan.

2. The bank or mortgage company sells that new loan to an investment bank or government-sponsored entity, and uses the sale money to create new loans.

3. The investment bank or government-sponsored entity combines the newly purchased loan into a bundle of mortgages with similar interest rates.

4. This investment bank assigns the loan bundle to a Special Purpose Vehicle (SPV) or Special Investment Vehicle (SIV) which securitizes the bundles of loans. This creates a separation between the mortgage-backed securities and the investment bank’s primary services.

5. Credit rating agencies review the security and rate its riskiness for investors. The SPV or SIV then issues the mortgage-backed securities on the trading markets.

When the process operates as intended, the bank that creates the loan maintains reasonable credit standards and makes a profit by selling the loan. They also have more liquidity to make additional loans to others. The homeowner pays their mortgage on time and the mortgage-backed securities holders receive their portion of the principal and interest payments.

Recommended: Investing 101 Guide

Who Sells Mortgage-Backed Securities?

While some private financial institutions issue mortgage-backed securities, the majority come from government-sponsored entities. Those include Ginnie Mae, the Government National Mortgage Association; Fannie Mae, the Federal National Mortgage Association; and Freddie Mac, the Federal Home Loan Mortgage Corporation.

The U.S. government backs and secures Ginnie Mae’s mortgage-backed securities, guaranteeing that investors will receive timely payments. Fannie Mae and Freddie Mac do not have the same guaranteed backing, but they can borrow directly from the Treasury when needed.

Types of Mortgage-Backed Securities

There are several different types of mortgage-backed securities.

Pass-Through

A Pass-Through Participation Certificate, or pass-through, is the simplest type of MBS. They are structured as trusts, in which a servicer collects mortgage payments for the underlying loans and distributes them to investors.

Pass-through mortgage-backed securities typically have stated maturities of five, 15, or 30 years, though the term of a pass-through may be lower. With pass-throughs, holders receive a pro-rata share of both principal and interest payments earned on the mortgage pool.

Residential Mortgage-Backed Securities (RMBS)

Residential mortgage-backed securities are mortgage-backed securities based on loans for residential homes.

Commercial Mortgage-Backed Securities (CMBS)

Commercial mortgage-backed securities are mortgage-backed securities based on loans for commercial properties, such as apartment buildings, offices, or retail spaces or industrial properties.

Collateralized Debt Obligations (CDOs)

These securities are similar to mortgage-backed securities in that CDOs are also asset-backed and may contain mortgages, but they may also include other types of debt, such as business, student, and personal loans.

Collateralized Mortgage Obligations (CMO)

CMOs or Real Estate Mortgage Investment Conduits (REMICs) is a more complex form of mortgage-backed securities. A CMO is a pool of mortgages with similar risk categories known as tranches. Tranches are unique and can have different principal balances, coupon rates, prepayment risks, and maturity rates.

Less-risky tranches tend to have more reliable cash flows and a lower probability of being exposed to default risk and thus are considered a safer investment. Conversely, higher-risk tranches have more uncertain cash flows and a higher risk of default. However, higher-risk tranches are compensated with higher interest rates, which can be attractive to some investors with higher risk tolerance.

What Are the Risks of Investing in Mortgage-Backed Securities?

Like all alternative investments, mortgage-backed securities carry risks that investors must understand. One such risk is prepayment risk, in which mortgage borrowers pay off their mortgages (often because they move or refinances), reducing the yield for the holder of the MBS. Mortgage defaults could further decrease the value of mortgage-backed securities.

Other risks include housing market fluctuations and liquidity risk.

Mortgage-Backed Securities and the 2008 Financial Crisis

Mortgage-backed securities played a large role in the financial crisis and housing market collapse that began in 2008. By 2008, trillions of dollars in wealth evaporated, prominent companies like Lehman Brothers and Bear Stearns went bankrupt, and the global financial markets crashed.

At the time, banks had gotten increasingly lenient in their credit standards making risky loans to borrowers. One reason that they became more lenient was because they were able to sell the loans to be packaged into mortgage-backed securities, meaning that the banks faced fewer financial consequences if borrowers defaulted.

When home values fell and millions of homes went into foreclosure, the value of all those mortgage-backed securities and CDOs plummeted, indicating that they had been riskier assets than their ratings indicated. Many investors lost money; many homeowners foreclosed on their homes.

An important lesson from that time is that mortgage-backed securities have risks associated with the underlying mortgage borrower’s ability to pay their mortgage.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

MBS Today

Residential mortgage-backed securities now face far more government scrutiny than they did prior to the financial crisis. MBS mortgages must now come from a regulated and authorized financial institution and receive an investment-grade rating from an accredited rating agency. Issuers must also provide investors with disclosures including sharing information about their risks.

Investors who want exposure to mortgage-backed securities but don’t want to do the research or purchases themselves might consider buying an exchange-traded fund (ETF) that focuses on mortgage-backed securities.

The Takeaway

Mortgage-backed securities are complex investment products, but they have benefits for investors looking for exposure to the real estate debt without making direct loans. While they do have risks, they may have a place as part of a diversified portfolio for some investors.

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

FAQ

What is a mortgage-backed security?

Mortgage-backed securities are asset-backed investments, in which mortgages are the underlying assets. Government entities and some financial institutions issue mortgage-backed securities by purchasing mortgages from banks, mortgage companies, and other loan originators and combining them into pools, which they sell to investors.

Who sells mortgage-backed securities?

Most mortgage-backed securities are issued by government-sponsored entities such as Ginnie Mae, the Government National Mortgage Association; Fannie Mae, the Federal National Mortgage Association; and Freddie Mac, the Federal Home Loan Mortgage Corporation.

What are common types of mortgage-backed securities?

Common types include pass-throughs, residential mortgage-backed securities, commercial mortgage-backed securities, and collateralized debt obligations, among others.

Photo credit: iStock/sturti

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.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

SOIN-Q225-058

May

2025

Purchasing Power 101: Examining the Value of the US Dollar

By Colin Dodds | invest, Investing, Preparing for Retirement | Comments Off

Purchasing power is a concept used to express the amount of goods and services a consumer or business can buy with a given unit of currency. In the United States, purchasing power is directly linked to the value of the dollar.

Due to inflation, a dollar today typically won’t go as far as it did last year. And a dollar next year won’t buy the same things that it did this year. This fluctuation in U.S. dollar purchasing power is constant, and typically goes unnoticed, except in times of extreme inflation.

Key Points

• Purchasing power is the quantity of goods and services that can be bought with a unit of currency.

• Inflation decreases the purchasing power of the U.S. dollar, influencing consumer and business decisions.

• The Consumer Price Index (CPI) measures inflation, which impacts various economic indicators.

• Inflation can pose challenges but also indicates economic growth, affecting stock market returns.

• Investors can diversify their portfolios to help protect against inflation, and consider assets such as value stocks, REITs, and commodities.

How Does Purchasing Power Impact Investors?

Once you understand the purchasing power definition, you can start to understand its context for investing. The purchasing power of a dollar affects investors because it makes an impact on virtually every aspect of the broader economy.

When the dollar buys less, it changes the shopping decisions of consumers, the hiring practices of employers, the strategic decisions of corporations, and the monetary policy of the Federal Reserve.

One way to track inflation and the purchasing power of a dollar is the Consumer Price Index (CPI), a statistic compiled by the US Bureau of Labor Statistics (BLS), which reports the figure every month. The statistic measures the average prices of a set of goods and services in sectors such as transportation, food, and healthcare. Economists consider it a valuable gauge of the ever-changing cost of living, though it does exclude some important spending categories, including real estate and education.

Investors, executives, and policymakers use CPI as a lens through which to scrutinize other economic indicators, including sales numbers, revenues, earnings, and so on. It also determines the payments made to the millions of people on Social Security, which gets adjusted for the cost of living every year, and retirees drawing a pension from the military or the Federal Civil Services.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Why Does the Value of the Dollar Change?

A number of factors drive the value of the U.S. dollar, including large-scale factors having to do with economic cycles, government politics, and international relations.

But the dollar has also experienced inflation for most of the last century. Inflation rose after World War I amid increased demand for food and other raw materials, which raised prices of most consumer goods up until the Great Depression, in which the country experienced prolonged deflation.

That’s when President Franklin Roosevelt stepped in with a surprising policy decision: He banned private ownership of gold, and required people to sell their holdings to the government. That allowed the Federal Reserve to increase the money supply and stop deflation in its tracks.

Since 1933, through World War II, the Cold War, and a host of changing monetary and economic policies, the U.S. dollar has seen various rates of inflation. It reached its peak during the late 1970s and early 1980s oil and gas shortages exacerbated existing inflation and led to a gas shortage, and an increase in the price of manufacturing and shipping of nearly every single consumer good.

Inflation rose at a more steady pace through the 1990s, falling to historically low levels in the past decade. One reason for the ongoing inflation is that the Federal Reserve continually increased the money supply via economic stimulus. The logic is simple supply and demand: If there are more dollars, then each one is worth less in terms of purchasing power.

Following the pandemic in 2020, economies around the world also experienced inflation, which peaked in 2022, but has since fallen near more typical levels.

What Purchasing Power Means for Investors

Generally, investors consider inflation a headwind for the markets, as it drives up the costs of materials and labor, boosts the cost of borrowing and tends to reduce consumer spending. That all tends to translate to lower earnings growth, which can depress stock prices.

But after decades of steady inflation, the markets have priced in a certain amount of shrinkage when it comes to the purchasing power of the dollar. Inflation has a great impact when it occurs suddenly and unexpectedly.

But inflation can have benefits for investors as well. During an economic upswing, inflation is a reliable side effect of prosperity, since economic booms produce higher profits, which drives up the markets.

Investors saving for long-term goals, such as retirement, must take declining purchasing power into account when determining how much they’ll need to reach those goals.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

How Does Inflation Influence Stocks?

Inflation impacts different types of stocks differently, and there are several strategies that investors can use to hedge against inflation. During periods of high inflation, growth stocks tend to underperform, simply because so much of their value is tied up in the expectation of future earnings, and inflation diminishes those expectations.

Value stocks, on the other hand, typically boast steadier earnings, and are valued in line with those earnings. As a result, value stocks, as a category, tend to hold up better during periods of high inflation.

Other investments to consider during periods of high inflation include dividend-paying utility stocks and REITs, gold and other commodities. And because periods of high inflation usually bring higher interest rates, it can be a good time to buy bonds, especially government bonds

The Takeaway

The value of the dollar, in terms of what it can buy, changes over time, but inflation isn’t always bad news for investors. Some stocks may perform better than others in an inflationary environment, and higher interest rates may be good news for bond investors and savers.

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

FAQ

What is purchasing power?

The phrase “purchasing power” refers to the quantity of goods or services that a consumer can purchase with a unit of currency.

How does purchasing power affect investors?

Changes in purchasing power, often related to inflation or rising prices, can affect companies’ revenues, earnings, and more, cascading into economic indicators, and eventually, altering the markets. That, in effect, can impact investors.

Is inflation beneficial for investors?

It’s possible that inflation can have benefits for investors. During an economic upswing, inflation is a reliable side effect of prosperity, since economic booms produce higher profits, which drives up the markets, for example.

Photo credit: iStock/pcess609

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

SOIN-Q225-079

May

2025

How to Use Social Media for Investing Tips: The Smart Way

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Social media has become an important news source for many people, including investors looking for ideas to guide their strategy. That said, social media users must be careful when sifting through the vast quantities of information on the web to make sure they’re relying on legitimate sources.

There are a variety of social media platforms that investors use for information. While there are potential benefits to using social media to invest, there are also plenty of pitfalls.

Key Points

• Social media may provide timely updates and expert insights, enhancing investment research.

• Following companies and informed experts can improve research and decision-making.

• Tech tools on social media platforms help aggregate and analyze data, but caution is needed.

• Avoiding impulsive decisions and verifying sources is essential for informed investing.

• Thorough research and a long-term strategy are crucial for aligning with financial goals.

Why Understanding How to Use Social Media For Investing Is Important

In 2013, the Securities and Exchange Commission (SEC) allowed companies to start using social media platforms like Facebook and Twitter (now X) to communicate information to investors. As long as companies tell investors which website to check, they can use social media to announce information like company metrics that may influence stock price. Individuals interested in investing in a particular company may want to follow that company directly to stay abreast of breaking news.

Social media can also be an important place to gather information from analysts and financial bloggers who post their thoughts about stocks and news events or upcoming IPOs. Since these folks are typically reacting to news, following them may be a way to stay on top of popular investment trends.

Recently, social media has entered the investment space in a new way with the rise of meme stocks. Meme stocks are companies that experience increased volume in trades due to hype on social media. Perhaps the original, and most famous, meme stock is GameStop.

Retail investors encouraged each other to buy shares of the company over the subreddit message board r/wallstreetbets to force a short squeeze among hedge fund investors betting against the stock. Together these retail investors drove the share price up nearly 8,000% by late January 2021 to $86.88 a share.

Because investor sentiment, rather than company fundamentals, often fuels meme stock price increases, they can be extremely volatile. While meme stock investing can be exciting, it can also expose investors to large amounts of risk.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How to Use Social Media When Investing

Individuals aren’t the only ones using social media to guide their investing decisions. It’s likely that most institutional investors are also using social media as part of their regular workflow. If you want to use social media as a way to inform your investment decisions, there are a few strategies to consider.

1. Follow Companies in Which You Invest (or Want to Invest)

Directly following a company’s social media accounts ensures the information you receive is timely and accurate.

2. Follow Informed Experts

Follow news sources, journalists, and analysts who cover the companies and sectors, such as health care or electric vehicles, in which you’re interested. Consider people who have large followings, a good clue that they provide information that is useful to a broad range of investors.

3. Use Tech Tools

Some brokerages offer social media tools such as social sentiment trackers that aggregate and analyze information that’s posted on social media sites. For example, some firms use software to compile information from Tweets, blog posts, and messages.

Others offer in-house social media platforms that allow investors to communicate with each other to discuss trading ideas. Or they may offer crowd-sourced research and analysis, using a website or app to gather ideas and opinions from the public at large. For example, analysts, investors, and academics might weigh in with their thoughts on earnings estimates.

It’s important for investors to beware that these tools can be inaccurate or misleading. Data gathered from social media may be old, or contain hidden agendas. Read all disclosures offered by social sentiment tools to understand how they collect data and any risks or conflicts of interest.

Recommended: Understanding Market Sentiment

Social Media Investing Mistakes to Avoid

While social media can be a helpful tool for investors, it also has several pitfalls that investors should understand.

1. Impulsive Decisions

Information driven by social media, such as discussion boards or buy/sell indicators based on social sentiment can drive investors toward emotional investing, especially when information appears in real time. Impulsive investments carry additional risks. Trading securities without proper due diligence can lead you to buy stocks as prices are peaking, or sell as prices tumble, locking in losses and missing out on potential rebounds. Avoid allowing social media to feed the tendency to time the market.

2. Failing to Do Your Own Research

Think of information you get from social media as a jumping-off point, something that sparks your interest and leads you to do more research.

For example, if someone posts about how great they think a stock is, take a look at the company’s financials yourself. Look at past and present earnings reports to understand trends. You can find out this and other information on a company’s quarterly report. Look at the annual report as well. It will let you know about any risks the company foresees in its future. In addition, look at what a number of analysts are predicting the company’s earnings will be in the future.

You may also want to consider broader economic indicators or market measures, such as the Fear & Greed Index.

3. Trusting Bots

Bots are programs — not humans — built to engage on social media. It’s not always clear what their agenda is, and they certainly don’t have your best interests in mind. There are several signs that an account could be a bot, including:

• No profile picture

• Strange numbers or characters in the account name

• Posting at irregular hours

• Repetitive, formulaic language

• Repeated posting on the same subject

The Takeaway

Social media has become an important way to gather investment information. But learning to recognize reliable sources is critical to finding accurate and useful information to create a strategy, whether you’re investing in stocks, bonds, options, or other financial securities.

What’s more, investors must understand the behavioral biases that social media investing can trigger, namely the temptation to time the market. To avoid this pitfall, create and follow a long-term financial plan. Use social media to research stocks and funds that fit your plan, including your time horizon and tolerance for risk.

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

FAQ

Which social media platforms can I use for investing?

Investing and financial content is pervasive on many platforms, including TikTok, X, Facebook, YouTube, and more.

What are some good practices to follow in regards to social media investing?

Some rules of thumb could include following the companies in which you invest (or may want to invest in), following credentialed, informed experts (not just influencers), and using different tech tools that may be offered by brokerages.

What common social media investing mistakes should I try to avoid?

Some common mistakes investors make include making emotional or impulsive decisions based on their social media feeds, forgoing due diligence or research, and trusting bots or bad actors posting on various social media platforms.

Photo credit: iStock/GOCMEN

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

SOIN-Q225-080