Jun
06
2024
Green Investing: What It Is, Investing Options, Industries
What is green investing — and how can it help make the world a better place (while making investors money)? Here’s what investors need to know.
Read more
SoFi
Student Loan Consolidation and Refinancing
Jun
04
2024
Self-Directed IRA for Real Estate Investing Explained
A self-directed IRA (SIDRA) allows you to save money for retirement on a tax-advantaged basis while enjoying access to a broader range of investments. Opening a self-directed IRA for real estate investing is an opportunity to diversify your portfolio with an alternative asset class while potentially generating higher returns.
Using a self-directed IRA to invest in real estate offers the added benefit of either tax-deferred growth or tax-free withdrawals in retirement, depending on whether it’s a traditional or Roth IRA. Before making a move, however, it’s important to know how they work. The IRS imposes self-directed IRA real estate rules that investors must follow to reap tax benefits.
What Is a Self-Directed IRA?
Individual Retirement Accounts (IRAs) allow you to set aside money for retirement with built-in tax benefits. These retirement accounts come in two basic forms: traditional and Roth.
Traditional IRAs allow for tax-deductible contributions, while Roth IRAs let you make qualified distributions tax-free.
When you open a traditional or Roth IRA at a brokerage you might be able to invest in mutual funds, exchange-traded funds, or bonds. A self-directed IRA allows you to fund your retirement goals with alternative investments — including real estate.
You can do the same thing with a self-directed 401(k).
Self-directed IRAs have the same contribution limits as other IRAs. For 2024, you can contribute up to:
• $7,000 if you’re under 50 years of age
• $8,000 if you’re 50 or older
Contributions and withdrawals are subject to the same tax treatment as other traditional or Roth IRAs. The biggest difference between a self-directed IRA and other IRAs is that while a custodian holds your account, you manage your investments directly.
Boost your retirement contributions with a 1% match.
SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.
Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.
💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with an IRA account. With a traditional IRA, the money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).
How Self-Directed IRAs for Real Estate Investing Work
Using a self-directed IRA to invest in real estate allows investors to invest in various funds or securities that, themselves, invest in property or real estate. Those securities may be real estate investment trusts (REITs), mutual funds, or ETFs focused. Investors with self-directed IRAs can, then, direct retirement account funds toward those securities.
Other types of real estate investments can include single-family homes, multi-family homes, apartment buildings, or commercial properties — actual, physical property. For investors who do want to buy actual property using an IRA, the process generally involves buying the property with cash (which may require them to liquidate other investments first), and then taking ownership, which would all transact through the IRA itself. It’s not necessarily easy and can be complicated, but that’s the gist of it.
With that in mind, the types of investments you can make within an IRA will depend on your goals.
For instance, if you’re interested in generating cash flow you might choose to purchase one or more rental properties using a self-directed IRA for real estate. If earning interest or dividends is the goal, then you might lean toward mortgage notes and REIT investing instead.
The most important thing to know is that if you use a retirement account to invest in real estate, there are some specific rules you need to know. For instance, the IRS says that you cannot:
• Use your retirement account to purchase property you already own.
• Use your retirement account to purchase property owned by anyone who is your spouse, family member, beneficiary, or fiduciary.
• Purchase vacation homes or office space for yourself using retirement account funds.
• Do work, including repairs or improvements, on properties you buy with your retirement account yourself.
• Pay property expenses, such as maintenance or property management fees, from personal funds; you must use your self-directed IRA to do so.
• Pocket any rental income, dividends, or interest generated by your property investments; all income must go to the IRA.
Violating any of these rules could cause you to lose your tax-advantaged status. Talking to a financial advisor can help you make sense of the rules.
Pros and Cons of Real Estate Investing Through an IRA
Using a self-directed IRA for real estate investing can be appealing if you’re ready to do more with your portfolio. Real estate offers diversification benefits as well as possible inflationary protection, as well as the potential for consistent passive income.
However, it’s important to weigh the potential downsides that go along with using a self-directed IRA to buy real estate.
| Pros | Cons |
|---|---|
|
• Self-directed IRAs for real estate allow you to diversify outside the confines of traditional stocks, bonds, and mutual funds. • You can establish a self-directed IRA as a traditional or Roth account, depending on the type of tax benefits you prefer. • Real estate returns can surpass those of stocks or bonds and earnings can grow tax-deferred or be withdrawn tax-free in retirement, in some cases. • A self-directed IRA allows you to choose which investments to make, based on your risk tolerance, goals, and timeline. |
• The responsibility for due diligence falls on your shoulders, which could put you at risk of making an ill-informed investment. • Failing to observe self-directed IRA rules could cost you any tax benefits you would otherwise enjoy with an IRA. • The real estate market can be unpredictable and investment returns are not guaranteed — they’re higher-risk investments, typically. Early withdrawals may be subject to taxes and penalties, and there may be higher associated fees. • Self-directed IRAs used for real estate investing are often a target of fraudulent activity, which could cause you to lose money on investments. |
Using a self-directed IRA for real estate or any type of alternative investment may involve more risk because you’re in control of choosing and managing investments. For that reason, this type of account is better suited for experienced investors who are knowledgeable about investment properties, rather than beginners.
Real Estate IRAs vs Self-directed IRAs For Real Estate Investing
A real estate IRA is another way of referring to a self-directed IRA that’s used for real estate investment. The terms may be used interchangeably and they both serve the same purpose when describing what the IRA is used for.
Again, the main difference is how investments are selected and managed. When you open a traditional or Roth IRA at a brokerage, the custodian decides which range of investments to offer. With a self-directed IRA, you decide what to invest in, whether that means investing in real estate or a different type of alternative investment.
💡 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.
Opening an IRA With SoFi
Opening a self-directed IRA is an option for many people, and the sooner you start saving for retirement, the more time your money has to grow. And, as discussed, a self-directed IRA allows you to save money for retirement on a tax-advantaged basis while enjoying access to a broader range of investments, including real estate.
Once again, using a self-directed IRA to invest in real estate offers the added benefit of tax-deferred growth and tax-free withdrawals in retirement. There are pros and cons, and rules to abide by, but these types of accounts are another option for investors.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Can you use a self-directed IRA for real estate?
You can use a self-directed IRA to invest in real estate-related or -focused securities and other types of alternative investments. Before opening a self-directed IRA to invest in real estate, it’s important to shop around to find the right custodian. It’s also wise to familiarize yourself with the IRS self-directed IRA real estate rules.
What are the disadvantages of holding real estate in an IRA?
The primary disadvantage of holding real estate in an IRA is that there are numerous rules you’ll need to be aware of to avoid losing your tax-advantaged status. Aside from that, real estate is less liquid than other assets which could make it difficult to exit an investment if you’d like to remove it from your IRA portfolio.
What are you not allowed to put into a self-directed IRA?
The IRS doesn’t allow you to hold collectibles in a self-directed IRA. Things you would not be able to hold in a self-directed IRA include fine art, antiques, certain precious metals, fine wines, or other types of alcohol, gems, and coins.
Photo credit: iStock/SrdjanPav
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN-Q224-1854329-V1
Jun
04
2024
Choosing the Best IRA for Young Adults
Saving for retirement may be lower on the priority list for young adults as they deal with the right-now reality of paying rent, bills, and student loans. But the truth is, it’s never too soon to start saving for the future. The more time your money has to grow, the better. And saving even small amounts now could make a big difference later. An IRA, or individual retirement account, is one option that could help young adults start investing in their future.
There are different types of IRAs, and each has different requirements and benefits. So which IRA is best for young adults? Read on to learn about different types of IRAs, how much you can contribute, the possible tax advantages, and everything else you need to know about choosing the best IRA for young people.
Understanding IRAs
First things first, what is an IRA exactly? An IRA is a retirement savings account that allows you to save for the future over the long term. It typically also has tax advantages that may help you build your savings more efficiently.
There are several types of IRAs, but the two most common are traditional IRAs and Roth IRAs. The key difference between the two accounts is how they’re taxed. With a traditional IRA, you contribute pre-tax dollars. That means you take deductions on your contributions upfront, which may lower your taxable income for the year, and then pay taxes on the distributions when you take them in retirement.
With Roth IRAs, you contribute after-tax dollars. Your contributions are not tax deductible when you make them. However, you withdraw your money tax-free in retirement.
How much you can contribute to an IRA each year is determined by the IRS, and the amount generally changes annually. In 2024, those under age 50 can contribute a maximum of $7,000 to a traditional or Roth IRA. (Those 50 and up can contribute an extra $1,000 in 2024 in what’s called a catch-up contribution.) However, the contribution cannot exceed the individual’s earned income for the year. So if a child made $2,000 babysitting for the year, the most they could contribute is $2,000 to a Roth IRA that year.
Boost your retirement contributions with a 1% match.
SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.
Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.
Factors to Consider & Eligibility
When choosing the best IRA for young adults, it’s important to consider your specific situation, the eligibility requirements, and what type of tax treatment would benefit you most.
Eligibility
The eligibility rules are different for traditional and Roth IRAs. One thing that’s not a requirement for either type is age — an individual of virtually any age can open an IRA as long as they have earned income for the year. How much money you make is another matter. Roth IRAs have income limits, while traditional IRAs do not.
How a Roth IRA works is that your modified adjusted gross income (MAGI) must be below a certain level to qualify for a Roth. In 2024, the limit on MAGI is $146,000 for those who are single. Single individuals who earn more than $146,000 but less than $161,000 can contribute a partial amount to a Roth, while those who earn more than $161,000 are not eligible to open or contribute to a Roth. For married couples who file taxes jointly, the limit in 2024 is $230,000 for a full contribution to a Roth, and between $230,000 to $240,000 for a partial contribution.
Young adults starting out in their career might be earning less than they will in the future — in fact, the average college grad salary for 2024 is projected to range from $61,000 to slightly more than $76,000, depending on the type of degree earned. So it could make sense for a young adult to open a Roth now when they may not have to worry about earning too much to qualify. In this case, a Roth might be the best IRA for young people.
Taxes
Another important factor to consider when looking at which IRA is best for young adults is taxes. For those who are currently in a lower tax bracket, the upfront tax deductions with a traditional IRA may not be as beneficial. On the other hand, a Roth, with its tax-free distributions in retirement, might be worth exploring, especially if the individual expects to be in a higher tax bracket in retirement.
With a traditional IRA, your income is important in determining how much of your contributions you can deduct. Deduction limits depend on your MAGI, whether you are single or married, your tax filing status, and if you’re covered by a retirement plan at work.
For instance, if you’re single and not covered by a retirement plan from your employer, you can deduct the entire amount you contribute to a traditional IRA in 2024. But if you’re covered by a workplace retirement plan, you can only deduct the full contribution limit if your MAGI is $77,000 or less. Those who earn $87,000 or more can’t take any deductions at all.
Individuals who are married filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their traditional IRA contributions. However, if their spouse is covered by a workplace retirement plan, they can only deduct the full amount of their contribution if their combined MAGI in 2024 is $230,000 or less. If their combined MAGI is $240,000 or more, they can’t take a deduction. And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their contributions only if their combined MAGI is $123,000 or less. If their combined MAGI is $143,000 or more, they can’t take a deduction.
Withdrawals
Whether you choose a Roth or traditional IRA, the idea is to keep your money in the account without touching it until retirement, when you begin making withdrawals. In fact, both types of IRA accounts have early withdrawal penalties.
With a traditional IRA, individuals who take withdrawals before age 59 ½ will generally be subject to a 10% penalty, plus taxes. A Roth IRA typically offers more flexibility: Individuals may withdraw their contributions penalty-free at any time before age 59 ½. However, any earnings can typically only be withdrawn tax- and penalty-free once the individual reaches age 59 ½ and the account has been open for at least five years. This is known as the Roth IRA 5-year rule.
That said, there are exceptions to the IRA withdrawal rules, including:
• Death or disability of the individual who owns the account
• Qualified higher education expenses for the account owner, spouse, or a child or grandchild
• Up to $10,000 for first-time qualified homebuyers to help purchase a home
• Health insurance premiums paid while an individual is unemployed
• Unreimbursed medical expenses that are more than 7.5% of an individual’s adjusted gross income
Building a Strong Investment Strategy
As you explore the best IRA for young people, you’ll want to make sure that you’re getting the most out of your investing strategy to help you achieve financial security. Here are some ways to do that.
Contribute to a 401(k) and an IRA.
If your employer offers a 401(k), enroll in it and contribute as much as you can. If possible, aim to contribute enough to get the matching contribution, which is, essentially, “free” or extra money that can help you build your savings.
If you don’t have a workplace 401(k) — and even if you do — open an IRA as another account to help save for retirement. Contribute as much as you are able to. With an IRA, you typically have more investment options than you do with a 401(k), and you can also choose the type of IRA that could give you tax advantages.
Automate your contributions.
With a 401(k), your contributions usually happen automatically. Opening an investment account for an IRA could help you do something similar. Many brokerages allow you to set up automatic repeating deposits in an IRA. This way you don’t have to even think about contributing to your account — it just happens.
Understand your risk tolerance.
When you’re deciding what assets to invest in, consider your risk tolerance. All investments come with some risk, but some types are riskier than others. In general, assets that potentially offer higher returns (like stocks) come with higher risk.
If a drop in the market is going to send your anxiety level skyrocketing, you may want to make your portfolio a little more conservative. If you’re willing to take risks, you might want to be a bit more aggressive. Either way, try to find an asset allocation that balances your tolerance for risk with the amount of risk you may need to take to help meet your investment goals.
Diversify your investments.
Building a diversified portfolio across a range of asset classes — such as stocks, bonds, and REITs (real estate investment trusts), for instance — rather than concentrating all of it in one area — may help you offset some investment risk. Just be aware that diversification doesn’t eliminate risk.
Reassess your portfolio regularly.
Once or twice a year, review the performance of your portfolio to make sure it’s on track to help you get where you want to be in terms of your financial future.
Maximizing Your IRA Investments
After you open an IRA, contribute up to the annual limit if you can to help maximize your investments. If you’re not sure how to fund an IRA, you can start with a few basic techniques.
For instance, you could use your tax refund to contribute to an IRA. That way, you won’t be pulling money out of your savings or from the funds you have earmarked to pay your bills. The same is true if you get a raise or bonus at work, or if a relative gives you money for a birthday. Put those dollars into your IRA.
Another way to fund an IRA is to make small monthly contributions to it. You could start with $50 or $100 monthly. You could even set up a vault bank account specifically for money designated to your IRA so that you don’t end up spending it on something else.
Finally, when you change jobs, consider rolling over your 401(k) into an IRA (learn more about an IRA transfer vs. rollover). Once you’ve rolled the money over, you can choose how to invest it.
Considerations for Young Adults Looking to Start Investing
Young adults who are ready to begin investing should aim to get started as soon as possible. Thanks to the power of compounding returns, the longer your money has to compound, the bigger your account balance may be when you reach retirement.
When choosing an IRA, consider the tax advantages of traditional and Roth IRAs to decide which type of account may be most beneficial for your situation. Once you’ve opened an IRA, try to contribute as much as you can afford to each year, up to the annual limit.
Young adults should also think about their financial goals, at what age they plan to retire, and what their tolerance is for risk. Each of these factors can affect how they invest and what kinds of assets they invest in.
The Takeaway
An IRA can be a great way for young adults to start saving for retirement. The earlier they start, the longer their money may have to grow, which can make a big difference over time.
In order to choose the best IRA for young people, weigh the different tax benefits of Roth and traditional IRAs. If you’re leaning toward a Roth IRA, make sure you meet the income limit requirements, and if you’re considering a traditional IRA, check to see if you can deduct your contributions.
Once you’ve chosen the right IRA for you, start contributing to it regularly if you can. And no matter how much you’re able to contribute, remember this: Getting started with retirement savings is one of the most important steps you can take to build a nest egg and help secure your financial future.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
What are the different types of IRAs?
There are several types of IRAs. Two of the most popular are traditional and Roth IRAs, which individuals with earned income can open and contribute to. Contributions to traditional IRAs are made with pre-tax dollars and the contributions are generally tax deductible; the money is taxed on withdrawal in retirement. Contributions to Roth IRAs are made with after tax dollars, and the money is withdrawn tax-free in retirement.
Other types of IRAs include SEP IRAs for self-employed individuals and small business owners, and SIMPLE IRAs for small businesses with 100 employees or fewer.
Which IRA is suitable for young adults?
It depends on an individual’s specific situation, but for young adults choosing between a traditional or Roth IRA, a Roth may be the better choice for those in a low tax bracket now and who expect to be in a higher tax bracket in retirement. That’s because with a Roth, contributions are made with after tax dollars and distributions are withdrawn tax-free in retirement. With traditional IRAs, contributions are deducted upfront and you pay taxes on distributions when you retire.
Still, it’s important to weigh the different options and benefits to choose the IRA that’s best for you.
What factors should young adults consider when choosing an IRA?
Young adults should consider their current tax bracket and the tax bracket they expect to be in during retirement when choosing an IRA. If they’re in a low tax bracket now and anticipate that they’ll be in a higher tax bracket when they retire, a Roth IRA may make more sense since distributions are withdrawn tax-free in retirement. Conversely, if they’re in a higher tax bracket now than they expect to be in retirement, a traditional IRA may be a better option.
How can young adults maximize their IRA investments?
To maximize IRA investments, young adults should start contributing money to their IRA as early as possible. The longer their money has to compound, the bigger their IRA balance may grow over time. In addition, they should contribute as much as they can to their IRA each year, up to the annual limit ($7,000 for those under 50 in 2024).
Photo credit: iStock/andresr
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.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.
SOIN-Q224-1854721-V1
Jun
02
2024
Bull vs Bear Market: What’s the Difference?
In the financial world, you’ll often hear the terms “bull market” and “bear market” in reference to market conditions, and these terms refer to extended periods of ups and downs in the financial markets. Because market conditions directly affect investors’ portfolios, it’s important to understand their differences.
As such, knowing the basics of bull and bear markets, and potentially maintaining or adjusting your investment strategy accordingly, may help you make wiser investing decisions, or at least provide some mental clarity.
What Is a Bull Market?
A bull market is a period of time in the financial markets where asset prices are rising, and optimism is high. A bull market is seen as a good thing for most investors because stock prices are on the upswing and the economy is booming. In other words, the market is charging ahead, and portfolios are rising in value. The designation is a bit vague, as there’s no specific amount of time or level of increase that defines a bull market.
Recommended: What Does Bullish and Bearish Mean in Investing and Crypto?
The term “bull market” has an interesting history, and was actually coined in response to the development of the term “bear market” (more on that in a minute). The short of it is that “bears” became associated with speculation. In the 1700s, “bull” was used to describe someone making a speculative investment hoping that prices would rise, and thus, itself became the mascot for upward-trending markets.
💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
What Is a Bear Market?
Investors and market watchers generally define a bear market as a drop of 20% or more from market highs. When investors refer to a bear market, it usually means that multiple broad market indexes, such as the Standard & Poors 500 Index (S&P 500) or Dow Jones Industrial Average (DJIA), fell by 20% or more over at least two months.
As noted, the term “bear” has a long history. It can be traced back to an old proverb, warning that it isn’t wise to “sell the bear’s skin before one has caught the bear.” “Bear’s skin” became simply “bear” over the years, and the term started to be used to describe speculators in the markets. Those speculators were often betting or hoping that prices would decline so that they could generate returns, and from there, “bears” became associated with downward-trending markets.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.
Bull vs Bear: Main Differences
The most stark and obvious difference between bull and bear markets is that one is associated with a downward-trending market, and the other, with an upward-trending market. But there are other differences as well.
For instance, bull markets tend to last longer than bear markets – although there’s no guarantee that any bull market will last longer than any particular bear market. The average bull market, for instance, lasts between six and seven years, while the average bear market lasts less than one-and-a-half years.
Typical gains and losses are lopsided between the two, as well. The average gain over the course of a bull market is almost 340%, while the average cumulative loss during bear markets is less than 40%.
|
Bull vs Bear Market: Key Differences |
|
|---|---|
| Bull Market | Bear Market |
| Upward-trending market | Downward, or declining market |
| Have an average duration of 6.6 years | Have an average duration of 1.3 years |
| Average cumulative gains amount to ~340% | Average cumulative losses amount to 38% |
How Is Investing Different During a Bull Market vs a Bear Market?
Depending on the individual investor, investing can be different during different types of markets. For some people, their investing habits may not change at all – but for others, their entire strategy may shift. A lot of it has to do with your personal risk tolerance and whether you’re letting your emotions get the best of you.
You may want to think of it this way: Just like encountering a grizzly on a hike, a bear market can be terrifying. Falling stock prices likely mean that the value of your retirement account or other investment portfolios are plummeting.
Unrealized losses during a bear market can be psychologically brutal, and if your investments don’t have time to recover, they can seriously affect your life.
Assuming, that is, that those unrealized losses become realized – if an investor does nothing during a bear market, allowing the market to recover (which, historically, it always has), then they’ve effectively lost nothing.
That can be important to keep in mind because markets are cyclical, meaning that bear markets are a fact of life; they tend to occur every three to four years. But what makes them nerve-wracking is that it’s difficult to see them coming. Some signs that a bear market may be looming include a slowing economy, increasing unemployment, declining profits for corporations, and decreasing consumer confidence, among other things.
Conversely, many investors may find it psychologically easier to invest during a bull market, when assets are appreciating (generally), and they can see an immediate unrealized return in their portfolio. Again, each investor will react differently to different market conditions, but the psychological weight of prevailing markets can be heavy on many investors.
Investing During a Bull Market
As noted, investors choose to adopt different investment strategies depending on whether we’re experiencing a bull or bear market.
During a bull market, some might suggest holding off on the urge to sell stocks even after you’ve had gains, since you could miss out on even higher prices if the bull market charges forward. However, no one knows when a peak will arrive, so this buy-and-hold strategy could lead to investors, who sell later, missing out on potential gains.
It may be a good idea to try and keep your confidence in check during a bull market, too. Because investors have seen their holdings gaining value, they might think they’re better at picking stocks than they actually are, and could feel tempted to make riskier moves.
Another common mistake is believing that the gains will continue in perpetuity; in reality, it’s often hard to predict a downswing, and stock market timing is challenging for even professional investors.
Investing During a Bear Market
A great way to prepare for a bear market is to try and remember that the market will, at some point, see a downturn. And, accordingly, to try and be prepared for it.
One way to do so could be to make sure your assets aren’t allocated in a way that’s riskier than you’re comfortable with — for example, by being overly invested in stocks in one company, industry, or region — when times are good. In other words, make sure your portfolio contains some degree of diversification.
Buying stock during a bear market can be advantageous since investors might be getting a better deal on stocks that could rise in value once the market recovers, which is also known as buying the dip. However, there can be obvious risks associated with predicting when certain stocks will hit bottom and buying them with the expectation of future gains.
No one knows what the future holds, so there’s always a chance the price will keep plummeting. Another tactic investors might be able to use is dollar-cost averaging — which is investing a fixed amount of money over time — so that chances of buying at high or low points are spread out over time.
Recommended: The Pros and Cons of a Defensive Investment Strategy
Once the bear market arrives, investors make a common mistake: getting spooked and selling off all their stocks. But selling when prices are low means they could be likely to suffer losses and may miss the subsequent rebound.
In general, as long as investors are comfortable with their portfolio mix and are investing for the long haul, it may be a good idea to stick with your predetermined strategy, no matter what’s happening in the markets in the short-term. Again, it’s worth remembering that market cycles are normal, and the same dynamism responsible for downturns allows investors to experience gains at other times.
Examples of Bull and Bear Markets
As discussed, bear markets are fairly common. In fact, dating back to 1929, the S&P 500 has experienced a decline of 20% or more 27 times – and the good news for investors, as of late, is that more recent bear markets have tended to be shorter in duration, and fewer and further between.
The most recent bear market was during 2022, and lasted 282 days, with a market decline of more than 25%. The market has, since then, bounced back to reach record-highs. Before that, there was a bear market in February and March 2020, when the pandemic initially hit the U.S., which saw the markets fall more than 33% – but the bear market itself lasted only 33 days.
Going back even further, there was a relatively severe bear market in the early 1970s which lasted 630 days, and saw the market decline 48%. Again, that makes more recent downturns look fairly tame in comparison.
💡 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.
The Takeaway
Bull and bear markets refer to either rising or declining markets, with bear markets notable as they represent declines of at least 20% in the market. Both bull and bear markets can have psychological effects on investors, and it’s important to understand what they are to try and adjust (or stick to) your strategy, accordingly.
If you’re investing for decades down the road, once you have an investment mix that is diversified and matches your comfort with risk, it’s often wisest to leave it alone regardless of what the market is doing. It may also be a good idea to speak with a financial professional for guidance.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN-Q224-1900573-V1
Read moreMay
30
2024
Guide to Fractional Art Investing
Fractional art investing allows individual investors to purchase shares of higher-priced artworks, and (assuming the art appreciates) to realize a profit when the work is sold.
The cost of owning and maintaining individual works of art can be prohibitive for many people, especially retail investors. Fractional art investing has evolved as an accessible alternative to owning physical art, which can entail significant expense, management, and maintenance issues.
Investing in art is considered a form of alternative investing, which means that art, and fractional art investments, don’t typically move in sync with conventional asset classes like stocks and bonds. While art assets may offer growth opportunities, and the potential for portfolio diversification, they also come with certain risks.
What Is Fractional Art Investing?
As an increasing number of investors have begun to explore alternative asset classes, collectible art has emerged as a potential growth area.
Just as savvy stock market investors seek out top companies to invest in, many art investors likewise want to put their money into so-called blue-chip art: well-known works by established artists that may be more likely to appreciate in value. In addition, established but less well-known artists — like so-called growth stocks — are also attracting interest, based on their potential to gain value.
Given that it’s expensive to purchase and own works of art, fractional art investing — like investing in fractional shares of stock — allows investors to own shares of existing works, spread some of the investing risk across a range of pieces, and get a proportional share of any gains when the art is sold (although there are no guarantees that the art will appreciate).
Because art isn’t considered one of the traditional asset classes — including stocks, bonds, and cash — it can also offer investors diversification.
Art Market Growth
The global art market suffered during the pandemic but has since recovered to pre-pandemic levels, with sales of about $65 billion in 2023, according to the Art Basel-UBS Art Market Report 2024. (There has been a similar surge of interest in other valuable types of collectibles.)
Nonetheless, 2023 saw a 4% dip in overall sales from the previous year, owing to the high interest-rate climate, inflation, and geo-political issues. But transaction volume did increase by 4% from 2022 to 2023.
In addition, there is growing interest in fractional shares as an easier way to invest in art. According to ArtTactic, an art market research company, more than $625 million in fractional art shares were sold between 2017 and 2022. Because of the relatively lower price point, and the focus on returns (not owning art, per se), fractional art investing is attracting younger buyers, who may not be as affluent, but who are contributing to the liquidity of the art market.
Alternative investments,
now for the rest of us.
Start trading funds that include commodities, private credit, real estate, venture capital, and more.
Fractional Art Explained
Fractional art investors don’t hold onto the art; they may never see it. Rather, a company that specializes in offering fractional art investments buys and maintains the actual pieces (say, a painting by Pablo Picasso or a sculpture by Fernando Botero), and then issues shares of each work to investors.
Art can be securitized in a couple of different ways, and as technology evolves more options are likely to emerge. In some cases the art is treated like a company, registered with the SEC, and the shares are sold to investors. In other cases a few works might comprise a fund that investors can buy shares of, similar to a mutual fund (which holds many companies). In some cases shares are managed using smart contracts on a blockchain.
Whereas the purchase price of a painting might be in the millions, investors could buy shares of a painting for, say, $50 per share. Prices vary widely, depending on the platform, and there may be high investment minimums (e.g. $3,000 and higher)
Share prices also include a fee for the maintenance and storage of the art, which can be relatively high, even when divided proportionally among shareholders. Similar to investing fees, even small amounts can add up over time.
How to Invest in Fractional Art: 3 Steps
Fractional art investing platforms may offer some liquidity in the form of on-platform trading. But generally it’s difficult to trade fractional shares of art. At the moment, fractional ownership is more of a long game, with lock-up periods that can last as long as a few years or a decade. Here’s how to start:
Step 1: Join a Platform
The first step is to find a platform that supports fractional art shares, and become familiar with its offerings.
Once you feel comfortable that a certain platform has the type of art you’d be interested in, get to know its terms (the investment minimum, cost per share, the fees involved, length of commitment) and sign up.
Step 2: Purchase Shares of Art
Decide which artwork or works you want to invest in. Be sure to understand the terms, and how long your money will remain invested.
It’s important to know that there’s no guarantee that the piece(s) you pick will appreciate in value.
Step 3: Wait or Trade
Depending on the platform, you may be able to trade your shares on an on-platform secondary market of sorts. In some cases, investors could potentially see dividend distributions before the end of their investing term. Otherwise, all you need to do is wait for your investment to be sold and take it from there.
Remember, the value of art can fluctuate considerably over time, so there’s no certainty that you’ll see your hoped-for return.
Pros and Cons of Fractional Art Investing
Fractional art ownership has emerged as a legitimate investing strategy, but because art is an alternative investment, there are a number of risks that investors must keep in mind, so it’s important to consider the pros and cons of investing in art.
Pros
Investing in fractional shares of art can be an affordable way to participate in the art market.
Art is considered an alternative investment, so investing in fractional shares also offers the potential for diversification.
Some pieces of art have been known to appreciate, especially if they’re by well-established artists. But in some cases works by less well-known and/or contemporary artists may appreciate as well.
Cons
Investing in art, whether through owning an artwork outright or through fractional shares, can be risky. The value of a piece of art is difficult to establish, and tends to fluctuate based on trends and tastes, not intrinsic or fundamental value.
As a result, an investment that looks promising now may not turn out to be profitable in the long term.
In addition, investing in fractional shares requires most investors to hold their investment for a period of years before the underlying work is sold. This means your capital is locked up, and may or may not see a return.
Fractional Art vs. Buying Art Yourself
Unless you have the resources to purchase, insure, and maintain a work of art yourself, buying fractional shares may be the best way to go. Owning physical art is a commitment, and can be quite expensive, putting aside the purchase price itself.
It’s true that art investing can be risky, but fractional shares may require less capital, which lessens the risk factor (although the risk of loss is always possible).
The Takeaway
The cost of owning individual works of art is out of reach for many investors. Fractional art investing is emerging as an accessible, and sometimes profitable option. Investors get to “own” part of a masterpiece, or an emerging artist’s work, without the headache of storing and maintaining it.
That said, investing in art is a type of alternative investment. While non-traditional assets may offer growth opportunities and the potential for portfolio diversification, they can also come with certain risks, such as market volatility, a lack of transparency, and little to no regulation in some cases.
Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.
FAQ
Is fractional art a good investment?
Is fractional art a good investment?
Buying fractional shares of art can be a good investment, but it’s difficult to predict. The art market is notoriously volatile, and knowing whether a piece of art will gain value depends on trends over time. Like any type of alternative investment, the art market isn’t transparent or heavily regulated.
How does fractional art work?
As it sounds, investors can purchase a percentage of a given work of art, typically via a platform that specializes in fractional art investing. Buying fractional shares may be inexpensive, but there can be fees and investment minimums to consider as well.
In addition, your investment is often held for a period of years, until the work is sold. At that time, if there is a gain, it would be shared (minus fees) proportionally with investors.
Is Investing in art profitable?
There’s no way to predict for certain whether investing in art (or commodities or real estate or any type of investment) will be profitable. It depends on the investment you choose and what happens in the market by the time it’s sold.
Photo credit: iStock/South_agency
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
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.
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.
SOIN-Q224-1858359-V1
Read moreSee what SoFi can do for you and your finances.
Select a product below and get your rate in just minutes.