The stock market can go up or down based on a number of different factors, including consumer confidence, worries about inflation, and supply and demand. As an investor, it’s important to understand market fluctuation and how it works, and to know how much fluctuation is normal.
Why do stocks fluctuate? Read on to learn more about market volatility and stock fluctuation.
Key Points
• Stock market fluctuations are generally driven by supply and demand, inflation, economic indicators, and company performance.
• Annual stock market fluctuations are common, and vary year to year.
• Market volatility may present opportunities to buy stocks at lower prices, but its possible prices could continue to decline.
• Diversifying assets may help reduce risk during volatile market conditions.
• Historical data shows 12 S&P 500 drops over 20% since World War II.
Top Causes of Stock Market Fluctuations
The stock market fluctuation definition is when stock prices rise or fall. So what causes this? The stock market can move up and down due to a variety of factors, including:
Supply and Demand
The prices of stocks depend on supply and demand. Supply is how much of a good — in this case, a share of stock — is available for sale. Demand is how much consumers want to buy that stock. Prices rise when the supply of shares of stock for sale is not enough to meet investors’ demands. When investors demand for shares falls, so does the price of the shares.
Overall, the stock market fluctuates because investors are buying and selling stocks in such a way, and in such volume, that stock prices make a large move in one direction or another.
Inflation
Concerns about inflation may cause investors to become bearish and stop buying stocks, which may make the market go down. That’s because during periods of inflation, consumer spending tends to slow, and corporate profits may suffer. Inflation can inject uncertainty and volatility into the market.
Economic Indicators
Economic indicators are data that analysts use to help judge the health of the economy. These indicators can, in turn, affect stock market fluctuation. They typically include such things as the Consumer Price Index, unemployment numbers, interest rates, and home sales. If prices, interest rates, and unemployment rise, chances are good that there may be stock fluctuation.
Company Performance
How well a company is doing can affect the price of its stock and potentially cause market fluctuations. If the company is expanding its operations and reporting a profit, for instance, investors’ demand for the stock may rise, along with the price of the stock. Conversely, if there are concerns about the company’s financial health, or it reports a loss, demand for the stock may drop, and so generally will the price.
Pros and Cons of Market Fluctuations
There are benefits and drawbacks to market fluctuations, and that may be particularly true for short-term traders to use volatility as an opportunity to generate returns. These are some of the advantages and disadvantages to consider when the market becomes volatile.
Market Fluctuations
Pros
Cons
May be able to purchase stocks at lower prices
Could lose money by selling stocks at a loss
Opportunity to diversify assets
Holdings could lose value
Pros of Market Fluctuations
Market fluctuations may be a good thing for some investors, in some instances.
• Chance to purchase shares at lower prices. When stock prices go down, it may be a good opportunity for investors to buy shares for less. Investing in a down market could be beneficial.
• Incentive to diversify your assets. When the market is volatile, it’s a prime time to look over your asset allocation and make any prudent changes. For instance, you may want to reduce some of your holdings in riskier assets and move them over to safer investments in case the market drops.
Cons of Market Fluctuations
Market fluctuations also have downsides including a potentially higher risk of seeing losses.
• Might end up selling stocks at a loss. Instead of panicking, selling your shares, and losing money, you may be better off waiting out the fluctuations if you can. When the market goes back up, you may be able to recoup what you paid for the stock.
• Holdings could lose value. Naturally, market fluctuations and volatility often mean that holdings lose value, and that may not be something that all investors can stomach.
Volatility Means the Stock Market Is Working
Although it’s difficult to watch the value of your portfolio drop, stock market volatility is a normal part of stock market investing. In fact, volatility is natural, and it shows that the stock market is working as it should.
Here’s why: The more investors weigh in — by actively buying and selling stocks — the more accurate the prices of stocks will ultimately be. Essentially, it’s a weighing of information about the “correct” price of a stock from many different investors.
It’s also helpful to remember that volatility doesn’t just relate to rising stock prices — it also refers to falling stock prices. When the stock market makes a surge upward, that is also considered stock market fluctuation.
What Is a Normal Amount of Stock Market Fluctuation?
Almost any amount of market fluctuation is possible.
The best guide for understanding what is normal (and what is not) is to look at what has happened in the past. While past performance is never a guarantee of future financial success, it’s helpful to look at the data.
The most commonly cited pool of data is the S&P 500. The S&P 500 can give a good historical gauge of stock market movement.
Since World War II — the “modern” stock market era, the S&P 500 has seen a dozen or so drops in the stock market of over 20%.
Peak (Start)
Return
May 29, 1946
-30%
August 2, 1956
-22%
December 12, 1961
-28%
February 9, 1966
-22%
November 29, 1968
-36%
January 11, 1973
-48%
November 28, 1980
-27%
August 25, 1987
-34%
July 16, 1990
-20%
March 27, 2000
-49%
October 9, 2007
-57%
February 19, 2020
33.93%
December 31, 2021
-28.5%
Source: Morningstar
You’ll notice that a big drop in the stock market happens somewhat regularly. And smaller fluctuations of 5% or 10% down happen much more frequently than that.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
What Does Stock Market Volatility Mean to You As an Investor?
How you deal with volatility as an investor depends on your tolerance for risk. What to know about risk is that if you can’t afford losses, volatility could be a time of fear and uncertainty for you. But if you have a higher tolerance for risk, you may see volatility as a potential opportunity.
Risk Tolerance in Investing
Risk tolerance is the amount of risk you’re willing to take with investments. Volatility in the market could directly affect your risk tolerance. For instance, if you have a higher risk tolerance, you may be willing to risk money for the possibility of high returns. If you have a lower risk tolerance, you’ll likely be looking for safer investments with more of a guaranteed return.
Your age, your financial goals, and the amount of money you have impact your risk tolerance. If you’re saving for retirement, and nearing retirement age, your risk tolerance will be lower. In this case, you’ll want to practice risk management with safer investments. If you’re in your 20s or 30s, however, you may have higher risk tolerance because you have more years to recoup any money you may lose.
The Takeaway
Choosing the right investment strategy depends on your goals, risk tolerance, and your personal situation. Every investor needs to manage their portfolio in a way that fits their needs during periods of market volatility and as well during times of stability.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
Why does the stock market fluctuate?
The stock market fluctuates for a number of different reasons, but the biggest overall factor is supply and demand. Prices of stocks rise when the supply of shares for sale is not enough to meet investors’ demands. When investors’ demand for shares falls, so does the price of the shares. This causes volatility.
What is the average market fluctuation?
Markets fluctuate fairly frequently. While the market, on average, returns around 10% annually, that can and does fluctuate year to year.
How long do market fluctuations last?
How long market fluctuations last depends on the reason for the fluctuations and how big the fluctuations are. Remember, it’s normal to have some periods of volatility in the stock market. Diversifying your portfolio may help you manage risk and stay on track with your investment goals during times of uncertainty.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Cyclical investing means understanding how various stock sectors react to economic changes. A cyclical stock is one that’s closely correlated to what’s happening with the economy at any given time. The performance of non-cyclical stocks, however, is typically not as closely tied to economic movements.
Investing in cyclical stocks and non-cyclical stocks may help to provide balance and diversification in a portfolio. This in turn may help investors to better manage risk as the economy moves through different cycles of growth and contraction.
Key Points
• Cyclical stocks tend to perform well during periods of economic growth, while non-cyclical stocks may thrive during economic contractions.
• Cyclical stocks exhibit higher volatility and sensitivity to economic changes.
• Non-cyclical stocks focus on essential goods, which may offer stability regardless of market conditions.
• Economic cycles include expansion, peak, contraction, and trough phases.
• Cyclical investing strategies may involve sector rotation and regular reallocation.
Cyclical vs Non-Cyclical Stocks
There are some clear differences between cyclical vs. non-cyclical stocks, as outlined:
Cyclical Stocks
Non-Cyclical Stocks
May Perform Best During
Economic growth
Economic contraction
Goods and Services
Non-essential
Essential
Sensitivity to Economic Cycles
Higher
Lower
Volatility
Higher
Lower
A cyclical investing strategy can involve choosing both cyclical and non-cyclical stocks. In terms of how they react to economic changes, they’re virtual opposites.
• Associated with goods or services consumers tend to spend more money on during growth periods
• Highly sensitive to shifting economic cycles
• More volatile than non-cyclical stocks
When the economy is doing well a cyclical stock tends to follow suit. Share prices may increase, along with profitability. If a cyclical stock pays dividends, that can result in a higher dividend yield for investors.
Non-cyclical stocks, on the other hand, share these characteristics:
• Tend to (but don’t always) perform well during periods of economic contraction
• Associated with goods or services that consumers consider essential
• Less sensitive to changing economic environments
• Lower volatility overall
A non-cyclical stock isn’t completely immune from the effects of a slowing economy. But compared to cyclical stocks, they’re typically less of a roller-coaster ride for investors in terms of how they perform during upturns or downturns. A good example of a non-cyclical industry is utilities, since people need to keep the lights on and the water running even during economic downturns.
💡 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.
Cyclical Stocks
In the simplest terms, cyclical stocks are stocks that closely follow the movements of the economic cycle. The economy is not static; instead, it moves through various cycles. There are four stages to the economic cycle:
• Expansion. At this stage, the economy is in growth mode, with new jobs being created and company profits increasing. This phase can last for several years.
• Peak. In the peak stage of the economic cycle, growth begins to hit a plateau. Inflation may begin to increase at this stage.
• Contraction. During a period of contraction, the economy shrinks rather than grows. Unemployment rates may increase, though inflation may be on the decline. The length of a contraction period can depend on the circumstances which lead to it.
• Trough. The trough period is the lowest point in the economic cycle and is a precursor to the beginning of a new phase of expansion.
Understanding the various stages of the economic cycle is key to answering the question of what are cyclical stocks. For example, a cyclical stock may perform well when the economy is booming. But if the economy enters a downturn, that same stock might decline as well.
Examples of Cyclical Industry Stocks
Cyclical stocks most often represent companies that make or provide things that consumers spend money on when they have more discretionary income.
For example, that includes things like:
• Entertainment companies
• Travel websites
• Airlines
• Retail stores
• Concert promoters
• Technology companies
• Car manufacturers
• Restaurants
The industries range from travel and tourism to consumer goods. But they share a common thread, in terms of how their stocks tend to perform during economic highs and lows.
Examples of Non-Cyclical Industry Stocks
Non-cyclical industry stocks would be shares of companies that are more insulated from economic downturns than their cyclical counterparts. It may be easier to think of them as companies that are probably going to see sales no matter what is happening in the overall economy. That might include:
• Food producers and grocers
• Consumer staples
• Gasoline and energy companies
Cyclical Stock Sectors
The stock market is divided into 11 sectors, each of which represents a variety of industries and sub-industries. Some are cyclical sectors, while others are non-cyclical. The cyclical sectors include:
Consumer Discretionary
The consumer discretionary sector includes stocks that are related to “non-essential” goods and services. So some of the companies you might find in this sector include those in the hospitality or tourism industries, retailers, media companies and apparel companies. This sector is cyclical because consumers tend to spend less in these areas when the economy contracts.
Financials
The financial sector spans companies that are related to financial services in some way. That includes banking, financial advisory services and insurance. Financials can take a hit during an economic downturn if interest rates fall, since that can reduce profits from loans or lines of credit.
Industrials
The industrial sector covers companies that are involved in the production, manufacture or distribution of goods. Construction companies and auto-makers fall into this category and generally do well during periods of growth when consumers spend more on homes or cars.
Information Technology
The tech stock sector is one of the largest cyclical sectors, covering companies that are involved in everything from the development of new technology to the manufacture and sale of computer hardware and software. This sector can decline during economic slowdowns if consumers cut back spending on electronics or tech.
Materials
The materials sector includes industries and companies that are involved in the sourcing, development or distribution of raw materials. That can include things like lumber and chemicals, as well as investing in precious metals. Stocks in this sector can also be referred to as commodities.
Cyclical Investing Strategies
Investing in cyclical stocks or non-cyclical stocks requires some knowledge about how each one works, depending on what’s happening with the economy. While timing the market is virtually impossible, it’s possible to invest cyclically so that one is potentially making gains while minimizing losses as the economy changes.
For investors interested in cyclical investing, it helps to consider things like:
• Which cyclical and non-cyclical sectors you want to gain exposure to
• How individual stocks within those sectors tend to perform when the economy is growing or contracting
• Your risk tolerance and risk capacity (i.e. the amount of risk you’re comfortable with versus the amount of risk you need to take to realize your target returns)
• Where the economy is, in terms of expansion, peak, contraction, or trough
For example, swing trading is one strategy an experienced investor might employ to try and capitalize on market movements. With swing trading, you’re investing over shorter time periods to attempt to see gains from swings in stock prices. Short-term trading, however, is considered high risk given the potential for seeing losses, and requires investors to be familiar with risk mitigation strategies. Swing trading relies on technical analysis to help identify trends in stock pricing, though you may also choose to consider a company’s fundamentals if you’re interested in investing for the longer term.
How to Invest in Cyclical Stocks
Investors can invest in cyclical stocks the same way they do any other type of stock: Purchasing them through a brokerage account, or from an exchange.
One way to simplify cyclical investing is to choose one or more cyclical and non-cyclical exchange-traded funds (ETFs). Investing in ETFs can simplify diversification and may help to mitigate some of the risk of owning stocks through various economic cycles.
Cyclical stocks tend to follow the economic cycle, rising in value when the economy is booming, then dropping when the economy hits a downturn. Non-cyclical stocks, on the other hand, tend to behave the opposite way, and aren’t necessarily as affected by the overall economy.
Investing around economic cycles can be a viable strategy, but it has its potential pitfalls. Investors who do their homework may be able to successfully invest around economic cycles, but it’s important to consider the risks involved.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
What are indicators of cyclical stocks?
A few examples of indicators of cyclical stocks include the earnings per share data reported by public companies, which can give insight into the health of the economy, along with beta (a measure of volatility of returns) and price-to-earnings ratios.
What is the difference between cyclicality vs seasonality?
While similar, cyclicality and seasonality differ in their frequency. Seasonality refers to events or trends that are observed annually, or every year, whereas cyclicality, or cyclical variations, can occur much less often than that.
How do you mitigate the risk of investing in cyclical stocks?
Investors can use numerous strategies to help mitigate the risk of investing in cyclical stocks, such as sector rotation and dollar-cost averaging.
Photo credit: iStock/Eoneren
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.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
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.
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.
Asset allocation is an investment strategy that helps you decide the ratio of different asset classes in your portfolio to ensure that your investments align with your risk tolerance, time horizon, and goals.
In other words, the way you allocate, or divide up the assets in your portfolio, helps to balance risk, while aiming for the highest potential return within the time period you have to achieve your investment goals. Here’s what you need to know about asset-based asset allocation.
Key Points
• Asset allocation is the process of dividing investments among different asset classes based on factors like age, risk tolerance, and financial goals.
• Younger investors can typically afford to take more risks and allocate a higher percentage of their portfolio to stocks.
• As investors approach retirement, they may shift towards a more conservative asset allocation, with a higher percentage allocated to bonds and cash.
• Regularly reviewing and rebalancing your asset allocation is important to ensure it aligns with your changing financial circumstances and goals.
• Asset allocation is a personal decision and should be based on individual factors such as risk tolerance, time horizon, and investment objectives.
What Is Age-Based Asset Allocation?
The mix of assets you hold will likely shift with age. When you’re younger and have a longer time horizon, you might want to hold more stocks, which offer the most growth potential. Also, that longer time horizon gives you plenty of years to help ride out volatility in the market.
You will likely want to shift your asset allocation as you get older, though. As retirement age approaches, and the point at which you’ll need to tap your savings draws near, you may want to shift your retirement asset allocation into less risky assets like bonds and cash equivalents to help protect your money from downturns.
In the past, investment advisors recommended a rule of thumb whereby an investor would subtract their age from 100 to know how much of their portfolio to hold in stocks. What is an asset allocation that follows that rule? A 30-year-old might allocate 70% of their portfolio to stocks, while a 60-year-old would allocate 40%.
However, as life expectancy continues to increase — especially for women — and people rely on their retirement savings to cover the cost of longer lifespans (and potential healthcare expenses), some industry experts and advisors now recommend that investors keep a more aggressive asset allocation for a longer period.
The new thinking has shifted the formula to subtracting your age from 110 or 120 to maintain a more aggressive allocation to stocks.
In that case, a 30-year-old might allocate 80% of their portfolio to stocks (110 – 30 = 80), and a 60-year-old might have a portfolio allocation that’s 50% stocks (110 – 60 = 50) — which is a bit more aggressive than the previous 40% allocation.
These are not hard-and-fast rules, but general guidelines for thinking about your own asset allocation strategy. Each person’s financial situation is different, so each portfolio allocation will vary.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
Asset Allocation Models by Age
As stated, age is a very important consideration when it comes to strategic asset allocation. Here are some asset allocation examples for different age groups.
Asset Allocation in Your 20s and 30s
For younger investors, the conventional wisdom suggests they may want to hold most of their portfolio in stocks to help save for long-term financial goals like retirement.
That said, when you’re young, your financial footing may not be very secure. You probably haven’t built much of a nest egg, you may change jobs relatively frequently, and you may have debt, such as student loans, to worry about. Setting up a potentially volatile, stock-focused allocation might feel nerve-wracking.
If you have a 401(k) at work, this might be your primary investment vehicle — or you may have set up an IRA. In either account you can invest in mutual funds or exchange-traded funds (ETFs) that hold a mix of stocks, providing some low-cost diversification without sacrificing the potential for long-term growth.
You could also invest in a target date fund, which is designed to help to manage your asset allocation over time (more on these funds below).
When choosing funds, it’s important to consider both potential performance and fees. Index funds, which simply mirror the performance of a certain market index, may carry lower expense ratios but they may generate lower returns compared to, say, a growth fund that’s more expensive.
Remember that the younger you are, the longer you have to recover from market downturns or losses. So allocating a bigger chunk of your investments to growth funds or funds that use an active management strategy could make sense if you feel their fees are justified by the potential for higher returns — and the higher risk that comes along with it.
And of course, you can counterbalance higher-risk/higher-reward investments with bonds or bond funds (as a cushion against volatility), index funds (to help manage costs) or target date funds (which can do a bit of both). Just be aware that the holdings within some funds can overlap, which could hamper your diversification strategy and require you to choose investment carefully.
Asset Allocation in Your 40s and 50s
As you enter middle age you are potentially entering your peak earning years. You may also have more financial obligations, such as mortgage payments, and bigger savings goals, such as sending your kids to college, than you did when you were younger. On the upside, you may also have 20 years or more before you’re thinking about retiring.
In the early part of these decades, one approach is to consider keeping a hefty portion of your portfolio still allocated to stocks. This may be useful if you haven’t yet been able to save much for your retirement because you’d be able to add potential growth to your portfolio, and still have some years to ride out any volatility.
Depending on when you plan to retire, adding stability to your portfolio with bonds as you approach the latter part of these decades might be a wise choice. For example, you may want to begin by shifting more of your IRA assets to bonds or bond funds at this stage. These investments may produce lower returns in the short term compared to mutual funds or ETFs. But they can be useful for generating income once you’re ready to begin making withdrawals from your accounts in retirement.
Asset Allocation in Your 60s
Once you hit your 60s and you’re nearing retirement age, your allocation will likely shift toward fixed-income assets like bonds, and maybe even cash. A shift like this can help prepare you for the possibility that markets may be down when you retire.
If that’s the case, you might be able to use these fixed-income investments to provide income during the downturn, so you can avoid selling stocks while the markets are down since doing so would lock in losses and might curtail future growth in your portfolio. Thus, leaning on the fixed-income portion of your portfolio allows time for the market to recover before you need to tap into stocks.
If you haven’t retired yet, you can continue making contributions to your 401(k) to grow your nest egg and take advantage of any employer match.
If you chose to invest in a target date fund within your retirement account when you were younger, it’s likely that fund’s allocation would now be tilting toward fixed-income assets as well.
Retirement Asset Allocation
Once you’ve retired it may seem like you can kick back and relax with all of your asset allocation worries behind you. Yet, your portfolio allocation is as important to consider now as it was in your 20s.
When you retire, you’ll likely be on a fixed income — and you won’t be adding to your savings with earned wages. Your retirement could last 20 to 30 years or more, so consider holding a mix of assets that includes stocks that might provide some growth. Keeping a modest stock allocation might help you avoid outliving your savings and preserve your spending power.
While that may sound contrary to the suggestion above for pre-retirees to keep more of their assets allocated to fixed-income, the difference is the level of protection you might want just prior to retirement. Now as an official retiree, and thinking about the potential decades ahead, you may want to inject a little growth potential into your portfolio.
It might also make sense to hold assets that grow faster than the rate of inflation or are inflation-protected, such as Treasury Inflation-Protected Securities, or TIPS, which can help your nest egg hold its value.
These are highly personal decisions that, again, go back to the three intersecting factors that drive asset allocation: your goals, risk tolerance, and time horizon. There’s no right answer; the task is arriving at the right answer for you.
Understanding Assets and Asset Classes
At its heart, a financial asset is anything of value that you own, whether that’s a piece of property or a single stock. When you invest, you’re typically looking to buy an asset that will increase in value.
The three broad groups, or asset classes, that are generally held in investment accounts are stocks, bonds, and cash. When you invest, you will likely hold different proportions of these asset classes.
Asset Allocation Examples
What are some asset allocation examples? Well, your portfolio might hold 60% stocks, 40% bonds, and no cash — or 70% stocks, 20% bonds, and 10% in cash or cash equivalents. But how you decide that ratio gets into the nuts and bolts of your actual asset allocation strategy, because each of these asset types behaves differently over time and has a different level of risk and return associated with it.
• Stocks. Stocks typically offer the highest rates of return. However, with the potential for greater reward comes higher risk. Typically, stocks are the most volatile of these three categories, especially in the short term. But over the long term, the return on equities (aka stocks) has generally been positive. In fact, the S&P 500 index, a proxy for the U.S. stock market, has historically returned an average of 10% annually (approximately 7% when adjusted for inflation).
• Bonds. Bonds are traditionally less risky than stocks and offer steadier returns. A general rule of thumb is that bond prices move in the opposite direction of stocks.
When you buy a bond, you are essentially loaning money to a company or a government. You receive regular interest on the money you loan, and the principal you paid for the bond is returned to you when the bond’s term is up. When buying bonds, investors generally accept smaller returns in exchange for the security they offer.
• Cash. Cash, or cash equivalents, such as certificates of deposit (CDs) or money market accounts, are the least volatile investments. But they typically offer relatively low returns.
💡 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).
How Do Diversification and Rebalancing Fit In?
The old adage, “Don’t put all your eggs in one basket,” is apt for a number of concepts in investing.
Putting all of your money in one investment may expose you to too much risk. When it comes to asset allocation, you can help manage risk by spreading money out over different asset classes that are then weighted differently within a portfolio.
Here is a possible asset allocation example: If your stock allocation was 100%, and the stock market hit a speed bump, your entire portfolio could lose value. But if your allocation were divided among stocks, bonds, and cash, a drop in the value of your stock allocation wouldn’t have the same impact. It would be mitigated to a degree, because the bonds and cash allocation of your portfolio likely wouldn’t suffer similar losses (remember: bond prices generally move in the opposite direction of stocks, and cash/cash equivalents rarely react to market turmoil).
Diversification
Portfolio diversification is a separate, yet related, concept. Simple diversification can be achieved with the broader asset classes of stocks, bonds, and cash. But within each asset class you could also consider holding many different assets for additional diversification and risk protection.
For example, allocating the stock portion of your portfolio to a single stock may not be a great idea, as noted above. Instead, you might invest in a basket of stocks. If you hold a single stock and it drops, your whole stock portfolio falls with it. But if you hold 25 different stocks — when one stock falls, the effect on your overall portfolio is relatively small.
On an even deeper level, you may want to diversify across many types of stock — for example, varying by company size, geography, or sector. One way some investors choose to diversify is by holding mutual funds, index funds, or ETFs that themselves hold a diverse basket of stocks.
Rebalancing
What is rebalancing? As assets gain and lose value, the proportion of your portfolio they represent also changes. For example, say you have a portfolio allocation that includes 60% stocks and the stock market ticks upward. The stocks you hold might have appreciated and now represent 70% or even 80% of your overall portfolio.
In order to realign your portfolio to your desired 60% allocation, you might rebalance it by selling some stocks and buying bonds. Why sell securities that are gaining value? Again, it’s with an eye toward managing the potential risk of future losses.
If your equity allocation was 60%, but has grown to 70% or 80% in a bull market, you’re exposed to more volatility. Rebalancing back to 60% helps to mitigate that risk.
The idea of rebalancing works on the level of asset allocation and on the level of asset classes. For example, if your domestic stocks do really well, you may sell a portion to rebalance your domestic allocation and buy international stocks.
You can rebalance your portfolio at any time, but you may want to set regular check-ins, whether quarterly or annually. There may be no need to rebalance if your asset allocation hasn’t really shifted. One general rule to consider is the suggestion that you rebalance your portfolio whenever an asset allocation changes by 5% or more.
What’s the Deal with Target Date Funds?
One tool that some investors find useful to help them set appropriate allocations is a target date fund. These funds, which were described briefly above, are primarily for retirement, and they are typically geared toward a specific retirement year (such as 2030, 2045, 2050, and so on).
Target funds hold a diverse mix of stocks and fixed-income investments. As the fund’s target date approaches, the mix of stocks and bonds the fund automatically adjusts to a more conservative allocation — aka the fund’s “glide path.”
For example, if you’re 35 and plan to retire at 65, you could purchase shares in a target-date fund with a target date 30 years in the future. While the fund’s stock allocation may be fairly substantial at the outset, as you approach retirement the fund will gradually increase the proportion of fixed-income assets that it holds.
Target-date funds theoretically offer investors a way to set it and forget it. However, they also present some limitations. For one, you don’t have control over the assets in the fund, nor do you control how the fund’s allocation adjusts over time.
Target funds are typically one-size-fits-all, and that doesn’t always work with an individual’s unique retirement goals. For example, someone aggressively trying to save may want to hold more stocks for longer than a particular target date fund offers. Also, as actively managed funds, they often come with fees that can take a bite out of how much you are ultimately able to save.
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The Takeaway
While many investors spend time researching complex issues like bond yields and options trading, understanding and executing a successful asset allocation strategy — one that works for you now, and that you can adjust over the long term — can be more challenging than it seems.
Although asset allocation is a fairly simple idea — it’s basically how you divide up different asset classes in your portfolio to help manage risk — it has enormous strategic implications for your investments as a whole. The three main factors that influence your asset allocation (goals, risk tolerance, and time horizon) seem straightforward enough as separate ideas, yet there is an art and a science to combining them into an asset allocation that makes sense for you. Like so many other things, arriving at the right asset allocation is a learning process.
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FAQ
What does asset allocation mean?
Asset allocation refers to the percentage of an overall investment portfolio that an investor sets aside for different types of assets or investments, such as stocks, bonds, cash, or alternative investments.
Is asset allocation the same as diversification?
Portfolio diversification is a separate, yet related, concept. Simple diversification can be achieved with the broader asset classes of stocks, bonds, and cash. But within each asset class you could also consider holding many different assets for additional diversification and risk protection.
Why might your asset allocation change as you get older?
Your goals and risk appetite might change as the years go by, and as such, your portfolio’s composition could change or be reallocated to reflect that.
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The Secured Overnight Financing Rate (SOFR) is the benchmark interest rate that has replaced the London Interbank Offered Rate (LIBOR) in the U.S. In fact, for the past several years, lenders have been gradually switching from using LIBOR to determine rates for consumer loans, such as private student loans, to using SOFR.
Here’s what you need to know about SOFR, including how it differs from LIBOR, and how you might be impacted by the change.
Key Points
• The Secured Overnight Financing Rate (SOFR) serves as the primary benchmark for interest rates on loans in the U.S., replacing the previously used LIBOR.
• SOFR is based on actual secured transactions, making it more reliable and less susceptible to manipulation compared to LIBOR’s hypothetical rates.
• The Federal Reserve Bank of New York publishes the SOFR daily, reflecting the rates financial institutions pay for overnight loans backed by Treasury securities.
• The transition from LIBOR to SOFR has been gradual, with minimal impact on borrowers, especially those with fixed-rate loans.
• Understanding the differences between SOFR and LIBOR is crucial for borrowers, as variable-rate loans may see adjustments based on the new benchmark.
What Is the Secured Overnight Financing Rate (SOFR)?
Financial institutions now use Secured Overnight Financing Rate, or SOFR, as a tool for pricing corporate and consumer loans, including business loans, private student loans, mortgages, and credit cards. SOFR sets rates based on the rates that financial institutions pay one another for overnight loans (hence the name). The SOFR rate is published daily by the Federal Reserve Bank of New York.
SOFR is a popular benchmark because it is risk-free and transparent. It is based on more than $1 trillion in cleared marketplace transactions. This is in contrast to the index it has replaced, the London Interbank Offered Rate, better known as LIBOR. LIBOR was based on hypothetical short-term loan rates. This has historically made LIBOR less reliable and more vulnerable to insider manipulation.
When large financial institutions lend money to one another, they must adhere to reserve and liquidity requirements. They do this by using Treasury bond repurchase agreements, known as “repos”. Using repo agreements, banks are able to make overnight loans with Treasurys as collateral.
The SOFR interest rate index is made up of the weighted averages of the interest rates used in real, finalized repo transactions. Every morning, the New York Federal Reserve Bank publishes the SOFR rate it has calculated for repo transactions on the previous business day.
Current SOFR Rates
The New York Federal Reserve publishes the SOFR rate every business day. The latest rate is:
4.30% on July 24, 2025
The History of SOFR
Financial institutions, banks, and lenders rely on certain indexes to determine interest rates. Before the 1980s, there wasn’t one particular index that was used internationally. However, during the 1980s, increased complexity in the market resulted in the need for more standardized use of a benchmark tool for determining adjustable rates.
The international financial industry adopted LIBOR as the standard because it was viewed as a trusted, accurate, and reliable index. Other indexes were still used, but the majority of institutions used LIBOR. LIBOR rates were once the basis for about $300 trillion in assets around the world.
Fast forward to around 2008, and certain large financial institutions were manipulating interest rates illegally in order to increase their profits. This was possible in part because LIBOR is based on hypothetical rates. Manipulation of rates was one factor that led to the financial crisis.
Once that manipulation was discovered, there was a global demand for a new rate benchmark and a call to end the use of LIBOR. As a result of the 2008 financial crisis, banking regulations led to less borrowing and a lessening of trading activity. Less trading made LIBOR even less reliable.
In 2017, the Federal Reserve formed a group of large financial institutions known as the Alternative Reference Rate Committee (ARRC) to work on finding an alternative to LIBOR. They ultimately chose SOFR.
Both LIBOR and SOFR were being used by banks and lenders until June 2023, when SOFR became the standard in the U.S.
How SOFR Is Different From LIBOR
There are some key differences between SOFR and LIBOR, which help explain the shift towards SOFR and away from LIBOR. Here’s a look at some of the biggest.
• SOFR is based on completed transactions, whereas LIBOR is based on the rates that financial institutions said they would offer each other for short-term loans. Because it’s based on hypotheticals, LIBOR is more vulnerable to manipulation.
• Lending based on LIBOR doesn’t use collateral, making it unsecured. Loans using LIBOR include a premium due to credit risk. SOFR, on the other hand, is secured, as it is based on transactions backed with Treasurys. Therefore, there is no premium included in the interest rates.
• SOFR is a daily (overnight) rate, while LIBOR has seven variable rates.
There has been some concern that the shift away from LIBOR would cause great market disruption. However, the changeover was designed to be slow and gradual and, generally, hasn’t caused any sudden changes for borrowers.
In fact, if you have a private student loan with a fixed-rate, the change from LIBOR to SOFR has not — and will not — have any impact on your loan, since the rate is fixed for the life of the loan. If you are entering into a new loan, SOFR rates are already being used. Keep in mind, though, that only private student loans use SOFR, as federal student loans have fixed rates set by law.
If you have a student loan (or any other type of loan) with a variable rate, the shift from LIBOR to SOFR may have impacted your loan — but likely not in any noticeable way. Switching from one index (LIBOR) to a largely similar index (SOFR) — in the absence of any other market changes — won’t have much impact on a loan’s interest rate, according to the Consumer Financial Protection Bureau.
The rate on an adjustable-rate loan can go up and down over time. These changes, however, are largely due to general ups and downs in interest rates across the economy. Loan rates have been going up across the board, but that is not due to the shift from LIBOR to SOFR. Rather, it’s the result of efforts by the Federal Reserve to tamp down inflation.
If you have a private student loan, you may have received a notice from your lender or servicer about a change in the index rate for your loan. Instead of LIBOR, lenders in the U.S. are now using SOFR. The indexes work in a similar way and it should not have a major impact on your loan. If you’re in the market for a new loan, you won’t be affected by the switch, since U.S. lenders have already made the shift to SOFR.
Keep in mind, though, that interest rates on loans are based on numerous factors, including general market conditions and your qualifications as a borrower.
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FAQ
What is the secured overnight financing rate?
The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate based on overnight repurchase agreements (repos) collateralized by U.S. Treasury securities. It reflects the cost of borrowing cash overnight in the repo market.
What is a 30-day SOFR?
The 30-day SOFR is the average of the daily Secured Overnight Financing Rates (SOFR) over a 30-day period. It provides a measure of the cost of borrowing cash secured by U.S. Treasury securities over a month.
Is SOFR a risk-free rate?
SOFR is considered a nearly risk-free rate because it is based on transactions in the highly liquid U.S. Treasury repo market. However, it is not entirely risk-free, as it can be affected by market conditions and liquidity constraints.
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Averaging down stocks is when an investor buys more shares of a stock they already own after that stock has lost value — and essentially buys more of the same stock at a discount. In effect, the averaging-down strategy is a way of lowering the average cost of a stock you already own.
It’s similar to dollar-cost averaging, where you invest the same amount of money in the same securities at steady intervals, regardless of whether the prices are rising or falling, thereby lowering your average cost basis over time.
While this strategy has a potential upside — if the stock price rises again — it can expose investors to greater risk if the price continues to decline.
Key Points
• To average down, an investor buys additional shares of a stock they already own, after the price has declined.
• Averaging down is a way to lower the average per-share cost of a position, potentially setting the investor up for bigger gains, assuming the stock rebounds.
• The advantage of the averaging down strategy is the potential for gains, if the stock prices rises again.
• If the stock price continues to fall, however, the investor would face larger losses.
• Averaging down is similar to dollar-cost averaging, which involves investing the same dollar amount on a steady basis, which can lower the average cost per share in a portfolio.
What Is Averaging Down?
By using the strategy of averaging down and purchasing more of the same stock at a lower price, the investor lowers the average price (or cost basis) for all the shares of that stock in their portfolio.
So if you buy 100 shares at one price, and the price drops 10%, for example, and you decide to buy 100 more shares at the lower price, the average cost of all 200 shares is now lower.
Example of Averaging Down
Consider this example: Imagine you’ve purchased 100 shares of stock for $70 per share ($7,000 total) by investing online or through a broker. Then, the value of the stock falls to $35 per share, a 50% drop.
To average down, you’d purchase 100 shares of the same stock at $35 per share ($3,500). Now, you’d own 200 shares for a total investment of $10,500. This creates an average purchase price of $52.50 per share.
Potential of Gain Averaging Down
If the stock price then jumps to $80 per share, your position would be worth $16,000, a $5,500 gain on your initial investment of $10,500.
In this case, averaging down helped boost your average return. If you’d simply bought 200 shares at the initial price of $70 ($14,000), you’d only see a gain of $2,000.
Potential Risk of Averaging Down
As with any strategy, there’s risk in averaging down. If, after averaging down, the price of the stock goes up, then your decision to buy more of that stock at a lower price would have been a good one. But if the stock continues its downward price trajectory, it would mean you just doubled down on a losing investment.
While averaging down can be successful for long-term investors as part of a buy-and-hold strategy, it can be hard for inexperienced investors to discern the difference between a dip and a true price decline.
Why Average Down on Stock
Some investors may use averaging down stocks as part of other strategies when trading stocks.
1. Value Investing
Value investing is a style of investing that focuses on finding stocks that are trading at a “good value” — in other words, value stocks are typically underpriced. By averaging down, an investor buys more of a stock that they like, at a discount.
But in some cases, a stock may appear undervalued when it’s not. This can lead investors who may not understand how to value stocks into something called a value trap. A value trap is when a company has been trading at low valuation metrics (e.g. the P/E ratio or price-to-book value) for some time, and is not likely to rise.
While it may seem like a bargain, if it’s not a true value proposition the price is likely to decline further.
2. Dollar-Cost Averaging
For some investors, averaging down can be a way to get more money into the market. This is a similar philosophy to the strategy known as dollar-cost averaging, as noted above, where the idea is to invest steadily regardless of whether the market is down or up, to reap the long-term average gains.
3. Loss Mitigation
Some investors turn to the averaging down strategy to help dig out of the very hole that the lower price has put them into. That’s because a stock that has lost value has to grow proportionally more than it fell in order to get back to where it started. Again, an example will help:
Let’s say you purchase 100 shares at $75 per share, and the stock drops to $50, that’s a 33% loss. In order to regain that lost value, however, the stock needs to increase by 50% (from $50 to $75) before you can see a profit.
Averaging down can change the math here. If the stock drops to $50 and you buy another 100 shares, the price only needs to increase by 25% to $62.50 for the position to become profitable.
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Pros and Cons of Averaging Down
As you can see, averaging down stocks is not a black-and-white strategy; it requires some skill and the ability to weigh the advantages and disadvantages of each situation.
Pros of Averaging Down
The primary benefit to averaging down is that an investor can buy more of a stock that they want to own anyway, at a better price than they paid previously — with the potential for gains.
Whether to average down should as much be a decision about the desire to own a stock over the long-term as it is about the recent price movement. After all, recent price changes are only one part of analyzing a stock.
If the investor feels committed to the company’s growth and believes that its stock will continue to do well over longer periods, that could justify the purchase. And, if the stock in question ultimately turns positive and enjoys solid growth over time, then the strategy will have been a success.
Cons of Averaging Down
The averaging-down strategy requires an investor to buy a stock that is, at the moment, losing value. And it is always possible that this fall is not temporary — and is actually the beginning of a larger decline in the company and/or its stock price. In this scenario, an investor who averages down may have just increased their holding in a losing investment.
Price change alone should not be an investor’s only indication to buy more of any stock. An investor with plans to average down should research the cause of the decline before buying — and even with careful research, projecting the trajectory of a stock can be difficult and potentially risky.
Another potential downside is that the averaging down strategy adds to one particular position, and therefore can affect your asset allocation. It’s always wise to consider the implications of any shift in your portfolio’s allocation, as being overweight in a certain asset class could expose you to greater risk of loss.
Tips for Averaging Down on Stock
If you are going to average down on a stock you own, be sure to take a few preparatory steps.
• Have an exit strategy. While it may be to your benefit to buy the dip, you want to set a limit should the price continue to fall.
• Do your research. In order to understand whether a stock’s price drop is really an opportunity, you may need to understand more about the company’s fundamentals.
• Keep an eye on the market. Market conditions can impact stock price as well, so it’s wise to know what factors are at play here.
The Takeaway
Simply put, averaging down is a strategy where an investor buys more of a stock they already own after the stock has lost value, in order to lower the average cost basis of that position.
The idea is that by buying a stock you own (and like) at a discount, you lower the average purchase price of your position as a whole, and set yourself up for gains if the price should increase. Of course, it can be quite tricky to predict whether a stock price has simply taken a dip or is on a downward trajectory — so there are risks to the averaging down strategy for this reason.
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FAQ
Is averaging down a good idea?
It depends on the stock in question. Averaging down can be a good idea when the investor has done their due diligence, and believes they can buy at the lower price and the stock is likely to rebound. Otherwise, averaging down can put the investor at a risk of further losses.
What is an alternative to averaging down?
One alternative is to sell the stock you have, rather than add to the position. This has the potential advantage of freeing up funds to invest in another stock or security. Another option is to do nothing, observe how the stock behaves, and use that to inform later decisions.
When does averaging down not work?
When the stock price doesn’t rise. So, if an investor sees that shares of a stock they own are dropping, they could attempt to average down by buying more shares of that stock. But if the stock continues to decline in value, they will see bigger losses.
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.
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.
[cd_dca] 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.
