The Threat From Within

2025 has been filled with twists and turns. From trade policy uncertainty to major tax reforms to the ongoing dominance of artificial intelligence, there has been a lot to digest. But complex and sometimes confusing backdrops create a fertile ground for investment mistakes.

When investing over the long-term, the most significant threat often comes from within. Most investors aren’t robots (though even that has been changing these days), which means that behavioral biases inevitably come into the fray. This can contribute to investors making the wrong decisions at precisely the wrong moments.

In a market increasingly dominated by animal spirits, it’s a good time to check ourselves before we wreck ourselves.

Recency Bias

Recency bias causes individuals to weigh recent events more heavily than historical data when making judgments and decisions. In investing, this manifests as the tendency to believe that recent market trends, whether positive or negative, will continue indefinitely into the future. This bias can be particularly potent — our freshest memories are usually the most vivid — and so they seem the most relevant.

However, this can lead investors to abandon longer-term strategies in favor of chasing hot trends or abandoning underperforming stocks. This year has provided a textbook example of the conditions that foster recency bias. As we discussed last week, the first half of 2025 disrupted the nearly two decades of “U.S. exceptionalism” in stocks, as a dramatic reversal saw the dollar depreciate significantly and international markets surge.

US vs. International Stocks

Here’s where the behavioral trap of recency bias snaps shut. After more than a decade of the U.S. market (particularly tech stocks) being rewarded for being overweight, investors are now confronting the possibility of a new market regime. In response, the psychological pull can be to over-rotate, chasing returns in international markets by selling U.S. assets.

Implicit in that decision is the assumption that what we saw in the first half of 2025 is a sign of things to come. Yet as July has shown, that’s not guaranteed. Relative performance has been mixed between regions.

Of course, the pitfalls of recency bias don’t mean that international is not going to outperform. It just means that things are more complicated than that and a decision to invest (or not) in international stocks should be based on more than a glance at year-to-date returns.

Speculative Fervor

Market pessimism from earlier this year has given way to optimism, and in some pockets, outright euphoria. With the transition has come a resurgence of speculative fervor reminiscent of the meme stock mania of 2021. It’s a classic example of the Fear of Missing Out (FOMO), which in investing usually means missing out on a rapidly appreciating stock. It sometimes leads to impulsive decisions to buy after a significant price run-up.

That doesn’t mean every decision to buy a stock after major gains is driven by FOMO. A company’s stock price surging because of a gangbusters quarter and an announcement of promising innovations would be different (and likely more sustainable) than a sudden surge due to a short squeeze. The former is generally driven by rational analysis, while the latter by the promise of immediate gains or the pain of regret.

Some telltale signs of these dynamics have been on display over the last week or so, with a new batch of meme stocks emerging. For example, Kohl’s (KSS), Opendoor Technologies (OPEN), Krispy Kreme (DNUT), GoPro (GPRO), and Beyond Meat (BYND) have seen major volatility this week, with the stocks experiencing 20-30 percent intraday price swings and trading volumes surging to over 22 times the norm.

Daily Trading Volumes Relative to H1 2025

Always Lurking

Perhaps the most common behavioral tendency investors deal with is loss aversion. This deep-seated psychological bias is particularly salient during periods of high volatility and uncertainty.

Loss aversion is a cornerstone concept of behavioral finance. It refers to the tendency people have to feel the pain of a loss more intensely than the pleasure derived from an equivalent gain (e.g. if your net worth is a million dollars, losing a million dollars would likely be far worse than winning a million dollars). This asymmetry means that investors are often more motivated by the desire to avoid a loss than they are by the prospect of making a gain.

There are many different facets to loss aversion, but the current environment of scary headlines, reemerging inflation fears, and market volatility can trigger its destructive aspects. One such example is panic selling, when investors get scared and indiscriminately sell their holdings during a drawdown or emergence of negative news. The sell-off following the April 2025 tariff announcements serves as a recent example of this. The S&P 500 fell sharply as investors reacted to the new uncertainty, with many selling first and asking questions later.

With the S&P 500 now near a record high, one would think that investor bullishness would be back to where it was early in the year. We can proxy for this by looking at dealer positioning in S&P 500 futures, which is updated weekly. Basically, because dealers generally position themselves on the opposite side of investors (in order to maintain overall neutral exposure), we can get an idea of how investors feel. The latest data shows that dealer positioning has gotten less negative since March and is the least negative since early 2024, which means that investors have gotten more negative.

Dealer Positioning in S&P 500 Futures

While panic selling is one way loss aversion can manifest, another is through a phenomenon called the disposition effect. As we discussed last year, this is the tendency for investors to sell their winning investments too early while holding on to their losing investments for too long. The reluctance to sell a losing asset is a direct consequence of loss aversion; selling would mean “realizing” a loss, which is psychologically painful and forces the investor to admit they made a mistake.

In today’s market, with its stark divergence between a few high-flying stocks and many laggards, the temptation to lock in gains on winners prematurely or hold on to losers in the hope they will “get back to even” is particularly strong. This behavior can trap capital in underperforming assets and prevent investors from letting their successful investments compound over the long term.

Think, Then React

The market will always present new narratives, new uncertainties, and new temptations. Succeeding as an investor over the long term isn’t about being able to predict the future, though that would definitely help. We can’t fully rid ourselves of the emotions that seep into the investment process — we’re human after all — but by understanding our biases and having a plan, we can manage them more effectively.

Want more insights from SoFi’s Investment Strategy team? The Important Part: Investing With Liz Thomas, a podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.

SoFi can’t guarantee future financial performance, and past performance is no indication of future success. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Mario Ismailanji is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Form ADV 2A is available at www.sofi.com/legal/adv.

It’s a question as old as financial markets: How safe should we play it? How much money should we hold in cash vs. invest in stocks, bonds, or other assets?

All investments come with risk. Returns are never guaranteed and there’s always a chance you’ll come out with less than you started with. For this reason, people who are more risk-averse might be inclined to hold on to most of their extra cash.

The thing is, there are also risks to not investing enough: You can miss opportunities to grow your wealth. Not to mention that money tends to lose value over time (thanks, inflation.)

“One important thing to understand about investing is the tradeoff between risk and reward: You cannot have one without the other,” said Brian Walsh, a Certified Financial Planner® and SoFi’s Head of Advice & Planning.

Unfortunately, there is no magic ratio of cash vs. investments that fits for every situation. It’s a balancing act, and depends on many factors, including your appetite for risk, your current financial situation, your goals, and how long you’re planning to be invested. Here are some key things to consider when deciding how to allocate your money.

First thing’s first: How much cash do you need?

When we say holding cash, we’re not just talking about the bills stuffed in your wallet. We’re talking about everything you have in your checking, savings, and money market accounts, plus what are known as cash equivalents — typically defined as assets that mature in under 90 days and are readily convertible to known cash values (think: short-term CDs and Treasury bills).

Financial advisors generally recommend having enough liquid cash saved to cover three to six months’ worth of living expenses. (If you generally spend $5,000/month, you would have between $15,000 and $30,000 to fall back on in case of a job loss, major medical expense, or other financial setback.) And keeping that money in an interest-bearing vehicle like a high-yield savings account can help you keep up with inflation (SoFi’s has an APY of up to 3.8%).

If you don’t have a financial buffer — or if you’re stretching just to pay for your necessities each month — you may not have the money to spare for investing right now.

But if you have enough to invest, how much should you invest?

Some advisors recommend keeping between 2% and 10% of your portfolio in cash and equivalents.

Another rule of thumb is the rule of 110, where you subtract your age from 110 to gauge how much of your money you should keep in stocks. So if you are 35, you’d keep 75% of your investible assets in stocks — the rest could be in bonds or cash. (Depending on your risk tolerance, the rule can be varied with a starting number of 120 or 100).

Of course, it may make sense to hold higher levels of cash under certain circumstances. Maybe your income isn’t steady or you’re planning a big purchase in the next few years (like a house or college tuition.)

Why invest at all? Let’s talk about opportunity cost

When you give up a potential benefit by choosing one option over another, it’s known as opportunity cost. While holding on to all your cash can shield you from volatility, the opportunity cost is any upside you might get from investing it.

People talk about the opportunity cost of not investing in the U.S. stock market because despite its ups and downs — especially in recent months — the benchmark S&P 500 index has trended up over time.

The average annualized return is about 10% per year, or 6% to 7% after inflation (not accounting for fees, expenses, and taxes). Annual returns often vary widely, and the historical average is not a reliable indicator for a specific year, but long-term investing is based on the idea that you’re probably better off staying in the market.

Of course, past performance is never a guarantee of future returns, and that’s all part of the risk-reward equation.

“Stock market investing can be more appropriate for big goals in the distant future, such as saving for a child’s education or your own retirement,” said Walsh. “A longer time horizon not only gives your investments a chance to grow but a chance to ride out market downturns that may occur along the way.”

Determining your asset allocation: Factors to weigh

Risk Tolerance (and Capacity)

There are two facets of risk-taking: your willingness (tolerance,) and your ability (capacity.) Someone with enough savings to cover two years’ worth of living expenses may not want to invest any of it even if they’re a good candidate. Likewise, even if someone feels comfortable investing all their emergency savings, that doesn’t mean they should.

When it comes to tolerance, research shows that women are inclined to be more risk-averse with their money than men, but when they do invest they tend to outperform men.

The bottom line: In addition to tolerance, you should consider how much risk you are realistically able to accept.

Time Horizon

Your investment horizon — the length of time you plan to hold an investment before you need to sell it — is another factor to consider.

If you plan to retire and cash out your 401(k) soon, you have a shorter investment time horizon and a lower risk capacity for the volatility of the market. In this scenario, you might adjust your portfolio to have a higher ratio of lower-risk holdings.

On the other hand, if you’re not retiring for 30-plus years, you have a longer horizon and therefore better odds of weathering the ups-and-downs of the market.

“Because higher-risk assets can go through periods of significant downside, they are generally only recommended for money that you won’t need for awhile,” said Walsh.

“Time can either be your best friend or worst enemy. Make it your best friend by investing early so your money has more time to grow.”

Financial Goals

A lot depends on where you are in your life, too. If you’re planning on making your first big college tuition payment soon or throwing a wedding, you might feel more comfortable keeping more of your money in cash to reduce the risk of losses.

But if you’re saving to buy a house someday, you might get your down payment faster if you invest some of your money.

Economic Environment

There are also external factors to consider.

For example, you might feel more comfortable holding higher levels of cash when interest rates are high because that’s when you can generally earn higher returns from things like a high-yield savings account or T-bonds. This shifts the opportunity cost, increasing the relative attractiveness of cash equivalents versus riskier assets like stocks.

When interest rates are low, however, the opposite may be true. After the Fed slashed its benchmark rate to virtually zero in 2020, for instance, the interest you could earn on cash was negligible while stocks soared.

The question of asset allocation can feel daunting, but considering how these different factors apply to you can help you feel more confident in your decisions. And it’s not a one-and-doner: You’ll want to reassess your mix of cash versus investments as your financial situation and goals shift.

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn't recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

OTM2025072301

Only two-plus years after a major push toward broad-based loan forgiveness and borrower subsidies, much of the federal student loan system is being redrawn again.

Whether you already have student loans, plan to borrow money, or haven’t yet contemplated how to pay for college, the reforms passed as part of the recent government budget bill could significantly change things for you and your family.

“The budget bill will affect the entire federal student loan program, from borrowing to repaying,” said Erica Sandberg, a debt expert at the personal finance site BadCredit.org.

Here’s what’s changed, why it’s significant, and what you may want to do differently now:

There will be no more blank checks.

Federal loan limits will no longer be based on how much it costs to attend college, meaning borrowers won’t necessarily be able to rely on federal loans to meet all their financing needs. Beginning in the 2026-27 school year, parents can borrow up to $20,000 a year and $65,000 in total per child. Graduate students can borrow up to $20,500 per year (and $100,000 in total) unless they’re pursuing a “professional” degree in a field like law or medicine. Then the cap will be $50,000 per year and $200,000 in total. Annual limits for undergraduates won’t change, but for all students, there will be a lifetime borrowing maximum of $257,500.

So what? Medical school costs an average of $238,420 and law school, an average of $217,480, according to the Education Data Initiative. If the cost of tuition doesn’t come down, borrowers unable to cover the full cost of an advanced degree with federal loans will have to look elsewhere to bridge the funding gap.

What to do:

•   If you’ve got parent or graduate student loans now, don’t worry: The old rules will still apply during the upcoming 2025-2026 school year — and to people with existing loans.

•   But if you’re thinking of graduate school, a private student loan could help fill the void as federal Grad PLUS loans are eliminated. For borrowers who qualify (and have a FICO credit score of at least 740,) SoFi is offering an alternative with no pre-set borrowing limit and a lower interest rate than Grad PLUS offers. Plus, you won’t have to pay the origination fee that’s standard with federal loans.

•   If you have a child who will be going to college in the next few years, consider the federal student loan changes when you’re comparing the cost of different schools. And remember that your child can take out loans, too (parent loans often serve as a supplement to student loans.)

There will be no more $0 payments and SAVE is going away.

The system for calculating payments based on income will change significantly. Over the next three years the government will phase out a number of income-driven repayment options, including the newest and most affordable one, the SAVE plan — which was already facing major legal challenges. These will be replaced with a single new option called the Repayment Assistance Plan (RAP).

Under the new RAP formula, borrowers will pay up to 10% of their adjusted-gross income each month, with the amount increasing 1 percentage point for every $10,000 in income they earn. It will require everyone to pay at least $10 a month (no one will qualify for $0 payments anymore) and make 30 years of payments — rather than 20 or 25 — before any remaining balance can be forgiven.

Regular payment plans (where the monthly bill is based on how long you borrow the money) will also change. Rather than a standard 10-year option, the length of the loan will be based on the amount you borrow (10 years for under $25,000, 15 years for $25,000-$50,000, etc., up to 25 years for $100,000 or more.)

So what? The rules around repaying federal student loans are generally getting more strict. Depending on the circumstance, monthly payments could be higher in the future, and it will be harder to get remaining loan balances forgiven.

What to do: If you’re one of the 7.7 million people on the SAVE plan, start comparing your other options. You can either move to the Income-Based Repayment plan (IBR) — which will remain an option for current borrowers — or RAP, which isn’t available yet. To see how your payments would change, here’s a new RAP calculator from The College Investor and a side-by-side comparison of RAP vs. IBR.

If you’re not a borrower yet, “it will be as important as ever to only borrow the amount you can reasonably repay,” said Sandberg. “Student loans can be enormous and the balance due will fall in your lap sooner than you think.”

It will be harder to get leniency on your loan payments.

Borrowers taking out loans on July 1, 2027 or later won’t be eligible for deferment or forbearance (a temporary reduction or waiver in your monthly payment) due to unemployment or economic hardship. And general forbearance can only be used for nine months within a 24-month period.

So what? Borrowers who fall on hard times will have fewer relief options in the future. But income-driven repayment will be available through RAP, and loan consolidation and refinancing will remain options worth exploring.

What to do: These changes, which don’t affect current borrowers, are yet another reason to take borrowing for college very seriously. If you haven’t decided where to attend, weigh the debt burden of each program against the potential benefits. And make sure to consider any student loan payments when building your emergency savings buffer.

Related Reading

How Will Your Student Loan Payment Change With the Repayment Assistance Plan (RAP)? (Saving for College)

Big Beautiful Bill Student Loan Changes 2025: What Borrowers Need to Know (Tate Law)

Big Bill Means Big Changes For Student Loan Borrowers: What You Need to Know (Student Loan Borrower Assistance)

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn't recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

OTM20250723SW

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