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After three years of relative inaction, shares of GameStop, the video game retailer, surged in May 2024 after an influential trader posted to social media for the first time in several years. Roaring Kitty, the online moniker of Keith Gill, whose own posts about GameStop helped inspire the meme-stock movement of 2021, posted an image of a man leaning forward, a popular meme among gamers signifying “things are getting serious.”

Since then, the retailer’s stock price has rallied, renewing interest in GameStop as well as a number of other so-called “meme stocks,” including AMC, Koss Corp., and BlackBerry. Gill’s profile initially rose in 2021 in the midst of day traders organizing on Reddit to “squeeze” GameStop short sellers.

A short squeeze is an orchestrated effort to drive up shares of a stock that’s being shorted. In this highly risky maneuver, short sellers are essentially forced to try to exit their bearish position quickly in order to minimize losses amidst the dramatic surge in the share price. Read on to learn everything you need to know about short squeezes.

Key Points

•   A short squeeze may occur when short sellers rapidly close their positions, which can help drive up a stock’s price.

•   This typically follows a sudden increase in a stock’s price, prompting a rush among those shorting the stock to “cover” or close their position.

•   Short sellers buying back shares to close their positions further drives up the stock price.

•   Benefits of investing in REITs include tax advantages, tangibility of assets, and relative liquidity compared to owning physical properties.

•   Short selling poses extreme risks, with the potential for dramatic — and potentially unlimited — osses.

What Is a Short Squeeze?

As mentioned, a short squeeze is an event in the market that involves short sellers having to quickly close out their positions. Because these investors have to actually buy back shares they’ve lent out, this may drive dramatic gains in the share price.

There are many investors, both retail and institutional, who use short selling to bet that a given stock will go down over a fixed period of time. But short selling is incredibly risky as stock prices have historically tended to drift upward. And timing a bearish position can also be picky. Even if an investor has good reason to believe that a company’s shares will fall, it could be some time before they actually do.

What Causes Short Squeezes?

To understand how short squeezes occur, we first have to understand how shorting a stock works. To sell a stock short, an investor must first borrow the shares. They then consequently sell in the open market. At an agreed-upon time, the investor will buy back the shares in order to return them to the original lender.

If the stock goes down between the time they borrow the stock and when they return it the investor makes money. That’s because they pocket the difference between what they sold the stock for and what they purchased it for when it came time to return it.

And if those short investors borrow a stock that goes up instead of down, they lose money.

Example of Short Selling

Let’s look at a hypothetical case of a short sale. Let’s say an investor borrows a stock that’s trading at $10 with an agreement to pay back the shares in 90 days.

The investor then sells the stock for $10. Then 90 days later, if the stock is trading at $5, they can buy back the number of shares they borrowed and return them to the lender, capturing the $5 per share profit (often minus interest and fees).

Example of Short Squeeze

Now, let’s use this example to look at a short squeeze. Let’s say the investor borrows the stock again that’s trading at $10 with an agreement to pay back the shares in 90 days.

This time however, the share price shoots up to $15. The investor still has to buy the shares they borrowed and return them to the lender. But other investors are also trying to cover their shorts as well, so there’s a shortage of shares in the market to buy back.

The shortage causes the stock’s price to jump even higher to $20, which in turn triggers other short sellers to close their positions. They have to now also purchase back shares, and hence a buying frenzy and short squeeze occurs.

Theoretically, there’s no limit to how much money short sellers can lose. When an investor is long a stock but wrong, the share prices can only go down as low as $0. But when an investor is short and wrong, the share prices can go infinitely higher, making it possible losses can be limitless for the short-selling investor.

Recommended: How Low Can a Stock Go?

Famous Short Squeezes

One famous example of a short squeeze was that of GameStop, which first occurred in 2021, when electronics retailer GameStop saw its shares jump more than 1,000% in a few weeks as a wide range of investors looked to take advantage of the high number of short sellers in the stock. This was perhaps one of the most well-known “meme stock phenomena” that overtook the market that year, but it wasn’t the only one. Shares of AMC, Bed Bath & Beyond, Koss Corp., and other company’s stocks spiked upward during the meme-stock frenzy that year.

Another example occurred in 2008, when automaker Volkswagen briefly became the world’s most valuable stock by market cap when it became known that Porsche was increasing its stake in its fellow German carmaker.

What’s a Long Squeeze?

By contrast, a long squeeze is when short sellers drive down the price of a stock or asset until the bullish investors begin to sell their positions in response, driving the price lower still. It can be helpful to review short positions vs long positions to get a deeper understanding of a long squeeze.

💡 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 Was the MOASS?

The “MOASS” is an acronym for the “Mother of all short squeezes.” And it’s more or less exactly what it sounds like: A monstrous short squeeze event in the market.

The short squeeze involving GameStop shares in 2021 is perhaps the best and most recent example of a MOASS, though companies such as AMC and Koss Corp., mentioned above, experienced similar phenomena at the time. Many institutional investors had shorted GameStop stock, anticipating that its value would fall, but groups of day traders worked together to drive up demand of the stock, and its value. This “squeezed” the short sellers, and caused many big firms to lose significant amounts of money on their positions.

How to Trade a Short Squeeze

Given the chance for dramatic returns, many investors have taken an interest in getting in on the winning side of a short squeeze.

To invest in a short squeeze, traders start by surveying the markets for stocks that have garnered substantial interest from short sellers. This factor is often called “short interest,” and as a metric, it represents the number of a company’s shares that have been sold short, but not yet returned to the lender. Traders know that the short sellers of all those shares will have to buy back shares — at any price — to return them to the lender.

There are two ways to understand short interest. One is short interest percentage, which shows how many of a company’s overall shares are currently shorted. A higher number means that more short sellers will be bidding up the stock to buy it back. The second metric is short interest ratio, which shows how much short sellers are responsible for a stock’s daily trading volume. A higher ratio means it’s likely that short sellers will help drive up the stock’s price once it starts to rise.

Another key metric has to do with when the short sellers will have to deliver those shares to the lender. It’s known as “days to cover,” and it’s the ratio comparing the total short-selling interest in a stock with the average daily shares that trade. As a metric, it gives traders a sense of how long until short sellers buy back the stocks they borrowed for their short positions.

Stocks with a high short-interest number and a high days-to-cover number are vulnerable to a short squeeze. Once these traders find stocks that seem like short-squeeze candidates, they buy the stocks outright, and watch those key metrics, along with the news, to decide when to sell. Short squeezes can make a stock shoot up, but those returns often evaporate quickly.

Short Squeezes vs Naked Shorts

As discussed, shorting typically involves borrowing shares to create tenable positions. Naked shorts, often involving naked options, are a type of short selling, but it involves not borrowing, or otherwise securing possession of, shares before making a trade or taking a short position. This leaves the trader “naked” in the event that a trade goes south.

Risks of a Short Squeeze

While short squeeze investments can produce eye-popping returns in the short term, they come with real risks for individual investors, and institutions.

Risks for Investors

For investors, perhaps the biggest risk of a short squeeze is that they’ll get caught on the wrong side of one, and lose some money. Obviously, that’s a risk for institutions as well, but individual investors likely don’t have as many resources on hand to try and recover.

Similarly, investors may misread the room — that is, not quite understand what’s happening in the market, and misjudge their position. They’ll also need to be vigilant in watching their positions to make sure they change those positions at the right time.

Risks for Institutions

Most of the risks involved with short squeezes for individual investors hold true for institutions, too.

For instance, the risks involved with stocks themselves include the fact that stocks with a high short-interest number may be undervalued or misunderstood, or they may simply be failing businesses. And if there is no good news, or market interest, they may continue to sink.

At the same time, the price increases caused by short squeezes are short-lived. Once the short-sellers have paid back their lenders, the market runs out of buyers who will pay any price for that stock. And the share prices often fall as quickly as they rose. The danger to traders in a short squeeze is that they’ll get in too late and stay in too long and lose money.

Long-term investors may try their hands at winning a short-squeeze trade here and there. But it requires deep research, constant monitoring and the ability to move in and out of a stock quickly — something that institutions may have access to more so than individuals.

Investing With SoFi

A short squeeze is a market event in which investors inadvertently bid up the price of a heavily shorted stock, while trying to get out of their bearish positions. In order to buy the stocks that investors borrow to sell short, those investors must buy the stock at ever-increasing values.

Short squeezes involving short positions and financial derivatives are relatively high-level concepts and may involve a skilled hand in navigating. For that reason, it may be worth discussing them, and their risks, with a financial professional.

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).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Are short squeezes legal?

Short squeezes are a natural occurrence in the stock market, but market manipulation is illegal. As the SEC says, “abusive short sale practices are illegal,” and that may play into short squeezes. As such, it’s a gray area.

What is the biggest short squeeze of all time?

While the Volkswagen short squeeze in 2008 was one of the largest of all time, the 2021 short squeezes of GameStop, along with AMC, Koss, and others, were, perhaps, some of the most dramatic and notable short squeezes in history.

How high can a short squeeze go?

Theoretically, there is no limit on how high a stock can go, and accordingly, how high a short squeeze can go.

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Apache is functioning normally

In the hustle and bustle of everyday life, our backyards often become neglected spaces, relegated to a mere patch of grass or an unused corner. Whether you’re decorating your quaint Twin Cities apartment backyard or renovating your Madison, WI, home’s overwhelming green space, with a little creativity and effort, your backyard can be transformed into a serene outdoor oasis — a place where you can relax, entertain, and connect with nature.

Important note for renters: Before making any landscaping or permanent changes to your backyard, please review your lease terms and verify any plans with your landlord.

Turning your backyard into an outdoor oasis

When warm weather arrives, a backyard is not merely an extension of your home but a sanctuary — an extension of your living space that reconnects you with nature’s beauty. Once you’ve embraced this vision, we can dive into the practical steps to turn your dream oasis into a reality.

1. Think big picture when imagining backyard design ideas

It’s essential to begin this process by identifying how you want to use the space. Do you envision it as a cozy retreat for reading and relaxation, a vibrant hub for social gatherings, or a combination of both? Understanding your needs and preferences will guide the design process and ensure that your backyard oasis reflects your lifestyle.

Dorina Williams, founder of Savvy in the Kitchen, recommends creating separate zones within your backyard to accommodate various activities. “By creating different zones for different activities you can split the backyard into separate sections depending on different things you like doing,” Williams notes. “This may range from an outdoor dining spot to a lounge area where one can relax and even an entertainment place specifically meant for children or pets. Through this, you will add functionality, and your outdoor space looks organized with purpose behind it.”

Dorina also recommends considering an outdoor kitchen when planning your backyard makeover. “You can easily transition from indoor to outdoor living [with an outdoor kitchen]. Making margarita pizza in an outdoor pizza oven, grilling delicious steaks, or mixing up refreshing summer drinks al fresco, are all wonderful ways to entertain family and friends and create lasting memories.”

2. Embrace nature

Harness the beauty of nature by incorporating natural elements into your backyard design. Katie, owner of Cast Iron Idaho, urges those on a backyard designing journey to add more flowers. “You need more flowers, a lot more flowers,” Katie says.

“Try easy self-seeding annuals like poppies, hollyhocks, larkspur, amaranth, and clary sage which will increase in abundance each year in your garden. Support pollinators, plus your own backyard joy, by choosing varieties that bloom throughout spring, summer, and fall. For example, in my area [Intermountain West] penstemon, lupine, columbine, blanketflower, and sunflowers are good choices.”

Candace Godwin, with The Coeur d’Alene Coup, recommends incorporating vegetables to take your garden to the next level. “If your flowering patio pots are looking the same year after year, punch them up by adding a few veggie plants,” Godwin recommends. “It’s a fantastic way to add a variety of new shapes, colors, and textures to your flowering containers and maximize your vegetable garden’s yield.”

Godwin suggests choosing a variety of plants that bloom at different times of the year to ensure year-round interest and vibrancy in your outdoor space. “Select vegetable plants that complement the aesthetic and growth habits of your flowering plants. Similar to flowers, you can find “thrillers, spillers, and fillers” when it comes to vegetable plants. Consider your color palette as well, and choose vegetables or herbs with foliage that will harmonize with your flowers,” Godwin notes.

Garden-Mom suggests considering outdoor decor along with your planting plan, for the ultimate summer aesthetic. “The addition of structures to your backyard has a variety of benefits. Not only will it be eye-catching, but it will also provide a foundation for your plants to grow around,” Garden-Mom shares. “For example, morning glories wrapped around an arbor, a trellis for your clematis or climbing rose, a pergola to sunbathe under, a wall fountain with relaxing running water, or pedestals with urns of boxwoods or topiaries on them to create a Mediterranean feel; the options are endless.”

Garden-Mom also warns that with gardening comes potential wildlife. “Once your backyard ecosystem starts to thrive, you can find rabbits, birds, butterflies, and others wanting to call your backyard their home. For the wanted guest, you can purchase a black wrought iron shepherd hook to hang birdhouses, bird feeders, and hanging flower baskets. You could even add a birdbath. This will most definitely invite the songbirds and hummingbirds to come to your space for a visit,” Garden-Mom shares.

3. Incorporate lighting

Extend the enjoyment of your backyard oasis into the evening hours with strategic lighting. Tazim Damji, with Being Tazim, recommends leaning into lighting to set the tone of your backyard. “Lighting is the key to setting the mood, especially as the sun sets,” Damji shares. “Hang some lights across the patio or pergola to create a magical atmosphere, or place solar lanterns along your pathways for a whimsical touch. Arrange a few battery-powered candles near the seating area to cast a soothing glow after sunset, enhancing the relaxing ambiance of your outdoor space.”

Susan Brinson with House of Brinson, recommends paying attention to detail around lighting when thinking of backyard design ideas: “Lighting brings so much mood to an outdoor space, and with so many solar options available, the installation doesn’t have to be a big project,” Brinson notes. “Think of lighting in three zones: along the ground for paths, mid-level on tables, and above head for lighting like string lights. Lighting has an instant impact. Thoughtfully placed lighting will not only enhance the aesthetic appeal of your backyard but also ensure safety and functionality after dark.”

4. Don’t forget the personal touches

Infuse your personality into your backyard oasis by incorporating personal touches and decorative elements. Display outdoor artwork, sculptures, or pottery to reflect your style and incorporate elements that evoke fond memories or inspire creativity, such as a hammock for lazy summer afternoons or a cozy reading nook tucked away in a shaded corner. You can add colorful textiles like outdoor rugs, throw pillows, and curtains to inject even more personality and comfort into the space as well.

5. Avoid getting too carried away

While it’s tempting to go overboard with accessories and decorations, strive for balance and simplicity in your backyard design. Meredith Spidel, with The Mom of Year, recommends keeping decor and necessities readily available to maintain the wonderful sunshine vibes associated with summer. “Have an easily accessible storage spot for lawn games and outdoor toys. You don’t want this stuff cluttering your yard, but you DO want to use it,” Spidel shares.

“Plan ahead for summer entertaining with plastic dishware and serving ware as well. The goal of any outdoor space is to be well-used, and nothing is less user-friendly than worrying over broken glasses and plates. Invest in an affordable outside set, and thank yourself later.”

Your oasis awaits

Transforming your backyard into an outdoor oasis is a rewarding endeavor that can significantly enhance your quality of life and connection to nature. By following these backyard design ideas and tips from backyard enthusiasts, you can create a tranquil retreat where you can unwind, entertain, and recharge amidst the beauty of the outdoors.

Whether you have a sprawling lawn or a compact patio, there are endless possibilities for turning your backyard into a haven of relaxation and rejuvenation. Take the time to plan and design your backyard oasis with care, and you’ll reap the rewards for years to come.

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The average homeowner with a mortgage ended 2023 with $299,000 in home equity, according to ICE Mortgage Monitor, which also estimates that the average funds homeowners could tap by borrowing against their home equity is $193,000.

Obviously, that number varies for each individual and depends on factors such as the original down payment, local property values, and the amount of time in the home. But if you have more than 20% equity in your home, using a home equity line of credit (HELOC) to build wealth is a strategy to consider.

Ways to Build Wealth With a HELOC

A home equity line of credit lets you borrow funds as needed (up to a prearranged limit) through a credit draw. This is different from a home equity loan, in which you would borrow a one-time sum of cash. Drawing on your home equity for certain expenses could help grow your wealth over time, if it financially makes sense. Here are some options to consider.

1. Home Improvements

A HELOC works well for larger home improvement projects and renovations because you can draw funds to pay for materials and contractors as needed. You accrue interest only on the outstanding balance, so it could be cheaper to opt for a HELOC vs. a home equity loan. And if you itemize your taxes, you could deduct HELOC interest payments when the money is used to improve the home.

Plus, a renovation project could build wealth by increasing the value of your home. Home improvement experts estimate that a kitchen refresh could deliver a 377% return on investment and refinishing hardwood floors could have a 348% ROI.

2. Debt Consolidation

You can’t deduct HELOC interest when you use the funds to consolidate debt, but you could still build your wealth. Paying off debt with a lower interest rate could save you a lot of money over the long run. Let’s look at an example.

Say you qualify for a HELOC with an 8% APR but you have a $10,000 credit card balance with a 22% APR. In order to pay off that card in five years, you’d pay $276.19 per month and pay $6,571.35 in interest.

With the HELOC, on the other hand, let’s say you made interest-only payments for one year, then spread out the principal and remaining interest over four years, for a total of five years. During the interest-only period, your payment would be $66.67, followed by $244.13 for the remaining four years. On top of that, you’d only pay a total of $2,518.19 in interest for the entire five years. That’s a potential savings of $4,053.16 in interest payments by consolidating to a lower rate!

3. Real Estate Investments

Using a HELOC to finance an investment property can help you start climbing the real estate ladder. Homeowners could use the funds to make a down payment, cover closing costs, and/or make some upgrades before renting out the property.

You’ll still need to qualify for the new property’s monthly mortgage loan payments, particularly if there isn’t a current rental income history for the lender to review. Assuming you’re eligible for the loan, the goal is to use the rental income to pay off the HELOC and make a profit. On top of that, the property itself could increase in value over time, building your overall wealth.

4. Education and Skills Development

Investing your home equity in your education or skills development could increase your earning power and, consequently, your wealth. Research shows that people with advanced degrees tend to earn more than those without them.

For instance, a study published in Demography revealed that women with bachelor’s degrees earn $630,000 more in a lifetime than those with a high school degree. For men, the increase in lifetime earnings is $900,000. The numbers are even more dramatic with graduate degrees. Women’s lifetime earnings are $1.1 million higher than their high school graduate counterparts, whereas men earn $1.5 million more. Clearly, investing in your professional skills can translate into greater wealth.

5. Start or Expand a Business

The majority of small business owners invest their personal funds in the growth of their companies. Research also shows that upfront funding correlates with greater revenue. So while there’s no way to know that home equity financing you use for your business will guarantee success, it could improve your odds to scale more quickly.

6. Investment Portfolio Growth

Growing a diversified investment portfolio is another option for using a HELOC to build wealth. Obviously, there is risk involved when funding investments. Focusing on long-term investments could help reduce the risk of short-term market volatility. Remember, though, that for investments made with money from a HELOC to truly pay off, you would have to earn more on the investment than you pay in interest for the HELOC.

7. Emergency Fund or Cash Reserve

Most financial experts recommend having three to six month’s worth of savings on hand in cash in case you lose a job or the ability to earn an income. However, the economic volatility that came during the pandemic has people rethinking that number and even recommending up to a year of expenses in savings. Using a type of home equity loan like a HELOC could give you the peace of mind of having a financial cushion to fall back on, while allowing you to carefully invest that six months of savings instead of keeping it in cash.

Turn your home equity into cash with a HELOC brokered by SoFi.

Access up to 95% or $500k of your home’s equity to finance almost anything.

What to Consider Before Getting a HELOC

There are several factors to consider before you decide on a HELOC instead of some other type of financing, such as a cash-out refinance or unsecured personal line of credit.

•   Your home is used as collateral: In other words, if you default on your HELOC payments, you could lose your house.

•   You must maintain 10% to 20% equity in your home: You can’t tap into your entire equity amount; lenders require you to keep some, which means you may not be able to borrow as much as you originally thought.

•   Rates are usually variable: Your interest won’t stay the same and could increase if rates rise. That could mean a bigger balance and bigger payments down the road.

•   HELOCs have two stages: The first is the draw period, in which you only have to make interest payments. After the draw period, you’ll make payments on both principal and interest.

Pros and Cons of Taking Equity Out of Your Home

It’s certainly possible to build wealth using a HELOC, but there are advantages and disadvantages to think about.

Pros:

•   Low interest rate compared to other financing

•   Interest accrues only on the balance, not available credit

•   Borrow again when you replenish the credit line

•   No restrictions on how you use the money you borrow

Cons:

•   Home is used as collateral, putting it at risk

•   Payment amount increases after draw period is over

•   May come with closing costs and maintenance fees

The Takeaway

Tapping into your home equity using a HELOC is one way to potentially build wealth, especially because rates tend to be low when compared to other forms of borrowing. It’s always worth weighing the pros and cons, since defaulting on payments could result in losing your house. But if you have the financial confidence to move forward, there are several ways that your home equity could help you build wealth.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 95% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Is it smart to use a HELOC for investment property?

Using a HELOC for an investment property could help you fund the transaction sooner than if you used other types of financing. You may be able to make a bigger down payment or even make an all-cash offer. Just be sure that you feel confident in your real estate market research and your ability to make payments even if a worst-case scenario occurs.

What should you not use a HELOC for?

A HELOC should not be used for depreciating assets, especially when your goal is to build wealth. Things like vacations and car purchases aren’t usually recommended since they don’t hold their financial value.

What are the pitfalls of a HELOC?

The biggest pitfall is that your home is used as collateral to secure a HELOC and can go into foreclosure if you miss payments. On top of that, variable interest rates result in the potential for larger-than-expected payments if rates increase over time.

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Flight to quality, also known as flight to safety, is when investors shift their assets away from riskier investments — like stocks — into conservative securities – like bonds. This reaction often occurs during turbulent times in the economy or financial markets, and investors want to put their money into relatively safe assets.

Because flight to quality is a term that’s often thrown around in the financial media, investors need to know what it is and how it can potentially impact an investment portfolio. A flight to quality is a short-term trading strategy that might not be ideal for long-term investors. But it’s still important for investors to know how the broader trend may affect the financial markets.

What Causes Flight to Quality?

Economic uncertainty is why investors look to reorient their portfolios away from volatile investments to conservative ones. Moments of economic uncertainty that spook investors can arise for various reasons, including geopolitical conflict, a sudden collapse of a financial institution, or signs of an imminent recession.

A flight to quality usually refers to a widespread phenomenon where investors shift their portfolio asset allocation. This large-scale change in risk sentiment can generally be seen in declines in stock market indices and government bond yields, as investors sell risky stocks to put money into more stable bonds.

Though a flight to quality usually refers to a herd-like behavior of most investors during economic uncertainty, individual investors can make a similar move at any time, depending on their risk tolerance and specific financial situation.

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

What Are the Effects of Flight to Quality?

During periods of flight to quality, investors tend to trade higher-risk investments for lower-risk ones. This shift commonly results in a decrease in the price of high-risk assets and boosts the price of lower-risk securities.

As mentioned above, investors can see one effect of a flight to quality in the price of major stock market indices and bond yields, as the market shifts money from the risky stocks to safer bonds.

But a flight to quality doesn’t mean that investors will necessarily shift out of one asset (stocks) into another (bonds). For example, investors worried about the economy might sell growth stocks in favor of more reliable value or blue-chip stocks, pushing the price of the growth stocks down and boosting the price of the blue chips.

💡 Recommended: Value vs. Growth Stocks

A flight to quality may also shift investment from emerging market stocks to domestic stocks or from corporate bonds to government bonds.

In addition to moving funds from stocks to bonds or other assets, investors may also move money into cash and cash-equivalent investments, like money market funds, certificates of deposit, and Treasury bills, during periods of economic uncertainty.

Real-World Example of Flight to Quality

A flight to quality occurred during the early stages of the COVID-19 pandemic and related economic shutdowns in 2020. Investors scrambled to figure out their portfolio positions in the face of an unprecedented global event, selling stocks and putting money into relatively safe assets.

The S&P 500 Index fell nearly 34% from a high on Feb. 19, 2020, to a low on Mar. 23, 2020, as investors sold off equities. But investors didn’t rush to put this money into high-grade corporate and government bonds, as many would have thought in a regular flight to quality. A record $109 billion flowed out of fixed-income mutual funds and exchange-traded funds (ETFs) during a single week in March 2020. Instead, investors moved capital into cash and cash-like assets during this volatile period in a desire for liquidity.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

The Takeaway

A widespread flight to quality that creates volatility in the financial markets can be scary for many investors. When you see decreases in a portfolio or 401(k), it can be tempting to follow the broader market trends and shift your asset allocation to safer investments. However, this is not always the best choice, especially for investors trying to build long-term wealth.

Flights to quality have happened in the past (such as during the early stages of the pandemic in 2020), and will, in all likelihood, happen again. But even if you don’t get caught up in it, it’s good to know what’s happening in the markets, and why.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
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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.

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Apache is functioning normally

I started working with a client a couple years ago whose incoming portfolio was 20% Starbucks. That’s a lat(te) in one stock. I’ll see myself out. 

ugh…

For comparison, Starbucks comprises 0.20% of the S&P 500. The S&P 500 should only be a portion of an individual’s stock holdings, which are only a portion of an overall portfolio (with bonds, alternatives, real estate, whatever). 20% is way too much Starbucks. 

When I started explaining this thought process, the client protested. “Jesse – there’s a Starbucks on every corner in America. Why would we sell it?”

This logic is very understandable. After all, there is a Starbucks on every corner in America. The premise is true. But this client’s conclusion—“Therefore, why sell Starbucks?!”—doesn’t follow his premise.

That’s the logical misstep we’ll dive into today. A “good company” doesn’t always make a “good investment.” 

Lessons from History

My hometown pride, Kodak, was once one of the most visible companies in the world.

It would have been easy to sit there in 1985 and think,

“Kodak is everywhere. They own the global film market the same way GE owns consumer electronics and Sears owns department stores. Why would I ever diversify out of Kodak?”

A seemingly logical investor

Well…

That’s a share price going from ~$90 per share to zero in about 17 years. The stock market and economic history are littered with “good companies” going broke. It’s called “creative destruction” and is an essential part of a healthy economy.

But it’s terrible if you happen to own those specific stocks.

It’s Not About Popularity or Frequency

Investor Peter Lynch is known for many quips, perhaps none more famous than:

“Invest in what you know. Know what you own and know why you own it.”

Unfortunately, many investors interpret that quote as:

“Invest in what you’ve heard of, and own it because you’ve heard of it.”

…and what they’ve heard of, naturally, are popular consumer brands and companies with a “high frequency” in society e.g. those with many stores, many products, long histories, etc.

But what Lynch actually meant in his quote is: “The more familiar you are with a company, and the better you understand its business and competitive environment, the better your chances of finding a good ‘story’ that will actually come true.”

You can’t just “know” Starbucks because you enjoy its coffee or because you see it on every corner. You must “know” its business fundamentals, competitors, potential future paths, etc. The market does not care about popularity or frequency alone. It only cares about popularity and frequency insofar as those factors positively or negatively affect the objective fundamentals of the business.

Past vs. Future

Riffing off the previous stanza, concepts like “popularity” and “frequency” are both hallmarks of a company’s past. The stores you see, the brand’s standing in our culture, and the company’s heretofore investment returns are all a function of what the company has done in the past.

But the stock market is forward-looking. The thousands of investors who buy and sell stocks and determine their daily prices don’t care about the past. They are, quite literally, trying to predict a company’s future. They are pricing in that anticipated future into today’s fair value.

Quite understandably, most investors don’t do this. They either shape their opinions based on the past (popularity, frequency, past investment returns, etc.) or they react to current-day news. These are both mistakes.

The intelligent investor thinks about the future. But any statement akin to, “Company ABC will be great in the future,” is a challenging statement to make accurately.

Wonderful Company? Fair Price?

Nothing against Peter Lynch, but most of you know I’m a fan of Uncle Warren, who is famous for saying:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Even if Starbucks is one of Buffett’s “wonderful companies,” is it trading at a “fair price”? Most people – including many investment professionals – are terrible at determining what a “fair price” truly is. Price is a defining feature of any investment!

I frequently use the “Honda Civic” example to explain this idea.

Is a Honda Civic a fair car? Sure. A good to great car? Quite possibly! Would you be happy owning a new Honda Civic? Many of you would say, “Sure, why not?”

But would you pay $100,000 for that new Honda Civic? No way.

It’s not enough to say, “Starbucks is a good company. Perhaps a great company.” That’s challenging enough on its own. But we must go further and ask ourselves if Starbucks is trading for a “fair price.” And quite simply, most of us are terrible at determining what “fair price” truly means – at least when it comes to stocks.

Needles

I’m biased, but I’m a big fan of this article I wrote in May 2023. I won’t rehash it too much here, but I encourage you to read it right now.

In short:
  • Most stocks perform worse than simple Treasury bonds
  • Only ~4% of stocks (or 1 in 25) account for all historical stock market outperformance over bonds
  • Anytime your odds are 1 in 25, you should think hard about your actions.

Sizing and Allocation

Play along with me. Let’s assume, for the sake of argument, the client was correct. Because Starbucks is everywhere, it must be a good stock to own, and it’s trading at a good price.

If that’s true, does it necessitate Starbucks should comprise 20% of our portfolio? Put another way: are there only ~5 good companies in America? 

Any way you cut the biscotti, a 20% position is severely overweight. In financial planning, we want to reduce our range of potential outcomes. That’s why we diversify. Having 20% of your money tied to one single stock leads to a wide range of potential outcomes.

Closing the Cafe

For what it’s worth, the client did listen to our counsel and has been divesting out of Starbucks (as tax efficiently as possible). This past week’s ~17% drop in Starbucks’ stock price hurts, but not as much as it would have two years ago.

I’m sure there are more reasons not to own a few single stocks, not to own Starbucks specifically, and not to have too many eggs in any basket. What do you think? If I’ve missed some low-hanging fruit (salad) in terms of my reasoning, please leave me a Comment below!

Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.

-Jesse

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Apache is functioning normally

Treasury securities are like the rock-solid foundation of the financial world. In essence, they are IOUs that the U.S. government offers to investors in order to borrow money. There are various types, each with unique characteristics, including Treasury bonds, bills, and notes.

Since they are seen as extremely safe investments, those seeking financial stability frequently choose them. Let’s examine Treasury securities in more detail and see why they are important.

What Are Treasury Securities?

In essence, Treasury securities are loans made by investors to the United States government. Treasury bonds, Treasury bills, and Treasury notes are the three primary varieties. Purchasing one of these securities is equivalent to making a fixed-term loan to the government that may last anywhere from a few days to thirty years.

The government agrees to reimburse you for your initial investment (the principal) plus interest in exchange. The Treasury yield, which is this interest rate, is used as a standard by which other interest rates in the economy are measured. Because they are backed by the full faith and credit of the United States government, Treasury securities are typically considered to be among the safest investments available.

What Are Treasury Bonds?

The United States government issues Treasury bonds, which are long-term debt instruments with maturities of ten years or longer. Purchasing a Treasury bond is akin to making a fixed-term loan to the government, typically for a duration of 20 or 30 years. In exchange, you get interest payments from the government every six months until the bond matures, at which time you are paid the bond’s whole face value.

Since the U.S. government backs Treasury bonds with its full faith and credit, they are among the safest investments available. Additionally, they are quite liquid, making it simple to buy and sell them on the open market. Investors looking for a dependable means of capital preservation and a consistent income source frequently utilize Treasury bonds.

Difference from US Savings Bonds

The U.S. government issues both Treasury bonds and U.S. Savings Bonds, but there are a few significant distinctions between the two.

U.S. Savings Bonds normally have shorter periods, typically between 20 and 30 years, while Treasury bonds typically have longer maturities, ranging from 10 to 30 years. Interest on Treasury bonds is paid semi-annually, whereas interest on U.S. Savings Bonds is paid monthly and compounded semi-annually.

Another difference is that U.S. Savings Bonds are offered at a discount to face value and earn a fixed rate of interest over time, whereas Treasury bonds are sold at face value and pay a fixed interest rate.

While U.S. Savings Bonds are frequently bought by individuals as a means of saving for short- or medium-term financial goals, such as retirement or schooling expenses, Treasury bonds are typically purchased by institutional investors and individuals seeking long-term investment possibilities. Both kinds of bonds are offered by the U.S. government and are low-risk investment options, but they have different uses and meet various demands from investors.

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What Are Treasury Notes?

The United States government issues medium-term debt securities called Treasury notes, which have maturities of two to ten years. Essentially, investors who buy Treasury notes are making a fixed-term loan to the government. Until the note matures and the investor obtains the full face value of the note, the government pays them interest every six months in exchange.

Since they are backed by the full faith and credit of the United States government, Treasury notes are thought to be less risky than many other investment options. Investors seeking a compromise between the short-term flexibility of Treasury bills and the long-term stability of Treasury bonds frequently choose them.

In addition to the ease of buying and selling on the open market, Treasury notes are extremely liquid, which makes them a preferred option for investors looking to combine flexibility and security in their investment portfolios.

The Significance of the 10-year Treasury Yield

In the financial world, the 10-year Treasury yield is very important since it is a key benchmark for other interest rates throughout the economy. The yield on a 10-year Treasury bond is the annual return that an investor can expect. As such, it reflects investor sentiment regarding future economic conditions, inflation expectations, and monetary policy outlook.

Variations in the yield on the 10-year Treasury note have the potential to impact not only corporate borrowing rates but also mortgage rates, vehicle loan rates, and consumer borrowing costs.

Additionally, it has an impact on the value of other financial assets since investors weigh their future returns against the comparatively safe yields of Treasury securities when valuing stocks and bonds. As a crucial indicator of general market mood and economic conditions, central banks and policymakers regularly monitor movements in the 10-year Treasury yield to assess the state of the economy and modify monetary policies accordingly.

What Are Treasury Bills?

The U.S. government issues Treasury bills, sometimes known as T-bills, which are short-term debt securities with maturities of one year or less.

In essence, investors who buy Treasury bills are making a short-term loan to the government. Treasury bills don’t pay interest on a regular basis like Treasury bonds and notes do. Rather, they are offered to investors at a price below face value, with the entire face amount due upon the bill’s maturity.

Since they are guaranteed by the full faith and credit of the United States government, Treasury bills tend to be considered some of the least-risky investments on the market. Because of their high liquidity and minimal risk, investors frequently utilize them as a short-term cash management tool or as a means of preserving capital.

Treasury notes are an essential part of the economy since they act as a base for a variety of financial transactions and as a benchmark for short-term interest rates.

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Who Should Invest in Treasury Securities?

Investors can benefit from investing in Treasury securities because of their consistent yields and low relative risk. Treasury securities are attractive to people who value capital preservation over large returns, particularly those who are approaching retirement or want to protect their resources. Treasury securities are a popular choice among conservative investors and those with low risk tolerance.

To comply with regulations and reduce risk, institutional investors like banks, insurance firms, and pension funds also set aside a percentage of their portfolio allocation for Treasury securities. Treasury securities are crucial components of diverse investment portfolios and a key part of any investor’s financial plan who is looking for a dependable and safe choice.

Pros and Cons of Treasury Investments

There are both benefits and downsides to Treasury Investments:

Benefits of Treasury Investments

•   Low Relative Risk: Because they are backed by the full faith and credit of the United States government, Treasury securities tend to be less risky than other investment types.

•   Guaranteed Yield: They give investors a steady source of income with a guaranteed rate of return – or, as close to a guarantee as an investor is likely going to find.

•   Treasury securities are highly liquid, which allows investors flexibility as they can be quickly bought and sold on the secondary market.

Drawbacks of Treasury Investments

•   Low Yield: Treasury securities usually have lower yields when compared to alternative investment options like equities or corporate bonds.

•   Interest Rate Risk: Interest rate fluctuations can have an impact on Treasury securities. The value of current Treasury securities may decline if interest rates rise.

•   Inflation Risk: Although Treasury securities are generally low risk, they might not yield enough returns in the long run to beat inflation, which might reduce one’s purchasing power.

•   Market Risk: While unlikely, there’s a chance that shifts in investor sentiment or market disruptions could have an impact on the price of Treasury securities.

How Can You Invest in Treasuries?

Individuals can invest in Treasuries with relative ease and accessibility. Investors can buy Treasury securities straight from the U.S. Department of Treasury via website, TreasuryDirect.gov.

Investors can also purchase them via a financial institution, bank, or broker. Mutual funds and exchange-traded funds (ETFs) that contain Treasury securities in their portfolios are another way for people to indirectly invest in Treasury securities.

Through TreasuryDirect.gov

Bonds, bills, and notes issued by the U.S. government can be directly purchased by individuals by using TreasuryDirect.gov. Without going via a broker or other financial middleman, investors can purchase, manage, and redeem Treasury securities using this online platform.

Treasury auctions, in which the public is offered newly issued securities, can be attended by investors via TreasuryDirect.gov. Investors can enter these auctions with competitive or non-competitive bids to buy Treasury securities at fixed yields or interest rates.

Non-competitive bids accept the yield that is decided by the auction, whereas competitive bids indicate the desired yield. Investors can interact directly with the U.S. Treasury Department to purchase Treasury assets through an open and easily accessible process, giving them more power over their financial choices.

Through a Broker or Bank

An additional way for investors to obtain these assets is by buying Treasury securities through a bank or broker. Treasury securities can be purchased and held alongside other financial products by investors through the investment services provided by numerous banks and brokerage firms. Financial experts can assist in customizing investing plans to meet the specific needs and objectives of each investor.

Purchasing through a bank or broker may provide access to a greater selection of investment options, including Treasury bills, notes, and bonds with different maturities and yields. Although there can be commissions or transaction costs associated with this approach, investors benefit from the ease of having all of their investment accounts combined into one location.

Purchasing Treasury securities via a bank or broker provides investors with ease, flexibility, and individualized assistance in creating a diverse investment portfolio.

ETFs and Mutual Funds

Investors can buy Treasury Securities in a convenient way through ETFs and mutual funds that hold bonds, bills, and notes. Investors can benefit from professional management and experience choosing and overseeing Treasury securities within the fund’s portfolio by making an investment in these funds.

Mutual funds and ETFs provide liquidity, enabling investors to buy and sell shares on the open market at any time. Investors can easily modify their exposure to Treasury securities in response to shifting market conditions or investing goals.

Mutual funds and ETFs often have lower expense ratios than actively managed funds, so investing in Treasury securities using this method can be an affordable way to access a diverse portfolio of Treasury securities.

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

How Are Treasury Bonds, Bill, and Notes Taxed?

Since they are subject to unique tax laws, investors looking for tax-efficient investment options may find Treasury bonds, bills, and notes appealing. State and local income taxes are not applicable to interest income collected on Treasury securities, but it is subject to federal income tax.

Taxation applies to any capital gains upon the selling of Treasury securities. An investor will have a capital gain that is liable to capital gains tax if they sell a Treasury asset for more money than they paid for it.

On the other hand, the investor can experience a capital loss if they sell the investment for less than what they paid for it. This loss can be applied to offset capital gains and lower their taxable income.

What Are Other Types of Treasury Securities?

The U.S. Treasury offers a variety of securities in addition to Treasury bonds, bills, and notes. By basing the principal value of Treasury Inflation-Protected Securities (TIPS) on fluctuations in the Consumer Price Index (CPI), TIPS offer protection against inflation.

By guaranteeing a rate of return, this helps investors maintain their purchasing power over time. Investors are protected against interest rate risk by Floating Rate Notes (FRNs), which have variable interest rates that fluctuate based on changes in market interest rates.

The U.S. Treasury issues savings bonds such as Series I and Series EE that provide people with a convenient and secure long-term means of saving money. Series EE Savings Bonds pay a set rate of interest for a maximum of 30 years, while Series I Savings Bonds protect against inflation.

The Takeaway

Treasury securities give investors a range of choices to achieve their financial objectives, including long-term savings, inflation protection, and income generation. In the ever-changing world of financial markets, investors can protect capital, reduce risk, and reach their goals through Treasury bonds, bills, notes, and other securities like TIPS and savings bonds.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is the meaning of Treasury Security?

The U.S. Department of the Treasury issues debt obligations known as Treasury securities, which include Treasury bills, notes, and bonds. Because they are backed by the full faith and credit of the United States government, Treasury securities are among the safest investments.

What is an example of Treasury securities?

Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs) are the five categories of marketable securities offered by the U.S. Treasury.

Are Treasury securities risky?

Because the U.S. government completely backs Treasury bonds, there is very little chance that they would default, making them a popular choice for investors looking to avoid risk. Investors need to be aware that interest rate risk exists even with U.S. government bonds.

Photo credit: iStock/Andrii Yalanskyi

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.

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 email customer service at [email protected]. Please read the prospectus carefully prior to investing.

Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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.

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SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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