Disclaimer: The information published in this post is for informational and entertainment purposes only, and does not constitute accounting, tax, investing, or other professional advice. It was written solely for informational purposes and should not be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any security or financial instrument or to participate in any transaction or trading activity. Accordingly, any decision in connection with funds, instruments, or transactions described or mentioned herein must be made solely on the information contained in a prospectus and no reliance is to be placed on any other representations.
I’ll start this post by saying that it is more for me than anything. It is an opportunity for me to document the moment in time surrounding my decision a couple of months ago to step into the world of individual stock investing. I am hoping I can look back years from now and reflect on this investment decision and the hand it played in further growing my wealth. In the end, only time will tell. With that being said, let’s jump right in and discuss my decision to allow one company to precipitate the death of my all index fund portfolio.
The Importance of Index Fund Investing:
First, it is important to acknowledge that I still very much embrace the core tenants of the FIRE movement to include low cost index fund investing. If you recall from one of my previous posts, it is extremely difficult to pick stocks and beat the market over the long-term. For this reason, I like many in the FIRE movement, firmly believe index fund investing is the best and easiest way to create long-term wealth. However, I also believe that you don’t necessarily have to invest in ONLY index funds — especially once you have a sizable investment portfolio. This is where investing in an individual stock(s) or actively managed funds can come into play. When choosing to invest in a single stock(s), I think it is important to still keep a significant portion of your invested assets in index funds. I also think it is important that you understand your purpose, set guidelines, and spend the time necessary to adequately understand the risks associated with the decision.
SoFi – The Death of My All Index Fund Portfolio:
As you may have guessed by the cover photo, the single stock I have chosen to invest in is SoFi Technologies, Inc. (SOFI). For those unfamiliar with the company, SoFi is a mobile-first personal finance company offering student loan refinancing, mortgages, personal loans, credit card, banking and investing. The company was founded in 2011 and went public in 2021. Their current market cap is ~ $18 billion, and they are growing rapidly from both a customer, product, and revenue perspective. As a financial technology (Fintech) company, SoFi seeks to leverage technology to automate and improve the delivery of financial services to customers. Essentially – SoFi wants to be a one-stop shop for financial services. A bank of the future if you will.
A Shared Mission:
There are several reasons that I like SoFi, and I have chosen to invest in them as an individual stock in my portfolio. First and foremost, I absolutely love their mission.
“SoFi’s mission is to help people reach financial independence to realize their ambitions. And financial independence doesn’t just mean being rich — it means getting to a point where your money works for the life you want to live.”
As someone with a passion for personal finance, investing, and the FI movement, SoFi’s mission is one that I believe in. I have come to realize over the course of the last 5 – 7 or so years that money is simply a tool that has the ability to give you control of your time so that you can live the life you want to live now and in the future. SoFi’s mission is to help you achieve the life you want to live. The entire reason I started this blog was to share what I have learned with others and document my journey to FI. With the right knowledge and tools, I believe everyone can save for a better tomorrow while still living their best today — especially HENRYs. SoFi’s mission is very similar in that regard which is a major reason why I like them long-term, and why I am willing to invest in them in the hopes they succeed.
Why I Like SoFi:
In addition to their mission, there are many other reasons I am bullish on SoFi in the long-term. Here are just a few:
1. The Fintech industry appears poised to continue to experience rapid growth as consumers continue to migrate toward financial products that leverage technology in a customer centric/friendly way. SoFi is positioning themselves to be THE all-in-one financial platform that can meet the various financial needs that arise throughout a person’s life.
2. SoFi’s current target audience is millennial and gen-z. I believe there is a lot of growth opportunity in this market long-term. Banks used to have a personal connection with their customers many years ago. Most would agree this connection has all but disappeared with traditional banks. In addition, the technology of traditional banks is often antiquated and their customer service leaves much to be desired. This presents an opportunity for a company like SoFi to be the bank of the future for the younger demographic.
3. SoFi appears to have several strategic advantages. Unlike other companies in the industry, SoFi is not hyper-focused on one industry segment (e.g. banking, student loans, private loans, mortgages, investing, crypto-currency, etc.). Instead, they seek to be a major player in all of these spaces by creating a best-in-class, customer-centric financial services ecosystem of sorts. If SoFi can deliver, their ability to leverage their customer base to cross-sell should be a major competitive advantage.
4. SoFi acquired Galileo in April 2020. At a high level, Galileo is a banking-as-a-service (BaaS) that offers the technology necessary for other entities to offer digital banking services without having a physical bank presence. Galileo offers the necessary banking platform for the vast majority of digital banks in North America including customers like Robinhood. Some would say Galileo to FinTech companies is similar to Amazon Web Services (AWS) which offers cloud computing platforms (think servers, storage, networking, remote computing, security, etc.) to individuals, organizations, and governments. In case you didn’t know it, AWS accounts for more than 10% of Amazon’s overall revenue and serves as one of it’s most consistent and profitable revenue streams. Similarly, Galileo appears to offer SoFi a significant competitive advantage and could drive a significant portion of their future revenue and profits as they continue to grow.
5. SoFi’s current CEO is Anthony Noto. Prior to becoming the CEO of SoFi, Anthony Noto was the former COO of Twitter, managing director at Goldman Sachs, and CFO of the NFL. In short — he has a solid pedigree. I have listened to several interviews given by Noto over the last 6 – 9 months. In one of his latest interviews, Noto discussed SoFi’s goal to create a lifetime relationship with customers where SoFi is there to help with major decisions in life and everyday in between. He noted there are many decisions in life that can impair someones ability to get to the point of FI, and SoFi wants to “help customers borrow better, save better, spend better, and invest better.” This again gets back to their core mission of helping people achieve financial independence. Noto seems truly passionate about SoFi’s mission, and I believe he has the leadership, experience, and capability to make their vision for the future become a reality.
There are several additional reasons I believe SoFi is poised to grow long-term that I will not cover in detail including their strategic plans for expansion into markets outside of the US, pending application for a bank charter, etc. In the end, it really comes down to my support of SoFi’s mission of helping people achieve financial independence coupled with my belief they have the capability of executing on their vision in becoming the bank of the future.
Acknowledging The Risk:
There is a lot to like about SoFi. However, it is also very important to acknowledge the risks of investing in a single stock when choosing to do so. These are just a few of the risks that I have considered prior to deciding to invest in SoFi.
- Company-Specific Risk – Any time you choose to invest in one company, you are taking on additional risk due to the lack of diversification. One quarter of poor earnings or an executive scandal likely won’t register on your financial radar when invested in a broadly diversified index fund. The same cannot be said if you are invested in said company with any significant exposure from a stock perspective. It is also possible for a company to completely collapse resulting in a complete loss in your investment. Although I believe SoFi has great leadership, a solid foundation, and many strategic advantages, company-specific risk very much exists.
- Increased Volatility – Individual stocks tend to be more volatile when compared to the overall market. Again — this is driven by the lack of diversification. SoFi is no different. Although the stock is up ~ 87% YTD as of publication of this post, the stock price has fluctuated wildly during this time period. When choosing to invest in a single stock, it is important to understand the potential volatility and not make decisions out of emotion. I personally believe that you should only invest in single stocks if you are doing so for the long-term. SoFi is a long-term play for me, and I am OK with the volatility as they continue to grow and establish themselves as a market leader in the space.
- Opportunity Cost – As with any financial decision, there is an opportunity cost. SoFi could reasonably underperform the market over the coming years. If this occurs, there WILL undoubtedly be a measurable financial opportunity cost associated with my decision. When choosing to invest in a single stock, it is important to understand and accept this opportunity cost, and I have done so before choosing to invest in SoFi.
- Additional Taxes & Decisions – Index funds are designed to be bought and held for the long-term. This is why they are great tools for building wealth. Single stocks can be bought and sold for short-term gain or held for the long-term similar to index funds. As I mentioned above, I plan to hold SoFi for the long-term. Even when planning to do so, I hope to be presented with decisions in the coming years that I would not have otherwise had to consider. If SoFi continues to grow and appreciate significantly as I hope it will, I will have to make decisions about when to sell, how much to sell, tax implications, etc. I am OK with a single stock comprising a small portion of my overall portfolio because the majority of my invested portfolio will still be in broadly diversified index funds. However, I am NOT OK with a single stock comprising a larger portion of my portfolio because this presents much greater risk for the reasons noted above. As I said in the beginning, I am still primarily an index fund investor. As such, by choosing to invest in a single stock, my best case scenario will ultimately result in me having to make decisions that I could have otherwise avoided by sticking strictly to invest fund investing.
Setting Guidelines:
Ultimately, I feel that I have a solid grasp on the inherent risks of choosing to invest in a single stock. I am willing to accept the risk because I believe in SoFi’s mission and vision. In addition to being a purpose driven investment for me, I have set several guidelines for myself that have also been implemented into my Investor Policy Statement (IPS).
First, I am limiting single stock investing to no more than 5% of my overall investment portfolio. The remainder of my portfolio will remain invested in low-cost index funds. This ensures that I maintain a solid foundation from which to continue to grow my wealth.
Second, I will re-evaluate the need to sell a portion of any single stock investment if the stock grows to exceed 10% of my overall investment portfolio. This ensures that I stay adequately diversified while still participating in the continued upside of a well-performing single stock investment.
Last, I have chosen to do a one-time, lump-sum investment with the intent to buy and hold. My intent with this approach is to mitigate risks associated with (1) investing additional money as the stock price rises due to FOMO and (2) making buy decisions based upon day-to-day volatility until I reach my desired allocation.
There are likely other guidelines that should be considered when choosing to invest in a single stock to include limitations on recurring investments, lump sum investing vs. dollar cost averaging, etc. Based upon my approach, I believe the guidelines above serve to adequately mitigate the risks associated with my decision.
Conclusion:
I wish that I could say that I am not uncertain, but I can’t. In fact, I am only certain of one thing. By choosing to invest in a single stock, I am taking on additional risk relative to solely investing in broad-based index funds. I am choosing to do so because I believe the potential upside is too great to ignore, and that SoFi is an asymmetric investment opportunity whereby the risk is significantly less than the potential reward. With that, I can say that my recent investment in SoFi stock officially marked the death of my all index fund portfolio.
Regards,
Henry
Note: For those that skipped right over the disclaimer at the beginning of the post OR for those that don’t like to read legal jargon — I am NOT a professional, you should NOT follow a random stranger on the internet relative to investment advice, and I am NOT responsible for any investment decisions you make as a result of reading this post. Be smart — do your research, make your own decisions, and live with the consequences. 🙂