• The S&P 500 OR the S&P 5?

    The S&P 500 is intended to be an index of 500 large companies listed on stock exchanges in the United States. However, if you take a closer look, you’ll find that just 10 stocks—or 2 percent of the total 500—account for almost one-third of the index’s overall performance. Why does this happen, and why should you care? Let’s take a closer look.

    The S&P 500 is a Weighted Average

    At first glance, it may seem like the S&P is an equal representation of 500 different stocks, but that’s not how it works. The index is actually a weighted average, so larger companies drive a more significant proportion of the index’s performance than relatively smaller companies. As the largest companies continue to grow ever larger, the market is becoming increasingly concentrated. This causes a dramatic lack of diversification, which can be financially catastrophic.

    1999 was the last time we saw statistics similar to this. At the height of the dot-com bubble, excessive investments in Internet-related companies led to an inflated market rise. In March 2000, the NASDAQ Composite rose 400 percent, only to fall 78 percent—or $5 trillion—by October 2002, negating all the gains experienced during the bubble. The dot-com crash also caused countless Internet startups to fail.

    How to Ensure Portfolio Diversification

    The issue of poor diversification lurks beneath the surface of many portfolios, particularly these days, given the massive run-up of a small handful of companies driving a disproportionately high segment of the market. The media has labeled these companies the “FANGs” because they comprise Facebook, Amazon, Netflix, and Google, among others.

    Clearly, when it comes to diversifying your portfolio, it’s not enough merely to own index funds. You really need to dig deeper and see what percentage of your portfolio is constituted in your top 10 holdings, which shows you what you ultimately own.

    With the way things are right now, index funds may be comprised of the same kinds of companies. Remember, the top 10 holdings in any portfolio should never exceed about 20 percent of the portfolio’s total value. And if your top 10 holdings begin to exceed 30 percent, your portfolio is not nearly as diversified as it should be.

    To sum up, it’s vitally important to be aware of the impact of investing in the S&P. If you’re not careful, you could end up with a serious lack of diversification, even when you think you’re diversifying effectively by investing in an index fund. For help digging into your portfolio and optimizing your investments, please contact Nelson Financial Planning. We’ll help you change your life with a successful financial plan.

  • Why Taxes Will be a Mess This Year

    Has filing your taxes felt confusing in past years? The 2020 tax season is a whole different animal. It’s turning into one of the craziest tax seasons we’ve ever seen. Let’s see if we can cut through all the red tape and make some sense of it all. 

    New Tax Filing Deadline  

    In mid-March, the Internal Revenue Service (IRS) extended the tax deadline from April 15 to May 17, 2021. Good thing, too—it gives filers more time to sort out the moving target that is this year’s tax season. 

    However, if you have already filed and you owe taxes this year, the date you scheduled for your bank account withdrawal is pretty much etched in stone. So if you were hoping to take advantage of the extended deadline, you’re out of luck. 

    Be aware that the deadline for funding individual retirement accounts (IRAs and Roth IRAs) and health savings accounts (HSAs) has also been extended to May 17. 

    Self-employed people or anyone who generates significant income without having taxes withheld should file quarterly estimated tax payments. If this applies to you, be aware that the deadline for your first payment is still April 15, despite the tax deadline moving forward one month. 

    Also, the deadline for corporations, partnerships, and non-profits to file tax returns remains April 15, 2021. 

    Tax Changes 

    The most recent stimulus package, called the American Rescue Plan Act of 2021 (ARPA), implemented several significant tax changes in the middle of tax season. These include: 

    • Unemployment: The first $10,200 per person of unemployment benefits received in 2020 is exempt from income taxes (assuming your income is less than $150,000 ). 
    • Health insurance: If you had health insurance through the marketplace in 2020 and earned more than your estimated income, the need to repay the advance premium tax credit is waived. 

    While it’s easy to celebrate these changes, the fact that they came so late is creating incredible confusion. For the tens of millions of Americans who filed their returns before the changes were implemented, the only option is to wait. The IRS hasn’t provided instructions on how to proceed. All they have said is not to amend returns yet. But at some point, the IRS must put a mechanism in place to deal with the millions of incorrect returns. 

    Even for those who haven’t filed yet, confusion abounds. Electronic filing is a popular option, but tax software hasn’t been updated to reflect the changes yet. Many new tax laws enacted after the CARES Act passed a year ago still haven’t filtered through the tax return system! This includes the 10 percent penalty exemption for taking distributions from retirement accounts due to COVID-19. 

    How are filers expected to maximize their returns when the tax law keeps changing in significant ways? 

    Interest Rates 

    The Federal Reserve announced in mid–March that they intended to hold interest rates near 0 percent until 2023. In addition, the Fed plans to continue quantitative easing, the process of injecting money into the economy by purchasing government bonds and other financial assets to expand economic activity and keep interest rates low. Spending is currently at about $120 billion per month. Despite the Fed’s efforts, 30-year mortgage interest rates recently crept above 3 percent for the first time since July 2020. 

    The Fed expects the US economy to grow 6.5 percent this year as the pandemic winds down, the country fully reopens, and economic activity spikes. If that estimate holds, it will be the fastest pace since 1983. Meanwhile, unemployment is back down to 6.2 percent. 

    Stock Market 

    March 17, 2021 was a big milestone for the Dow Jones. The market closed at just over 33,000 points, a new threshold for the Dow that had never been reached before. This milestone occurred just five days after closing above 32,000, making it the fastest 1,000-point increase in the Dow’s history. 

    Just remember to keep this in perspective. Increasing by 1,000 points now is a 3 percent increase, compared to a 10 percent increase if the Dow was at 10,000 points. Still, this is certainly a noteworthy market shift. 

    Required Minimum Distributions 

    The rules regarding required minimum distributions (RMDs) have already changed in the past year, courtesy of the SECURE Act. Here’s what happened in 2020: 

    • The 50 percent penalty for failing to take the minimum distribution was waived. 
    • The RMD age rose from 70.5 to 72. 
    • The timeframe for retirement account beneficiaries to empty the account changed from a lifetime to just 10 years. 

    RMDs were waived in 2020, but they’re back for 2021. You may find that your required minimum distribution jumped quite high compared to 2019. Here’s why this may have happened: 

    • The market performed pretty well last year. 
    • You’re one year older now. 
    • More money has accumulated in the account if you suspended distributions in 2020. 

    Looking ahead to 2022, here’s what you can expect from RMDs: 

    • The IRS will issue a new Uniform Lifetime Table used for calculating RMDs to reflect higher life expectancies. 72-year-olds can expect a 6.5 percent reduction in required minimum distributions compared to the current Life Expectancy Factors. 
    • Some professionals speculate that the RMD age may rise to 75. 

    Common Traits of Successful Investors 

    Five key things set successful investors apart: 

    • Save more: Pay yourself first. Then, make sure everything else gets paid. 
    • Avoid worrying: You can expect great long-term results, no matter what the market is doing in the short term. 
    • Start early: Compound investing is much more powerful if you start saving early. 
    • Stay positive: Having an optimistic outlook helps keep your investments on track. 
    • Have a steady temperament: Consider the bigger picture and don’t lose sight of potential growth despite what may be happening now. 

    For answers to your questions about tax changes, interest rates, required minimum distributions, or successful investing, please contact Nelson Financial Planning at 407-629-6477.

  • Buying a House

    As a financially savvy individual, you know you should be investing and preparing for retirement. Everyone wants to build a healthy nest egg, but what if you don’t have any extra cash or disposable income each month? These are two major roadblocks to investing. Another is buying a house while making sure you don’t end up “house poor.”

    Problems with Rushing into Buying a House

    The way you go about buying a house can dramatically impact the amount of money you have leftover at the end of the month. Spending too much on a mortgage or rushing into the wrong opportunity can cause two major issues:

    • You rack up debt: If you put all your money into buying a house, you may end up taking out loans or putting day-to-day expenses on credit cards without the ability to pay them off. Going into debt just to make ends meet is never a good place to be financially.
    • You have no disposable income to invest in: Because of inflation, money is always more valuable today than it will be tomorrow. As a result, you should strive to always keep your funds growing through wise, diversified investments.

    A Look at Florida Homebuyers

    Radio show host, author, and businessman Dave Ramsey recommends keeping housing expenses around 25 percent of your income. Following this advice, a Floridian earning the state’s median household income of $53,000 should spend no more than $13,500 per year—or $1,100 per month—on housing.

    However, the average American spends about 37 percent of their income on housing. This means a typical Floridian might spend nearly $20,000 per year—or over $1,600 per month—on rent or a mortgage. This is a difference of roughly $6,000 per year.

    Putting Your Money to Work for You

    $6,000 per year might not sound significant, but this amount can substantially affect your investment portfolio. $6,000 is enough to fully fund a traditional or Roth IRA. You can use $6,000 per year to fund your children’s college educations in a 529 college savings plan. Or you can put $6,000 into stocks and bonds as a personal investment. The possibilities are endless!

    Assuming a 7 percent rate of return, investing $6,000 per year starting at age 25 can grow to over $1.2 million by the time you reach retirement age, or 65 years old. However, if you spend an excessive amount of your income on housing and don’t have anything left to invest, you will not end up with the same nest egg when you retire.

    Clearly, it’s essential to understand the opportunity cost of buying a house, especially if doing so will push your housing expenses too high. For more on how we can help you determine if a mortgage is within your budget, please contact Nelson Financial Planning. Our team of certified financial fiduciaries focuses every day on helping you change your life through a successful financial plan that provides peace of mind for the future.