The S&P 500 consists of 500 of the country’s largest publicly traded companies. These companies include the following sectors: energy, technology, consumer staples, consumer discretionary, financials, health care, industrial, materials, telecommunication, utilities and real estate. At first glance, this seems like adequate diversification. However, the S&P 500 is market cap weighted, which means that the larger companies make up a bigger percentage of the index than the smaller companies.
Technology companies currently make up about 25 percent of the entire index and the largest five tech stocks (Apple, Microsoft, Google Amazon and Facebook) accounted for 14.4 percent of the entire index as of the end of February 2018.
Since the beginning of 2015, the technology sector has returned 18 percent per year vs. 10.2 percent for the S&P 500 as a whole. This recent out-performance has contributed to the tech sector’s overweight in the index. What does this mean for the S&P 500? It means that if technology stocks continue outperform, then that bodes well for the S&P 500. However, if the sector falls out of favor, the S&P 500 will likely under-perform.
If you own the S&P 500 index or an actively managed large cap mutual fund, which on average consists of 30.3 percent technology, then you are essentially making an oversize bet on the technology sector.
If you would prefer to be a more diversified investor rather than an unwitting sector bettor, there are some viable alternatives. For instance, the Guggenheim S&P 500 equal weight index allows investors to own an equal share of all 500 stocks with quarterly rebalancing. For value investors, the Barclay’s Shiller Cape Index allows investors to own only the cheapest sectors of the S&P 500. This index has significantly performed the S&P 500 as a whole over the last five years with significantly less volatility.
One of the major benefits of a deferred annuity is the ability to delay paying taxes on all of the gains. By kicking the tax-liability can down the road, you are essentially utilizing an interest-free loan of the government’s tax cut while you continue to enjoy compounding growth within your annuity. Moreover, the IRS allows your beneficiary spouse to stand in your shoes at your death and continue to defer taxes for their lifetime without any required minimum distributions. Even your children, if they are designated as your beneficiaries, are permitted under current tax law to take only relatively small amounts out each year from their inherited annuity based on their life expectancy. This concept is known as a non-qualified stretch annuity. If structured correctly, an annuity can be used to defer taxes over several lives.
However, if your annuity’s beneficiary is a trust, all of the funds in the annuity must be distributed to the trust, (and taxes paid) within five years of the owner’s death — even if the spouse is the trust beneficiary. Unfortunately trusts are taxed at the top tax bracket after only $12,500 of income.
Many of you paid good money for your trusts and you like maintaining some control over how trust assets are distributed after your death, but you are essentially going to have to decide what is more important to you: minimizing the tax bite for your family or controlling how your kids spend their inheritance. Since a spouse isn’t even required to take required minimum distributions as the beneficiary, I usually recommend putting the spouse as the beneficiary of one’s annuities. For those looking to minimize taxes for their kids and still maintain some control, certain insurance carriers allow contract owners to create restricted beneficiary designation for their children.
In an effort to cut the trade gap and negotiate a more favorable trade agreement with China, President Trump recently announced tariffs of
25 percent on steel and 10 percent on aluminum. This means that the cost of purchasing these items from abroad will increase.
This will ostensibly help American steel and aluminum companies become more profitable because their competition will need to raise their prices to cover the cost of the tariff. However, this means that all American companies that need to buy steel and aluminum for their products will have to pay more for those products. Therefore, those companies will make less profits and will need to raise prices. This could result in a loss of sales and potentially cause a loss of jobs.
Additionally, foreign countries tend to retaliate by imposing tariffs on U.S. exports. For instance, China has indicated that it is now considering imposing tariffs on U.S. agricultural exports, wine and pork products. This would result in a loss of sales and profits to these U.S. industries and could reduce jobs in those industries as well.
Most economists agree that tariffs are bad for the economy.
In a letter to the White House signed by leaders of the U.S. Chamber of Commerce, the National Retail Federation and other groups, President Trump was urged to consider that “the imposition of sweeping tariffs would trigger a chain reaction of negative consequences for the U.S. economy, provoking retaliation; stifling U.S. agriculture, goods and services exports; and raising costs for businesses and consumers.”*
We don’t yet know how this will end or if the tariffs will become permanent and lead to a full-scale trade war. However, the stock market dislikes uncertainty and until this is favorably resolved, expect the possibility of continued volatility.
Although tax-deferred annuities will delay the due date of tax liability, taxes will eventually be due at some point because eventually the non-spousal beneficiaries will be required to take the money out of the contract and pay taxes.
Modified endowment contracts (MECs) are life insurance contracts that were created by an act of Congress in 1988, and can be designed to grow like deferred annuities — but with several advantages.
The biggest advantage is the tax treatment. Modified endowment contracts have an income-tax-free death benefit.
Secondly, they tend to be much more liquid than annuities. Advisers commonly recommend deferred annuities that typically allow for annual penalty-free access of up to 10 percent of the account value. MECs typically allow for access of up to 90 percent of the account value without any penalties.
Additionally, some insurance companies, such as TIA CREF, will — for no additional cost — allow penalty-free access to 100 percent of the account value. Like other fixed deferred annuities, MECs pay interest based on either a fixed rate, or a portion of the increases — but not the decreases of a stock index. For those looking for attractive growth potential without the risk of stock market loses, a fixed index MEC could be a viable alternative.
Many insurance companies are now offering MECs that not only provide safety, liquidity and growth potential but are also offering sizable tax-free death benefits that can be accelerated and accessed during one’s lifetime if there is a long-term care need.
This could be a more palatable way to plan for potential long-term care needs than a traditional LTC policy. These insurance benefits typically cost between
1 and 2 percent per year of the account value, depending on one’s age.
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