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What are the Limits for My Investing and Spending Accounts?

What are the Limits for My Investing and Spending Accounts?

As Spring springs and we approach the end of the first quarter of 2022, it is a good time to familiarize yourself with the changes to the more popular savings vehicles. It is imperative to understand the basics of these accounts to avoid mistakes, as the penalties can be quite onerous. This is not an exhaustive list, but it is a good place to start. 

The list is broken up into the appropriate categories of employer-sponsored plans, personal retirement plans, healthcare and spending accounts, and educational accounts.   

Employer-Sponsored Plans

401(k), 403(b), and most 457 plans have a new maximum employee contribution limit of $20,500, up from $19,500 in 2021. The overall maximum annual additions into defined contribution plans (which include 401(k) and 403(b) plans) increased from $58,000 to $61,000. 

Individuals aged 50 and older are allowed an additional $6,500 of contributions. Note that the “age 50 catch-up” amount did not increase from 2021 to 2022.

Personal Retirement Plans

IRA and Roth IRA contribution limits are unchanged at $6,000 for people under the age of 50 and $7,000 for individuals 50 years old and older. 

The traditional and Roth IRA income phase-out ranges are also increasing. 

Healthcare and Spending Accounts

Health Savings Account contribution limits increased from $3,600 to $3,650 for individuals and $7,200 to $7,300 for families. 

The HSA catch-up contribution for individuals 55 years old and older is an additional $1,000. This is unchanged from 2021.

The  Health Care Flexible Spending Account (FSA) limit has increased to $2,850 in 2022 – up from $2,750 in 2021.

The Dependent Care FSA limit in 2022 has reverted back to $5,000 for a married couple filing a joint tax return. The American Rescue Plan temporarily increased the limit to $10,500 in 2021.

529 College Savings Plan

529 plans do not have contribution maximums; however, contributions are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor ($15,000 in 2021), per beneficiary qualifies for the annual gift tax exclusion.

The Coverdell IRA contribution limit is $2,000 per student, per calendar year. 

The annual changes to contributions and income limits are not consistent year-over-year; therefore, understanding the changes and how they affect your specific situation is important. It is a good idea to check your contribution levels early in the year as payroll adjustments and/or automatic contributions into your IRA accounts may be required periodically. 

Nate Condon 

Market Correction: What It Is and Why Market Corrections Matter

Market Correction: What It Is and Why Market Corrections Matter

The domestic and international stock markets have started 2022 with a level of volatility unseen for the past few years. The rather benign market conditions, over the last 10 years, have lulled investors into a false sense of security and normalcy that is anything but normal. 

This is completely understandable when we look at the recent history of the S&P 500, a benchmark for US stocks. The S&P 500 has only posted one year of negative returns greater than 1% since 2009. The index’s loss of 6.24% in 2018 was paltry compared to its 38% loss in 2008 and three consecutive double-digit down years of 2000-2002. This is all to say that the beginning of 2022 is a reminder that volatility and market corrections are part of the normal market cycle, not a deviation from it. 

What is a Market Correction?

The term “market correction” is generally defined as a drop in a given market index of at least 10%, but not more than 20%. A drop of more than 20% is referred to as a bear market.

To give some perspective on the recent history of market corrections, the S&P 500 experienced a market correction in 11 of the past 20 years. Further, the S&P has experienced a correction, on average, every 19 months since 1928. This helps to illustrate the fact that market corrections are common over most periods of time and should be viewed as the market resetting stock valuations back to a more fundamental level.

Most economists believe that periodic corrections are healthy for investment markets, particularly stock markets, as equities tend to have large price swings. As stock prices appreciate over periods of time, there can start to become a disconnect between the valuation for a company and the price of its common stock. While the relationship of company valuations and respective stock prices can be a moving target, market corrections help to bring this relationship back in line, and, in some cases, corrections can provide a buying opportunity as the stock price may fall too far relative to the valuation. The circumstances and variables that cause the to market slide are different each time, which makes predicting when a correction will happen and for how long nearly impossible. Furthermore, many corrections have been caused by non-financial related events such as geopolitical issues or military skirmishes.

Investing During a Market Correction

Now that we have a better understanding of corrections and their history, we need to turn our attention to how we should react during a correction. Corrections can be a scary, unnerving period of time in a market cycle, however, history shows us that corrections last, on average, four months before the market makes up the loss. This is the reason why most economists recommend riding out market downturns. Often people ask the question, “why not just sell stock positions when the market begins to fall and buy back in when the market bottoms”. This is almost always a recipe for disaster as it requires correct market timing, not one, but two major moves in a portfolio. It also requires that we are actually at the start of a correction. We know that we are in a correction once the market has already fallen 10% and, by that point, it is too late to avoid the loss by selling shares. The best advice for weathering volatility in the markets is to fully understand your personal risk tolerance and accurately match your investment allocation to that risk profile. This way, we can have confidence that our portfolio is built to withstand the appropriate amount of market loss for your specific situation.

Nate Condon

What is Index Investing? History, Construction, Weightings and Factors

What is Index Investing? History, Construction, Weightings and Factors

The subject of index investing is one of the most popular topics of the investment industry. It is written about constantly in business magazines, newspapers, and websites and generally comes with the author’s opinion on the topic whether you are interested in their opinion or not. As often as it is covered, I rarely find a piece that explains indexes and index investing in an easy-to-understand way. The goal of this article is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies. 

A BRIEF EXPLANATION AND HISTORY OF INDEX FUNDS

One of the most notable indexes is the Standard and Poor’s 500, more often referred to as the S&P 500. Simply put, the S&P 500 tracks the stock performance of the 500 largest companies, primarily based in the U.S. Investment companies took this idea and developed a way to purchase this basket of 500 companies in one investment as opposed to buying each stock as its own investment. The index itself was created in 1957 and is used to provide a broad representation of the overall stock market’s daily performance. The Dow Jones Industrial Average, which is arguably the most well-known index, is made up of only 30 stocks and, therefore, gives a more narrow representation of the market. The first S&P 500 index fund was created by Vanguard in 1976. This was the beginning of an entirely new way of investing. The vast majority of index investments, including Exchange Traded Funds, that exist today have been created within the last 20 years

An Exchange Traded Fund (ETF) is a different form of index investing. The first ETF was created in Canada in 1990, with the first U.S. ETF created shortly thereafter in 1992. One of the fundamental differences between index funds and ETFs is that ETFs trade throughout the day on a given exchange and, therefore, have price fluctuations intraday. Mutual funds only change their price per share once per day after the market has closed. With ETFs behaving more like individual stocks, they tend to be more tax-efficient than mutual funds as well. 

THE EXPANSIVE WORLD OF INDEXES

Since the beginning of the 2000s, the index investing world has exploded with offerings. The bellwether indexes of large companies, mid-sized companies, and small companies have given way to more niche and exotic indexes such as cybersecurity, photonics, and global blockchain, to name a few. A recent estimate put the total number of ETF investment products at more than 7,000; however, the number fluctuates by the day. The splintering of the ETF market also creates challenges in comparing what appear to be similar index investments, only to find out they can be vastly different. If we look at three Small Cap US ETFs from Vanguard (VB), iShares (IJR), and Charles Schwab (SCHA), we find three very different investments.

This chart represents a one-year performance comparison between the three mentioned ETFs. While this is a relatively short time frame for performance, the chart highlights the drastic difference between these investments, even though they all appear to be similar by title. The biggest reason for this performance variation is the makeup of each of these investments, which represents a different investment philosophy. The Schwab ETF owns the most small-cap companies in its basket with 1,761, then the Vanguard investment with 1,560, both of which dwarf the iShares offering with 684 total holdings. These are three of the most popular, passively managed U.S. small-cap index investments. It is fair to say that not all small-cap index investments are created equal. 

INDEX CONSTRUCTION

The development of index investments has evolved drastically over the past two decades. Let’s start with the most basic – the S&P 500. The purchase of an S&P 500 fund will yield you a basket of the 500 largest, mostly U.S.-based companies. The methodology used to determine the 500 companies that make up the S&P 500 is agreed upon by the investment community as a whole, in that, the list of companies that make up the index is published and accepted. That said, the construction of S&P 500 index funds can be quite different because the relative weighting of each of the 500 stocks can be different. Many of the S&P 500 funds are market capitalization-weighted, meaning that the largest stock in the index holds the largest position within the fund. This, proportionally, happens all the way down to the 500th company in the fund. By purchasing a market-cap-weighted index fund, the investor should understand they are not getting an equal slice of all of the stocks in the 500. Currently, the top five companies in the 500 make up over 20% of the index. By comparison, an equal-weighted index fund will do just that – invest an equal amount across all of the stock in the index. Here is a chart to illustrate how the performance of these two strategies may differ by using the SPDR S&P 500 market-cap-weighted fund (SPY) and the Invesco S&P 500 equal-weighted fund (RSP). 

The one-year performance chart of these two investments ends in relatively the same place. However, a closer look at the chart will show how the two investments behaved differently throughout the year. This next chart, representing the five-year performance of both investments, shows the more dramatic separation. 

This isn’t to say that one method is superior to the other, but rather, to illustrate the differences in index investing as well as the importance of knowing what you own in your investment portfolio. 

PASSIVE VERSUS FACTOR STRATEGIES

In the infancy of index investing, the idea was to model a well-known stock or bond index and simply follow the performance of the stocks in the basket. This eliminated the need for dedicated portfolio managers to use their expertise to pick stock or bond winners for their portfolios. The logic was simple: Why try to beat the performance of said index year-in and year-out when you can participate in the performance of the index. This is the way it went for many years until the development of factor strategies. Factor investing was a groundbreaking idea that would theoretically take a good idea – index investing – and make it significantly better. Typically, factor strategies will start with an index and use factors such as profitability or price-to-earnings ratios to weed out underperforming companies and then rank the remaining companies in the index. The idea is centered around the thought that not all of the companies in any given index are solid investments. Why own the bad with the good? Of course, this idea also relies on the correct combination of factors to determine what defines a “good” company and what defines a “bad” company by way of their investment merit. While the past five years have been difficult for many of the factor investment strategies, there are also periods when they dramatically outperform.  

When index investing was created and began to gain traction in the 1990s, it was difficult to see where it might lead. Many investment ideas have come in quickly, had their day in the sun, and went away almost as quickly. Index investing is not one of those ideas. It is as popular today as it has ever been, and the daily creation of new funds is evidence of that growth. Investment companies will continue to tinker with different ways to package their index offerings and try to build a better mousetrap. But, in the end, millions of inventors still prefer to own the funds from the early days, and that isn’t likely to change any time soon. 

Nate Condon

2022 Investment & Market Outlook Guide

Syl Michelin’s piece is part of Walkner Condon’s 2022 Investment & Market Outlook Guide, a comprehensive reflection of 2021 and glimpse at the factors impacting the year ahead in 2022.

Reviewing Sector Performance in 2021 and Positioning in 2022

Reviewing Sector Performance in 2021 and Positioning in 2022

A LOOK AT SECTOR PERFORMANCE

Every single U.S. sector, as determined by S&P Dow Jones Indices, posted gains in 2021. You heard that correctly, every single one! Of course, each sector doesn’t move in unison, so let’s explore this a bit further. 

The energy sector was the big winner in 2021, whether it be large-cap, mid-cap, or small-cap companies. They posted 2021 gains of 53.4%, 71.3%, and 60.0%, respectively. Real estate also had a solid 2021, posting gains of 46.2%. 

One thing that we talk a lot about is cyclicality and reversion to the mean. When we are talking about sectors, cyclicality means that sectors generally go in and out of favor. Said another way, a sector that outperforms one year may underperform the following year or vice versa. For example, let’s look at what energy did in 2020 (keep in mind we just talked about it being the big winner in 2021). Returns for large, mid, and small-cap energy stocks were -32.8%, -42.8%, and -40.0% respectively. From 2020 to 2021, energy went from the worst-performing to the best-performing sector. 

Financials is a sector that many are looking at opportunistically in 2022. The reason being is that banks are one of the few places that benefit from rising interest rates. One of the key points to take away is that it’s unlikely that a single sector can consistently be the “winner” year-in and year-out over the long haul.

A Look at Factor Performance

Factors are another variable, like sectors, that move in and out of favor. Most people are familiar with sectors, but might not be able to list as many investment factors off the top of their heads. BlackRock describes factor investing as “an investment approach that involves targeting specific drivers of return across asset classes.” Factor investing is not passive; one tries to find attractive attributes of a security that will enhance returns and/or reduce risk. There are macroeconomic factors and style factors. Similar to the sector discussion above, each of the seventeen factors (among S&P 500 companies) delivered positive returns in 2021. The top performing factor in 2021 was High Beta, at 40.9%. 

One item that many clients have asked about over the last several years is growth versus value. Growth has dominated value in recent memory, including in 2020 when it outperformed value with a 33.5% return vs. 1.4% return. In 2021, S&P 500 growth again outperformed S&P 500 Value, 32.0% to 24.9%. In 2022, we might see growth and value continue to have less of a dispersion compared to the 2010s, where growth significantly outperformed value. Momentum, the worst performing factor in 2021– granted it still produced a 22.8% return – was the third-best performing factor the year prior when it returned 28.3%. Momentum is another good example of a factor that outperformed the general index in one year (2020), only to underperform the index the following year (2021). 

Where to go from here?

Does this mean that you should only own energy? Or only own high beta? Of course not. There is generally a reversion to the mean. Again, most investors need exposure to a diversified portfolio and a disciplined investment process. Rebalancing is one technique to help take small gains over time and not become too concentrated on a single sector or factor. 

Note that diversification doesn’t imply that owning every sector equally-weighted is always the best approach, either. If you own an S&P 500 index fund, you own every sector, but in different weights. If we’re looking at the end of 2021, 29.2% of your S&P 500 exposure would be in information technology alone. Also, keep in mind that true diversification includes more than just sector diversification. Having a mix of uncorrelated assets from a geographic, asset class, and allocation perspective must all be considered when building a diversified portfolio.

Mitch DeWitt, CFP®, MBA

2022 Investment & Market Outlook Guide

Mitch DeWitt’s piece is part of Walkner Condon’s 2022 Investment & Market Outlook Guide, a comprehensive reflection of 2021 and glimpse at the factors impacting the year ahead in 2022.

2022 Investment and Market Outlook Guide

2022 Investment and Market Outlook Guide

Walkner Condon’s team of experienced financial advisors explores key topics that are top-of-mind as we transition out of 2021 and into a new calendar year, featuring the market outlook and review from Syl Michelin, a Chartered Financial Analyst™. Other topics include index funds, sector & factor performance, a pair of U.S. expat-focused pieces, and more.

Below you can find a breakdown of the individual pieces in this year’s outlook. 

1. The Year of Impossible Choices: 2021 Market Recap & 2022 Outlook
Syl Michelin, Chartered Financial Analyst™

Through a lens of current and historical data, Walkner Condon’s resident CFA® explores the last year in the markets, with an eye on factors that may impact 2022. 

2. It Only Gets Harder from Here: Valuations, Bond Environment & Wage Growth
Clint Walkner

With a multitude of market highs throughout 2021 and a long stretch of gains post-2008 financial crisis, it would appear the “easy” money, if we can call it that, has been made. In this piece, Clint dives into the three main challenges as we move forward into 2022.

3. Reviewing 2021 Sector and Factor Performance and Positioning in 2022
Mitch DeWitt, CFP®, MBA

The markets were up routinely throughout 2021, but that doesn’t mean the gains were shared equally. Mitch discusses the sector winners (and losers) of the last year, along with what factors – things like high beta, value, and quality – had their day in the sun. He also goes into what might be on the horizon this year.  

4. Exploring Index Funds: History, Construction, Weightings & Factors
Nate Condon

The goal of this piece from Nate is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies.

5. Three Reasons to Look at Investing Internationally in 2022
Keith Poniewaz, Ph.D.

Though the U.S. dollar had its best year since 2015 in 2021, Keith explains several reasons to think about international investments in 2022, including the very strength of that U.S. dollar, valuations, and the rest of the world’s growth in GDP.  

6. Top Five International Destinations for U.S. Expats in 2022
Stan Farmer, CFP®, J.D.

One of our U.S. expat experts, Stan jumps headfirst into possible locations for Americans to consider in 2022 if they’re thinking about a move abroad – or even if they’re just wanting to dream a little bit. Stan covers ground in South America, Europe, and Asia in this thorough piece, perhaps his first crack at being a travel journalist in his spare time.