There’s a tug-of-war going on in the economy right now. Inflation is stubborn and not coming down as quickly as expected. Yet the job market remains hot as people are spending money at unexpectedly high rates. So what does this mean? We’ve got consumer spending, yet inflation is still high.
Is that the recipe for disaster? Well, we’re going to tell you what we think today on the show. On the Tipping Point today, we’re going to talk about questions you need to be asking yourself to make sure you’re on your path to financial independence
The Big Picture
How you view the market depends on your perspective and how you view the data. If you’re a bear, you’re going to see every bit of news as negative and miss the big picture. If you’re bullish and optimistic, you’re going to see the positive or you’ll see it realistically.
The Producer Price Index PPI came in hotter than expected which could be considered bearish. But the macro picture shows it has been cut in half over the course of the last couple of months
Inflation is now at 6.4% – but it peaked at 9% last summer. That’s a big drop.
When you know the macro environment, you can see the macro picture. That’s much more important as an investor. Look at the overall data – China’s opening up, inflation’s moderating, the price of oil is down, people are spending money.
”Markets don't care if the news is good or if the news is bad. All it really cares about are things getting better or are things getting worse.Bob Payne
Just buying the S&P 500 is not diversification
Before the S&P 500 became overweighted in five large-cap tech companies it was a great diversifier. But because the index is capitalization weighted, it’s now dominated by the Big Eight tech stocks that represent 20% of the entire index. So today, what you have to do is you have to diversify.
”... a big mistake a lot of investors are going to make moving forward here... they're just going to own the S&P and there's a good chance they're going to be very, very disappointed.Ryan Payne
The Tipping Point
How do you design your wealth strategy for 2023? What are some of the critical questions you need to ask yourself?
Do I have the correct amount of risk in my portfolio?
As a retiree you need cash flow, you need income, you need balance. One of the keys to good financial planning is making sure you have the right balance between the two types of risk:
- You have too much money in the market and maybe last year you had too much money in tech or growth and you said, “Whoa, wait a second.. my portfolio went down way more than I expected.”
- On the flip side, you’ve had too much money in cash for too long, earning almost nothing on your money, as inflation now is at a 40-year high. That’s a lot of risk, too, because your money is not growing over inflation long term, you’re losing purchasing power.
”In bull markets... you're chugging along at 8, 9% in a balanced portfolio... you're sitting there fat, dumb and happy. But then the guy next door doubled his money in cryptocurrency and you're jealous and you think, Oh, my God, I'm a poor investor.Bob Payne
”... in a bear market, you end up putting too much money in cash, missing the recovery. Some panicked into CDs at the end of last year and missed a magnificent rally.Ryan Payne
It all goes back to figuring out what your goals are and what that balance is between safer investments like bonds, and cash, and what risk in the markets is right for you.
It’s one of the biggest mistakes investors tend to make. The best returns in wealth creation that the markets generate comes from the compounding of your dividends and your interest in a diversified portfolio. Take last year for example, you’re all in large-cap growth, and all you did was lose 30%. When something is down 30% it’s a great time to add more money. But if all your money is in the same category, there’s nowhere to draw additional funds to take advantage of that. You miss out on that compounding and as a result, underperform dramatically. The other side of that coin is compounding can work against you, too, with inflation.
”If you're sitting with too much cash, inflation over time will erode your purchasing power – you're going to lose 50% of your dollar every 20 years.Chris Payne
Am I utilizing every tax benefit available to me?
From the portfolios we look at every month, most of us are not utilizing all the tax benefits available to us, and we’re probably leaving, in some cases, hundreds of thousands of dollars on the table. If you educate yourself on all the tax breaks out there it has a huge impact positively.
With the new tax law that was passed at the end of the year, Secure Act 2.0, there are ways to really optimize your tax situation. But the rules keep changing so you’ve got to be aware of what’s happening and you’ve got to be smart about it.
Some are just not aware of what tax benefits are available, whether it’s converting money to a Roth or backdoor Roth IRA. There are so many ways to create tax-free income in retirement by doing simple little strategies.
”There's no reason not to take a tax loss harvest when things are down. But people don't like taking losses. They're not using their brain, they're using their emotionsBob Payne
”I spoke with somebody last week and they said they're maxing out their 401k putting in the $19,000 a year that they're able to. And I informed them that in fact, they're able to put in $22,500 a year. The IRS gave us a generous increase in that.Chris Payne
Do I have a budget this year? Am I on track with what I need to be saving for retirement?
This isn’t the fun stuff, but all these numbers need to be figured out. We spend a good portion of our time just helping clients budget, figuring out whether you’re in the wealth creation stage, “am I saving enough?” or in the wealth distribution stage, “am I taking too much or too little?”
Most of the people that walk through our door do not have a clue as to what they spend. For the people that think they have a clue, it’s usually 30 to 40% more than what they thought.
”It's early enough in the year to really get on top of this and say let's figure out where I am in terms of my budgeting, what my risk should be in my portfolio, what tax advantages I have. These are simple things that have a huge impact on your financial health.Ryan Payne
Hidden Facts of Finance
ChatGPT has hit an estimated 100 million monthly active users, making it the fastest-growing consumer internet application in history, according to a UBS study. An exciting development in artificial intelligence.
Recent tech layoffs have been widely publicized as a warning sign of more reductions in the overall U.S. labor force. However, the tech sector isn’t really that representative of the economy at large. The information industry only accounts for about 2% of all nonfarm payrolls.
For individuals, single stock buying has been dominated by one market darling this year, Tesla. Over the past several weeks, Tesla has accounted for roughly a third of all single-stock net purchases by individual investors according to Vanda Research.
British Petroleum says it will invest 1 billion more a year in both fossil fuels and energy transition businesses through the year 2030, leading to higher oil production and more renewables. Ironically, traditional energy companies will be one of the biggest investors and providers of sustainable energy in the future.