Are Index Funds Still Diversified? Concentration Risk and a Top-Heavy Market

14:41Anna Helhoski:But should the average investor be rethinking how they're constructing a diversified portfolio?

14:48Ryan Sterling:Yeah, absolutely. Once again, I think people need to be adding more international as part of their portfolio. I think bonds play a role in the portfolio. People say all the time, hey, I'm young. Why do I need bonds? Bonds provide current income, but they also mute volatility. And when you look at bonds right now at 4 % or so, I'll take a 4 % income to have some sort of stabilizing force in the portfolio. You know, I also, I keep going back to small caps and mid caps. You know, when you look at the valuation disconnect between large caps and small caps, it's the largest that we've seen since the late 1990s.

15:22Ryan Sterling:Okay. So what happened after the late nineties? Well, small caps outperformed large caps in a meaningful way. Non-US outperformed US in a meaningful way. So again, this goes back where history does rhyme. We're not calling for this to happen tomorrow, but we do think broadening out the allocation to include more asset classes that aren't as, yeah, so some correlation, but you don't necessarily see the same overlap. I think this is really important for investors because if you're just 100 % in the S &P 500, I think the biggest risk that you face today is that you see a lost decade.

15:55Anna Helhoski:So if you're someone who is working on diversifying, are there any other ways that people can manage or reduce their exposure to concentration risk?

16:04Ryan Sterling:Yeah, I mean, it goes back to, again, looking at the different line items in your portfolio. So the different investments in the portfolio and looking in and digging to see, is there overlap? Because again, you could have 10 different funds in your portfolio, but all 10 funds could contain all the same stocks and all be the same strategy. So there's a lot of overlap within index funds. So I think, again, knowing what you own and being crystal clear in terms of every investment that you make in your portfolio, knowing the role that it plays in the portfolio.

16:37Anna Helhoski:Got it. All right. Well, Ryan, thank you so much for joining us today.

16:40Elizabeth Ayoola:Really appreciate it.

16:41Ryan Sterling:Yeah, thank you so much.

16:42Elizabeth Ayoola:Thank you, Anna and Ryan, for reminding me to take a look at my portfolio and make sure the index funds that I'm invested in are diverse enough. Once again, Ryan is a wealth advisor with NerdWallet Wealth Partners. If you're considering working with a financial planner like Ryan, then visit NerdWalletWealthPartners.com. We're going to include a link to that site in today's episode description.

17:06Sean Pyles:Up next, we answer a listener's question about catch-up contributions and how to fund accounts for maximum benefit. But before we get into that, listener, you know the deal. This is a show that runs on your financial questions, so send them our way.

17:19Elizabeth Ayoola:Maybe you're trying to figure out how to diversify your own portfolio, or you're a new investor and want to know the way to get started in the market. Whatever your money question is, we want you to text us, leave a voicemail at 901-730-6373. That's 901-730-NERD. We see you guys' comments, so please leave a comment on Spotify, or you can email us at podcast at nerdwallet.com.

17:46Sean Pyles:In a moment, this episode's money question. Stay with us.

17:54Elizabeth Ayoola:Today's episode is sponsored by Spectrum Business.

17:56Sean Pyles:Picture this. You're running a business and the internet drops during business hours. Your to-do list instantly becomes one, panic. Two, stare at the router like you're negotiating with it.

18:07Elizabeth Ayoola:And three, start offering customers a brief moment of mindfulness while the checkout screen loads.

18:12Sean Pyles:For business owners, being connected isn't a perk. It's how you take payments, talk to clients, and keep things moving.

18:18Elizabeth Ayoola:Spectrum Business keeps businesses connected seamlessly with fast, reliable internet and advanced Wi-Fi. Plus phone, TV, and mobile services if you need them.

18:27Sean Pyles:And Spectrum Business offers 100 % U.S.-based customer support 24-7 to help you stay up and running. That means you get actual help, not submit a ticket and hope for the best.

18:37Elizabeth Ayoola:Our colleague Carrie is a Spectrum customer. Shout out to our social media team. And she told us that she chose Spectrum because people online kept recommending it as a reliable and affordable option for internet and phone service.

18:49Sean Pyles:Carrie told us she was actually a little hesitant to switch at first because she'd been using a different service for a while. But after a year with Spectrum, she's had a really good experience. Her phone gets strong, reliable service and automatically connects to Spectrum Wi-Fi everywhere.

19:02Elizabeth Ayoola:Join the millions who rely on Spectrum business. Visit Spectrum.com slash business to learn more. One more time, that's Spectrum.com slash business.

19:11Sean Pyles:Restrictions apply. Service is not available in all areas.

19:14Anna Helhoski:When you want your spring break to feel like... And your kids' pool day to feel like... And your hotel bed to feel like... Ooh, and room service to feel like... Because at Hilton, hospitality feels like...

19:33Sean Pyles:Your cabana's ready. Would you like fresh towels?

19:36Anna Helhoski:It matters where you stay. Book now at Hilton.com. Hilton, for this day.

19:45Elizabeth Ayoola:We are back. And we're answering your money questions to help you make smarter financial decisions. This episode's question comes from Batilda via Spotify. Yes, we do take listener questions via Spotify and we love comments too. So please leave them for us. All right, here's a question. In a future episode, can you talk about catch-up contributions for higher earners only being allowed in Roth 401k versus traditional? Not sure that I understand what FICO wages are. Batilda.

20:14Sean Pyles:To help us answer Batilda's question is no one. Elizabeth and I are taking this on ourselves this episode. So I'll start with a rundown of how Ketchup contributions work, how you qualify and how much you can tuck away. Ketchup contributions allow people in the later stages of their working years to save extra for retirement using workplace retirement accounts like a 401k, 403b or even non-workplace accounts like IRAs. You become eligible on January 1st of the year that you turn 50. In terms of how it works, you first max out your retirement accounts, be it a 401k or an IRA. And then you can save an additional amount with the catch-up contributions.

20:55Sean Pyles:You can make catch-up contributions to multiple accounts, but your contributions across your retirement accounts shouldn't exceed the limit. And a fun fact for the history buffs out there, catch-up contributions became a thing in the early 2000s and were just around$2 ,000 back then. They're much higher now.

21:12Elizabeth Ayoola:In the early 2000s, I was busy wearing bell bottoms and watching music videos. So yes, same here.

21:18Sean Pyles:Low rise jeans and a lot of Madonna and Cher for me.

21:22Elizabeth Ayoola:Yes. Good to see Sean.

21:24Sean Pyles:As a child. Yeah. Okay. Well, fast forward to 2026. You can make an$8 ,000 ketchup contribution to a 401k and a$1 ,100 ketchup contribution to an IRA. This is in addition to the annual contribution limit on those accounts. The catch-up contribution limit and rules vary depending on the type of account that it is. Super catch-up contributions were introduced in 2022 with the Secure Act 2.0. It allows folks from 60 to 63 a higher catch-up contribution amount of$11 ,250 to a 401k, 403b, and 457 plans and thrift savings plans. So you can make both traditional and Roth catch-up contributions, but because of some recent changes, a lot depends on your income as Batilda was alluding to.

22:11Elizabeth Ayoola:Right. Batilda mentioned changes to how high earners can make catch-up contributions this year. Now the change states that if you are a high earner making FICO wages over$150 ,000, then you have to make those contributions to a Roth account. And that Roth account can be an IRA, it could be a 401k, anything of the likes. Now let's answer Batilda's question about what FICA taxes are first, and then we can look at the implications of the new changes. FICA stands for Federal Insurance Contributions Act and is federal payroll taxes that funds some social insurance programs now. Both you and your employer contribute to this tax.

22:52Elizabeth Ayoola:6.2 % of your gross income goes to paying Social Security tax, and then another 1.45 % goes to Medicare taxes. Good thing is that your employer matches each of those contributions, so you're not paying the whole thing yourself. And also, it's worth noting that FICA taxes are separate from your federal income taxes that you pay. And then really quickly, because I always hear about this all the time, I want to add that a common misconception about FICA taxes is that they're like a savings account for your future retirement benefits. I'm sorry to break it to you, but they're not. Now, those taxes help to pay benefits for people who are currently retired and for other benefits like disability, surviving spouses, and the likes.

23:32Elizabeth Ayoola:Now, anything that isn't used goes towards Social Security trust funds, and it's invested in special issue U.S. Treasury securities.

23:40Sean Pyles:That's probably more than anyone thought they would ever want to know about FICA taxes, but it is helpful to know where your money is going. These taxes aren't just going into the abyss, at least not all the time. It's going to help people with their benefits. So it's nice to know. All right. So I'm going to pivot to the new changes to catch up contributions and why they've been made. Back to the SECURE 2.0 Act. As we mentioned, this act made it so people who make more than$150 ,000 from the year before have to make after-tax contributions into a Roth beginning January 1st of this year, 2026. Prior to this rule, there was no income cap for the catch-up contributions and the type that they were.

24:17Elizabeth Ayoola:A downside of this new rule is that if you are earning more now than you anticipate you would have, say, during retirement, you're likely going to end up paying more in taxes. I know that sucks. But on the other hand, if you were able to defer your taxes until retirement, you could potentially pay less in taxes, obviously depending on where tax rates are when you would potentially retire in some time in the future. Are there any other downsides of this new rule that you can think about, Sean?

24:42Sean Pyles:Well, a smaller paycheck is probably the most obvious one here. There are some other benefits of this change too, including tax-free withdrawals in retirement. Also, Roths aren't subject to required minimum distributions of the original owner of the account, and you face that with something like a 401k. So that's more money that you can leave to grow in the market or leave for your beneficiaries. The new rule also potentially forces you to diversify your tax situation, which is a plus if you haven't done that so far.

25:08Elizabeth Ayoola:That's right. Now, for people who are bummed about the recent changes and who earn close to the$150 ,000 cap, one of the things that come to mind that you can do is looking for ways to lower your taxable income. You could do that through making contributions to a health savings account. Did you guys know I love health savings accounts? Yes, I do. So they do have triple tax benefits, which is why I love them so much. So you can make tax deductible contributions, you get tax free growth, and also you can make tax free withdrawals on qualified expenses.

25:39Sean Pyles:Something else I'm thinking about here is how many people even make catch up contributions. We know that a lot of folks aren't saving nearly enough for retirement. So are people even maxing out their accounts enough to be able to make catch up contributions?

25:51Elizabeth Ayoola:That is a wonderful question, Sean, and I have an answer for it because I looked. Only 16 % of eligible participants, those who are 50 and older, actually made catch-up contributions to their employer-sponsored plans according to the latest Vanguard, How America Saves 2025 data. Now, as you said, Sean, that's probably not shocking as a small percentage of people. That's about 14 % actually max out their account anyway. And those are the people who catch-ups might make the most sense for, honestly. It's probably a good idea for folks to utilize these catch-up contributions if they have the means to, because it gives you a chance to bulk up your retirement savings and also capture all of those yummy benefits, whether it's a Roth or traditional retirement account.

26:33Elizabeth Ayoola:All right, Sean, Mr. CFP, I want you to give us an example of how catch-up contributions could boost retirement savings. Let's look at the numbers.

26:41Sean Pyles:Okay, I'm going to talk about a lot of numbers, so maybe pull out a pen and paper or just get your brain ready for that. So let's say Denise is 50 and has current retirement savings of$350 ,000 in a 401k. The annual rate of return on her investments is, let's say, 7%, and she plans to retire at 65. In 2026, the standard 401k limit is$24 ,500, and the catch-up contribution for those 50 or older is$8 ,000, as we said before. So Denise can contribute up to$32 ,500 per year. So if she diligently did that over the next 15 years, she would have about$1.78 million. Not bad. If Denise only contributed the max of$24 ,500, she'd have about$1.58 million.

27:30Sean Pyles:Still not a bad amount of money, but it's a$200 ,000 difference roughly. So if you want to play with some of these numbers yourself, check out NerdWallet's investment calculator. We will link to that in the show description.

27:41Elizabeth Ayoola:And I just have to say$200 ,000 is not small money. I can think of 10 million or maybe 200 ,000 things I would do with$200 ,000. Now, while all of this math sounds lovely, thank you for doing that, Mr. CFP. We do have to point out that not every employer sponsored retirement plan offers the Roth feature. But luckily, there are still ways for those who are 50 and older to boost their retirement savings. Now, one thing you all can do is put catch up contributions into an IRA instead. You can't save as much as you would with a 401k. The annual contribution limit for an IRA in 2026 is$7 ,500. And then you get$1 ,100 in catch-up contributions.

28:22Elizabeth Ayoola:And Roth IRAs are subject to income level restrictions, but something's better than nothing.

28:27Sean Pyles:Although if your income is too high to contribute to a Roth IRA, you could explore a backdoor Roth IRA. That's a strategy where you contribute non-deductible funds into a traditional IRA and then convert them to a Roth. There's often a tax bill involved, so just be prepared for that. But you could potentially put$8 ,600 of non-deductible dollars into a traditional IRA that includes the standard limit and the catch-up 2, then convert that to a Roth. But beware of the pro-rata rule. We won't go too far down this rabbit hole because it's really technical, but you could potentially be on the hook for even more in taxes or a taxable that you just weren't expecting if you didn't look into this rule beforehand.

29:07Elizabeth Ayoola:That's it. It can get really complicated. So you want to seek financial advice before you do that. All right, Sean. So I just want to know what your thoughts are on this new rule.

29:17Sean Pyles:I think it's a great way for the government to get their taxes now instead of later.

29:23Elizabeth Ayoola:I agree, but I have a little rant. I don't know. No, I think it's a strange role. It's a strange role because when you think about it, people who are 50 and older are hopefully in their highest earning years. And then it's like they're being penalized after working all these years to get to that point of being a high earner by losing the tax break. And I think these tax breaks can be helpful because they lower your taxable income if that's something that you want to do. And then my other thought is that retirees and seniors as a whole tend to be vulnerable. And I think they should be able to get that tax break if they need it so they have a better chance at a comfortable retirement.

29:56Elizabeth Ayoola:We know so many retirees aren't comfortable right now, you know, because they didn't save enough or life happened and so on and so forth. But like you said, Sean, I get that the government needs their tax dollars, but I'm not going to go into my thoughts on how those tax dollars are being used.

30:10Sean Pyles:We can talk about that another time. But I think this all goes to show that the priority here wasn't maybe giving people an option to save as much as they could for retirement. It was really about the government getting their money now versus later.

30:22Elizabeth Ayoola:Uh-oh, I think it's a good note to end the episode.

30:25Sean Pyles:Well, that's all we have for this episode. Remember, listener, that we're here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com.

30:41Elizabeth Ayoola:We would love, love, love if you would join us next time to hear about climate change and the financial impacts of home ownership. useful episode if you were planning to buy a house or own one. In the meantime, follow Smart Money on your favorite podcast app that is Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

31:01Sean Pyles:Here's our brief disclaimer. We are not your financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

31:10Elizabeth Ayoola:This episode was produced by Tess Figland, Hilary Georgie Help With Editing, Nick Kersamee, and Eve Krogman Helmar Audio and Video Production. And a big thank you to NerdWallets editors for all their help.

31:22Sean Pyles:And with that said, until next time, turn to the nerds.

31:30Anna Helhoski:I'm Micah Sargent, co-host of iOS Today alongside Rosemary Orchard, and we hope you get more from your iPhone, from your iPad, from your Apple Watch, from your Apple TV, all of it. Apps, tips, clever tricks, and the updates you should know about. It's informative. It's fun. It's full of things you'll want to try right after the show and have a few laughs about as well. Check it out at twit.tv slash IOS. That's twit.tv slash IOS. Rinse knows that greatness takes time, but so does laundry. So Rinse will take your laundry and hand deliver it to your door expertly cleaned. And you can take the time pursuing your passions.

32:10Anna Helhoski:Time once spent sorting and waiting, folding and cueing, now spent challenging and innovating and pushing your way to greatness. So pick up the Irish flute or those calligraphy pens or that daunting Beef Wellington recipe card and leave the laundry to us. Rinse. It's time to be great.