The Investment Scientist

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This is, unfortunately, an all-too-common story I have heard. A new client of mine told me that hisfather bought a $500k whole life insurance policy for him 26 years ago, hoping that when he died he would leave half a million dollars to his children. (26 years ago, that was a lot of money.)

The premium for the insurance policy is $9000 a year. At some point, his dad asked him to take over the premium payments.. Between the two of them, they have already paid in a total of $234,000, but the cash value of the insurance is only $103,000.

Next year, his dad will turn 80 and here is the in-force illustration the insurance company gave him. Basically, even if he continues  paying the premium, his insurance will lapse when his dad turns 83, a mere four  years from now. If that happens, they will have paid $270,000 to the insurance company,  all for nothing. To avoid that outcome, his dad literally has to die in within the next four  years.

When his dad turns 80, the mortality expense of the life insurance escalates to $40k – $50k per year, far more than the annual premium. The shortfall has to be drawn from the cash value. That’s why the cash value will dwindle fast. When there is no cash value left, Read the rest of this entry »

Hedgefund.jpgI took the sensationalist title from a CNBC article I read yesterday. The articles talks about, and I quote, ” … hedge funds, as a category, is experiencing the worst quarter of outflows since the bottom of the financial crisis … there were an avalanche of stories about the industry’s nearly systematic underperforming.”

Readers of my newsletter and blog, The Investment Scientist,  can thank me later for warning them years ago.

On April 28, 2011, I published “A Balanced Portfolio to Avoid (II): Hedge Funds Don’t Deliver Outstanding Returns.” Let me quote my former self: “Hedge funds are often peddled as an unique asset class that are uncorrelated with the market. In reality, hedge funds are as much an asset class as Las Vegas is.” The unspoken message is: you should expect to lose money.

On August 15, 2012, I published “Why You should Avoid Hedge Funds.” I wrote that article after I read the book by former hedge fund industry insider Simon Lack, “The Hedge Fund Mirage.”  I summarized the book in one sentence for my readers: “Between 1998 and 2010, hedge fund fees totaled $440 billion vs. $9 billion profits for investors. Read the rest of this entry »


At the end of June this year, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed possible consequences.

Journalists responded by using the results to craft dramatic headlines and stories. The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into free fall, and tested the strength of safeguards since the last downturn seven years ago.” The Financial Times said “Brexit” had the makings of a global crisis. “[This]represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”

What about those self-proclaimed financial gurus? Motley Fool wrote: “Sell Everything! How Brexit Can Shatter Share Market” and Jim Cramer wrote: “Don’t Buy! Why the Mass Brexit Sell Off is Worth Riding Out.”

It turned out there was no “mass brexit sell off.”

It’s true UK got a new Prime Minister, and the Pound Sterling fell to 35 years low. But within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July, the US S&P 500 and Dow Read the rest of this entry »

Recently, I did a portfolio analysis of a prospective client who has a Wells Fargo “financial advisor.” Here is the result …

Symbol Expense Ratio Load Turnover
CAIBX 0.59% 5.75% 63%
CAPCX 1.66% 1% 89%
FEVCX 1.90% 1% 15%
MIQBX 1.30% 5.25% 29%
OIBIX 0.57% none 111%
WAFMX 2.25% none 34%
WFPAX 1.24% 5.75% 58%

Let me explain …

Load is the initial kickback (coming directly from your account) the fund gives to the broker for directing money to the fund. There are so many no load funds out there, you shouldn’t be paying load. A broker only does that to line his pocket, there is no benefit to you whatsoever.

Expense ratio is what the fund charges every year. As my rule of thumb, any expense ratios higher than 0.5% are too high. Any expense ratios higher than 1% are exorbitant. As you can see, all the fund expense ratios here are either too high or exorbitant! The broker who directed your money to these funds gets to share a portion of the loots ever year. Can you see a conflict here?

Turnover is how often the fund manager churn the investments. The higher the churn rate, the higher the costs to investors. Typically, a 100% turnover translates into about 1.2% in return reduction. As my rule of thumb, any turnover higher than 10% is too high, a turnover higher than 100% is exorbitantly costly! Read the rest of this entry »


Between 2000 and 2002, I worked as head weather derivative trader at PG&E National Energy Group. On the side, I also traded stocks for my personal account.

By the time the Enron Debacle happened, I had already become the third largest weather derivative trader in the country. Given another year, I am quite sure I would have become #1 in this field. Well, that’s a story for another time.

My stock trading, however, was a lot less successful. All the stocks I picked lost money, except for one. The one exception was PCG, the company I worked for. Granted, the time between 2000 and 2002 was a time of market collapse due to the burst of the dotcom bubble, but there is still an important lesson I learned and that I want to share with you.

The lesson was about  information advantage.

Though I was not in management and therefore was not privy to any material insider information, just from the ambiance noise of the trading floor I know so much more about my company than folks outside of the company.That’s why I was able to make money on PCG. That’s also why I didn’t make money in all those other stocks  – I didn’t  have any information advantage. Read the rest of this entry »

charity-1940x1259.jpgI visited a physician client in Wisconsin while on vacation in Chicago this week. He has been my client for several years now and his personal finance is in very good order. As I was driving the four hour stretch of highway, I thought: What idea I could bring to him that could make his situation tens or even hundreds of thousands of dollars better?

This physician client of mine is easily in the top income tax bracket, meaning marginal tax rate for him is nearly 50% combining federal and state. He also gives away about $10k to various charities a year. He plans to retire in about 10 years.

When he retires, he will continue to give away $10k a year. In fact, there is a good chance he will give away more since people become more charitable inclined when they get older and having a meaningful impact becomes much more important to them.

If he lives another 30 years after retirement, he will give away a minimum of $300k. Here is the problem, he will have little income to write off, thereby wasting up to $150k worth of tax savings.

Alas, but there is a way to recapture these tax savings, it’s called Donor Advised Fund or DAF.

Read the rest of this entry »


hard-times.jpgRecently, I had a Review and Discovery meeting with a physician in her late 50s. When I first saw her, she looked  burnt out and stressed. Who can blame her? She has been dealt a very bad hand in life.

  • One of her children suffers from down syndrome and requires lifelong care.
  • Her husband, also a physician, passed away several years ago, leaving behind a financial mess
  • The financial professionals who were supposed to help her, led her to make disastrous investments. She lost her house and had to declare personal bankruptcy.
  • Her father recently passed away, also leaving behind a financial mess.
  • Her mother is so dependent on her now that she cannot continue her medical practice.

She told me she almost wanted to pull her hair out when thinking about her responsibility to her patients, her children, her mother and yet she can’t even sort out her own personal finances.

I did not mince words in telling her how dire her financial situation is. When I told her how much she needs to retire, she almost fell off her chair.

Read the rest of this entry »


Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.

You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]

Twitter: @mzhuang

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