The Investment Scientist


e61c4cba-818c-4330-98e4-f83600ebfa53.jpegRecently, I took a one-week trip to China, primarily to thank my English teacher. Since late last year, it had dawned on me that I had been so busy chasing my own success that I had forgotten to properly thank those people who made my success possible in the first place. So my new year’s resolution was to identify those people who had the most positive impact on my life and go thank them personally.

Teacher Huang is one such person. He started the first ever English immersion program in China, and he poured his heart into teaching us English. Without him, I wouldn’t have the language skills to accomplish what I have now

He lives in Guangzhou, China though, which takes nearly 24 hours of travel to get there. No matter, I made up my mind to do that. I wrote him a thank you letter, carried it with me, and I read it out loud in front of him and his family. We both were choked up in tears. This is a picture of me with my English teacher.

  1. I learned that Teacher Huang has kept me in his memory for all these years. He filled me in with many details of my middle school years that I had forgotten.
  2. Seeing his white hair, I felt like I had been an ungrateful student who took 30 years to come thank my teacher. But seeing how happy he was, I also felt like I’d made amends. Read the rest of this entry »

US_Dept_of_Labor.jpgRecently Department of Labor issued a fiduciary rule that requires that financial advisors who manage retirement accounts must act in clients’ best interests.

Here is the quote from a Wall Street Journal report …

About $14 trillion in retirement savings could be affected by the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.

Still, reflecting intense lobbying from the financial industry, which has fought the regulation since it was first proposed six years ago, the final version includes a number of modifications.

This might come as a surprise to many people that financial advisors do not need to act in clients’ best interests up until this day.

Alas, as I explained in this article, there are really two types of financial advisors: Read the rest of this entry »

60 40 portfolio.jpgThe 60/40 portfolio, one that consists of 60% equity and 40% bond, is very common. Most of my clients use a variation of this portfolio. Because of this, I want to understand how this portfolio performed in the past.

For this study, I use the S&P 500 for the equity portion and the 10 year treasury bond for the bond portion. The market data I use is from 1928 to 2015. Note that this period includes the Great Depression.

The portfolio is rebalanced every year to maintain the 60/40 allocation. Then I examine five return intervals: 1 year, 2 years, 5 years, 10 years and 20 years. For each return interval, I calculate the average return, best return and worst return.

Here are the results I get. Note all numbers are annualized returns without the % sign.
Interval 1 year 2 years 5 years 10 years 20 years
Average 8.55 8.55 8.55 8.55 8.55
Best 32.85 25.75 20.15 16.04 14.78
Worst -27.55 -20.6 -5.37 1.8 3.48
What can I learn from these results?
  1. The 60/40 portfolio can still be quite risky in the short term. Note that the worst returns for the 1 year and 2 year intervals are -27.55% and -20.6% respectively. These are steep losses nobody likes. Read the rest of this entry »

capitalmarkets.jpgRecently a client asked me why we bother with investing in international markets.  After all, the S&P 500 has done quite well in the last year. Indeed, it has outperformed foreign markets three years in a row, and by a huge margin to boot. Take 2014 for example-the S&P 500 was up 13%, while the international markets on aggregate were down 5%.

So why then? Well, let’s look at this table …

Screen Shot 2016-03-22 at 7.20.53 PM.png

Read the rest of this entry »

inflation.pngRecently, I did a long horizon return study based on 100 years of stock market data and inflation from 1916 to 2015.

The study assumes a 20-year investment horizon. If your primary reason for investment is for retirement security, this is the horizon that should apply.

In the study, I looked at rolling 20-year stock returns, inflations and (after inflation) real stock returns. I present the results in the table below. The first and second columns are the beginning and ending years of the 20- year period. The third column shows the nominal growth of $1 invested in S&P 500 in the corresponding period. The fourth column shows the shrinkage of $1 due to inflation in the corresponding period. The fifth column shows the real (after inflation) growth of $1 invested in S&P 500.

There are some fantastic insights from the data:
  1. During the last 100 years, inflation (cash is losing value) is the norm, while deflation (cash is getting more valuable) only occurs during the Great Depression.
  2. In the 20-year span that has the worst inflation (between 1968 and 1987,) cash loses 71% of its value.In the medium case, cash loses 45% of its value in 20 years.
  3. During the last 100 years, stocks always make money in any given 20-year period. Even in the worst 20 years (between 1929 and 1948) which includes the Great Depression, you get $1.95 for $1 invested in stocks. (If you use my dividend strategy, you could do a lot better.)
  4. In the medium scenario, stocks give you 4 times real return; In the best scenario, stocks give you 10 times real ret Read the rest of this entry »
Retirement securitymutual funds .jpg
Like most investors out there, I buy stocks (mostly stock funds) primarily to build my retirement security.

The whole world’s productive assets (TWWPA)
Unlike most investors out there, I don’t pick individual stocks. I construct a portfolio of low cost funds that represents the whole world’s productive assets. For the sake of simplicity, let’s give it a symbol – TWWPA.

As long as human race exists, TWWPA will keep growing in fundamental value by the simple fact that we (human race) are growing in number and we are demanding ever increasing living standards. The market value of TWWPA will fluctuate, but the fundamental value will not.
The more TWWPA you own, the more secure is your retirement.

Why I am happy
Every month, I invest $10,000 to buy TWWPA. Since stock prices have fallen about 15% due to irrational fear of oil price dropping and China not building as many ghost towns, I get to own more TWWPA with the same amount of money. Fear will dissipate sooner or later, but the more TWWPA I own will remain mine.


That’s why I am happy!

Read the rest of this entry »

It seems every other dchina market.jpgay or so, another shoe drops in China that sends the world market into tailspin. What the heck is going on there?

In 2008, the US was hit by the worst financial crisis since the Great Depression. Between 2008 and 2013, US industrial production contracted about 5%, Japan and Europe did even worse, they were down more than 10%. But China’s industrial production more than doubled during those five years. By 2013, it was 30% larger than that of the US.

What give? Alas there was a stimulus package in China (with borrowed and printed money) to build high speed rails, airports, metros, ports, and more than a few ghost towns. This infrastructure building binge created a massive but artificial demand, while growing government debt to 280% of GDP.

For a time, it was almost magical. China was growing by 10% while other countries were in recession and China was credited with saving the world economy.

But this growth model is not sustainable: there are only so many ghost towns you can build before running out of ghosts. So starting about 3 years ago, China scrambled to find a new growth model that is based on domestic consumer demand (as opposed to export,) services (as opposed to manufacturing,) innovations and entrepreneurship (as opposed to government command and control.) 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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