The Investment Scientist

Archive for January 2010

Is it how you treat you stocks?

At the end of last October, the Chinese stock market index was up 70% for the year. One would expect Chinese investors to be making money hand over fist. Not so, the Chinese Securities Investor Protection Agency, the equivalent of SIPC, did a survey of investors in November that garnered 2,791 valid responses. The result was shocking.

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Guest author: Mike Piper

There are inherent conflicts of interests between for-profit mutual fund companies and the investors in funds run by such companies. For example:

  • Investors benefit from low expense ratios. Fund management benefits from high expense ratios.
  • Investors benefit from plain-English, thorough disclosures regarding costs and conflicts of interests. Fund management benefits from poor disclosures.

A reader (we’ll call her Martha) recently asked me if such problems could be avoided by using mutual fund managers who have the interests of their investors at heart.

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There is one important rule to keep in mind when it comes to converting a traditional IRA to a Roth IRA – you need to pay federal income taxes on any portion of the conversion that you haven’t already paid taxes on.

Example 1

For example, let’s say you started to fund traditional IRAs in 2006 and by 2010 you’ve got $20,000 in your account.  Furthermore, let’s say this account consisted of four years of $4,000 non-deductible contributions – a total of $16,000 in non-deductible contributions and $4,000 in account growth.

In this example, you’d need to pay income taxes on the $4,000 in fund growth when you convert to a Roth IRA.  But the good news is you’ll never have to pay income taxes on this account again.

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When I started this blog 30 months ago, my only goal was to disseminate the best investment research done in academia.

Much of the so-called investment research produced by the financial industry (aka Wall Street) and purveyed by the media is nothing more than advertisement in disguise. The truly rigorous and unbiased research is often done in the nation’s best universities, like Yale, Harvard, and the University of Chicago. This research is not accessible to the vast majority of investors who are not academically trained. My blog was meant to change that, thus the title “The Investment Scientist.”

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Boo-Yahhh

Never underestimate what a bull market could do to Jim Cramer. After shying from making any top picks for 2009, presumably because he didn’t see any stocks worthy of buying at the beginning of 2009, he is back to his own game with a vengeance this year. We’ll see if his 2010 picks below will turnout as dismal as his 2008 ones.

  • Apple (AAPL)
  • Google (GOOG)
  • Crown Castle (CCI)
  • American Tower (AMT)
  • SBC Communications (SBC)
  • Skyworks Solution (SWKS)
  • Altera (ALTR)
  • Cypress Semi (CY)
  • Xilinx (XLNX)
  • Amazon (AMZN)
  • Cisco (CSCO)
  • Electronic Arts (ERTS)
  • Qualcomm (QCOM)

This past Christmas, I had the distinct pleasure of calling several of my clients in retirement and telling them their portfolios are back to their pre-crisis level and their financial freedom is safe and sound.

Their portfolios are variations of the so-called 60/40 portfolio – about 60% in equity-like investments and 40% in bond-like ones.

icarra chart

Many other 60/40 portfolios have been decimated by this crisis. Even with recent gains, they are still far from recovering all their losses. How did I manage to pull even for my clients? There are a few key lessons I’d like to share.

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Author

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]mzcap.com.

Twitter: @mzhuang

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