The Investment Scientist

Archive for March 2011

[Guest Post by Tom Warburton of Tulsa, OK] So…a life-long buddy walks into my office.  We exchange pleasantries until the inevitable ‘philosophizing’ begins.  We normally begin with complex issues like ‘what’s the meaning of life’ and as the afternoon progresses we wallow in less mundane initiatives such as ‘why does my wife think I’m crazy’

At a rare quiet moment my buddy states “he is living a fretless life”.

A Fretless Life!

What a nice thought…this sounds ideal.

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My friend DIY Investor found this pearl. I thought it contains incredibly good advice for young investors.

I personally had a few encounters with Google employees (to do their financial review.) In the end, I had to tell them they are fine on their own, they don’t need my help by and large. This is owing to three factors:

  1. Google provides strong continuous education on money, like this Suze Orman talk.
  2. They have a vibrant discussion forum about money inside Google.
  3. Their 401k plan is with Vanguard.

About Suze Orman, her show is the only show on CNBC that actually gives good information. Enough said. Enjoy the talk!

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If you invested $1 in the small cap value index at the beginning of 1927, you would have had $52,892 by the end of 2010. This is according to the recently published Dimensional Fund Advisors’ annual Matrix Book. Included in the book are historical risk and returns of various indices based on capitalization and book-to-market valuation.

Table 1 presents a summary of historical returns. The best returns are marked in green; the worst, marked in red. As one can see, the small cap value index is the best for all the periods considered. And it is the best by a huge margin.

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Recently I asked my assistant John to pull up Harvard Endowment’s 13F filing for Q4 of 2010 and compare it to that for Q4 of 2009 (shown in table below).

Apparently, Harvard Endowment’s year-end position in 2010 had changed significantly from that of 2009. The way I see it, there are three significant changes:

1. At the end of 2009, Harvard Endowment was extremely bullish on emerging markets; the top 10 positions were emerging market positions. That number was reduced to 5 at the end of 2010. On top of that, the size of each emerging market position has been reduced. Take China for example; the value of shares of FXI was reduced from 365k to 203k.

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I must confess: I have fallen short of the standards and requirements to become one of America’s Best Financial Advisors. To be exact, I am $497 short.

In March of last year, I received an email with a congratulatory title: “You Have Been Nominated To Be One of America’s Top Advisors.” I eagerly opened the email. It read:

You have been nominated to be listed on the most Exclusive List of Financial Advisors in America….We would love to have you as a member of this exclusive club and I have attached additional information regarding how our unique marketing model works.  We will be advertising the list of Top Advisors in the Wall Street Journal next week so I would like to get you included before the deadline on Monday.

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This is a story sent to me by a client. It’s about how we live our lives, which I think is more important than how we make our investments.

His name was Fleming, and  he was a poor Scottish farmer. One day, while  trying to make a living for his family, he heard  a cry for help coming from a nearby bog. He  dropped his tools and ran to the bog.

There, mired to his waist in black  muck, was a terrified boy, screaming and  struggling to free himself. Farmer Fleming saved  the lad from what could have been a slow and  terrifying death

The next  day, a fancy carriage pulled up to the  Scotsman’s sparse surroundings. An elegantly  dressed nobleman stepped out and introduced  himself as the father of the boy Farmer Fleming  had saved.

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[Guest Post by Christopher Guest] I guess I was slightly off on my prediction on what the 2011 estate tax environment would look like. On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, or TRUIRJCA, but I will call it the “tax compromise.” One thing I will discuss is that this estate tax regime only exists for 2011 and 2012 and the “old” 2011 rules that had many people indecisive in 2009 and 2010 returns in 2013.

Exemption Level and Rate

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Listen to an insurance agent's financial advice

Invest in a Variable Annuity

Recently, a client of mine brought me the variable annuity he bought a few years ago.

Prominently displayed on the first page are the benefits of the annuity:

Death Benefit: Enhanced Guaranteed Minimum Death Benefit

Living Benefit: Lincoln Lifetime Income Advantage

as well as the fact that the money will earn an fixed annualized rate of 5.75%. Under the bold ACCOUNT FEE subtitle, it states: Account fee is $35 per contract year.

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This list is taken from an Irish Times article on behavioral economics.

1. LOSS AVERSION

People are more motivated by fear of a loss than hope of a gain, hence are more likely to seek to avoid a penalty than seek to gain bonus, even if both amount to the same thing.

2. ILLUSION OF CONTROL

For example, people feel an illusion of control when they’re allowed pick their own lottery numbers, even though they are no more likely to win by being given this choice.

3. DENOMINATION EFFECT

The tendency to spend more money when it’s denominated in small amounts (like coins) as opposed to large amounts (like large notes).

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[Adapted from my post on Physicians Practice]

“Laws are like sausages …” Otto Von Bismarck, First Chancellor of Germany

Physician Wealth

Doctor and Monday

The last Congress, the one that received a “Shellacking” in November election, was actually very good at making “sausages.” As the result, there are many tax law changes that have come into effect. I asked the tax specialist in my wealth management network to give me a list of tax law changes in 2010. As I went through the list, I identify these seven that are relevant to physicians and their practices.

Don’t take this as legal or tax advice; don’t even take this as complete information. To avoid putting you to sleep before you get to item 7, I simplify much legal minutia. Consult your own tax and legal experts before using any of these:

  1. If you have a practice of less than 25 employees, you maybe qualified for health insurance credit.  Read the rest of this entry »
Bill Gates

Bill Gates

A physician client of mine passed on to me this list, from Bill Gates’ talk in a high school. There is a good bit of wisdom there. If you have kids in high school, pass this on to them.

Rule 1 : Life is not fair – get used to it! Rule 2 : The world doesn’t care about your self-esteem.

The world will expect you to accomplish something BEFORE you feel good about yourself. Rule 3 : You will NOT make $60,000 a year right out of high school.

You won’t be a vice-president with a car phone until you earn both. Rule 4 : If you think your teacher is tough, wait till you get a boss

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Annuity without Risk

Annuity without Risk

Recently, I was approached by a prospective client named John, who has all of his retirement in one annuity.

I have always been intrigued by how annuities and life insurance are sold. Listening to John explain his decision-making process and reading through the annuity contract is like turning on the light bulb in my head.

It turns out that the unique selling point of this product is the “200% Step-Up of the Guarantee Amount (GA).” The way John puts in, if he just keeps the annuity for 10 years, he will get back 200% of what he put in. What is there not to like about that! After all, he gets guaranteed upside with absolutely no downside risk.

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[Adapted from Brian Harris of Dimensional Fund Advisors] As government spending hits record levels (see chart below) around the globe, some politicians, economists, and pundits are warning that rising indebtedness may drag down economies and financial markets. If you are concerned, you are not alone. I heard that over and over from my clients.Chart of Government Debt Relative to GDP 

So how does public debt affect economic growth and market returns? The evidence might surprise you. Let’s explore these issues by addressing a few popular questions about sovereign debt:

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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