Archive for April 2011
A Balanced Portfolio to Avoid (III): Most Financial Advisors Are Not Fiduciaries!
Posted on: April 30, 2011
My friend is a savvy businessman. However, like most Americans, he has a misconception: he thinks financial advisors are legally bound to put clients’ interests first. This can not be further from the truth. Everybody and his grandma can be a “financial advisor.” Unlike being a “physician”, there are neither legal requirements no educational qualifications. Whether a certain financial advisor is bounded legally to act in his client’s best interests all depends on his true profession. Here is an ad hoc summary:
| Professional Title | Fiduciary? |
| Attorney | Yes |
| Certified Public Accountant (CPA) | Yes |
| Registered Investment Advisor (RIA) | Yes |
| Financial Planner | Maybe |
| Certified Financial Planner (CFP) | Maybe |
| Wealth Manager | Maybe |
| Insurance Agent | No |
| Registered Representative | No |
| Stock Broker | No |
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A Balanced Portfolio to Avoid (II): Hedge Funds Don’t Deliver Outstanding Returns
Posted on: April 28, 2011
Hedge funds are often peddled as a unique asset class that has outstanding returns that are uncorrelated with the market. In reality, hedge funds are as much an asset class as Las Vegas is.
Hedge funds are a general description of private investment companies that are organized as limited partnerships with fund managers as the general partners and investors as limited partners. The keyword here is private. By law they are not supposed to be sold to the public; therefore, they are exempted from government oversight. But sold to the public they are! It is not the first time unscrupulous “financial advisors” have pushed the limit of the law, while the SEC looks the other way.
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I recently met an entrepreneur friend of mine. I was pleasantly surprised to learn that he had sold his business and was now looking forward to retirement. He has about $1mm in his 401k plan. As any shameless financial advisor would do, I asked him if he had someone helping him manage his money.
“As a matter of fact, yes!” he answered. “A friend of mine is also a financial advisor, and he helped me create a balanced portfolio.”
He related that “50% of the money will be in safe investment—a (deferred) annuity that has a guaranteed yield of 5%; the other 50% will be in alternative investments for higher performance.”
To say that I was flabbergasted is a serious understatement. With a friend like that, who needs enemies?
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Watch the show and you’ll know what I meant.
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In 1993, the Journal of Financial Economics published “Common risk factors in the returns of stocks and bonds” by Fama and French. They examined bond returns in particular through the lens of various asset return models.
Let’s look at one of those models: the Fama/French three-factor model. The regression statistics of various bond classes are summarized in the table below:
| Bond class | 1-5G | 6-10G | Aaa | Aa | A | Baa | <Baa |
| Alpha | 0.72% | 0.84% | -0.84% | -0.85% | -0.96% | -0.6% | -1.32% |
| Beta | 0.1 | 0.18 | 0.25 | 0.25 | 0.26 | 0.27 | 0.34 |
| S | -0.06 | -0.14 | -0.12 | -0.11 | -0.09 | -0.04 | 0.04 |
| V | 0.07 | 0.08 | 0.14 | 0.15 | 0.16 | 0.2 | 0.23 |
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It’s April 20th 2011 today, my small independent fiduciary wealth management pratice ranked 16th by Google using keyword search “Wealth Management,” My practice is right in between Merrill Lynch and AllianceBernstein in the ranking. I don’t think I am in good company though, since the other two don’t abide by fiduciary standards.
Click to get The Informed Investor: 5 Key Concepts for Financial Success.
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Inflation Ahead?
[Adapted from my Morningstar contribution] A year ago this month, after a trip to China I wrote ominously about inflation hitting the US economy like a tsunami.
My opinion was based on two observations:
- China’s labor costs were galloping at a 20% to 30% clip per year, and so much of what we consume is produced in China now.
- The Fed was printing money like crazy.
So far I have been wrong. The February 2011 inflation rate was 2.11%; though a slight uptick from 1.63% in January, it was by no mean a tsunami. Recently, Fed Chairman Ben Bernanke testified before the Senate Banking Committee that the Fed projects an inflation rate of less than 2% for the next 3 years.
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April Wealth Management Roundup
Posted on: April 16, 2011
Conflict of Interest
Goldman Sachs, Rating Agencies Blamed in Senate Crisis Probe by CNBC
Where to Find Financial Advice? Probably Not Your Brokerage Firm by Oblivious Investor
Asset Protection
Protecting 401(k)s, IRAs From Creditors by WSJ.com
Investing
10 Ways to Beat the Market by Nathan Hale of Money Watch
Variable Annuities Don’t Belong in Retirement Plans by Mel Lindauer of Bogleheads.org
5 Sexiest Things about Indexing by Allan Roth of Money Watch
Value of Full-Service Brokers? By CXO Advisory
What’s My Job? By DIY Investor.
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Roth 401k vs Traditional 401k
Posted on: April 14, 2011
Many companies now offer employees the option to contribute to a Roth or traditional 401k. For a long while, I have advised my clients to go for the traditional 401k; they are all high-income earners and the tax deductions can be substantial. Besides, what’s not to like about taking money out of the clutches of the IRS?
The other day I googled “US tax rate history.” I was shocked to learn that out of the last 100 years, there were 48 years when the top rate was above 70%. There was even a period when the top rate was 94%! For heaven’s sake, that’s not taxation, that’s deprivation!
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US Stock Market Returns
What an indelible mark on many investors’ psyche the financial crisis in 2008 has left! Despite two years of strong equity returns, many investors are still on the sideline, afraid even to dip their toes into the market.
That’s understandable. Most investors’ perspectives are shaped by their most recent experiences. They are now doing things they wish they had done prior to the economy’s plunge into crisis. But does this make sense now that we are recovering?
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You may not believe it: the term “financial advisor” is a free title. Anybody can use it; there is no legal requirement, nor educational qualification. In practice, though, generally there are three types of people who use this title: insurance agents, stockbrokers, and registered investment advisors (RIAs). Whether they are required to disclose fees all depends on what type they are.
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As a small business owner, you are caught in a conundrum. On the one hand, you need to offer good health benefits to your employees to attract and keep talent; on the other hand, you can’t afford to lose an arm and a leg doing so.
There is a simple option that enables you to kill two birds with one stone—Section 125 Premium Only Plan (POP).
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Doctor's Tax Saving
[Adapted from my post for Physicians Practice] Generally speaking, physicians make good money while in practice. Many of them are in the top tax brackets. Upon retirement, however, their earned income often drops to zero. If they can defer some of their compensation to the future, they can effectively move money from the top tax brackets to lower tax brackets.
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Today, my friend Jiefei Yuan of Givology.org passed on to me a message asking for help. The message was from Nasrine, who runs an inspiring women’s organization in Afghanistan called Kabultec that is the training ground for women’s rights, studies and education. The message starts like this
As many of you know, every year my non-profit organization, Kabultec, assists ten needy schools and three orphanages in Afghanistan. We gather goods (mainly used) here in the US, ship them to Afghanistan, and distribute them to schools and orphanages across the country. The goods are raised through donations like the drive some of you helped with last year.
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MZ Capital 70/30 model vs S&P 500
(Performance stats last updated on 8/16/2011) I have maintained 4 model portfolios since the beginning of 2007 to show that successful investing can be extremely simple: one only needs to do 1)prudent allocation, 2)disciplined rebalancing. One does not need Harry Dent’s prescience nor Jim Cramer’s encyclopedic knowledge to be successful in investing.
This report shows the construct and performance of the 70/30 model portfolio, the most aggressive of the four. The chart on the right shows the portfolio value of $100 invested on the first day of 2007, relative to the S&P 500.
Asset Classes and Fund Selection
The Investment Scientist 