The Investment Scientist

Archive for August 2011

[Guest post by Jeremy Bendler] It’s back to school time!  Many of our clients are wondering how to properly plan for higher education expenses.  If your children are younger you may be wondering how to efficiently save for college.  If your children are already college age, your goal is to pay for current or imminent college bills. I’d like to address both of these concerns by suggesting several approaches that seek to take maximum advantage of tax benefits to minimize your expenses. (Please note that the following suggestions are strictly related to tax benefits. You may have non-tax-related concerns that make the suggestions inappropriate.)

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Not satisfied with its downgrading of U.S. Treasury Debt and Fannie Mae, today S&P downgraded Google’s stock from “Buy” to “Sell,” sending GOOG tumbling by 3.3%.

In case you don’t remember, yesterday Google announced that it would purchase Motorola Mobility for a whopping $12.5 billion in cash – a decision that prompted S&P’s  downgrade of Google. According to S&P’s equity analyst, Scott Kessler:

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[Guest Post by Christopher Guest] Last month, I discussed the questions a settlor, or creator of a trust, needs to ask before selecting a trustee. Once a trustee is selected, a settlor needs to determine the trustee’s powers with respect to the trust.

The trustee is charged with caring for and managing the trust property. To do this, the trustee must have the ability to control the property, and, depending on the property, the trustee can be given a vast array of powers. A few of those powers could include the power to: Read the rest of this entry »

Harry Markowitz

The common approach to dealing with a market correction is trying to get out of the way at the first sign of trouble before the big one hits, like getting out after a 5% dip before the 30% drop hits. This approach requires perfect foresight. God can do that, not you, and certainly not a financial advisor who needs the job to make a living. (FYI, only one out of every thirty 5% dips turns into a 30% fall.)

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On the first trading day after the US credit rating was downgraded, the markets seemed to suffer from bipolar disorder.

The stock market was a bloody mess: the Dow Jones was off 634.76, its worst ever decline since the credit crisis in 2008!

The bond market, especially the treasuries market, which was supposed to take the brunt of S&P’s downgrade, responded positively. In fact, the 10-year treasuries yield dropped to a record 2.38%. The yields on long-term municipal bonds also dropped, to below 4%. This actually makes government borrowing costs lower, not higher. In a way, the bond market just thumbed its nose at S&P: to hell with your downgrade, we like US bonds even more.

Why the bond market reaction is important

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Market Correction

Market Correction

As of yesterday, the market had dropped more than 10% from its recent peak on 5/2. Many investors are very concerned. I am too.

Whenever I find my emotions are unsettled, I study historical data. That has always given me a perspective unavailable from the tick-by-tick reporting of the real-time financial media.

The following table summarizes the frequencies of market declines of various magnitudes.

Magnitude of market decline Frequency of occurrence
>5% Every year
>10% Every two years
>20% Every five years
>30% Every ten years
>40% Every twenty-five years
>50% Every fifty years

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Asset Class Rebalance

Asset Class Rebalance

In one of my previous posts, I showed how diversification across asset classes is superior to momentum and contrarian strategies. Today, I am going to show how disciplined rebalancing adds to returns. I will first demonstrate this using a stylized example and then through historical returns.

An example of two asset classes

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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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