The Investment Scientist

Archive for September 2011

Setting Up a 401k Plan

Dr. Smith is a client of mine. He is a facial plastic surgeon with a booming solo practice supported by five non-essential staff members. His staff turnover is very high; no one stays more than three years. This has allowed him to contribute the maximum amount to his SEP IRA without contributing anything to his employees (Note that by law working three years out of the last five years is the eligibility requirement for SEP IRA participation.)

In our recent regular progress meeting, he told me that he was pondering setting up a 401k plan for his employees. There are three reasons why it’s time for him to have a 401k plan:

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Wall Street Journal

Wall Street Journal

If you think reading Wall Street Journal would make you a more intelligent investor, think again.

After a recent one-day market rally, WSJ wrote this:

U.S. stocks jumped on Tuesday as many investors sent a plea to Federal Reserve Chairman Ben Bernanke: Come to the rescue of the stalling economy and battered financial markets.

The Dow Jones Industrial Average jumped 322.11 points, or 3%, to 11176.76 as a new round of bleak economy data helped buoy investor hopes that Mr. Bernanke will step in with some sort of monetary stimulus.

That optimism comes despite all signs to the contrary. Federal Reserve officials are saying nothing to encourage market speculation that Mr. Bernanke will use a speech in Jackson Hole, Wyo., Friday to unveil further Fed actions …

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Estate Tax[Guest post by Christopher Guest] One of the areas of estate planning that causes the most confusion is gifting. Gifts are transferred from a donor to a done in several ways. Gifting has a huge diversity of answers in how gifting is accomplished.

Here are some basics on gifting. The IRS considers any gift from one person to another a taxable gift. But, there are some exceptions to the rule:

  1. Gifts of any property that are not more than the annual exclusion for the calendar year. (Note – the annual exclusion is $13,000 for 2011.)
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.

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On March 6, 2009, about lunch time, I got a call from Mrs. C. Apparently she was in some sort of a panic; she asked me when the market would stop falling. I couldn’t predict the future, all I could tell her: the market will eventually turn around, and when it does, it will stage a huge rally and we won’t know it in advance.

I felt I was making some progress in comforting Mrs. C and convincing her to stay the course. Then, I heard a roaring voice: “Get out! Get out! Tell him to get the hell out of stocks!!!” I knew it was Mr. C in the background. Mrs. C broke down in tears on the other end of the phone call. She said, “Michael, I can’t take it anymore, just get out of stocks.” I meekly replied: “OK, but you should never try stocks again.”

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This year, total federal spending in projected to be $3.6 trillion. The top three budgetary categories are:

  1. Medicare/Medicaid —  $826 billion
  2. Social Security —  $717 billion
  3. Defense/Wars —  $703 billion

Medicare and Medicaid costs alone account for 23% of total federal spending.

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Imagine your house has a ticker symbol, and it scrolls along the bottom of CNBC together with other ticker symbols. The price of your house, like a stock price, is set by a bunch of people you’ve never met making apparently random bets based on a combination of intuition, general economic statistics, output of an automatic-trading program, and, a couple of times a year, the real price achieved by one of your neighbors actually selling a house.

Minute by minute, the price of your home would gyrate wildly. If you are a nervous type, you might lie awake at night wondering if its value would cover your mortgage in the morning.

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10. How Often Do Market Corrections Happen?

9. Google’s Revenge: Morgan Stanley’s Downgrade Fiasco

8. America’s Top Financial Advisors: How They Are Made?

7. How Can A Investor Prepare for Market Corrections?

6. The 2011 Estate Tax Changes

5. Variable Annuity Fees You Don’t Know You Are Paying

4. Why Doctors Don’t Get Rich?

3.  Bonus Depreciation – Congress Wants Businesses to Invest in 2011

2. Recession and Stock Market Performance

1. Profit from Harry Dent’s prediction? Think Again.


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

Twitter: @mzhuang

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