The Investment Scientist

Archive for October 2011

Greek Hair Cut

Greek Hair Cut

This morning, I woke up to news that the Europeans, Germans mostly, have finally hammered out a deal with Greece, which now only needs to pay 50% of what it owes to private lenders (mostly German banks). German Chancellor Angela Merkel called this a 50% “haircut.”

World markets cheered the news by rallying 2% to 6%. But wait a minute, how is it different from a Greek default? Is the market dumb or not?

There are lessons for investors in this.

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Many investors are puzzled by the underperformance of small cap value since May of this year. They ask: “Is it worth being in an asset class that can’t do well in bad times?

To answer their question, I did a 10-year rolling return comparison between the Fama/French Small Cap Value (SCV) and the S&P 500 index using data from 1931 to 2010. The first 10-year period is 1931 to 1940, the second is 1932 to 1941, and the last is 2001 to 2010. Here is the rolling return chart I got.

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Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for taxyears beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

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Tax Loss Harvesting

Realize losses on investment without substantially changing your portfolio positions; for instance, selling Vanguard 500 Index and buying Vanguard Total Stock Market Index.

Roth Conversion

If you do a Roth conversion, the IRA account will become a multigenerational tax shelter. Do this only if you have sufficient cash to pay taxes now.

Capital Gains

The 15% rate on long-term capital gains was extended through the end of 2012. After that, the rate could go up to 20% or higher. You may want to sell assets to realize long-term capital gains and reset the basis.


The 15% rate on qualified dividends was also extended through 2012. If you are a shareholder in a closely held corporation with accumulated retained earnings, you may wish to take dividends now, while the rate is low. In 2013, a surtax on investment income will become effective.

Required Minimum Distribution (RMD)

If you are age 70.5 and older, don’t forget RMD from your IRA and 401k plan.

Health Flexible Spending Account (FSA) and Health Savings Account (HAS)

Increase the amount you set aside for next year in your employer’s health FSA if you set aside too little for this year. If you become eligible to make HSA contributions in December this year, you can make a full year’s worth of deductible contributions for 2011.

Qualified Small Business Stock (QSBS)

Purchase QSBS before the end of this year. There is no tax on gains from the sale of such stock if it is (1) purchased after 9/27/2010 and before 1/1/2012 and (2) held for more than five years.

Bonus Depreciation

This is still in effect and allows expensing of 100% of the cost of eligible assets acquired in 2011. The rate will fall to 50% and the provision will expire at the end of the year.

Charitable Gifting

Gift your significantly appreciated assets, or if you are age 70.5 and older directly from your IRA.


You can give a total for the year of up to $13,000 to each individual without reducing your lifetime gift or estate tax exclusions.

Kiddie Tax

If your children do not fall under the kiddie tax rules, give them appreciated shares of stock or mutual funds instead of cash. Their lowest capital gains tax rate could be 0%.

Education Saving

Set up 529 plans for your children and claim state tax deductions. The deduction limit is per plan owner per beneficiary. Take Virginia, for example; the limit is $4,000. For a couple with three children, the maximum state tax deduction is 2x3x$4,000 = $24,000.

Energy Tax Credit

If you are a homeowner, making energy savings improvements to the residence may qualify you for a tax credit if those improvements were installed in your home before 2012

*In creating the list, I referenced the newsletters of E Cohen and Company and Klausner, Bendler + Associates. All errors remain mine. Check with your own CPA before executing any of the tips.

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What happened to the market in August and September?

Between July and the end of September, markets lost between 13.5% (Dow) and 27% (Emerging markets) depending on which market you are looking at.

I pored through economic data and could not see any marked deterioration in the economy. In fact, on balance, I see continued slow improvements.

Pundits attribute the market tumble to 1) political gridlock in Washington and 2) the European debt crisis. I don’t buy either of these explanations.

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[Guest post by Jeremy Bendler] IRS has launched a new voluntary compliance program that allows employers to prospectively reclassify-as employees-those workers they have erroneously treated as independent contractors. The program carries generous settlement terms and provides audit relief for previous years.

Background. Whether a worker is an independent contractor or employee generally is determined by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Under the common law rules (so-called because they originate from court cases rather than from the Code), multiple factors are used to determine if an individual is a common law employee.

Section 530 of the ’78 Revenue Act (as amended) provides retroactive and prospective relief from employment tax liability for employers who misclassified workers as independent contractors using the common law facts and circumstances standards. Section 530 applies only if:

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10. How Investors Lost Monday: Evidence from Mutual Fund Flows

9. Irrevocable Life Insurance Trust

8. Recession Stock Market Performance Revisited

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

6. The 2011 Estate Tax Changes

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

4. Recession and Stock Market Performance

3. Why Doctors Don’t Get Rich

2. Bonus Depreciation: Congress Wants Business to Invest in 2011

1. Profit From Larry Dent’s Prediction? Thank Again.

Also see the top 10 last month.


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


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