The Investment Scientist

Archive for January 2012

Healthy Lifestyle

Longer life spans, rising medical costs, declining retiree medical coverage, and Medicare and Medicaid insolvency all add up to making health care costs a serious challenge for folks preparing for retirement.

According to Fidelity research, a couple retiring today at age 65 will need current savings of $200k to supplement Medicare and pay for out-of-pocket health care costs in retirement. In another five years time, the number could balloon to $275k. And that’s before we talk about long-term care.

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Financial Salesman

In an online forum, a doctor’s wife shared with me her story that should serve as a cautionary tale for all doctors.

Her husband had a solo medical practice. They had a “financial advisor” who advised them to put their saving into a $5mm cash value life insurance policy. They believed the product not only provided protection in the event of the doctor’s death but also was a great savings vehicle.

Last July, her husband was struck by an uninsured drunk driver. He suffered brain damage. Though he recovered from the coma, he was unable to practice medicine any more.

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I have a client (Let’s call him John) who retired 12 years ago from the government. He had a pension, and he had the option of taking out a lump sum of about $800k or drawing a monthly check of more than $4,400 per month until death.

Lost Retirement Money?

John took his options to his financial advisor from Smith Barney (now absorbed into Morgan Stanley Smith Barney.) Guess what the advisor recommended? He recommended that John take out the lump sum and let him manage it instead.

By the time John came to me for a second opinion financial review four years ago, his retirement account had only $265k left. John decided to become my client, and I have been able to restore some of his money, but not all.

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If you are new parents, you are busy nursing, changing diapers, and dealing with the emotional roller coaster of having a new life in your household. If you put your finances in backburner, I don’t blame you.

As a new parent and a financial advisor, I can offer you a few absolutely necessary to-do items to safeguard the financial well-being of your family and your new baby.

1. Have a will.

Now that you have a baby, you don’t just live for yourself any more. You have the responsibility of seeing your baby grow up. What happens if both you and your spouse die in an accident? If you don’t have a will, the court will determine the baby’s guardianship. Do you want to leave that decision to the court without your input? If you don’t, get a will.

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My investment approach can be summed up by three principles:

  1. Globally diversified
  2. Small cap value tilt
  3. Short duration tilt

This approach endured extraordinary challenges in 2011.

1. Globally diversified

Even though the US equity market largely ended up where it started, the global equity markets did a lot worse: the MSCI EAFA Index (world developed markets) dropped 15% and the MSCI Emerging Market Index dropped 20%. To the extent that your portfolio is globally diversified, it will suffer along with the rest of the world. Despite that, global diversification is still a sound principle. We should not regret just because the US market did better. In fact, the market that did the best last year was Venezuela; it went up 110%! Should we regret not concentrating on the Venezuela market? (The answer is no.)

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Saving for College

My son is 6 weeks old. Today, he received his social security card. The first thing I did for him after receiving the card was to open two Maryland 529 plan accounts for him: one with myself as the account holder, and the other with my wife.

In Maryland, the 529 plan deduction limit per parent per child is $2,500. So I put $2,500 into each of the accounts, for a total of $5,000. I invested the money for a target date 2030 fund since that’s the time my child will be of college age. I further set up an automatic contribution going forward: $2,500 will be deposited into each account every year.

Why I am doing this?

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A few days ago I got a call from someone who needs financial help. He is a typical middle class person, making a middle class wage, and has not saved a lot of money.

How Can I Help?

In the past, I would have gently turned him away: “Sir, my practice has a limited capacity of serving only 50 clients. To make the most of it, I only work with doctors and small business owners who have at least $500k in investable assets or a combined household income of $400k and above.”

Maybe it’s because of my newborn son’s sickness, but I did not say no this time. I took him through the discovery process to find out where he was financially, what he wanted to achieve, and how he planed to get there.

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


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