The Investment Scientist

Archive for March 2012

[By Tom Warburton] We view the primary component of ‘Maintaining Financial Wellness’ to be ‘Maintaining Access To Currency’. Think about this a bit. Wealth is really irrelevant if you don’t have currency!

Think about all of the companies that were Asset Rich, Cash Poor and ended up on the shores of Bankruptcy. Lack of currency sunk the ship.

Imagine that you owned $100,000,000 worth of land in the Brazilian Rain Forest – BUT – there were no buyers! Lack of currency is a huge impediment when it comes to paying the bills.

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[By Tom Warburton] So…how do we achieve ‘Financial Wellness’? 

This exercise sends us on an initial quest to ‘Figure out How Much Money We Need’ and how to ‘Accumulate That Amount’.

Maybe you’ve seen the advertisement on TV where the guy is ‘trying to figure out his number’.  The neighbor has a number under his arm and the comic figure of the commercial thinks his number is ‘A Gazillion’!

Well – we think we’ve figured out what ‘The Number’ is for most folks. As a general guideline:

  • Multiply Your Net Monthly Need By 300.

If you are 65, the above will be close. (Of course, individual age, health, facts and circumstances vary, so, we would need to meet with you to confirm the accuracy for you – which we are happy to do.)

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[By Tom Warburton] Our view for a working definition for Financial Wellness has been forged as a result of discussions with hundreds of folks. We start our discussions with this question:

  • What Is Important To You About Money?

This leads to a variety of responses, and, frankly, there appears to be a strong correlation between age (or maturity or wisdom or whatever) and the answers our question solicits.

  • Youngsters Often Say Things Like:
    • I Like Money So I Can Buy Stuff
  • Older Folks Often Say Things Like:
    • I Don’t Want To Outlive My Money
    • I Want To Take Care Of My Family
    • I Like To Give It Away
    • Money Gives Me Freedom
    • Money Lets Me Live The Way I Want To Live
    • Money Represents Security…However Illusory

So – when it comes to defining Financial Wellness, permit us to synthesize the responses of folks as the following:

  • Financial Wellness Exists When A Family Or Person Can ‘Live Worry Free The Way They Want To Live For As Long As They Live

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[Guest Post by Christopher Guest] I have seen a number of articles declaring approximately 70% of all Americans do not have a will. If they died, that would mean the distribution of their estate would be controlled by intestate provisions. In my February 2010 Newsletter, I discussed the basics of intestacy. For those in second marriages, the importance of drafting an estate plan and not succumbing to the intestate provisions is very important, as demonstrated below.

As I mentioned in 2010, there is an order of priority in which beneficiaries inherit assets under intestate statues. Order of priority is governed by the familial relationship of the beneficiary to the decedent. In other words, family members related closer to the decedent generally get a share and cut-off those family members not as closely related. But, every state’s laws are different when determining this order or degree of familial closeness.

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Fee-based Financial AdvisorMany people think that fee-based financial advisors are those who charge their clients fees for service; therefore, they have more transparency and less conflict of interest. That’s exactly what the financial industry wants you to think.

Fee-based financial advisors are the financial industry’s response to the rise of independent fee-only financial advisors. Fee-only financial advisors are paid solely through fees for service paid directly by clients; they are not licensed to receive third-party commissions. Consumers rightfully associate this compensation model with integrity and unbiased advice.

Firm | Youtube | Facebook | Twitter | LinkedIn | Newsletter

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Old Age

Believe it or not, you are a stranger to yourself. That’s the finding of Hal Ersner-Hershfield et al. in their published research detailed in Social Cognitive and Affective Neural Science.

This unconscious assumption of a different self in the future is demonstrated graphically by brain scans. In their study, Ersner-Hershfield et al. found that when people think about their future selves, the same brain region lights up as when they think about strangers. The implication for saving behavior? Saving for the future instinctively feels like giving money away to a stranger. No wonder only 9% of Americans are saving enough for their retirement.

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I am not a big fan of IPO shares. Research has shown that IPO shares usually underperform seasoned shares by about 2% a year. Business owners tend to time their IPOs at the optimal time for them, not for the future shareholders.

With Facebook (FB), there are so many people chasing so few shares that the IPO will create a “Winner’s Curse” effect – whoever wins the shares will end up overpaying for them.

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Investors crave certainty, but the future is never certain. Prudent investment requires juggling odds. Here are the types of odds that go into my decision making process.

January Barometer Effect

When the market records a positive return in January, the odds that it would record a positive return for the rest of the year are 90%. If not, the odds drop to 50%. This January, the market had a positive return.

Seasonal Effect

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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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