The Investment Scientist

Archive for July 2012

Multi-generational families

A councilman from Montgomery County (a wealthy county just outside of Washington DC) once told me: Asian Americans in our county are doing very well economically, but surprisingly Asian American seniors have the highest poverty rate among all ethnic groups.

I know why: their children are depriving them of social security and Medicare benefits.

Most Asian American immigrants are the crème de la crème of their home countries. Armed with intelligence and diligence, they find tremendous success in the land of opportunity, especially in the field of science and business. One only needs to count the number of government contractors of Indian origin in Northern Virginia or research scientists of Chinese origin at the National Institutes of Health to find proof of that.

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Lease agreement

I wrote about our rental property investment six months ago. We purchased the property for $180k, and we are earning a monthly rent of $1,750. That’s a great investment, with cash-on-cash return of 8% after taxes and HOA fees.

All was hunky dory until recently when we got a call from our tenant, who told us he lost his job and he was only able to scrape together $875 to pay for half of the rent.

We told him we appreciated his effort, and we hoped he would get another job soon. Deep down, we are really not sure how long our rental property will be nonperforming.

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Brain collage

I received this question from a subscriber to my monthly newsletter. To answer it, I must take a detour to our human brain structure.

We actually have three brains in our head!

In the center is the reptilian brain that we share with fishes, birds, and reptiles.  It deals mostly with “housekeeping” and instinct, such as body temperature and hunger. The fight-flight-freeze fear response is handled here as well.

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Estate planning

I received a marketing piece from a major CPA firm this morning. Let me tell you what I think about its key points.

Due to the expiration of certain tax provisions, 2012 may be the last year that taxpayers will be able to utilize the gift and estate tax exemption under the Temporary Tax Relief Act of 2010 – an exemption that generally allows taxpayers to exempt up to $5,120,000 from estate and gift taxes.

This is good to know…

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College graduation

Being a small business owner comes with risk, responsibilities, and advantages.

This week I went to a seminar called “Little-known Secrets of Paying for College”.

My biggest take away was that everything being equal, being a small business owner makes it easier for your kids to qualify for financial aid. Let me explain.

Universities and colleges determine the financial aid eligibility of a student by the following formula: COA – EFC, where COA stands for cost of attendance and EFC stands for expected family contribution. COA is fixed, so the lower the EFC, the higher the amount of aid the student is eligible for.

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I have a new client who suffers from the same problem: her retirement accounts are choked full of Allianz’ variable annuity products very similar to this Lincoln product I reviewed a year ago. They are not as deviant as the Lincoln product in term of hiding fees, but they are nowhere close to being a keeper.

The Investment Scientist

Recently, I was approached by a prospective client named John, who has all of his retirement in one annuity.

I have always been intrigued by how annuities and life insurance are sold. Listening to John explain his decision-making process and reading through the annuity contract is like turning on the light bulb in my head.

It turns out that the unique selling point of this product is the “200% Step-Up of the Guarantee Amount (GA).” The way John puts in, if he just keeps the annuity for 10 years, he will get back 200% of what he put in. What is there not to like about that! After all, he gets guaranteed upside with absolutely no downside risk.

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conscious and unconscious mind

What prompted me to write about financial peace of mind is actually something that happened to me recently that had nothing directly to do with the topic.

My iPhone failed to sync with my desktop calendar; as the result, I missed an important client meeting.

For a whole day and whole night, I had this nagging feeling that I missed something but couldn’t quite be sure what it was. Did I leave my keys in the gym? No.

Then, I woke up in the middle of the night and remembered the appointment that did not show up on my iPhone!  Apparently, some part of my mind was not resting during sleep.

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[Guest Post by Anthony S. Carducci

1. Failure to leave any written documentation of your assets, including a list of your online accounts and passwords

2. Failure to let family members know where to find important estate planning documents

3. Failure to name a guardian for minor children or choosing a guardian who lives far away without planning for temporary, local guardianship (solved with a comprehensive Kids Protection Plan®)

4. Failure to name recipients for your personal possessions

5. Failure to designate beneficiaries for retirement and other financial accounts

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While reading USA Today at Panera Bread, I came across an article with a headline that blared: “Managed commodities can counter volatility.” You should have seen the chagrin on my face; you would have thought I was a facial contortionist.

How could such an uninformed article ever get published by a major newspaper? Just imagine the large number of people who will be misled by this article to put money into a financial product they don’t understand.

The claim of this article is based on a comparison of a managed futures index and the S&P 500 index. The managed futures index was compiled by a private firm called Barclay Hedge, basically a marketing arm of the managed futures industry. Read the rest of this entry »

Leap of faith

Recently, I went to the monthly meeting of the Chicago Booth Entrepreneur Advisory Group. The group is made up primarily of University of Chicago alumni, and it provides a forum for entrepreneurs to share their issues.

I was blown away by one entrepreneur’s unbridled optimism. He invented a technology that makes changing TV channels on a PC feel as fast as on a real TV. He plans to challenge the cable companies by convincing all of us to watch TV on our PCs.

Yes, cable companies charge us an arm and a leg for their channels, many of which we don’t watch. And nobody loves their cable company. But they have been in business for years. How could a solo entrepreneur working in his bedroom take them on?

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

Twitter: @mzhuang

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