The Investment Scientist

Archive for June 2013

Wise words written by myself two years ago: “The whole idea of investing only when “the sky is clear” is flawed. When the sky is clear, it can’t get any better; you can be sure another storm is brewing just beyond the horizon.”

The Investment Scientist

[I wrote this two weeks ago.]

On September 12, a client of mine called me to get out of stocks altogether.

He used a vivid analogy: “The storm is raging; I will wait until the sky clears before I get in again.” The storm he referred to was the European debt crisis. Judging by my many interactions with investors, he is not alone.

This morning, I woke up to great news: the Europeans have finally hammered out a debt deal in which Greece only needs to pay 50% of what they owe to the banks. With this debt reorganization, it looks like we will not have a Greek default (even though this is really a default by another name, but that’s the subject of another piece).

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annuity 1(1)Last week, I got a panicked phone call from a client of mine, “Michael, my wife bought an annuity a few weeks ago. Now we really regret it. The agent won’t take our call! Can you help us?

I went to their home to examine the annuity contract. It was actually relatively straightforward; for $100k, they will get $456 per month for the next 30 years, beginning three years from now. My client is 71 years old; he will be getting his last payment when he is 104 years old! By then $456 will probably be worth $56 in today’s money. Not what I’d call the deal of a lifetime.

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suit pocketThe other day, I was invited to visit a multi-family office that only serve super-wealthy families that have $10mm and above.

I was curious what set them apart from my firm, which mostly serves folks in the $1mm to $5mm wealth range.

I came away with one word: exclusivity.

The name

What they do is no different from wealth management, but they call themselves “multi-family office.” Just in case you don’t know what family offices are, they are offices billionaire families set up to manage their own complex financial affairs. A family office serves only one family. By adding “multi-” to “family office,” a wealth management firm can make their millionaire clients feel like they are billionaires.

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Rebalancing your portfolio

Rebalancing your portfolio

Recently, I visited a prospective client in New Jersey. He is currently a client with Fisher Investments, and his advisor told him never to rebalance since that involves market timing.

I have to hand it to this financial advisor for recognizing that market timing is an unproductive endeavor, but he is so wrong about rebalancing that I am compelled to write this article.

Rebalancing is not a market timing activity, it is calendar-driven or condition-driven. For instance, you may decide that you will rebalance your portfolio on January 1st of each year or whenever an asset class allocation is off by 20%.

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Morgan Stanley Smith Barney

Morgan Stanley Smith Barney

I went to a Morgan Stanley financial advisor associate recruitment meeting recently to spy on how they train their new financial advisors.

They have an extremely rigorous 36 month program. New associates are expected to pass series 7 and series 66 license testing in the first 12 months. These licenses enable them to charge both fees and (hidden) commissions. (Comparatively, my series 65 license prohibits me from charging commissions.)

As soon as they get the licenses, they are expected to go into “production.” The firm sets very tough production targets. If they fail the targets, they will be kicked out of the program.

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I wrote this article in October of 2011 after the market had a brutal summer. I made a bullish call. Since then, the S&P 500 is up 44%. I must say I am less bullish now than I was then.

The Investment Scientist

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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Is this your fund manager?

Is this your fund manager?

Securities and Exchange Commission Chairman Mary Jo White supports a new rule that would allow hedge funds to market directly to the public. I think that’s a fantastic idea. Let me explain why.

Between 1998 and 2010, hedge fund managers earned “only” $379 billion in fees. Do you know how much they made for investors?

Before you answer that question, you should be aware that one-third of hedge fund money is channeled through funds of funds. Their managers need their cut too. Between 1998 and 2010, their take was about $61 billion.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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