The Investment Scientist

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Recently, the Wall Street Journal reported that Merrill Lynch had just lowered fees for their fee-based accounts from 2.7% to 2.2%. Let me also quote:

“The reduction affects clients with under $1 million in assets at the firm. Those clients with $1 million to $4.9 million in assets will continue to pay a maximum of 2.2%, while investors with $5 million or more in assets will continue to pay a top rate of 2%.”

I’ve done a lot of second opinion financial reviews over the years and these fees are broadly consistent with what I’ve seen in portfolios managed by Wall Street brokerages like Merrill Lynch, Morgan Stanley, Ameriprise etc.

In comparison, my fees are 1% for the first million, 0.7% for amounts up to $5mm and 0.4% for amounts over $5mm. Most independent RIAs (registered investment advisers) are like me – our fees are about a third of those by major brokerages.

Everything else being equal, if you are paying 1.5% more a year in fees, a back-of-the-envelope calculation will tell you that in 20 years you will be 30% poorer because of those higher fees. In 30 years, you will be 45% poorer.

But everything else is not equal. There are two other major distinctions between brokers and RIAs: Read the rest of this entry »

Allow me to answer these questions by two charts. The first one comes from the website of Nobel Prize winner Robert Shiller. It shows that the current Shiller PE10 is at 29.14. It is right at the level reached just before the Great Depression, and already far higher than the level just before the previous stock market crash in 2008. However, it still has ways to go before it reaches the peak achieved during the dot com bubble.

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The second chart represents Shiller PE10 among global stock markets. It shows the relative valuation of stocks across the world. In this chart, US stocks are red hot and they are currently the most overvalued stocks in the world.
Read the rest of this entry »
LasScreen Shot 2017-02-01 at 2.12.53 PM.pngt week I attended a tax seminar organized by McLean Estate Planning Council. The keynote speaker was  a CPA and lobbyist for the AICPA on Capitol Hill. He is privy to Trump’s tax reform plan and a number of other Republican tax reform plans. These plans have a long way to go to become law, but the contour is taking shape  so I thought I would share what I learned with you in a few bullet points. Note that I bolded the parts that may be disadvantageous to taxpayers.
On personal income tax:
  • The number of tax brackets will be reduced from seven to three, and the top marginal income tax rate will be reduced from 39.6% to 33%.
  • Personal exemptions will be eliminated.
  • Standard deduction for married filing jointly will rise from $12,600 to $30,000.
  • Itemized deductions will be capped at $200,000 per household.
  • Mortgage interest deduction will be eliminated.
Overall, taxpayers will get a tax break. However, there are some taxpayers who will end up with a tax increase.These are folks with many dependents, who have a huge mortgage or who give a lot to charities.
On corporate income tax:
  • Tax rate will be reduced from 35% to 25%.
Screen-Shot-2016-11-18-at-5.07.47-PM.pngSince the election, the US stock market has been breaking new highs, encouraged by the prospect of lower taxes and higher growth. However I believe investors have not paid sufficient attention to the prospect of a trade war.

To a large extent, the election of Donald Trump is a repudiation of globalization by a large segment of the US electorate. Even though the country as a whole has benefited tremendously from globalization, those benefits have by and large bypassed working-class folks.

Before 2000,  Apple made all of its computers in the US and its market cap never rose about 10 billion dollars. Since then, Apple has subcontracted all of its production overseas and only kept design and marketing in US soil. The result?

Apple has become the most valuable company in the world with a market cap of over $600 billion even though they only have 66,000 employees in the US.

At the same time, Apple’s contract manufacturer Foxconn directly employs over 1 million workers in China. The supply chain to Foxconn employs another two million people. Read the rest of this entry »

  1. I went to San Francisco to study improvised musical theater and performed at the Bay Front Theater for a 45 minute set of musical story entirely improvised on stage.
  2. Against all odds, I kept Storyfest Short Slam, a short storytelling contest, alive and strong at the Bethesda Writer’s Center.
  3. I visited my English teacher whom I had lost touch with for 30 years. I couldn’t have accomplished this much in the US without him. I went to say thank you to him personally.
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  4. I went to Guangzhou for my high school reunion and took pictures with my female classmates for the first time. (Back then we didn’t hang out with the opposite sex.)
  5. At Leadership Montgomery homecoming, I acted out Michael Jackson. Read the rest of this entry »
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With the election of a Republican president and a Republican Congress, the tax Wheel of Fortune is spinning again. Since it’s December 2016, you will have to make an educated guess and place your bet now before the wheel comes to a stop.

Tax cuts are  very likely, as is a cap on deductions. According to President-elect Trump’s tax proposal, the seven tax brackets will be reduced to three, the top marginal rate will be reduced from 39.6% to 33%, and the 3.8% Obamacare surtax on investment will be repealed. However, itemized deductions that include mortgage interest and charitable donations will be capped at $200k for joint filers.

If you make a few smart moves now, you can potentially save big.

  • Delay recognition of incomes and accelerate recognition of expenses/deductions.
  • Maximize retirement savings
  • Take capital losses.
  • Front load your charitable contributions

You can use a donor advised fund to front load your charitable contributions. Take my situation,for example. I typically give about $3000 a year to charities. I now have a d Read the rest of this entry »

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A few months ago, I stumbled upon a report about a homework essay written by a nine year old girl, Jia Jia, in rural China. The title of the essay was “If I live to be a grownup 如果我能长大.” It turns out Jia Jia suffers from thalassemia, a blood disease that requires a blood transfusion every 40 days.  Without them, she would die. Jia Jia was abandoned by her own parents because they could not afford the medical treatments, but her grandmother refuses to give up on her.

Jia Jia is  very aware of her own mortality, but she still has dreams. In the essay, she wrote how she was heartbroken to see her grandmother weep because she did not have enough money for her granddaughter’s  treatment. She also wrote  that if she lives to be a grownup, she wants to take care of her grandmother so she never has to worry about  her again; she wants to become a doctor, so she can treat those people who can’t afford medical treatments.

I was so touched by the overflow of love despite their tragic situation that I called the reporter to get the grandma’s phone number and home address. Read the rest of this entry »


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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