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to three, the top marginal rate will be reduced from 39.6% to 33%, and the 3.8% Obamacare surtax on investment will be repealed.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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My Best Investment in 2016
Posted on: December 7, 2016
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 »
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When I was in California last week, I met with a prospective client and did a second-opinion financial review of his situation. He has $5mm in his company’s ESPP (employee stock purchase plan.) I can’t help but feel a bit dizzy, that feeling you get when you’re standing on the edge of a tall building without any protection.
I have a friend who was a senior engineer at MCI Worldcom. He also participated in this company’s ESPP. In only a few years, Worldcom went from being a no-name, little known company to acquiring the second largest telecom at the time – MCI, and its stock price went up tenfold. The value of my friend’s ESPP account went from $300k to over $3mm and he looked extremely smart by not diversifying at all.
The rest of the story you all know. MCI Worldcom filed for chapter 11 in 2002 due largely to corporate fraud committed by their executives. Its stock price plummeted to zero and my friend lost every dime in his ESPP.
So what exactly is an ESPP?
An ESPP enables a company employee to purchase company stock through payroll deduction.These kind of plans are very popular among high-tech companies because they are considered a very effective way to align the interests of the employees and the firm. Read the rest of this entry »
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This is, unfortunately, an all-too-common story I have heard. A new client of mine told me that his father bought a $500k variable universal life insurance policy for him 26 years ago, hoping that when he died he would leave half a million dollars to his children. (26 years ago, that was a lot of money.)
The premium for the insurance policy is $9000 a year. At some point, his dad asked him to take over the premium payments.. Between the two of them, they have already paid in a total of $234,000, but the cash value of the insurance is only $103,000.
Next year, his dad will turn 80 and here is the in-force illustration the insurance company gave him. Basically, even if he continues paying the premium, his insurance will lapse when his dad turns 83, a mere four years from now. If that happens, they will have paid $270,000 to the insurance company, all for nothing. To avoid that outcome, his dad literally has to die in within the next four years.
When his dad turns 80, the mortality expense of the life insurance escalates to $40k – $50k per year, far more than the annual premium. The shortfall has to be drawn from the cash value. That’s why the cash value will dwindle fast. When there is no cash value left, Read the rest of this entry »
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I took the sensationalist title from a CNBC article I read yesterday. The articles talks about, and I quote, ” … hedge funds, as a category, is experiencing the worst quarter of outflows since the bottom of the financial crisis … there were an avalanche of stories about the industry’s nearly systematic underperforming.”
Readers of my newsletter and blog, The Investment Scientist, can thank me later for warning them years ago.
On April 28, 2011, I published “A Balanced Portfolio to Avoid (II): Hedge Funds Don’t Deliver Outstanding Returns.” Let me quote my former self: “Hedge funds are often peddled as an unique asset class that are uncorrelated with the market. In reality, hedge funds are as much an asset class as Las Vegas is.” The unspoken message is: you should expect to lose money.
On August 15, 2012, I published “Why You should Avoid Hedge Funds.” I wrote that article after I read the book by former hedge fund industry insider Simon Lack, “The Hedge Fund Mirage.” I summarized the book in one sentence for my readers: “Between 1998 and 2010, hedge fund fees totaled $440 billion vs. $9 billion profits for investors. Read the rest of this entry »
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At the end of June this year, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed possible consequences.
Journalists responded by using the results to craft dramatic headlines and stories. The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into free fall, and tested the strength of safeguards since the last downturn seven years ago.” The Financial Times said “Brexit” had the makings of a global crisis. “[This]represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”
What about those self-proclaimed financial gurus? Motley Fool wrote: “Sell Everything! How Brexit Can Shatter Share Market” and Jim Cramer wrote: “Don’t Buy! Why the Mass Brexit Sell Off is Worth Riding Out.”
It turned out there was no “mass brexit sell off.”
It’s true UK got a new Prime Minister, and the Pound Sterling fell to 35 years low. But within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July, the US S&P 500 and Dow Read the rest of this entry »
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Recently, I did a portfolio analysis of a prospective client who has a Wells Fargo “financial advisor.” Here is the result …
| Symbol | Expense Ratio | Load | Turnover |
| CAIBX | 0.59% | 5.75% | 63% |
| CAPCX | 1.66% | 1% | 89% |
| FEVCX | 1.90% | 1% | 15% |
| MIQBX | 1.30% | 5.25% | 29% |
| OIBIX | 0.57% | none | 111% |
| WAFMX | 2.25% | none | 34% |
| WFPAX | 1.24% | 5.75% | 58% |
Let me explain …
Load is the initial kickback (coming directly from your account) the fund gives to the broker for directing money to the fund. There are so many no load funds out there, you shouldn’t be paying load. A broker only does that to line his pocket, there is no benefit to you whatsoever.
Expense ratio is what the fund charges every year. As my rule of thumb, any expense ratios higher than 0.5% are too high. Any expense ratios higher than 1% are exorbitant. As you can see, all the fund expense ratios here are either too high or exorbitant! The broker who directed your money to these funds gets to share a portion of the loots ever year. Can you see a conflict here?
Turnover is how often the fund manager churn the investments. The higher the churn rate, the higher the costs to investors. Typically, a 100% turnover translates into about 1.2% in return reduction. As my rule of thumb, any turnover higher than 10% is too high, a turnover higher than 100% is exorbitantly costly! Read the rest of this entry »
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Why I Don’t Pick Stocks
Posted on: August 18, 2016
Between 2000 and 2002, I worked as head weather derivative trader at PG&E National Energy Group. On the side, I also traded stocks for my personal account.
By the time the Enron Debacle happened, I had already become the third largest weather derivative trader in the country. Given another year, I am quite sure I would have become #1 in this field. Well, that’s a story for another time.
My stock trading, however, was a lot less successful. All the stocks I picked lost money, except for one. The one exception was PCG, the company I worked for. Granted, the time between 2000 and 2002 was a time of market collapse due to the burst of the dotcom bubble, but there is still an important lesson I learned and that I want to share with you.
The lesson was about information advantage.
Though I was not in management and therefore was not privy to any material insider information, just from the ambiance noise of the trading floor I know so much more about my company than folks outside of the company.That’s why I was able to make money on PCG. That’s also why I didn’t make money in all those other stocks – I didn’t have any information advantage. Read the rest of this entry »
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I visited a physician client in Wisconsin while on vacation in Chicago this week. He has been my client for several years now and his personal finance is in very good order. As I was driving the four hour stretch of highway, I thought: What idea I could bring to him that could make his situation tens or even hundreds of thousands of dollars better?
This physician client of mine is easily in the top income tax bracket, meaning marginal tax rate for him is nearly 50% combining federal and state. He also gives away about $10k to various charities a year. He plans to retire in about 10 years.
When he retires, he will continue to give away $10k a year. In fact, there is a good chance he will give away more since people become more charitable inclined when they get older and having a meaningful impact becomes much more important to them.
If he lives another 30 years after retirement, he will give away a minimum of $300k. Here is the problem, he will have little income to write off, thereby wasting up to $150k worth of tax savings.
Alas, but there is a way to recapture these tax savings, it’s called Donor Advised Fund or DAF.
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When Going Gets Tough
Posted on: July 19, 2016
Recently, I had a Review and Discovery meeting with a physician in her late 50s. When I first saw her, she looked burnt out and stressed. Who can blame her? She has been dealt a very bad hand in life.
- One of her children suffers from down syndrome and requires lifelong care.
- Her husband, also a physician, passed away several years ago, leaving behind a financial mess
- The financial professionals who were supposed to help her, led her to make disastrous investments. She lost her house and had to declare personal bankruptcy.
- Her father recently passed away, also leaving behind a financial mess.
- Her mother is so dependent on her now that she cannot continue her medical practice.
She told me she almost wanted to pull her hair out when thinking about her responsibility to her patients, her children, her mother and yet she can’t even sort out her own personal finances.
I did not mince words in telling her how dire her financial situation is. When I told her how much she needs to retire, she almost fell off her chair.
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The Real Danger of A Market Decline
Posted on: June 30, 2016
I was an amateur pilot. I remember vividly an episode happened during a training class ten years ago.
That was a very windy day. Up to that point, I had only experience flying in calm weather. As soon as my Cessna took off, I immediately felt the difference. My plane was tugged and pulled in all directions by cross winds. I felt like I was losing control of the plane, and fear swelled up from the bottom of my spine to the top of my head. I sat stiffen in the pilot seat and my sweaty palms grabbed tightly at the control handles like a sinking person holding onto a straw.
My trainer sensed my tenseness and she asked: “Are you OK?”. Not willing to acknowledge my fear, I asked her instead: “Is it more dangerous to fly in turbulent weather like this?” The trainer smiled and said: “It is not more dangerous to fly in turbulent weather. The plan was built to withstand any turbulences. But occasionally, an amateur pilot would lose his cool and do something stupid. That’s the real danger.”
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According to research by Dimensional Fund Advisors, Inc, only 33% of mutual funds that outperformed the market in the last five years continue to do so in the next five years.
Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.
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Brexit: What to Do About It?
Posted on: June 17, 2016
A week from now, there will be a referendum in Great Britain to determine if the UK should stay in EU or should leave for good.
A mere month ago, the stay vote still won by a comfortable margin. Just showing how political wind can shift, the odds are now 50/50 that the leave vote might win.
Here are some consequences I believe a leave vote would entail:
- Copycat referendums in other EU states, and within a few years, EU might not exist.
- London’s reputation as world financial capital on par with New York may be diminished.
- Disruptions to trades and investments, since UK’s relationship with Europe and the rest of the world, will have to be renegotiated.
- Pound Sterling, London stocks, and property prices might go south. Potential capital flights from the UK.
- More volatility in global stock markets.
As an investor, what should you do about it?
Well, all of the above can be called informed speculations. They are not actionable Read the rest of this entry »
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Double Your Return … What I Learned!
Posted on: June 3, 2016
On May 27th, 2005, I started MZ Capital Management as a hedge fund with “Double Your Return” as my first marketing tagline.
Shortly after the Enron debacle, Congress passed the Sarbanes-Oxley Act, which requires company insiders to report their trades to the SEC electronically within a day of the trades taking place. I created a computer program to query the SEC’s database in real time. So as soon as, for example, IBM’s CEO reported that he bought 10000 shares of IBM, I would know it right away.
On a typical working day, I would be half naked lying on the beach of Palm Beach and I would get a text on my dumb cell phone (sent to me by my computer working hard on my desk.) I would call my broker right away to follow the trade. Then the news would get to the WSJ one week later, the price of IBM would pop and I would sell for maybe a 5% to 10% gain.
Just like that I was making 20% to 30% return every month!I calculated that at this rate of compounding, I would become a trillionaire in about 10 years. I was so confident, I started the hedge fund to share the wealth.
Lest you don’t know yet, I did not become a trillionaire hack, not even a billionaire. So what went wrong?
A few months into my hedge fund, I noticed a small website, where for a $20 a month Read the rest of this entry »
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My Gratitude Trip to China
Posted on: April 29, 2016
- In: Life
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Recently, I took a one-week trip to China, primarily to thank my English teacher. Since late last year, it had dawned on me that I had been so busy chasing my own success that I had forgotten to properly thank those people who made my success possible in the first place. So my new year’s resolution was to identify those people who had the most positive impact on my life and go thank them personally.
Teacher Huang is one such person. He started the first ever English immersion program in China, and he poured his heart into teaching us English. Without him, I wouldn’t have the language skills to accomplish what I have now
He lives in Guangzhou, China though, which takes nearly 24 hours of travel to get there. No matter, I made up my mind to do that. I wrote him a thank you letter, carried it with me, and I read it out loud in front of him and his family. We both were choked up in tears. This is a picture of me with my English teacher.
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I learned that Teacher Huang has kept me in his memory for all these years. He filled me in with many details of my middle school years that I had forgotten.
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Seeing his white hair, I felt like I had been an ungrateful student who took 30 years to come thank my teacher. But seeing how happy he was, I also felt like I’d made amends. Read the rest of this entry »
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Recently Department of Labor issued a fiduciary rule that requires that financial advisors who manage retirement accounts must act in clients’ best interests.
Here is the quote from a Wall Street Journal report …
About $14 trillion in retirement savings could be affected by the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.
Still, reflecting intense lobbying from the financial industry, which has fought the regulation since it was first proposed six years ago, the final version includes a number of modifications.
This might come as a surprise to many people that financial advisors do not need to act in clients’ best interests up until this day.
Alas, as I explained in this article, there are really two types of financial advisors: Read the rest of this entry »
The Investment Scientist 