I met with three prospective clients on my trip to Los Angeles last week. I did a quick financial review with each one of them and gathered some lessons learned as well.
Prospective client A is a physician in his late 60s. He has already reached retirement age but he needs to keep working since he has less than $1mm saved for his retirement.
All that money is in tax deferred accounts, meaning far less than $1mm is available for his retirement. This is NOT retirement security.
Client A is not an extravagant person, so why is he in such dire straits?
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Medicine is a profession fraught with legal risk. According to an AMA survey for the period 2007-2008, for every 100 doctors, there were 95 lawsuits.
The survey also reveals that physicians 55 years and older are eight times more likely to get sued than physicians 40 years and younger.
Not that they make eight times more medical errors, just that they are richer lawsuit bait.
That reminds me of a joke. Why won’t a shark attack a lawyer? Professional courtesy.
Back to the topic at hand, many physicians in solo or small practice simply use a SEP IRA as their retirement plan. It is very simple to set up, and the contribution limit is a generous 25% of earned income or an annual limit of $49,000. What is there not to like about it?
Click to get my white paper Wealth Management Guide for Physicians.
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Bullet train
I just came back from a long trip in China and Taiwan. During the trip, what impressed me the most was China’s bullet train. We rode the longest high-speed rail line in the world – Beijing to Guangzhou – which started services only a few months ago.
The train is futuristic, comfortable and extremely smooth. Zipping at speed of 300 km/h or about 190 mph, the water in my glass sitting on the table stayed still.
With such a speed, one could travel from New York City to Washington DC in one hour and 15 minutes, or from New York City to Chicago in three and a half hours. High-speed rail truly shrinks the country.
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New York Stock Exchange
The S&P 500 closed the first quarter at a record high. Should that worry investors? The short answer is, No.
When the market was 30% below the high three years ago, I did some research. I categorized all market conditions into:
1. Breaking a new high.
2. Less than 10% below historical high.
3. Between 10% and 20% below historical high.
4. Between 20% and 30% below historical high.
5. Between 30% and 40% below historical high.
6. More than 40% below historical high.
Then I calculated the one year forward returns of the six conditions.
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10. January Barometer Effect: What Will the Stock Market Do for the Rest of 2013?
9. Email Scam Targets Financial Advisor Clients
8. Why Asset Class Diversification is Superior
7. How Often Do Market Corrections Happen?
6. Variable Annuity Fees You Don’t Know You are Paying
4. Profit from Harry Dent’s predictions? Think again
3. The High Cost of Fee-based Financial Advisors
1. Be Careful When Buying a Condo as a Rental Property
Also see Top 10 last month.
Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
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What fills up your tank?
Posted on: February 28, 2013
How Can I Help?
“What makes you smile every day? What fills up your tank?”
These are questions a friend of mine asked me recently. For my wife, it is hosting dinner parties. She loves seeing people come together and enjoys conversations with friends. She does this almost every week now. It is also a great way for me to see her doing the thing she loves.
For me, it is learning improv and performing comedy on stage. English is not my first language, and I never thought I could do that. Now, I regularly go on stage to make people laugh.
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House for sale
Recently, a client called to tell me that he had finally got the big boulder off his back, and it was such a relief for him.
The “big boulder” he referred to was his big house, with a swimming pool and a tennis court. The house had been costing him $100k a year in property taxes and upkeep, more than 50% of my client’s retirement income. No wonder he called it a big boulder on his back.
He bought the house 25 years ago for $2.2mm, and he just sold it for $2.1mm. After all the costs associated with selling the house, he took home $2mm and change.
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January Barometer Effect: What Will the Stock Market Do for the Rest of 2013?
Posted on: February 7, 2013
New York Stock Exchange
With the market up about 5% in January, a prospective client of mine called to let me know he is not going to invest in stocks at this time – in fact, he is going to pull all of his money out of the market.
This may not be the best course of action for him.
According to research done by Cooper and McConnell, what the market does in January has a strong predictive power for what the market will do for the rest of the year.
Using data since 1940, they found that if the market is up in January, it will rise an additional 14.8% for the rest of the year; if the market is down in January, it will rise only 2.92% for the rest of the year. This gives rise to a spread of almost 12%, a highly statistically significant number.
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Email scam
I recently received an email from a client of mine. The mail contained only one line: “What’s the balance of my account?”
“It’s $978k as of close of yesterday,” I replied.
“I need $500k for a business transaction,” my client responded.
I went into an explanation of the tax consequence of selling long-held investments to fund a business transaction, but my client insisted that he needed the money urgently. So I emailed him: “send me your wire instruction, and I will make sure the money will be in your account tomorrow.”
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10. How Often Do Market Corrections Happen?
9. Why Asset Class Diversification is Superior
8. Small Business 401k, Big Plan Fees
6. An Investment Rule for Young People
5. Fiscal Cliff Deal: What does it mean for high income/high net-worth families?
4. Roth Conversion Decision Framework
3. Profit from Harry Dent’s predictions? Think again
2. Be Careful When Buying a Condo as a Rental Property
1. The High Cost of Fee-based Financial Advisors
Also see Top 10 last month.
Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
Get informed about wealth building, sign up for The Investment Scientist newsletter
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Oil and Gas Investment Scam
In the last month alone, I’ve gotten calls from two clients asking me if they should invest in tax advantaged oil and gas investments being pitched to them? Both of these clients are physicians.
The pitch is that oil and gas investments are like IRA accounts, but without the contribution limit. Whatever amount you invest can be written off right away.
The pitch is quite alluring to high-income professionals like physicians who are facing higher taxation. But it sounds too good to be true, so I did a study.
It turns out what is being pitched as “tax advantaged” is in fact the riskiest part of an oil and gas investment.
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The reward of a financial advisor
Posted on: January 7, 2013
Recently, a client of mine fell, broke his hip and ended up lying on the floor for 20 hours before he was rescued. I went to visit him in the hospital a couple of times. The good news is: he is out of immediate life-threatening danger. The bad news is: he may be wheelchair bound for the rest of his life.
When John first came to me to seek my help with his personal finance, I looked at his overall financial big picture and was pleased overall. He worked at federal and state jobs and enjoyed good pensions. On top of that, he had a decent investment account.
But there was a gaping hole in his retirement security: he was turning 70 then, was divorced, and his children lived far away. That meant if he were to get sick, nobody would be there to take care of him; he would need to hire caregivers. Right then, I insisted that he buy long-term care insurance.
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10. Variable Annuity Fees You Don’t Know You are Paying
9. Is P/E ratio a useful stock valuation measure?
8. Small Cap Value: Risk and Returns
7. Why Asset Class Diversification is Superior
6. An Investment Rule for Young People
4. The High Cost of Fee-based Financial Advisors
3. Profit from Harry Dent’s predictions? Think again
2. Be Careful When Buying a Condo as a Rental Property
1. The two most common ways investors lose money
Also see Top 10 last month.
Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
Get informed about wealth building, sign up for The Investment Scientist newsletter
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Fiscal Cliff Deal: What does it mean for high income/high net-worth families?
Posted on: January 2, 2013
Approaching the fiscal cliff
The cliff deal struck between Vice President Joe Biden and Senate Minority Leader Mitch McConnell is a good deal overall for high income folks.
Make no mistake, some of them will have to pay more in taxes, but the amount is far less than if there is no deal and all is set back to the Clinton tax regime.
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Tax planning tips
In the past, I have advised my clients to defer income recognition and capital gain realization so that they can pay taxes later. Not this year! Under current law, major tax changes are set to happen at the end of the year. These include:
- Tax rates on ordinary income will rise. The rates for most brackets will increase by 3%. The highest top marginal tax rate (which was for income above $388,350 for both single and married filing joint filers in 2012) will go from 35.0% (in 2012) to 39.6% (in 2013).
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New Year’s investment resolutions
After working as a financial advisor for six years and after reading tons of research, I have developed a good sense about how the average investor loses money. As the New Year approaches, I think it’s good to share my insight so that readers can determine if they are making these mistakes.
Conflict of interest
I cannot emphasize this enough: Wall Street firms don’t work for you. If you have a Merrill Lynch or Morgan Stanley advisor, expect to give away 2.5% of your money every year – about half of it will be in explicit fees, the other half will be in hidden fees. If you invest through insurance products, expect to give up 3.5 percent of your money.
The Investment Scientist 