Invest in a Variable Annuity
Recently, a client of mine brought me the variable annuity he bought a few years ago.
Prominently displayed on the first page are the benefits of the annuity:
Death Benefit: Enhanced Guaranteed Minimum Death Benefit
Living Benefit: Lincoln Lifetime Income Advantage
as well as the fact that the money will earn an fixed annualized rate of 5.75%. Under the bold ACCOUNT FEE subtitle, it states: Account fee is $35 per contract year.
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This list is taken from an Irish Times article on behavioral economics.
1. LOSS AVERSION
People are more motivated by fear of a loss than hope of a gain, hence are more likely to seek to avoid a penalty than seek to gain bonus, even if both amount to the same thing.
2. ILLUSION OF CONTROL
For example, people feel an illusion of control when they’re allowed pick their own lottery numbers, even though they are no more likely to win by being given this choice.
3. DENOMINATION EFFECT
The tendency to spend more money when it’s denominated in small amounts (like coins) as opposed to large amounts (like large notes).
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[Adapted from my post on Physicians Practice]
“Laws are like sausages …” Otto Von Bismarck, First Chancellor of Germany
Doctor and Monday
The last Congress, the one that received a “Shellacking” in November election, was actually very good at making “sausages.” As the result, there are many tax law changes that have come into effect. I asked the tax specialist in my wealth management network to give me a list of tax law changes in 2010. As I went through the list, I identify these seven that are relevant to physicians and their practices.
Don’t take this as legal or tax advice; don’t even take this as complete information. To avoid putting you to sleep before you get to item 7, I simplify much legal minutia. Consult your own tax and legal experts before using any of these:
- If you have a practice of less than 25 employees, you maybe qualified for health insurance credit. Read the rest of this entry »
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Bill Gates
A physician client of mine passed on to me this list, from Bill Gates’ talk in a high school. There is a good bit of wisdom there. If you have kids in high school, pass this on to them.
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Annuity without Risk
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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Deficits, Debt and Market Returns
Posted on: March 10, 2011
[Adapted from Brian Harris of Dimensional Fund Advisors] As government spending hits record levels (see chart below) around the globe, some politicians, economists, and pundits are warning that rising indebtedness may drag down economies and financial markets. If you are concerned, you are not alone. I heard that over and over from my clients. So how does public debt affect economic growth and market returns? The evidence might surprise you. Let’s explore these issues by addressing a few popular questions about sovereign debt:
Read the rest of this entry » |
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Recession Stock Market
Three years ago, at the onset of the recession, I performed research analyzing the previous nine recessions after WWII and wrote an article “Recession and Stock Market Performance” based on that research.
Given that I am not clairvoyant – unlike many market pundits and some fellow financial advisors – I can’t see the future. I can only use my research of the past to frame my perspective of the future.
I came away with two conclusions:
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March of Efficient Market
I turned $300k into $2mm in six month. Here is what happened.
After the Enron debacle in 2002, Congress passed the Sarbanes-Oxley Act. One obscure clause in the act required company insiders to report their insider trades electronically within a day. The reports would go into a Securities and Exchange Commission (SEC) database accessible to the public (if they knew how to query the database.)
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Tom making his new year resolution
[Guest Post by Tom Warburton] How’s this for a New Year’s Resolution – repeat after me – I Resolve That I Will Abandon Personal Stock Picking And I Will Not Permit That Foolishness To Be Foisted Upon Me By Stock Brokers, Money Managers Or Financial Advisors.
New evidence shows up every day suggesting that it makes more sense to invest in index funds than to personally pick stocks, invest in hedge funds, invest in actively managed mutual funds or let a money manager pick stocks for you.
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Roth Conversion
As 2010 comes to a close, one time sensitive wealth management move affluent individuals and families should consider is converting an existing traditional IRA into a Roth IRA.
It is not a trivial decision, and there is no one-size-fits-all answer. What I hope to accomplish below is to give you a framework to help you make the best decision for you and your family.
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A Simple Investment Principle
Posted on: December 5, 2010
MZ Capital 40/60 model vs S&P 500
Just like two sides of a coin, the capital market is made up of capital demanders (businesses) and capital suppliers (investors). What for businesses are costs of acquiring capital are for investors rewards of supplying it. It is a simple truth that
Costs of Capital = Expected Returns
Looking through this lens, many capital market phenomena can be explained.
Why small stocks tend to have higher returns than large stocks?
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Managing Investment Risks
Posted on: November 11, 2010
MZ Capital 60/40 model vs S&P 500
Once I asked a prospective client how he managed investment risk.
“Well,” he intoned, “I try to get in before the market rallies and get out before it tanks.”
It is not just lay investors who have this misconception about risk management; many financial advisors equate risk management to market timing as well. One only needs to watch those advisors talking on CNBC to see that many of them are in the fortune-telling business.
So how do I manage risks? There are three steps.
Read the rest of this entry »
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Warren Buffet on Hedge Funds
Posted on: October 31, 2010
These are Warren Buffet’s own words. As usual, they are as humorous as insightful.
“In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: it’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide.
“…The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these hyper-helpers. Even so, the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money”
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Active Money Manager Blah Blah
Posted on: October 12, 2010
Going Somewhere?
[Guest post by Tom Warburton] Most of us who have survived and thrived in the money management industry were trained under the traditional model of ‘getting in front of somebody and making a pitch’. Our ‘pitch’ was designed to make us look smart and normally started out with something like “our best idea right now is blah blah”.
Thanks to our persistence and personal charisma we succeeded in winning a few clients that referred more clients and ultimately created a book of business from which we could make a living. So off we went with more ‘best ideas right now’ and more ‘blah blah’.
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Taking Investment Risks
Posted on: September 30, 2010
Investment Risks
Risk taking is an integral part of investing, yet most investors are blissfully unaware of the risks they are taking, let alone managing them well. In this post, you will quickly learn the good, the bad, and the ugly of investment risks.
Nine Types of Risks
Idiosyncratic risk is defined as risk that is specific to a particular company. This type of risk can be eliminated simply by holding a well-diversified portfolio; therefore, taking this kind of risk is not compensated by the capital market. Examples of taking idiosyncratic risk include investing in individual stocks and buying annuities as investment.
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Who Should You Trust
Posted on: September 8, 2010
[Guest post by Tom Warburton] Almost every single day a buddy calls us to discuss the “Investment Pornography” coming from the brokerage houses or from the mouths of the talking heads on CNBC. Last week was different – almost all of our buddies only wanted to talk about Goldman-Sachs and the Senate Hearings.
The crux of the issue was proffered by Knut A. Rostad, Chairman, Committee for the Fiduciary Standard. His quote from Wealth Manager “Goldman Sachs, Suitability and the Fiduciary Standard”, April 21, 2010
“The Case Highlights The Wide Gap And Opposing Roles Of A Broker Who Is Permitted In Law To Further His And His Firm’s Interests At The Expense Of Customers, And A Fiduciary Who Is Required In Law To Put His Clients’ Interests First. This Is At The Core Of Why The Fiduciary Standard Is Important.”
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