COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR. BSCE, LLB, MBA, MSFP, PhD
CERTIFIED FINANCIAL PLANNER
REGISTERED INVESTMENT ADVISER
ANNUITIES: Many annuities offer first year bonuses to boost the appeal to potential purchasers. However, their long term rates may be - probably are- less than competitors who do not have the bonus. When you are in for a long time therefore, the lower initial rate can be a much better purchase. Check the table below. The top scale represents the First Year Bonus. The vertical scale represents Base Rate. The interior numbers represent $100,000 in seven years and are based on annual base rate renewals.
So what's the deal? Assume someone gives you a base rate of 5.50% but with a 4.00% first year bonus. Looks great with an advertisement of 9.50% the first year. The other agent only has a 6.25% overall rate and NO bonus. In seven years with the bonus, you would have $150,983. But if you had taken the 6.25% rate, you would have had $152,863. While not a huge difference, the difference gets larger and larger as the years roll by. You rarely will ever see this comparison because 99 44/100% of all agents do not have (never mind can't use) a financial calculator.
That's also the reason why looks can be deceiving. Let's be careful out there.
NATIONAL ASSOCIATION FOR VICTIM ASSISTANCE: (NOVA) 717 D
Street NW, Washington, DC 20004, 202 393-6682 provides a national advocacy
for victims rights, help for crime victims and will help locate assistance
in your local community.
FUNERALS: (Survivor's Guide)
If a funeral is to be conducted:
There are apparently five types of funerals
Traditional with open casket- the body is embalmed and placed in a casket and religious services are held followed by earth burial, cremation or entombment
Traditional with casket closed- same as above except embalming is optional
Traditional with rented casket- either of the two above is possible. After the service, the body is transferred to a burial case or cremation.
Memorial service- a religious or secular service is held either before or after the body has been buried or cremated. Embalming is optional.
Direct burial or cremation- the body is NOT embalmed but is buried or cremated as soon as legally possible.
FUNERAL COSTS: The Federated Funeral Directors of America
reported in 1991 that the average funeral sale was $3,247.46. This included
owner and staff services, use of mortuary equipment, professional care, motor
vehicles and the casket. The casket price averaged $526.96. That's from about
171,000 funeral of 1,400 privately owned funeral homes. Thirty two percent
of funeral arrangements were preplanned. Another 21% involved some discussion
or arrangement before needed.
GRAVESITES: In 1991, gravesites were estimated to cost from
$500 an up in metropolitan areas and about half that in rural areas.
CREMATION: In 1970, cremation was 4.58%; in 1980 it was 9.74% and in 1989 it was 16.36% of all final dispositions. Four reasons for its increase
SURVIVOR: To be considered a legal successor, most states
require that a survivor must outlive the decedent by 120 hours. Except in
the case of simultaneous death, any person who fails to outlive the decedent
by 120 hours is deemed to have predeceased the decedent. Makes a big difference
in how estate are passed to beneficiaries. Check you local state regulations.
COMPASSIONATE FRIENDS: PO Box 3696, Oak Brook, IL 60522,
312 990-0010 provides help for families that have lost a child of any age
through accident, illness, assault, suicide, etc.
LIVING BANK: 4545 Post Oak Place Drive, Houston, TX 77027, 713 528-2971 is a non profit organization to help those that wish to donate all or part of their bodies for transplantations, research, etc.
SUDDEN INFANT DEATH SYNDROME: (SIDS) National SIDS Foundation,
8200 Professional Drive, Ste 104, Landover, MD 20785 301 459-3388 will supply
info about local chapters where parents can share grief with others.
SAMARITANS: 500 Commonwealth Ave., Kenmore Square, Boston,
MA 02215, 617 247-0220 is a special group of volunteers trained to help those
considering suicide or persons who have lost a friend or relative to suicide.
BUDGET DEFICIT: Though the budget gets balanced- and that's
a very good thing in itself- it still won't forestall a major problem with
the retirement of the baby boomers in the years to come. The entitlements
will all be stretched to the hilt- and some will break. The hardest hit,
obviously, are the poor. Mentioned here previously, most of the wealth of
the poor- about 70%- is from future social security checks. They have little
savings and no pensions. Even the middle class hasn't been saving that much.
So in the future- from about 2020 onward- it's really going to hit the fan.
This is the time you are apt to see major racial and economic turmoil embroil
our society into, perhaps, further haves and have nots. What to do? Well,
as stated, reducing the budget deficit was step one. Second is the lowering
of benefits for the elderly and forcing them to spend more for the services
they now get. They must take on more responsibility if, for no other reason,
there is no money. To give you an idea of how far we have gone to a socialistic
society, in 1995, per Chronicle article, every one earner couple that retires
will receive an excess $260,000 in social security and Medicare benefits
beyond which they contributed in taxes to those programs. (The figure is
far less when allowing that interest could have been earned on the taxes
collected.) The article further noted that when the baby boomers retire,
younger workers would have to pay about 73% of their income to support federal
spending. Ain't gonna happen. But just like politics of old, we'll roll merrily
along until it's obvious that things are so bad that we must do something.
It might mean a major restructuring of the entire tax and benefits system
about 2005 to 2010.
INFLATION INDEXED BONDS: (FED Board of San Francisco) We
don't have them in the U.S. yet, but the governments of England, Australia,
Sweden, Canada and soon for New Zealand are offering them for sale. They
are nice in that you don't have to worry either about the semi annual payments
nor your principal at maturity. All are offset for inflation so, "you can't
lose". They are a lot easier to sell and own since you don't have to figure
out discounts and premiums based on anticipated further inflation. The general
consensus is that any government issuing these bonds signals that it is serious
about controlling inflation- certainly something that Greenspan has focused
on for some time. We may see them in the next five years or so.
DYING: Several months ago you might remember my comments about my being named as an agent on some clients living wills so that they could be reasonably assured that I would be independent enough to see that their wishes were carried out. Well, it appears that that might be absolutely necessary since a four year study showed that Doctors repeatedly ignored their patients wishes, their pain often went unrelieved and their doctors many times persisted in using extreme measures to keep the person alive. They did indicate that things were better than previous, but still commented that the common hallmark of hospital deaths remains "a mechanically supported, painful and prolonged process of dying". The study of 4,031 patients with end of life care:
Those that indicated no resuscitation 31%
The doctors knew of this request 47%
The request had been entered on charts 49%
Patients who wrote a request for DNR (Do Not Resuscitate) within 2 days of death 46%
Spent a minimum of 10 days in ICU 38%
Were on a respirator within the last 3 days 46%
Conscious patients who died after 50%
experiencing moderate to severe pain in
at least half the time in the last 3 days of life.
Also about 1/3 of the families spent all or most of their savings "during an vain and unsought effort to postpone an inevitable death."
A later study of an additional 5,000 who used nurse advocates- those who
attempted to encourage doctors to communicate with their patients and determine
their wishes and to avoid the futility and unwanted high technological efforts
when death was near- reported that patients still spent the same time in
intensive care and almost all suffered as much unrelieved pain in their last
days and almost as many ended up on ventilators- often against their wishes.
Dying is bad enough without being abused in the process.
HOW TO CHOOSE A NURSING HOME: It's a book by Joanne Meshinsky,
RN, Avon Books, 1991 that I will paraphrase from over the next couple issues
because I think it has valuable insight to offer. (Good luck in finding the
book- but it's probably worth the effort if you have someone going into a
home. There's a tremendous amount of info from direct experience that is
lacking in most other texts.) It's necessary since there were about 1.5 million
nursing home residents in 1985 and they are expected to reach 3.1 million
by 2025. That's because the number of elderly is growing so fast. It is estimated
that the number or elderly over age 85 will be about 4.9 million by 2000
and up to 7.1 million by 2020. Admittedly, the odds of needing a home are
fairly small when one is younger and less that 5% of the elderly end up in
homes. From age 65 to 74, less that 1.5% are in a nursing home at any one
time but over 20% of the elderly over age 85 receive nursing home care. Studies
indicated that one in four will need nursing home care before they die. A
key point for some of you is that if you live alone or in a cold weather
state, the odds go up dramatically.
NURSING HOME INSPECTORS: (How to Choose a Nursing Home). This list is a brief rundown on what an inspector reviews at a nursing home. However, it seems to be an excellent list you can use yourself. You might have to dig deeply to check all of these, but since I'll assume a loved ones comfort is at stake.........
DIRECTORS OF NURSES RESPONSIBILITIES: (How to Choose a Nursing Home)
Looks like the Director of Nurses may be the person you may want to talk
to before signing any papers and admitting a loved one.
MURDER: Parents of Murdered Children, 100 East 8th St. B-41,
Cincinnati, OH 45202, 513 721-5683 supports local chapters for parents of
FINANCIAL QUESTIONS TO ASK A NURSING HOME: (How to Choose a Nursing Home)
I thought the last comment was extremely noteworthy. Alzheimer patients
experience a continual loss of motor skills and thought processes and do
take an increased amount of time by the staff to take care of.
NURSING HOME COSTS: (How to Choose a Nursing Home) Here
is an interesting example of how the facts are not what they appear to be.
Every article on nursing home care focuses on the monthly cost- let's say
$3,000 per month. But the nursing home may add $40.00 for laundry and $15.00
for ironing. Total $3,055 per month. Another home is substantially cheaper
at $2,300 per month. But they have daily costs of $3.00 for incontinence
care; $4.00 for spoon feeding; $15.00 per dozen for incontinence pads; $2.00
for tissues and $30.00 for laundry and ironing. Added together, they total
more than the first home. Additionally, many of the other costs you think
are covered by you basic monthly fee are NOT. Enema supplies, catheters,
rubber gloves, bandages, syringes, hand and skin lotions and urine testing
materials are among those added to monthly bills. As are doctor, pharmacy
and surgical company supplies. Then you still need to consider renting a
wheelchair, walker, cane. Maybe add in speech or physical therapy. Be prepared.
RESIDENTS BILL OF RIGHTS: (How to Choose a Nursing Home) Ms. Meshinsky has provided a concise review of the formal Bill of Rights for Nursing Home Patients. The Bill is for the patients safety, well being and privacy. They should be posted in the facility
NURSING HOME THEFT: The Bluegrass Long Term Care Ombudsman
Program, 1530 Nicholasville Rd., Lexington, KY 40503 has info on the precautions
one should take to prevent theft in the nursing home. Ms. Meshinsky also
says that you should label EVERYTHING. Use sew in labels, laundry markers,
indelible pens to tape and put on EVERYTHING- even the removable parts such
as the footrests on wheelchairs.
CLANCY LOWERED THE BOOM: Or maybe vice versa. Tom Clancy, the noted author of "Red October" and other novels involving spies, etc., etc., should have done a little sleuthing himself. Seems he lost $1.4 million to "his friend" who supposedly invested it in a UNREGISTERED mutual fund he had guaranteed would return 30%. Investors in 17 states lost about $7 million. Stuff like this should never happen, but as long as people want trust without competency, there will always be a lot of room to get screwed. Sure trust is necessary, but there are very few people that I have ever met that have done the absolutely necessary scrutiny to review an investment adviser or financial planner as to education, qualifications and background.
VIDEO TAPES: Here is yet another excellent suggestion by
Ms. Meshinsky. Many elderly and partly senile patients can become highly
agitated and aggressive, calling for past partners and relatives. She indicated
that using a video tape with the family, children and married partner eased
the stress considerably. She thought that this could ultimately reduce the
amount of tranquilizers used for such stressful situations. If you have anything
like this, bring them to the patient or nurse.
NURSING HOME ADMISSIONS DAY: Use the list below for the info you
should bring on admissions day. And, according to Ms. Meshinsky , the best
time to bring your relative in is mid morning.
There's a lot more solid information that this book provides, so
do try and check in out BEFORE you or a loved one needs to go into a home.
At least keep this for reference.
MORAL OBLIGATION TO SUSTAIN LIFE: (The Essential Guide to a Living
Will) In 1957, Pope Pius XII indicated that extraordinary means were not
required to sustain life. "Even if the case is not hopeless, but the means
are so extraordinary as to impose an enormous burden, be it one of pain or
even of overwhelming obligation, its use is not obligatory". He further indicated
that physicians were not morally obligated to use the new life extending
technologies in a purely vitalist fashion. For example, if a person had
pneumonia, the use of a respirator would probably benefit the patient since
he could be well enough to breathe without it in a few days. However a
chronically comatose patient would NOT benefit from a respirator. Hence,
since the respirators use would be considered extraordinary, its would not
be required morally. Even with all the commentary you could find, people
are still loathe to let a parent or other loved one die instead thinking
that they should do and use whatever means necessary to provide all the help
necessary. A daughter might say, "but she was my mother!" True enough, but
the benefit is NOT to the comatose or suffering person but to the child.
You have to get beyond that and recognize that you are apt to be putting
the dying person in a great deal of extra and severe pain and discomfort.
If you can recognize that, the situation is much clearer.
RESPIRATORS: In defense of some of the doctors deliberate attempts
to sustain life comes this commentary from the Essential Guide to a Living
Will. Any patient that is admitted to a unit with a breathing problem is
almost automatically put on a respirator since, as the doctors said, "allowing
a patient to die of respiratory failure is an awful death". And once that
happens, the "respirator will never be disconnected unless the patient no
longer needs it or is dead." The living will at this point can be used to
terminate or eliminate any other life sustaining measure- drawing blood for
tests, intubation, antibiotics, feeding- just about anything except for turning
off the respirator. The turning off of the respirator would be the proximate
cause of death which is loathe to many doctors- justifiably so. But is there
a way to avoid the respirator initially if you are brought in a "short to
die" condition? Yes, apparently. Use a specific DO NOT RESUSCITATE. Even
that is not perfect because it must be verified in sufficient time and legality
to be accepted by the admitting physician. Certainly, some physicians are
more liberal, but it's your life and your death. You can't decide how you
want to come into this life, but you can decide, in many cases, how you'll
go out. Based on some of the commentary from the book mentioned above, I
have revised my living will to include some more definitive statements. The
author, BD Colen, also indicated that irrespective of the written physicians
directive, it's probably an excellent thing to have a video tape of your
THE HOSPITAL IS NOT THE PLACE TO COME IF YOU WANT TO BE LEFT ALONE
CACA: (FED Board of Philadelphia) Not exactly what you think- though by the time I get through with some of these definitions, it might be apt. It's a review of "simple" exotic derivatives.
A CACALL is a option to purchase a call as a hedge against interest rate movements foreign exchange for instance. They're trying to lock in an acceptable price if needed.
CAPUT- same thing for a put
Contingent Premium Call is similar to a standard call but no premium is paid up front. If the call ends up IN THE MONEY, a premium is paid. If it ends up OUT OF THE MONEY, no premium is paid. If a premium is paid, it is higher than the standard call
Average Rate Option pays off the difference between the strike price and the average exchange rate over the life of the option.
BARRIER OPTION comes into existence or is canceled depending on whether the exchange rates crosses a predefined barrier. For example, a down and out call is canceled if the value of the foreign currency declines below a certain level.
And from the New England Economic Review, here are their interpretation of derivatives overall.
Derivative instruments can be defined as financial contracts whose value is derived from the value of other assets, interest or exchange rates, indexes or financial contracts. The value of the derivative instruments is often linked to the prices of traded securities- call and put options on stocks are the most useful examples. The term derivatives is also used to refer to a variety of debt instruments, sometimes called structured securities, that have derivative characteristics or embedded options. For example, some bonds contain put and call options. This allows the holder to exercise certain opportunities depending on the direction of interest rates.
Many familiar financial instruments have embedded derivatives. Prepayment privileges on fixed rate mortgages are equivalent to the call option on a bond while early redemptions privileges on fixed rate deposits are equivalent to a put option.
Derivatives can be categorized according to several characteristics. First they can be classified on the basis of the underlying asset, index, or rate of exchange to which thy are linked. Second, derivatives can also be classified as whether a forward contract or an option contract (or combination of the two.) A forward contract is an agreement to buy or sell a security at a future date at a price determined at the time of the contract. In contrast, an option confers the right, but not the obligation, to purchase or sell a security at some future date at a predetermined price.
A distinction can be made between derivatives that are traded on
an exchange and those that are traded over the counter. Over the counter
contracts are usually between two financial institutions or between a financial
institutions and its corporate customer and are often individually tailored
to the customer's requirements. Standardized derivatives however, are traded
on exchanges (where forward contracts are known as futures). As the two parties
to this contract do not know each other, the exchange itself guarantees that
the contract will be honored- not necessarily true in the OTC contracts.
DERIVATIVES: USE OR NOT: Cathy Minehan proposed 10 questions that should be asked by any end user of derivatives. They are repeated here verbatim. Admittedly, they might not apply to you directly- save for the fact that the mutual funds you are considering may use them. Maybe you would like to ask these questions of them. They must answer yes to all ten.
Yes, I know the above was very esoteric and perhaps beyond your ability
to comprehend and possibly your interest as well. But the reason I forced
you through this is the fact that Orange county did not institute rules like
this- not did Bank of America, Merrill Lynch, etc., etc. or a lot of the
other institutions that we "look up to" as having a supposed innate capability
in securities and investing. As the New England Economic Review noted, the
loss sustained by these entities was based on "it was the all too human tendency
to "bet the ranch" that was responsible for these problems as much as the
instruments themselves. .........market participants must exercise self
discipline and restraint." However the restraints must be overseen by people
that have the knowledge and power to do something- not the norm.
DERIVATIVES EXIST BECAUSE IN THE REAL WORLD THERE ARE TRADING COSTS,
LIMITATIONS ON BORROWING, MARGIN REQUIREMENTS, TAXES, AND REGULATORY CONSTRAINTS
P/E RATIOS: A study of stocks with news about the best versus worst
P/E ratios shows that the worst stocks display above average returns for
about 19 quarters thereafter. The long term reversion to the mean means that
the stocks tend to revert to long term history- that which is down will tend
to come back. It validates contrarian investing. However, one must also recognize
that if some stocks are down, it's because the company is now terrible.
INDEX: About 70% of actively managed funds do not outperform the
S&P 500 index over time. But what is worse is that 93% of all the Government
bond funds do not beat the Lehman Brother's bond index. One major reason
is that they charge a lot- particularly load funds. There are much better
alternatives- corporate and high yield bonds for example.
BITCH: (Nursing Homes, The Complete Guide) I quote, people ....."
do not grow old in direct proportion to their advancing years. Martha was
a brat at 10, a bitch at 20, a witch at 40 and impossible at 80. Her children
and grandchildren do not like her very much." Know anyone like this? I do.
As mentioned previously, young bad people tend to not only become older but
meaner. They play all the guilt trips, and some children may still feel a
tinge of remorse for not bowing to an insufferable old cow. I guess it's
for this reason that I sincerely hope there is a heaven and hell.
CHEATING STOCKBROKERS: Last year the SEC cracked down on some bad stockbrokers. But the communiqué also went on to say that for very broker that is caught doing wrong, about 100 are never caught. The 1:100 ratio seems about right.
COMATOSE: Never assume the comatose person cannot hear or understand
you. Be sure to assume that they understand what you are saying to others
when you are nearby.
STOCKS VERSUS HOMES: In the most recent past, the house was the largest equity holding by Americans. But that has been surpassed by the current holding In the stock market. From 1992 to 1994, the number of stock mutual fund accounts has climbed an astonishing 79%, from 33 million to 59.1 million.
LIFE EXPECTANCY: The IRS, life insurance companies, health insurers
and all others involved in reviewing how long someone might live use various
actuarial tables for their work (they vary depending upon their experience).
Below is one used by an annuity company that should help to give you some
idea of how long the average person is expected to live once they reach a
Age Life Expectancy Age Life Expectancy
70 16.0 80 9.5
71 15.3 81 8.9
72 14.6 82 8.4
73 13.9 83 7.9
74 13.2 84 7.4
75 12.5 85 6.9
76 11.9 86 6.5
77 11.2 87 6.1
78 10.6 88 5.7
79 10.0 89 5.3
As is clear, if you're 70, you can expect- and should anticipate and budget for- that you will live to 86 years of age because that is what is average. If you have a poor health history, you may want to discount that. By the same token, if you're very healthy, expect to live longer. But even if you did reach 86, you can see that there are several more years that you have to expect- over 6 years. This actually goes on and on till about 100. But I do have a client who had both grandmothers live till 100+ and her 90 year old mother is now living with her. Obviously, though she is only in her early 60's, I have her scheduled for a long lifetime and a need for a lot of money.
BANK ASSET ALLOCATION: Banks are having a tougher time attracting investment customers now that all the "easy pickings" have been gleaned out in the past few years as the novice investors got into the mutual fund marketplace. Banks are now taking a more active position by offering asset allocation accounts- where the allocation between stocks, bonds and cash is selected for the customer based on their risk and suitability. The article said the info was gleaned from an interview from the bank's "investment advisor or counselor" and is then run through a computer to determine the mix. A few troubling areas. One is the use of the "investment advisor or counselor." I ask you, from whence comes this supposed expertise in analyzing a client's past investment and planning history or in determining suitability? Not from any securities licensing training, that's for sure. From the bank? Nope. So where? No where. As for the info going through a computer, give me a break! There has never been a program developed that can decipher suitability for a client (many tried, all failed). However, as mentioned in several seminars, people tend to become mesmerized by the fact that since a computer did the analysis, it must be right. Wrong, wrong, wrong.
Another WSJ article on banks noted that the SEC is trying to stop the bank practices of giving referral money to bank tellers to "suggest" you invest with the account executive sitting just a few feet away. Something about "conflict of interest".
After all said and done, outside of an FDIC CD, never buy any investment or insurance product at a bank.
MORE BANKS: Think I'm harsh with my last statement? I do some insurance continuing education classes. On the last week in March I had a student tell me about this recent unethical situation that had just happened to his mother. He is about 70 years of age- his mother is 95, lives alone, drives a car, etc. although, obviously, is frail. She had a CD coming due and he suggested that they review it when he came back from vacation. Upon his return she said that she had gone down to the bank and got another CD. Not likely. She had been sold a 4.5% loaded bond fund that she could not access for three months. This had to be one of the most unethical sales and moronic behaviors by a rep I have heard about in years. If nothing else, she does not even have an actuarial lifetime long enough to outlive the sales load. She thought she had another CD. SHE TRUSTED THE BANK. What was most distressing was when her son confronted the bank officers. I would reasonably expect that the agent might try to defend the sale just because he was incompetent to begin with. But the rest of the bank officers also attempted to defend the sale with totally nonsensical commentary. Does this happen often? Maybe not, but the mere fact that it does and that supposedly ethical and knowledgeable people try to defend the practice should be clearly abhorrent to all. Unfortunately the NASD and SEC have done nothing about this- nor will they. They require testing on sophomoric and irrelevant issues, not training on ethics and real life suitability issues. Never trust anyone with your money unless they have proven track record of competency.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
2295 W. Ave 133
San Leandro, CA 94577
Fax 510 352-4127