MOODY'S REVIEW

APRIL 1999

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

ERROLD F. MOODY JR.

MASTER OF SCIENCE IN FINANCIAL PLANNING

LIFE AND DISABILITY INSURANCE ANALYST

REGISTERED INVESTMENT ADVISER

WWW.EFMOODY.COM

LONG TERM CARE: (Center for Long Term Care Financing) We do NOT have a budget surplus: From 1990 to 1997, the proportion of government-paid longterm care (including nursing homes and home health care) rose from 48% to 60%. Consumer out-of-pocket payments declined from 40% to 28% of spending, according to the Health Care Financing Administration. (Total long-term care spending over this time increased from $64 billion to $115 billion.) Medicaid, which pays, at least in part, for about 72% of all nursing-home patient days.

But do you have to divest yourself of most of your assets in order to qualify for Medicaid? Well, "New York City residents who need nursing home care can qualify for Medicaid benefits despite having incomes of over $7,000 per month, more if they are married." Additionally, he adds, "Most assets are exempt already or they are easy to divest or convert to exempt status."

In 30 states so much can be deducted from the base income- including medical expenses, premiums, co-payments, prescription drugs and eyeglasses- that only the top 5% to 10% of elderly incomes will not qualify for nursing-home coverage outright. And in the other 20 states, which use "income caps" that, for instance, cannot exceed $1,500 per month, it is relatively easy to shift the money to get under these caps. In short, income is not a barrier to getting on Medicaid.

Seniors also can have enormous assets and still be eligible. Houses, and all contiguous property, cars, house-hold goods, support for spouses, businesses, term life insurance policies, for example, do not count.

Sounds good? Nope- YOU NEVER WANT TO DIE IN A MEDICAID WARD WITH A BUNCH OF OTHER SCREAMING ALZHEIMERS PATIENTS. IF YOU HAVE ENOUGH MONEY, PAY FOR PRIVATE CARE. IT IS UNIVERSALLY FAR BETTER.

INVESTOR PSYCHOLOGY: (Karz). "People typically give too much weight to recent experience and extrapolate recent rends that are at odds with long run averages and statistical odds. They tend to become more optimistic when the market goes up and more pessimistic when the market goes down. For example, Professor Shiller found that at the peak of the Japanese market, 14% of Japanese expected a crash, but after it did crash, 32% expected a crash."

COMPUTERIZED MEDICATIONS: a computer system installed to monitor medications reduced prescription errors by 50%+ putting a major "dent in a problem that causes an estimated 3 million patient injuries and results in death for three of every 1,000 patients".

50% of people hospitalized for drug misuse are over age 65.

DRUG MISUSE: 90% of those over age 65 suffer from side effects from improper use. 65% of those in a study found that they were not told by their doctors about any precautions in drug use and 67% were not told anything about potential side effects.

Older Americans consume more than 33% of all prescriptions each year and fill between 9 and 12 prescriptions each year. 85% use drugs on a daily basis.

Some refuse to take the medications prescribed. Interviews with noncompliant cardiovascular patients noted that 26% reported doubts about the need for the medicine and 19% doubted its effectiveness. They also had problems remembering the medicine (26%), difficulty in obtaining refills on time (21%), being bothered by the medicine (19%) and difficulty in opening the container (16%).

PAIN: About 97 million Americans suffer form chronically painful conditions. A 1997 survey found that 66% of older Americans said that pain prevented then from performing routine tasks or engaging in other activities.

TRADE DEFICIT: (FED Bank of New York) If you look at most past commentary, a high trade deficit meant we were losing jobs to foreign countries. Well, if you have read anything during the last few years, you can see that the U.S. unemployment rate has gone down and down and stayed down. Further, the article said. "when viewed narrowly as the gap between exports and imports, the current account deficit translates into lower employment in export-import counties. However, when seen from an economywide perspective, the deficit represents an inflow of employment generating investment capital to the United States.....The current account deficit produces jobs for the economy as a whole: both from the direct effects of higher employment in investment oriented industries and from indirect effects of higher investment spending on economywide employment." "Increased investment spending, however, comes at the cost of higher foreign debt." Lastly, "because of the downward trend in private spending, the United States must continue to rely on foreign capital to maintain an adequate rate of investment spending".

LARGE VERSUS SMALL: A formal study of the market was done by Gompers and Metrick and noted that institutional traders now "control" the stock market. Firms that manage $100 million or more in securities controlled 51% of the capitalization of the U.S. stock market at the end of 1996- almost double the 25.6% in 1980. That was due in large part to mutual funds whose holding increased from 8.2% in 1980 to 25.3% in 1996 and from investment managers who went from 21.2% to 37.2%. A subsequent Business Week article said that as the growth of large companies must come to a halt, small caps could once again take over. To add another substantiation, consider this article from Mutual Funds magazine on the Morgan Stanley Dean Witter Value Added Market Equity Fund. It took an analysis from 1972 to 1987 wherein an equally weighted S&P 500 portfolio outproduced the capitalization weighted index. Essentially, it showed that small cap stocks simply outproduced large caps and that by putting in more weight to smaller companies, it could outproduce the standard S&P index. Since its inception in 1987 it produced 372% versus the S&P's 583%. Well, that sucks. Does that mean that small caps will still come back? Maybe, but so might the Stegasaur.

ETHICS: In the 19th century, if it wasn't illegal, then it wan't unethical. A University of Buffalo professor noted- "throughout history there have been those who considered it a matter of personal honor to deal fairly and also those who thought that anything one could do without penalty was acceptable". "The question, at base, is whether human nature has changed. To that, I find, the answer, "It has not".

Unfortunately almost all the planning organizations have faltered on ethics and have set up standards that effectively related only to illegal activities. Ethics clauses are primarily for marketing.

INSURANCE RISK: "A.M. Best Co. states that about one-third of U.S. life/health insurers are at risk in the converging financial services market. About 10% of life/health insurers are positioned to remain highly competitive and the rest of the industry can be expected to maintain average performance. According to Best, competitive factors that insurance companies must be concerned with include over-reliance on low interest rates, a strong stock market and regulatory protections (all external factors which may change drastically and are outside of companies' control), as well as being forced to compete with "nontraditional" rivals that have lower cost structures."

FACTORY ORDERS: "1998 was the worst year for U.S. factory orders since the recession year of 1991. The Commerce Department says that despite a rebound in December, orders for all of 1998 edged up 2.1% compared to the year before. That followed a healthy 5.4% gain in 1997 and was the weakest year since a 2.3% decline in '91. December orders rose 2.3% to a seasonally adjusted $343.5 billion, the biggest increase in 13 months."

We have to slow down sometime. The Asia and South America messes do not have to create a recession- and under current conditions- they won't. What is perhaps more troubling is how well Europe will do. The Euro actually dropped in value early on and some economists see a recession there. If that happens, then we won't have any trading partners. Also troubling is OPEC which recently voted to reduce oil supplies. That can drive up costs and inflation.

INDEXES: (FED Board of Boston) The Dow Jones 30, S&P 500 and the Wilshire 5000 have high correlations among themselves and all have a beta coefficient less than one relative to the market, indicating that these indices represent relatively conservative investments with lower volatility. The NASDAQ composite and the Russell 2000 have higher correlations with each other than with the other three indices had have beta coefficients greater than 1.0 indicating that they represent relatively aggressive investments with above average volatility.

MEDICAID "PLANNING": So you wanna divest yourself of assets so you can use a nursing home and be "covered" by Medicaid. Read this, " "...the proportion of Medicaid recipients is indeed associated with lower levels of RN staffing and a higher proportion of residents not toileted ...higher proportions of Medicaid were found to be associated with lower nursing home quality, suggesting that the Medicaid program in fact exercises its power to bargain for price rather than quality.... A higher proportion of residents whose care is reimbursed by Medicaid is associated with lower quality as measured by these indicators.... Residents in homes with few private-pay patients (implying more public-pay patients) were found to be 30% more likely to experience functional decline.... Simply raising Medicaid rates or mandating parity across payers may not provide sufficient incentives for increasing quality. Under conditions of excess Medicaid demand, there may be little incentive to provide quality at any price...." (Zinn, 1994, pps. 570, 573,574-575)" and, "Planning only for Medicaid eligibility severely restricts options, and would not be in the best interest of many clients. For example, considerations should be given to the following possible consequences of transferring resources in an effort to meet resource eligibility requirements: (1) Possible loss of autonomy, pride, and dignity; increase in dependence on others; (2) Inability to purchase services not available under Medicare or Medicaid; (3) Reluctance of nursing homes to admit Medicaid as opposed to 'private pay' patients; (4) Donees of transferred assets may be or become unwilling to provide financial assistance to the donor when needed; and (5) Resource depletion eliminates the option of obtaining entry to facilities that do not accept Medicaid patients." (Overman, 1995, pps. 16, 54-55)

TOTAL RETURN VERSUS CAPITAL APPRECIATION: (BOSTON FED) When you look at the return of an index, you almost focus exclusively on that current number without addressing the total return available over time. You should add in any dividends are being paid. The Federal Reserve Board of Boston addressed the issues noting that, "each of the indices examined is an index of prices allowing one to determine the rate of capital appreciation , BUT NOT TOTAL RETURN. Over long periods, cash dividends are a significant component of the value of stocks. While it is true that attention is drawn to the rapidly moving hare of stock prices, the slow but steady tortoise of reinvested dividends is a very important component of wealth." (paraphrased)

"According to the Frank Russell Company (1998), the median dividend for the Russell 2000 was zero while the median dividend yield for the S&P 500 was 1.36%. The focus of indices on prices rather than accumulated values (the inclusion of dividends) can distort our view of relative performance!"

I went to a bookstore and asked the saleswoman, "Where's the self-help section? She said if she told me, it would defeat the purpose.

INSURANCE: "The research firm Datamonitor predicts a 31% compound growth rate in insurance products sold in banks. Of the $40.2 billion sold through bank channels this year, 75% was annuities."

An investor who holds a portfolio with unsystematic risk will earn no extra return because that risk is avoidable.

Federal Reserve Board of Boston

If you buy stocks and don't understand what the above statement means, you have no business buying individual securities. Admittedly, if the position is relatively a minor one and if the rest of your portfolio is diversified properly, perhaps no problem. But usually when you are that unknowledgeable, you have no idea what is going on with your portfolio anyway and are screwing up your finances and retirement because of your ego. Grow up and read a book.

Y2K: I have felt that the problem might be overblown. I even felt more strongly about it NOT being a major problem when I saw 11 "miscellaneous" countries manifest their energies in one of the biggest computer headaches- that of getting the EURO to work. They did a marvelous job. Bill Gates was recently quoted, "We may see 12 months where people are distracted getting their things ready. But I agree with the general sentiment, that of the range that people have thought about in terms of the problems that will occur, it will be below the middle of the panic that some people have suggested."

Here's another side. Any major company that does not address the problem will get its stock price handed to them by the public. And the company president and other officers will be summarily fired. You'd really have to have a bunch of stupid officers not to recognize that. And I think that Medicare, Social Security and the IRS will be 95%+ in order by 2000.

All that said, the issue is a concern for third world countries and small businesses that do not have enough money for corrections. Also, much software has been pirated and such companies are NOT going to get any assistance from the software company for any fixes it may provide. Therefore, the U.S. will get hurt somewhat though I still don't see a meltdown of the economy.

LIFE INSURANCE: "According to a Roper Starch study, households having life insurance are down from 83% in 1976 to 74% today. Reasons cited: fewer agents, bad reputation of the industry and lack of proper financial planning by U.S. families."

I'll add a fourth item that is not as apparent. The financial planning industry- specifically the fee planners- also have a lack of interest in insurance primarily due to their distaste for commissions, sales agents, etc. While the commission "thing" is an issue, the fact remains that life insurance is mandatory for most consumers and needs to be addressed in full. That said, there is the fifth reason why it's not offered as much. IT'S SO UNBELIEVABLY COMPLICATED IT DEFIES DESCRIPTION. Since almost all planners have limited expertise- probably less than agents per se- they simply point to the "fact" that commissions are bad and don't do any insurance planning at all. Just because you don't like something doesn't mean that you don't need it and should not buy it.

"Outside of the killings, Washington DC has one of the lowest crime rates in the country."

Mayor Marion Barry, Washington, DC

BASIS: This is bad commentary from a national financial planner -"If you do plan to leave houses, automobiles or other such assets to your children, you should: a) sell the assets and give equal amounts of the proceeds to each heir, or b) leave the "hard" assets to one child, and give the other children equivalent assets." I'll just make reference to b). Assume you gave hard assets of $100,000 to one child. How much of an IRA would you need to give the other child? Bet literally everyone (initially) got the wrong answer. Unless the restriction is noted in detail, thousands of assets will be distributed unequally and cause dissension that could last for a generation- or more.

P.S.- the answer involves the fact that literally all qualified monies are ordinary income taxable.

MOVING: People who own homes move on average every 8.2 years. Renters move every 2.1 years. The median for people aged 15 and older is a move every 5.2 years (1993 study). Whites- 8.4 years for owners, 2.0 for renters. Blacks- 8.1 years for owners and 2.6 years for renters. Asians and Pacific Islanders- 5.2 years for owners and 2.0 for renters. Hispanics- 6.6 years for owners and 1.9 for renters. Women in owner occupied homes stayed a median duration of 8.8 years while it was 7.6 years for men. Rentals- women stayed 2.2 years while it was 2.0 for men. About 43 million people (16.7% of the population) moved last year, about 15.3% had lived in the same house for over 20 years.

MARKET NEUTRAL FUNDS: - They represent a relatively new group of funds whose objective is to match stock market returns without assuming the market's risk. They attempt to do this by (1) investing in stocks they think will outperform the market and (2) "short selling" (selling borrowed shares of stocks they think will decline in value). In a rising market, these funds can benefit from stock gains and might also earn a profit on some short sales. In a falling market, profits from short sales can offset declines in portfolio stock values."

Brilliant strategy, bound to lower risk and increase gain. Oh, really?

Fund	Inception Date	Inception to 3/17/99 Return
Barr Rosenberg Market Neutral	12/97	-6.1%
Barr Rosenberg Select	11/98	3.6
Boston Partners	12/98	-6.1
Dreyfus Premier	6/98	-13.0
Phoenix Euclid	5/98	-7.6
Puget Sound	6/98	-3.4

I also remember the "great" commentary regarding the use of Collateralized Mortgage Obligations (CMO's) offered by the largest financial firms in the 80's- and they lost millions. It was a can't lose proposition. And don't forget Long Term Capital and the "ability" of Nobel laureates to provide formulas for hedging that gave huge profits with almost nil risk. That one cost $3.6 billion. Notice the words- they THINK will outproduce the market- in the PR release. Literally every new and guaranteed way to beat the market has simply cost investors money. I would not touch Market Neutral funds for at least three years- maybe five. Everyone that has consistently tried to outproduce the market has effectively failed- or did it only for a relatively short period of time. CAVEAT EMPTOR

ACCELERATED DEATH BENEFITS TO VETS: With the signing of the Veterans Programs Enhancement Act, the VA now can pay accelerated death benefits to terminally-ill veterans. Both SGLI and VGLI policyholders can receive up to half of the face value of their coverage, up to a maximum of $100,000 during their lifetimes. You are seeing a lot more of these offerings for terminally ill insurance owners- but not all are legit. Be very careful.

Suppose you were an idiot. And suppose you were a member of Congress ... But I repeat myself

Mark Twain

MANAGED FUNDS: Morningstar found that 273 out of 294 actively managed equity funds underproduced the S&P 500 index. That's why it is awful tough not to consider its use. That, however, is not to say you do not use managed funds. Some have lower levels of risk- hence, traditionally, a lower return. Some focus on an area of investing- say technology- where greater returns might be possible (though I am not a fan of Internet stocks which are WAY overpriced). But people get carried away by their supposed innate capability of choosing the best funds a the right time in concert with economics. You are just kidding yourself. Read the first sentence again. The key word is underproduced.

INDEX ANNUITIES: These are tough to figure out and usually the people who use them are CD "investors" who think they re getting a free ride on the market. (The other stupid issue is that the SEC does not require insurance agents to sell these due to a quirk in the insurance law. I don't suggest you buy insurance from (just) an insurance licensee so here they go selling investments as well. Go figure) Anyway a WSJ article noted that the "volatility and losses this year may cause investors to reap just a 7% return from the S&P's current 21% 1998 return. "A lot of people assumed it was a mutual fund with no risk- and it was never intended to do that."

Some of the insurance firms do extensive hedging to protect their bottom line- but the volatility in 1998 tripled costs. They are now repricing their annuities. Further, the insurance firms have found up to 25 different ways to calculate the S&P 500.

FOREIGN CURRENCY SCAMS: (WSJ)  The article noted that foreign currency options have become HUGE scams against "investors" (c'mon- literally everyone of these "investors" wouldn't know an option if it bit them) who are promised large returns with little or no risk. Indiana State regulators says "its one of the highest visibility areas on our radar screens". Texas says the same. Why do people invest money- mostly offshore? "...their false sense of their own sophistication."

401(K) PLANS: An article in CFO magazine commented that most companies are not providing sufficient education to employees. Absolutely true and is simply indicative of the industry overall that has never provided adequate knowledge. And that dovetails with literally no education that covers the basics of investing- alpha, beta, correlation, diversification, etc. for example. Certainly, if companies do not present standard deviation to their participants in an understandable and usable format, they have not provided a key educational element to risk. (Good god! How is anyone going to define investing and investments unless you have a foothold on risk? How can you relate to asset allocation unless you discuss correlation? And how can you do anything without addressing current economics? YOU CAN'T!) Hence employees may do the wrong thing at the wrong time for the wrong reason. Additionally, "plan sponsors fear that if participants outlive their savings, they'll argue that employers should have warned them that they weren't investing correctly. That is a distinct possibility whether or not the recent turmoil in the stock market proves to be the start of a prolonged downturn, say industry experts." "Thirty years from now the liability will fall on the corporation," says Brian Roehl, a partner at investment-education firm Educational Technologies Inc. because participants have underfunded their retirement due to improper education. "Sooner or later, the attorneys will grab hold of this, and it will be just like the tobacco lawsuits."

I'll say one thing for 401(k) plan participants. Unless your plan has at least an index fund (S&P 500 or perhaps extended market (Wilshire)) and an index medium term bond fund, your corporation has NOT done any realistic analysis for the plan nor for the employees. You CANNOT use managed funds with high fees without dismissing the use of index funds. Corporations need do some more homework.

BOND PRICING: (NY TIMES) "Last Tuesday, someone bought one or more Los Angeles County pension bonds due in June 2007. The bonds were of the zero-coupon variety, and the buyer paid dearly -- $613.23 for every $1,000 in face amount. Another buyer, the very same day, paid just $568.23 for the same bond. As a result, the first investor will get a yield to maturity of 5.79 percent while the second will get a yield of 6.71 percent." Why the difference? Because the first investor didn't know what he/she was doing. Why's that? Because bonds and bond pricing are far from the liquid, open and market of most equities.

"Unlike the stock market, where investors can scarcely avoid learning the latest prices, the municipal bond arena has long been cloaked in such mystery that just to ask about the detailed terms of an issue can be akin to breaking a fraternal taboo. And some brokers have used this secrecy to mark up muni bonds by big amounts."

"There's this perception that bonds are more risky than stocks" because so little specific information about issuers and the trading markets reaches the investing public."

Do fish get cramps after eating?

EXERCISE AND BRAINS: A new study with mice shows that when they are were allowed to run whenever they wanted, they increased the number of brain cells. They are now going to try to prove whether the scenario exists with humans. I have been running for 34 years. I don't know if I am much smarter, but I do have an insatiable craving for cheese.

Foreploy

Any misrepresentation or outright lie about yourself that leads to sex

COMPUTERS: There are more than 6 million computers in the nation's schools, but most teachers still lack the training to use them in a way that truly helps children learn, a study finds.

The point to this is that, in this society, there are the "haves and have not". Those that "have" computers and the skills to effectively use them will be able to succeed in this society. Those that "do not have" such access will be forever lost in a technological world.

HEALTH CARE: (Health Insurance Association of America (HIAA). "Under current economic conditions, more than 53  million people in the U.S. - greater than one out of every 5 non-elderly Americans - will be uninsured by the year 2007. The study also projects the number of uninsured Americans could grow as high as 60 million by 2007- nearly one out of every 4 non-elderly Americans - if the nation experiences an economic downturn and higher than anticipated health costs."

Well, we are already there. HMO's are opting out of Medicare in many states and the costs to seniors will go up dramatically since, if they want to keep medical costs low- they have to buy a Medigap policy. They are not cheap- particularly in the states like California and Florida where many elderly reside.

As to the pre Medicare individual consumer, medical costs have been escalating far beyond the cost of the standard CPI necessitating large increase in premiums. I go about a 20% increase since Kaiser lost $200 million in 1998. I can assure you that it will cause many families to simply drop health care insurance because it is too expensive. And HIAA is absolutely correct- if we have a downturn (in my mind at least a slowing at some point in 1999) the problem is exacerbated. You may have thought the deficit for Social Security was bad- this is far worse.

MEDICARE: Medicare Part A or Hospital Insurance is financed by a 2.9% payroll tax. If you have sufficient number of working quarters, it costs nothing. Medicare Part B or the Supplemental Medical Insurance will cost $45.50 in 1999 but represent only about 25% of the total cost of care. In fiscal 1998, Federal outlays for Part A was about $135 billion and for Part B about $75 billion. The total was about 1/8 of the entire Federal budget and about $5,500 per enrollee.

And per the American Institute for Economic Research, the sickest 5% of beneficiaries account for half the total benefits paid. And a similar proportion of the benefits goes to the care of those in the last six months of life.

The Balanced Budget amendment of 1977 switched home health care over to Part B in a effort to forestall the deficit of Part A. This will only work for awhile and once the deficit finally  hits, more tax is mandatory.

The Health Care Financing Administration estimates that in order to meet hospitalization costs under current law, it will have to increase payroll tax to 3.7% by 2010, to 4.9% by 2020 and 6.2% by 2030 using intermediate assumptions of the future trends of payrolls, hospital use and costs. Under the most pessimistic assumptions, the tax increases are to 4.6% in 2010, 7.2% in 2020 and 10.9% in 2030.

Under intermediate assumptions, payments for Part B (in 1997 dollars) would be $126 billion in 2010, $189 billion in 29020 and $267 billion in 2030. The pessimistic assumptions call for $331 by 2030.

SOCIAL SECURITY: (FED Board of SF) A study by Murphy and Welch showed that taking account of the increase in payroll tax rates needed to keep Old Age Survivors Insurance solvent implies that a 35 year old male with average earnings can expect to SUFFER A NET LIFETIME LOSS OF $133,600 THROUGH HIS LIFETIME PARTICIPATION IN SOCIAL SECURITY (where net gain or loss is measured by the present value of benefits minus the present value of contributions). Put another way, such an individual would be willing to forfeit the value of a typical residual house in return for being allowed to drop out of Social Security altogether)."

Clients identify managers who are good when they are really not, and managers themselves believe thy are good when they are not because what brought about their performance results was something other than what the thought.

Barr Rosenberg

LONG TERM CARE POLICIES: (Life Insurance Selling). The  Health Insurance Portability and Accountability Act required Tax Free Long Term Care policies be offered. However the terms are more restrictive for coverage and there have been many pundits that say these policies will result in FAR less coverage overall. Various statistics seem to support that contention. One company's lower estimates says the higher restrictions would have reduced its coverage by 5%. While not much in pure numbers, it would have meant a lower payment total by the company of approximately $8.5 million. Other companies estimates lower coverage of 20% to as much as 40%. Just like the government is screwing up on Medicare payments to HMO's etc., it will have to revise these policies to make them more favorable to the policyholder than they are to the insurance company.

SWITCHING SOCIAL SECURITY TO STOCKS: (FED Board of SF)- The GAO in 1998 showed that a reallocation of about 70% of the Social Security trust fund to stocks (earning a historical return of 7%) would only DELAY the projected exhaustion date of the combined trust fund by only a decade from 2030 to 2040. It will not make that much difference in the long run. So what really will need to happen? Certainly you can raise the age to benefits and a raise in taxes is literally preordained. Mainly, only those people who really need social security will get it. The "affluent" will not get any at all.

The reshuffling of assets between Social Security would add nothing to the economy's overall level of wealth. Admittedly the use of stocks would increase individual participation  (a study in 1997 showed that 59% of families had no direct or indirect stockholdings in 1995) but if they do not receive adequate information about risk and reward, the end result could be a disaster. The main point of this last commentary is simply this- the U.S. consumer is woefully unknowledgeable about risk/reward now and the SEC is directly involved with such dismal understanding. How's that? The SEC and every SRO (Self Regulating Organization) has never even required brokers to know about risk and reward so it would clearly appear that intervention by the government to protect the most naive has got to be a wasted exercise. The sheep will be shorn all the closer.

Further, the article noted that even if the S&P stock index were to plummet by 50% (unlikely, but possible), it would have greatly outperformed the growth of the payroll tax base over the last 47 years.

VOLATILITY: 1998 may end up being only the year in this decade and only the fourth since 1970 where the volatility exceeded 20% (One standard deviation = 68% of the time). The annualized volatility for the past two decades was 12.8%. The U.S. Treasury bond had a standard deviation of 11% while municipal bond index (Bond Buyer Index) had a volatility under 5%.

DEPRESSION. It has been shown the chronic depression is linked to heart disease and other maladies and has recently been linked to cancer as well. A study by the national Institute on Aging has shown that people who reported more episodes of depression were twice as likely to have a subsequent  diagnosis of cancer. "Chronic depression changes the chemical processes of the body."

Depression is the most common psychiatric illness affecting 20% of people at some point in their lives- though chronic depression affects form 3% to 5% of the total population.

NURSING HOME: Average stay in a nursing home is 2.1 years for men and 3.2 years for women.

TESTOSTERONE POISONING: As mentioned previously, investors think they are much better investors than they are- men in particular. An article in Smart Money related a study by a Cornell professor who gives MBA students a test with a theoretical portfolio that they can trade any way they want. Some get more information than others and others also get guidance. But guess what? Those with little or incomplete information trade just as actively as those that are better informed. And they lose more money. What does it show? Overconfidence in their ability. When taken further, remember that the study used MBA's who supposedly had been presented the fundamentals of investing. But look at the bulk of investors- they have never been presented any element of the fundamentals and they simply trade haphazardly and randomly (my statements). Also, Professors O'Dean and Barber of UC Davis (mentioned previously) did a study of 60,000 accounts from 1991 to 1996 that showed that individuals tended to buy small cap stocks but did significantly less that the benchmark (15.3% to 17.1%). Their turnover rates was 80% versus a mutual fund average of 45%. Ludicrous.

And of course the men did worse (1.4% less than women) since they traded 45% more than women. Single men- the most aggressive- traded 65% more than single women and returned 2.3% less.

That also clearly solidifies the other studies that show that loaded funds outproduce no load funds for "investors". That doesn't appear to make sense initially until you realize that since such "investors" buy and sell so often, the taxes just eat them alive even though their no load fund might have done better than a loaded fund (and it would, everything else being equal, due to the lesser fees and commissions). The brokers simply had their people use a more traditional buy and hold. Hence fewer trades, more long term capital gains- or simply more non recognized appreciation.

PERCENT OF WORKING AGE MALES IN THE U.S. WITH DISABILITIES (1989): (FED Board of San Francisco)

Aged 25- 59...........9%

Aged 25- 34...........6.5%

Aged 35- 49 ..........8.5%

Aged 50- 59...........15.0%

Employment, Earnings and Transfer Receipt among Working Men with and Without Disabilities

(1991 dollars)

	Total Employed	Full time Employed	Part time employed	Mean Labor Earnings	Receiving transfers
Men with Disabilities	71.8	45.9	25.9	19,369	48.7
Without Disabilities	97.8	84.2	13.6	39,819	15.2
Ratio	0.83	0.55	1.9	0.49	3.2

FUND SIZE CHANGES: Both Morningstar and Lipper are changing the way they define small and large cap funds as well as other categories. The market value of small cap has grown from $500 million to $1.5 billion. Morningstar will give the largest 5% of the top 5,000 U.S. companies a designation as large cap- the next 15% are mid cap and all the rest are small cap. An article noted that the funds may find the categorizations very restrictive since they will not be able to move into another category where they think a better value might lie. Also that financial advisers might become "policemen" and yell whenever a fund violated its style status. But it did not state what might be the most obvious. If a managed fund cannot move that much nor buy anything different, it might be nothing more than a closet index fund and therefore preclude exceptional returns (which rarely happens anyway without added risk). So, instead of spending extra money on managed fund fees, investors might simply settle for index funds which do very well indeed, thank you. Of course which index fund is a question that is usually addressed by how much you read and understand economics.

VISIT: "In most cases, it is a mistake to select a nursing home that is difficult to visit on a regular basis. Frequent visits are the best way to make sure that you or your relative does well in the nursing home."

Heed these words, particularly if you are trying to give all your assets away so you can die in a Medicaid ward. Unfortunately, the facility you will have to accept may be miles away from a private facility that you could have afforded with the purchase of a policy years ago. DO NOT EXPECT YOUR FAMILY TO VISIT- OR VISIT AS OFTEN. EXPECT A BAD DEATH- AT LEAST PSYCHOLOGICALLY.

As a real life recognition of visiting- my mother is in a Medicaid ward in Massachusetts so I get home infrequently. But my sister lives close by and visits maybe 5 times a week. My mother gets very good care in the facility because every one of the staff KNOWS MY SISTER AND THEREFORE KNOWS MY MOTHER.  She gets good attention while many others may languish. There is nothing wrong with the statement per se. It's just human nature- "the squeaky wheel gets the grease." If you visit often, the staff knows it and your loved one gets more attention.

CONTRARIAN INVESTING AND SMALL CAP STOCKS: (NY Times) " Consider the performance of the Dimensional Fund Advisors 9-10 Small Co. fund, the index fund that most closely follows the methodology of the academic studies. It invests in the 20 percent of New York Stock Exchange stocks with the smallest market capitalizations, as well as companies of similar size on the American Stock Exchange and NASDAQ; such companies, on average, are much smaller than those in the typical small-cap fund. DFA 9-10 Small Co. produced a 10.7 percent annualized return over the last 15 years, through Nov. 30, according to Lipper Inc., versus 17.2 percent for the Vanguard Index 500, which tracks the Standard & Poor's 500-stock index, a large-cap benchmark."

The Times article also noted that the costs of trading small caps was far greater than large cap stocks. A Wharton professor  "found that total trading costs for the buying and selling of the smallest stocks were sometimes more than 7 percent. For the largest stocks, by contrast, they were about one-half of 1 percent."

They also related to the Gompers and Metrick study noted herein-"the increasing institutional dominance of the market has led to enormous stock market share being shifted from small caps into large caps.

HEY TUBBY! Yes, you in North Dakota. According to the Centers for Disease Control and Prevention, Americans in rural areas spend even less of their leisure time exercising than people in metropolitan areas. Nearly a third of all Americans may go at least a month without exercise. But in rural areas, 37% did not exercise, compared with 27% in metropolitan areas.

LOCK 'EM UP: According to an insightful article in US News by Gary Becker, the fact that we have and still are locking up criminals faster and longer has helped reduce crime irrespective of other comments about the better economy, etc. Crime has actually dropped during the last decade even during a time of "widening income inequality (and getting worse), a further breakdown of the traditional family and no obvious recovery of morality".

KNOWLEDGE: A young man studying for his series 6 securities license felt that my Who Can You Trust article was too critical and cynical and that a person just starting out didn't have a chance with the level of expertise I felt consumers should seek. My reply:

"You seem to have confused the real world with what I have written. Simply stated, there are only going to be a few people that will ever read or properly relate to almost anything I have written. The real world is that a series 6 rep can be successful. It has nothing to do with competency, knowledge or most of what I suggest people do and that is fully known by the brokerage, insurance and planning industries. And that also includes the NASD and SEC. Knowledge and the requirements thereof are effectively irrelevant to success. Same with ethics.

As for your "five minutes of real world "expertise" is worth the same as a year of college"-that's ludicrous, though I am not saying a world of theory is that valid. But, again, the general public will never understand either so the issue is relatively moot.

Simple as that.

CIVILIZED??: Dick LePre who has a site called HomeOwners Finance Center noted in his recent newsletter ".......... Instead of looking at the last year on the Millennium and reflecting pensively on the future, we are reminded of our humanity. We may have intellect unsurpassed on the planet. We may be capable of great artistic accomplishments and feats of caring. But the one unabashed fact is that we are not some advanced species. We are (just) very sophisticated animals."

CAREGIVING: 12/20: (National Family Caregiver Association Survey 1995) Employers note these statistics about employee caregivers:

1. 60% of employees are late, leave early or take lunch lunchers regularly

2. 9% decline promotions and business trips; 12% decline special projects

3. 11% take leaves of absence; between 5% and 17% change jobs or reduce hours

4. 50% talk regularly with co workers about providing care

5. Employee caregivers cost their companies about $3,500 a year in lost productivity.

When small investors attempt to play options, they are entering a world with its own rules and with a pace of trading so fast that only the most sophisticated can keep pace. It would be like entering the Indy 500 on a bicycle. As you are pedaling down the back stretch, you get killed when cars come roaring by at 250 miles per hour.

Peter Siris