COMMENTARY ON ECONOMIC AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST 0626414
REGISTERED INVESTMENT ADVISER
MEDICAID: Based on responses by 40 states to a survey of treatment of annuities, results indicate that over $1 billion in federal and state government money is lost each year due to an unintended federal loophole that allows people seeking medicaid long-term care to shelter excess resources in annuities
BABY BOOMERS: The first Baby Boomer will turn 65 in 2011. Starting in 2011 and continuing through 2025, annual percentage increases in the older (age 65 and over) population will outstrip increases in the general population by three to four times.
Marital status and living arrangements: Among the population 65-to-74 years old, 77% of men and 53% of women live with their spouses. Among the population 75 years and over, 67% of men and only 29% of women live with their spouses. Of the women, 49% live alone and 22% are not currently married but live with relatives or nonrelatives. Only 21% of men live alone at this age.
Education: 70% of people 65 and over have completed high school. 17% have a bachelor's degree or more education.
World ranking: The United States ranks second among nations of the world in number of people 80 and over. (China ranks first.) Although the United States contains less than 5% of the world's population, it has 13% of its people 80 and over.
Sex Ratio: There were 70 men age 65 and over on July 1, 2001, for every 100 women in this age group.
This ratio drops from 83 for those in the 65 to 74 age group to 42 for those 85 and over.
Income: 49% of married-couple families with a householder age 65 and over who had an income of $35,000 or more.
Poverty: 10.1% of people 65 and over are below the poverty line.
Population: There are 35.3 million people 65 and over in the United States. That is 12% of the total population. In the first 15 months after Census 2000, 300,000 people moved into this age group.
Centenarians: There were an estimated 48,400 centenarians in the United States on July 1, 2001.
Population Distribution: The number of people age 65 and over has increased 10-fold during the 20th century. The 85 and over population increased more than 30-fold over the century. The entire U.S. population, in the meantime, more than tripled.
Foreign Born: 3.1 million people age 65 and over are foreign-born. Almost two-thirds of them have lived in the United States for more than 30 years. 70% of the older foreign-born population are naturalized citizens, almost twice the proportion as the citizenship rate for the entire foreign-born population.
HECK OF A RETURN: The IRS has ordered $2.4 million in penalties against tax preparers in the past two years but has collected just 12% of the amount due
DESIGNATIONS. This is some commentary from INMAN regarding the proliferation of designations in real estate.
Realtors really love designations. Education is fine, they seem to think, but it's all the better with a suitable-for-framing certificate, a special lapel pin and the obligatory acronym for the overcrowded business card.
But the proliferation of real estate designations is destroying whatever meaning these proofs of extra education ever had. Some of the many designations are a true representation of professional expertise. But others are just a marketing gimmick and a revenue stream for the sponsoring organization.
Worse yet, buyers and sellers have no idea what all those letters mean and whether they should know or care is doubtful. After all, a longer string of acronyms doesn't really mean one broker is better qualified than another. Nor does it mean the designated broker is a better negotiator or a more ethical practitioner or whatever than another.
NAR owns the ABR, ABRM, ALC, CCIM, CIPS, CPM, ARM, AMO, CRB, CRS, CRE, GAA, GRI, RCE, RAA and SIOR designations, and the AHWD and ePRO certificate programs. A little research also turns up the CAM, CBR, C-CREC, CLHMS, CREA, CRIA, QSC and SRES designations.
Do you know what those 26 acronyms mean and what the qualifications are to use each of them? Do you know even half of them? (One of my degrees was in real estate and I hardly have a clue to what any of the designations mean nor how much of an effort it takes to get one. )
The article notes that “Some of those designations have extensive requirements, including several days or even a full week in a classroom setting, a written examination, a tenure of some years in the business and evidence of having closed a set number of transactions in the specialty.” (Sorry- spending just one week in class doesn't cut it- though better than nothing at all.)
But then there's the CRE designation. Only 1,000 people hold it, the qualifications are secret, and membership is by invitation only. What meaning could that possibly have to property owners or investors?
Or consider the QSC designation. That one requires a live or online course, a 40-question multiple choice quiz, a signed commitment to quality statement and participation in a perpetual customer survey program that costs $50 for every 20 surveys
RE/MAX International last week introduced a new designation for RE/MAX sales agents. This one is the "internationally recognized CNHS designation."
Never heard of it? It's the "Certified New Home Specialist."
The CNSH is awarded after completion of a 20-hour self-study course on recognizing and pursuing opportunities in new-home sales; understanding the builder's perspective, needs and motivations; the psychology of new-home buying; reading blueprints and understanding scale rulers, site plans and topography; and understanding new-home contracts, legal and monetary issues, according to a RE/MAX press statement.
Could four CD-ROMs and a 200-page guidebook really make someone a specialist in selling new-built homes? Even someone who's never sold a new-built home? Or someone who's never put on a hard hat and toured a housing development or a construction site?
The Women's Council of Realtors, which awards the LTG designation, will add a new designation in "performance management" later this year. The program will require a course of study in negotiation, networking, organizational performance management, personal performance management and cultural awareness, according to the NAR affiliated-group's Web site.
Yes, education is good and agents who want to specialize in a particular niche should learn as much as they can about it. But a true professional designation should mean more than having completed a self-study course or paid an organization for the use of a fancy logo. It should mean the professional so designated is a real expert among the field of specialists.
WORKPLACE STRESS: (American Institute of Stress) "We estimate it (stress) costs American industry $300 billion a year in terms of diminished productivity, employee turnover and insurance. It found that 80 percent of workers feel stress on the job and nearly half say they need help coping with it. Twenty-five percent have felt like screaming or shouting because of job stress, 14 percent felt like striking a co-worker and 10 percent are concerned about a colleague becoming violent.
IT CAN'T BE!: The New England Journal of Medicine concludes that "a third of the health care dollars spent in the United States are wasted shuffling paper and on other administrative tasks
JUNK BONDS: (Standard and Poors) The global junk bond default rate fell to 4.54% in January and should continue to fall courtesy of favorable financing conditions and an improving economic outlook. January's global default rate was its lowest since May 1999, while the junk bond default rate of 5.39% in the US during the month was the lowest since December 1999.
The US high yield default rate ended 2003 at 5%, a level less than one third 2002's extraordinary 16.4% rate, according to Fitch Ratings. Default volume fell 69.2% compared with 2002, and the number of companies defaulting on their bond obligations fell 39%. The cumulative default rate over the period 1989 - 1992 was approximately 23%, while the comparable statistic for 2000 - 2003 was 9.4%..
But as the default rate drops, so will the interest rates. But as the companies get stronger, the value should rise more than offsetting the reduced yield.
In an expanding economy, these can work. In a dropping economy, they are horrid investments.
GENERATION XERS: (Best Review) A New York Life survey shows that members of Generation X--ages 22 to 36--saw their median net worth fall from 2002 to 2003 by more than 16.2%, to $77,200 from $92,200. The percentage losses were spread about evenly among wealth strata ranging from $50,000 to more than $500,000. Also, fewer Gen Xers were employed, with net employment falling to 76% from 86%. Full-time employees suffered sharper job losses, to 61% from 73%, while part-time employment rose to 8% from 6%.
Gen Xers have now become more conservative investors than even the older baby boomers and seniors.
only 59% of participants owned nonretirement assets, down from 70% in 2002. Nearly one-third reported a distrust of Wall Street. Over the 12-month period, 11% of Gen Xers stopped investing, up from 4% in the previous period.
Insurance and real estate products, meanwhile, have grown in popularity. Insurance, in fact, was the most popular financial product, with 75% of survey respondents buying it, up from 62% a year earlier. Mutual funds fell to 71% from 85%, and real estate as an investment rose to 55%, up from 43%. Securities fell sharply to 47% from 69%. About half of Gen Xers added to cash positions and money-market products.
fully 75% of Gen Xers surveyed said they should have a comprehensive financial plan. But only about a third have such a plan, and half acknowledged that they need the help of professional advisers, up from 44% in 2002.
Among the survey's other findings are that:
-- Some 58% of Gen Xers felt they don't have enough money to invest, up from 45% in 2002.
-- Most believe that neither the government nor their company plan will support them in retirement. Some 76% had reservations about Social Security playing a significant role in funding their retirement, and 48% were bearish about company retirement plans.
Despite the big drop in employment in this year's figures, only 1.6% of survey respondents were laid off or downsized. The number of homemakers rose to 19% of respondents from 11%, and the number of students rose slightly to 3% from 2%. The increase in homemakers might reflect more parents deciding to stay home with children.
BREACH OF FIDUCIARY DUTY: The Securities and Exchange Commission fined Prudential Securities Inc. $382,000 for failing to properly oversee sales of mutual funds and accused a former employee of selling customers pricier funds to boost commissions. Prudential agreed to settle the SEC's allegations.
It involved a huge section of class B shares which have huge on going fees. Although investors don't pay a commission at the time they purchase B shares of a fund, a broker selling those shares still gets paid upfront just as they would with front-loaded shares. In the case of investors who would qualify for commission discounts on front-loaded shares, a broker often makes more money by selling the B shares than the A shares.
So why hasn't the NASD and SEC effectively shut these things down? Money. Commissions
PENSIONS: Only half of the nation’s workers are covered by any kind of pension plan.
Pension Benefit Guaranty Corp., the federal pension agency, covers about 33,000 pension plans for a total of 44 million workers, down from l00,000 in the mid-1980s.
The number of 401(k) type retirement savings plans rose from just over 200,000 in 1975 to nearly 700,000 in 1998.
YOU ARE GOING TO SEE BILLIONS OF DOLLARS IN THESE: Weather derivatives allow companies whose earnings are affected by nature's variables — temperature, precipitation, frost and others — to hedge against that risk.
ETHICS. The NY Times notes that "If managers take seriously the importance of ethical behavior in the workplace, they need to do a better job of letting all workers know what behavior will not be tolerated, that they will receive full support if they report misconduct, and that those guilty of misconduct will not catapult their way to the top but instead be held accountable for their actions. Such management behavior would send a clear signal to workers that being ethical in the workplace is career-enhancing — and that any alternative is unacceptable."
Ethical behavior has not existed ever in the planning business. The past head of the FPA and a member of NAPFA is illegal in this state. It's a dirty little secret that they have tried to coverup for years.
FIDUCIARY: Under California case law, stockbrokers owe a fiduciary duty to their clients. (Twomey v. Mitchum, Jones & Templeton (1968) 262 Cal.App.2d 690.) The relationship between a broker and principal is fiduciary in nature and imposes on the broker the duty of acting in the highest good faith toward the principal, which duty embraces the obligation to render a full and fair disclosure to the principal of all facts which materially affect his rights and interests. When there is a duty to disclose, the disclosure must be full and complete and any material concealment or misrepresentation amounts to fraud." (Hobbs v. Bateman Eichler Hill & Richards (1985) 164 Cal.App.3d 174.)
The relationship between a stockbroker and his customer is fiduciary in nature and the duty is owed to a customer who is both sophisticated and unsophisticated, according to Duffy v. Cavalier (1989) 215 Cal.App.3d 1517.
Moreover, the NASD holds that stockbrokers are fiduciaries--if for no other reason than because of the fiduciary duty to "know your customer." This requires knowing everything relevant about the customer's account, including the amount that the customer is willing to "lose" in his or her account. In addition, if the customer believed that he or she was making money, but the stockbroker knew that the client was losing money, the stockbroker would have a duty to inform the customer.
Fiduciary duty requires disclosure of all relevant facts about the customer's account. Fiduciary duty requires learning everything relevant to the customer's account and his or her risk tolerance and then rendering appropriate advice.
SAY, JUST WHAT IS A BALANCED FUND?: (WSJ) For instance, credit-rating agency Standard & Poor's Corp. in London divides "asset allocation" -- that is, balanced -- funds into four categories with specific definitions: "defensive" funds can invest no more than 30% in stocks; "neutral" funds always have 30% to 70% of their portfolio in stocks; "dynamic" funds are "usually" invested 70% or more in stocks; and "flexible" funds can invest in any proportion in any asset class -- including 100% in stocks.
THIS IS ONLY THE BEGINNING. International Business Machines (IBM), the world's largest computer company, will move the work of as many as 4,730 U.S. software programmers to India, China and elsewhere.
Accenture will more than double its staff in India to 10,000 people, taking advantage of relatively low wages paid to software engineers in the country.
Purely technical, non personal jobs, will continue to move out of the U.S. I don’t care what Kerry says- until the younger Americans are better educated, more jobs will go overseas where education is more readily understood and admired.
YOU SURE FEE ONLY BEATS COMMISSIONS?: I have a client that called me to place $850,000 into a guaranteed fixed annuity for five years. (Normally not a particularly good move, but this is a 1035 exchange from a poorly performing variable life insurance policy that had excessive losses. By exchanging into an annuity, you can transfer the initial basis, earn some money in the annuity and then subsequently cash out without tax. Interesting) Anyway, the best I found so far was 4%. It is commissionable. So I looked around for a no load product. TIAA- Cref is noted as having low cost mutual funds and it recently started offering a fixed annuity. I certainly figured that it would have some decent rates since it is not paying any commissions. The best they would do was 3.05%. Vanguard also has one- 3.50%. Schwab was 3.15%.
That is at least one reason that an adviser needs an insurance license. A fee only planner would have cost the client over $46,000 in just five years. Now, most of the stuff I do is on a fee basis. But this example should clarify why separate licenses are necessary in this business- particularly insurance. Never assume that just because someone solely charges a fee that they are any good.
401(K): (Hewitt) When workers leave jobs, nearly half (42%) of workers cash out their 401(k)s instead of rolling the assets into an IRA or their new employer’s retirement plan. The statistics show that more than half (57%) of workers with 401(k) balances between $5,000 and $10,000 cashed out, while 46% with balances between $10,001 and $25,000 cashed out. However, a even a relatively modest 401(k) balance of $5,000 that earned an average annual return of 8% could more than triple in size in 15 years and grow to $50,313 in 30 years – and that’s ignoring the impact of taxes and employer matching contributions..
The results of Deloitte’s 2003 Annual 401(k) Benchmarking survey suggest that plan sponsors are more actively poring over their plans’ investment performance and turning a more skeptical eye toward plan fees. The survey reports that the number of plan sponsors benchmarking how well their investments did on a quarterly basis jumped to 55% in the latest poll, up from 47% last year – while only 83% labeled their plan fees “competitive,” versus 87% a year ago, according to Deloitte’s 2003 Annual 401(k) Benchmarking Survey. Still, nearly all (96%) employers believe participants are satisfied with their plan investment options – up (slightly) from the 93% that said so a year ago.
LTC: A national study of Medicaid funding for long-term care services released today shows that on average, the Ohio Medicaid program paid nursing homes in the state $7.65 per day less than it cost to take care of seniors who live in the homes. According to the Ohio Health Care Association (OHCA), the state's largest organization representing nursing home residents and their caregivers, this shortfall jeopardizes resident care and the jobs of the 88,000 Ohioans who work in nursing facilities. “This study points out the huge disparity between Medicaid funding and the actual costs of providing services to our most important generation,
ANOTHER MEDICAL THEORY BITES THE DUST: A positive attitude does not improve the chances of surviving cancer and doctors who encourage patients to keep up hope may be burdening them. Optimism made no difference in the fate of most of the 179 cancer patients that Australian researchers followed over five years. Only eight people were still living by the time the study ended in 2001.
"We should question whether it is valuable to encourage optimism if it results in the patient concealing his or her distress in the misguided belief that this will afford survival benefits," the study's lead author Penelope Schofield wrote. "If a patient feels generally pessimistic ... it is important to acknowledge these feelings as valid and acceptable."
FDIC: The Federal Deposit Insurance Corp. (FDIC) approved new rules, effective April 1, that clarify that living trust accounts will be insured up to $100,000 per qualified beneficiary (they must be closely related to the account owner).
AFFINITY SCAMS OR PROPER ADVICE?: Thrivent Financial for Lutherans(TM) will continue its aggressive financial associate hiring campaign and has set a goal of adding 650 new financial associates to its field organization of more than 2,500 by the end of 2004. Thrivent Financial associates are licensed financial professionals who provide counsel and sell financial products such as life insurance, annuities and mutual funds to the Lutheran marketplace. The recruitment effort is part of Thrivent Financial's commitment to further strengthen service to its current base of nearly three million members and expand more deeply into the current Lutheran market, which stands at 9.5 million adults.
I have taught agents for the Lutheran Brotherhood years ago. They were each given a church as marked territory and got all their business by involving other church members. Does it work? You betcha. Great marketing? Absolutely. Is it the best for the consumer? Not even close. Why does it work? Churchgoers want to trust other churchgoers simply because they are there. No review, no scrutiny, no nothing
INSURANCE: "The average cost for auto insurance nationwide for 2004 is estimated to be $898--an increase of $51 per vehicle from 2003."
ADDED VALUE?: Dalbar has done research that suggests that the average return achieved by investors acting on their own behalf, without the benefit of professional counsel, is nearly 5%, while the return realized by utilizing advisors is just 50 basis points (one half of one percent) better. This reaffirms the thesis that advisors engaged in commission sales add little or no value.
DEBT STRATEGY - The Federal Reserve says that consumer debt, excluding mortgages, now equates to about $18,700 per U.S. household.
EXERCISE THE BRAIN: If you hit the weights at the gym with iron regularity, your arms may get to look a little more impressive. The right kind of training, it now appears, can do much the same for the brain.
In a study conducted at the University of Regensburg in Germany, people who spent three months learning to juggle showed enlargement of certain areas in the cerebral cortex, the thin sheet of nerve cells on the brain's surface where most higher thought processes seem to be handled. They were then asked to quit juggling completely, and three months later the enlarged areas of the cortex had started to shrink.
SWEDEN RETIREMENT: Due to the past retirement programs were running their economy into the ground (much faster than our social security would do to the U.S.), Sweden had to institute a new program to get employees to do some investing on their own. But evidence shows that people still did not want to get involved.
Personal investment accounts were established until 2000, with a bewildering array of funds to choose from. Some 456 funds participated initially, and the number has since grown to around 600. Most funds invested in stocks, with a quarter primarily in Swedish stocks. Workers could choose up to five funds.
Anyone who did not choose a fund was automatically assigned to the default fund, which was set up by the government. The default fund must invest 80 to 90 percent of its assets in stocks.
A central pension agency records all the accounts and fund values. The agency also ran an ad campaign to discourage people from going into the default fund.
Nonetheless, a new study by Henrik Cronqvist and Richard Thaler of the University of Chicago finds that a third of Swedish workers did not make an active choice when the system started in 2000, and were therefore assigned to the default fund. Since 2000, fully 92 percent of new enrollees have not made a choice and have been added to the default fund.
Apparently, the large number of funds to choose from paralyzed many individuals from making a choice. This has also been the experience of many 401(k) plans that have a default option in the United States: the default option, whatever it may be, is chosen by a high proportion of investors. People are also reluctant to switch once they are in a fund, a tendency that the economists William Samuelson and Richard Zeckhauser have called status quo bias.
Another bias that Mr. Cronqvist and Mr. Thaler documented is home bias, a tendency to pick funds composed of Swedish companies, as opposed to a diversified portfolio of companies from around the world. Nearly half the money actively invested was in Swedish stocks. The default fund, by contrast, was better diversified: only 17 percent was in Swedish stocks.
They also found that people tended to pick funds in sectors that had done well recently, and to pick funds with low fees. The average fee for active choosers was 77 basis points, or 0.77 percent of the funds invested. For the default fund it was just 16 basis points.
U.S. consumers should take a clue from this and learn. But they won’t.
LIVING AND DYING: It is estimated that in 2001, 72 million of the 6.1 billion inhabitants of the world are 80 years or older (United Nations, 2001). The population of the oldest-old (e.g. those 80 years and older) constitutes therefore 1.2 per cent of the world’s population but, although it is a small fraction of the whole, it is the fastest growing segment of the population. Thus, whereas the world population is expected to increase by about 50 per cent and to reach 9.3 billion by 2050, the number of people aged 80 years or older is expected to increase more than five-fold, to reach 379 million in 2050 (Figure 1). Most of the growth of the oldest-old population will occur in the developing world where their numbers are expected to increase almost eight-fold, from 34 million in 2001 to 266 million in 2050. In the more developed countries, the number of oldest-old will likely triple, passing from 38 million to 113 million. By 2050, therefore, the majority of the oldest-old will be living in the less developed regions of the world. Furthermore, because life expectancy continues to increase, not only are an increasing number of people surviving to very old ages but also deaths to the oldest-old are accounting for an increasing proportion of all deaths. Thus, at the global level, 18 out of every 100 deaths expected in 2000-2005 will be to persons aged 80 years or older (i.e., 10 million out of the expected 55 million deaths). In the more developed regions, the proportion of deaths to persons aged 80 or over is expected to be much higher 42 per cent and those proportions are expected to keep on rising.
PSYCHOLOGY: (Gilovich) According to a survey of more than 2,700 individuals with household incomes of $75,000 or more, the key "blind spots" that regularly handicap financial decision-makers from all walks of life are:
Loss aversion -- it hurts more to lose money than it feels good to gain.
Framing -- how an issue is presented can affect financial decisions.
Mental accounting -- though all money "spends" the same, people treat money differently depending on how they got it.
In the survey questions related to loss aversion, respondents were divided into two groups. The first group was asked to choose between a 100 percent chance of gaining $240 versus a 25 percent chance to gain $1,000 coupled with a 75 percent chance to gain nothing. More than three-fourths of the group went for the sure gain. (Of those opting for a sure gain: All respondents, 77 percent; Doctors, 80 percent; Attorneys, 73 percent; CPAs, 77 percent.)
The second group's choices were: a sure loss of $240 versus a 25 percent chance to lose $1,000 coupled with a 75 percent chance to lose nothing. More than two-thirds of this group opted for the latter, the chance to lose nothing. (Of those opting to lose nothing: All respondents, 68 percent; Doctors, 69 percent; Attorneys, 61 percent; CPAs, 67 percent.)
"These results are not surprising." "People of all ages and income levels tend to have different tolerances for risk, depending upon whether they're contemplating losses or gains."
It's all in how you ask it
In the survey questions related to framing, two different groups of people were asked the same question in two ways.
Roughly 50 percent said they could not when asked, "Could you comfortably save 20 percent of your household's income at this point in your life?" (All respondents, 49 percent; Doctors, 45 percent; Attorneys, 48 percent; CPAs, 44 percent.)
But, more than 7 in 10 said they could when asked "Could you comfortably live on 80 percent of your household income today?" (All, 71 percent; Doctors, 72 percent; Attorneys, 67 percent; CPAs, 77 percent.)
"We make decisions based on how choices are presented. Framing is often influenced by our reference point. In fact, we also see the influence of framing in other key theories of behavioral economics, such as loss aversion."
All dollars are created equal
In the survey questions related to mental accounting, respondents were asked to judge how they would spend their money in two apparently different retail situations.
Would they buy a much-needed alarm clock from a local store for $18, or from a store 20 minutes away selling the same clock for $10? And would they buy a new television from a local store for $250, or from a store 20 minutes away for $242?
In both instances, driving 20 minutes would save $8.
Two thirds of the respondents would drive 20 minutes
to save money on the clock, but almost 75 percent would not drive the same 20 minutes to save the same amount on a new TV set. (Of those opting not to drive the same 20 minutes to save the same amount on a TV set: All, 73 percent; Doctors, 73 percent; Attorneys, 80 percent; CPAs, 79 percent.)
"We approach decisions differently depending on the context in which they're embedded." "In this example, the relative size and importance of the purchase is what influences the respondents' decisions."
WEALTH VS. RISK: A Northwestern Mutual survey also found that though most people value the need for life, disability income and long-term care insurance, protecting against potential risk does not override the drive to accumulate wealth. While 50 percent of the professionals actually own permanent life insurance, one third of those polled wish they had bought more permanent life insurance and four in ten wish they had bought more permanent life insurance when they were younger.
LTC- The $4.5 million private long term care policies could save Medicaid and Medicare about $30 billion
Private research by Life Plans, Inc, indicated that LTC coverage saved an average of $1,668 in out of pocket expenditures per month for insured who used home care and $2,458 per month for insured who needed nursing home care.
Private LTC reduced the probability that an insured would become poor enough to qualify for Medicaid nursing home assistance to 3% from 9%.
Private LTC coverage could save Medicaid $23 billion or $5,302 per insured for all forms of LTC care and Medicare $7 billion or $1,609 per insured for home care.
ANNUITY OBLIGATIONS SHORTFALL - (Weiss) as a result of historically low interest rates, the investment income generated by 87 annuity writers was insufficient to adequately fund their annuity reserves in 2002. Thus, the companies were forced to reallocate investment income from other product lines, dip into capital, or take from operating profits to meet their reserve requirements
INVESTING: Per a John Hancock survey, after three years of a difficult economy, rising unemployment and declining stock prices, consumer investment preferences have changed in a fundamental way that will continue even after the economy recovers. Specifically, "decision-makers today are increasingly conservative, focusing more on protecting their financial assets and families than building wealth." Also, consumers believe it is more important than ever to choose companies that are known for: safer investment products (74%), expertise in products with guaranteed rates of return (71%), and conservative investment strategies (60%).
HOW WE THINK WE WILL FEEL: This represents a fascinating study that will have a major impact on investments. But considering the business per se, it will take at least a decade. After all, diversification is still not taught. (NY Times Gilbert, Wilson, Kahneman and Loewenstein) The problem is that we falter when it comes to imagining how we will feel about something in the future. It isn't that we get the big things wrong. We know we will experience visits to Le Cirque and to the periodontist differently; we can accurately predict that we'd rather be stuck in Montauk than in a Midtown elevator. However we overestimate the intensity and the duration of our emotional reactions -- our ''affect'' -- to future events. In other words, we might believe that a new BMW will make life perfect. But it will almost certainly be less exciting than we anticipated; nor will it excite us for as long as predicted. On average, bad events proved less intense and more transient than test participants predicted. Good events proved less intense and briefer as well.
One experiment of Gilbert's had students in a photography class at Harvard choose two favorite pictures from among those they had just taken and then relinquish one to the teacher. Some students were told their choices were permanent; others were told they could exchange their prints after several days. As it turned out, those who had time to change their minds were less pleased with their decisions than those whose choices were irrevocable.
Another recent study asked whether transit riders in Boston who narrowly missed their trains experienced the self-blame that people tend to predict they'll feel in this situation. (They did not.) And a paper waiting to be published, ''The Peculiar Longevity of Things Not So Bad,'' examines why we expect that bigger problems will always dwarf minor annoyances. ''When really bad things happen to us, we defend against them. ''People, of course, predict the exact opposite. If you ask, 'What would you rather have, a broken leg or a trick knee?' they'd probably say, 'Trick knee.' And yet, if your goal is to accumulate maximum happiness over your lifetime, you just made the wrong choice. A trick knee is a bad thing to have.''
Our emotional defenses snap into action when it comes to a divorce or a disease but not for lesser problems. We fix the leaky roof on our house, but over the long haul, the broken screen door we never mend adds up to more frustration.
Gilbert does not believe all forecasting mistakes lead to similar results; a death in the family, a new gym membership and a new husband are not the same, but in how they affect our well-being they are similar. ''Our research simply says that whether it's the thing that matters or the thing that doesn't, both of them matter less than you think they will,'' he says. ''Things that happen to you or that you buy or own -- as much as you think they make a difference to your happiness, you're wrong by a certain amount. You're overestimating how much of a difference they make. None of them make the difference you think. And that's true of positive and negative events.''
Why is divorce so expensive?
Because it's worth it.
FROM A CONTRACT I HAD TO REVIEW: “Each associate shall perform duties under this agreement in compliance with federal, state and local law, rules and regulations, including without limitation all laws relating to the practice of >>>>>>in the state.”
Shouldn't you expect the same of your planner? Well, it has not happened at all in California.
LIVE LONG AND PROSPER: A 65-year-old man, for example, has about a 30 percent chance of living to 90 and a 4 percent or so chance of cracking the century mark.
RICH AND POOR: (NY Times) the richest 1 percent of Americans in 2000 had more money to spend after taxes than the bottom 40 percent.
In 1979, the wealthiest 1 percent had just under half the after-tax income of the poorest 40 percent of Americans
The richest 2.8 million Americans had $950 billion after taxes, or 15.5 percent, of the $6.2 trillion economic pie in 2000.
The poorest 110 million Americans had less, sharing 14.4 percent of all after tax money.
But the higher incomes of the last decade did not lift all people equally.
In 2000, the top 1 percent of American taxpayers had $862,700 each after taxes, on average, more than triple the $286,300 they had, adjusted for inflation, in 1979.
The bottom 40 percent in 2000 had $21,118 each, up 13 percent from their $18,695 average in 1979.
Both low- and middle-income people shared in the boom of the 1990's, while in the 1980's the bottom fifth experienced a decline in after-tax income, according to the budget office data analyzed by Mr. Shapiro and Robert Greenstein, director for the Center on Budget and Policy Priorities.
The middle fifth had an average after-tax income of $41,900 in 2000, a rise of 15 percent both since 1979 and 1997, indicating a long period of no real economic gains for this group.
From 1979 to 2000, the total federal tax burden for the top 1 percent dropped 3.8 percentage points, but for the middle fifth the decline was only 1.9 percentage points. Tax rates for the poorest fifth declined 1.6 percentage points.
The top 1 percent pay a quarter of all federal taxes, while the bottom 40 percent pay 6 percent of all federal taxes.
LEADERSHIP: Asked to choose between two behaviors that represent the most critical leadership skills for their organizations, nearly nine in 10 (89%) respondents favored an agile leader who anticipates change over a flexible head of the organization who can respond to change,
SCAMS: Often living on fixed incomes and sometimes desperate about money, older investors are being targeted with complex investment scams promising huge returns as the stock market churns and health care costs climb.
Kenneth Reusser of Beaverton, Ore., an 82-year-old former Marine aviator and decorated veteran of more than 200 combat missions in three wars, says he lost $262,500 in a high-yield investment scheme he learned about from friends he met through a club called "Life After 50."
Reusser and his wife, Trudy, filed a personal bankruptcy petition last week, a step ahead of the anticipated foreclosure of their hand-built home worth more than $1 million.
"I'm here as a very embarrassed individual," Kenneth Reusser said at a news conference with state regulators. "We just trusted the people."
I am just so sick of people giving money to people they trust when they have done no homework whatsoever. Yes, I know he is 82. But just because you are old does not mean that you are inherently stupid. You can think, you can read. The fact that they don't at age 82 is probably symptomatic that they did not do it at age 62, 42 or maybe even 22. Unfortunately, this usually results in a lot of problems. In their case, bankruptcy.
Regulators "are deeply concerned that a perfect storm for investment fraud is brewing and our nation's 35 million seniors are most at risk." They are trying to set up more education. Fine- but if you have people that don't read, what good will it do??
RETIREMENT HEALTH: (NY Times) From the 1950's through the 1970's, a number of industrial companies agreed to pay for their employees' health care after they retired. Current company estimates for health care costs put their obligations at $284 billion. Funding for these plans is an abysmally low 13.2 percent, the study said. By comparison, pension obligations at these companies are 65.6 percent funded.
costs associated with these plans grew at an average annual rate of 18.2 percent from 2000 to 2002. Liabilities associated with these plans rose 11.9 percent annually in the same period.
Companies are estimating that their health care costs will grow by an average 9.7 percent in 2003. And the average company in the study says it is assuming that growth in health care costs will drop to 5 percent over the next five years. Yet one independent study of health maintenance organizations found that their managers expected to raise their rates by 14 percent next year.
BAD BREAKPOINT SALES: NASD estimates that at least $86 million is owed to investors for 2001 and 2002 alone when mutual funds did not refund the discounts owed.
INSURANCE DEPARTMENTS: The Oklahoma Insurance Commissioner was indicted by the FEDs recently. Did you know that three Louisiana commissioners were indicted in a ROW? (Apparently due to inbreeding.) The previous California commissioner was run out of town (now writing a book in Hawaii). Gives you an idea how well these agencies are run.
TAX SHELTERS: The Internal Revenue Service, as part of a crackdown on abusive tax shelters, has been pressing an action against one of the country's biggest accounting firms, Grant Thornton, to force it to disclose the names of clients it advised to shelter millions of taxable dollars in Roth I.R.A.'s via shell corporations. The worked this way- Set up a shell company and a Roth I.R.A., then make the Roth I.R.A. the effective owner of the new company by transferring shares of and tax-free dividends from the shell company to the Roth I.R.A. Next, have the shell company pay tax-free dividends, of any amount and from apparently any source, into the I.R.A. One benefit of GIFT, according to the brochure: "savings for higher education."
This stuff goes on all the time. The IRS is catching just the tip of the iceberg. But it may melt some future violations if it can fine and sentence some of these perpetrators.
HISPANICS: “A Profile of Hispanic Older Americans Aged 65+” which highlights that the Hispanic older population was 2.0 million in 2002 (5.5 percent of the older population) and is projected to grow to over 13 million (16 percent of the older population) by 2050. By 2028, the Hispanic population aged 65 and older is projected to be the largest racial/ethnic minority group in the 65+ age group.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
Life and Disability Insurance Analyst
2232 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127
FROM INVESTMENT ADVISOR- "Investment issues are so complex and the inputs change so rapidly that the portfolio management task cries out for a reliable, simple framework for managing the decision process. Over the last quarter century, personal advisors have embraced just such a framework, loosely formalized under the rubric “modern portfolio theory.” The average advisor is now quite familiar with beta, duration, efficient frontier modeling, indexing, benchmarking, style boxes, Monte Carlo theory, and Ibbotson data on the history of interest rates, inflation and stock and bond returns. These have become our fundamentals, our tools, our “tradition,” if you will." And "In open markets with significant participation by non-professionals, securities prices tend to reflect cyclical waves of emotional buying and selling as well as traditional economic influences. Long-term success in this semi-rational competitive environment requires alertness to change, an eagerness to realistically appraise both rational and emotional variables, and a willingness to re-examine the adequacy of our traditional tools."
It is true that the "average" advisor is aware of these issues- but that generally may be the extent. None of this is practically taught to such advisors. They use the sophomoric rhetoric and just buy software that does all their allocation. For those that think this harsh, simply pick up the most recent manual for CFP training and note that there is no practical training at all.
DISABILITY COVERAGE (American Council of Insurers) 82% of employees are lacking in adequate coverage.
The Society of Actuaries says that only 2.5% of employees have individual disability coverage.