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

WWW.EFMOODY.COM

SKILLED NURSING FACILITIES --Protection Against Unfair Transfer or Discharge

Skilled nursing facilities (also known as rehab facilities and rehab hospitals) sometimes discharge senior patients before they have recovered enough to be sent home. Often, it's a matter of economics ... Medicare provides only a fixed amount of money to pay for a patient's medical condition. Just like hospitals, if the skilled nursing facility can discharge a patient before it spends the entire pot of money, it keeps the difference. But, just like hospitals, federal law protects recovering patients from being discharged too soon. But sometimes hospitals and skilled nursing facilities need to be reminded of this fact.

With regard to skilled nursing and other rehab facilities, the following information was taken directly from Medicare's latest consumer booklet on skilled nursing facilities. The rights described apply to ALL Medicare beneficiaries, regardless of whether they participate in Medicare's original plan, or under an HMO licensed to provide coverage to Medicare beneficiaries.

"At a minimum, Federal law specifies that a SNF (Skilled Nursing Facility) resident’s rights include:

Protection Against Unfair Transfer or Discharge:

You cannot be sent to another SNF, or made to leave the SNF unless:

• It is necessary for the welfare, health, or safety of you or others,

• Your health has declined to the point that the SNF cannot meet your care needs,

• Your health has improved to the point that SNF care is no longer necessary,

• You do not pay for the services you are responsible for, or

• The SNF closes.

Except in emergencies, SNFs must give a 30-day written notice of their plan to discharge or transfer you.

If you have a problem at the SNF (Skilled Nursing Facility), talk to the staff involved. For example, if you have a problem with your care, talk to the nurse or Certified Nurse Assistant (CNA). The staff may not know there is a problem unless you tell them. If the problem is not resolved, ask to talk with the supervisor, the social worker, the Director of Nursing, or your doctor.

The facility must have a grievance procedure for complaints. If your problem is not resolved, follow the facility's grievance procedure. You may also want to bring the problem to the resident or family council. The SNF must post the name, address, and telephone number of state advocacy groups, such as the State Survey and Certification Agency, the State Licensure Office, the State Ombudsman Program, the Protection and Advocacy Network, and the Medicaid Fraud Control Unit.

DO THE MATH: The standard french fry offered in 1955 was 2.4 ounce and contained 210 calories; in 2004, it was 7 oz and tanked in at 610 calories.

There were 103,200 gastric bypass operations in 2003.

OBESITY Epidemiological studies still don't take into account obesity's effects on a person over time. A 50-year-old person who has been obese for 30 years may have a higher risk of death than a 50-year-old who has gained the weight recently.

More recent studies indicate that if the current “fatness” continues, the actuarial lifetime for U.S. citizens could actually go DOWN since obese people will live three to five years less than their slim counterparts.

HEDGE FUND RETURNS: Burton Malkiel of Princeton University and Atanu Saha of the Analysis Group are asserting that the returns of hedge funds may be lower than commonly advertised, possibly making them a riskier choice for investors. (I agree)

The study analyzed the TASS database, which is run by hedge fund group Tremont Capital Management. The two academics claimed that because of backfill and survivorship biases within hedge fund indices, investors should look at such an index with a skeptical eye.

Backfill bias occurs because hedge funds report performance on a voluntary basis. Managers quite often will retroactively report returns if they are positive, while often failing to do so if returns are negative. Malkiel and Saha found that backfilled returns were more than 5% higher annually than those that were not backfilled. (Huge amount)

Survivorship bias also warps the actual performance of hedge fund investments. While most hedge fund databases reflect the returns of hedge funds currently in existence, most do not include hedge funds that have failed (the study also asserts that only a quarter of funds in existence in 1996 are still around today). It is common for funds that are failing to stop reporting their returns for the months before they go under. This makes it so only funds who are currently enjoying a successful run are included in an index, biasing the results so as to not include the entire hedge fund universe.

The study cites Long-Term Capital Management, a massive Greenwich-based hedge fund that infamously tanked in 1998, as a prime example of such action. Although the fund lost 92% from October 1997 to October 1998, it failed to report any of the losses to hedge fund databases, skewing the returns of the industry as a whole. Although it was still losing money, hedge fund databases would not pick up on a fund such as Long-Term; so any hedge fund index that purported to speak for the entire universe would be incorrect in its performance reporting.

Critics contend that every index has this problem. They also point out that not all funds with positive returns report their performance either, since they may not be seeking further capital or may just strictly abide to the industry standard of intense secrecy.

Overall, the study contends that funds that survived outperformed a combination of live and dead funds by nearly 4% over a period stretching from 1996 to 2003. Earlier studies pinned this number at anywhere between 0.6% and 3.6%

 LTC: Most of the men and women in a Met Life survey believe they are prepared to live alone if their spouses die, and 83% of the men say their wives would be prepared to live alone.

But only 67% of the women surveyed said they thought their husbands were prepared to live alone.

Only 7% of the men thought they were unprepared to manage their own health care, and only 11% of the men thought they were unprepared to maintain activities outside the home. About 14% of the men said they were unprepared to handle cooking.

But 25% of the women thought their husbands were unprepared to manage their health care, 24% were worried about their husbands' ability to stay active outside the home, and 27% were worried about their husbands' ability to cook.

Other study findings:

- 21% of the survey participants believed, incorrectly, that they could pay for long term care with Medicare.

- 7% of the men and 9% of the women believed that they could pay for long term care with ordinary health insurance.

POPULATION: More than 34 million U.S. residents were born outside the USA, with arrivals from Mexico driving much of the growth in the foreign-born population since 2000. Nearly 10.5 million U.S. residents are from Mexico. That is close to one-third of the total U.S. foreign-born population, up from about one-sixth in 1980.

Overall, more than 9 million immigrants in the United States are illegal, with almost 2 million entering since 2000.

MEAT: Producing eight ounces of beef requires 6,600 gallons (25,000 liters) of water; 95 percent of world soybean crops are consumed by farm animals, and 16 percent of the world's methane, a destructive greenhouse gas, is produced by belching, flatulent livestock.

Smelly, smelly dirty animals.

 RETIREMENT (Allstate Corp) The researchers found that only 35% of the retirees and only 16% of the workers said they were "very prepared" financially to stop working.

Only 8% of the retirees said they have had to take a job for the health insurance benefits, and only 28% of the retirees said they've had to work after retiring to make ends meet.

About 44% of working Americans expect to have to work after retirement to make ends meet, and 45% believe they'll need to look for a job to help pay for health insurance benefits.

But the retirees might be feeling more relaxed partly because they have more faith in the future of the Social Security and Medicare programs.

Only 28% of the workers expect the federal government to keep Social Security going long enough to meet their needs, and only 32% expect the federal government to save Medicare.

Meanwhile, 45% of the retirees expect Social Security to survive long enough to meet their needs and 46% expect Medicare to continue to meet their needs.

NONDIVERSIFIED PORTFOLIOS: (WSJ) University of Michigan and the University of Illinois at Urbana-Champaign.) Stock trades made by households holding only one or two stocks outperformed those with more diversified portfolios.

Wealthier investors -- those with brokerage accounts of $100,000 or more -- who held concentrated portfolios also outperformed comparable households with diversified accounts by at least four percentage points a year. In fact, wealthy households that invested in many stocks underperformed the markets by about 1% a year.

The outperformance of households with concentrated portfolios is particularly strong if they hold "local" stocks -- defined as companies located within a 50-mile radius of their residences. That is because investors who live near the company they are investing in are likely to know more about whether that business is worth investing in.

On average, investors who held one or two stocks outperformed those who held three or more by about one percentage point during the year following a stock purchase. For households with portfolios of $25,000 to $100,000, the difference in returns for concentrated versus diversified investors is three percentage points. Households with stock portfolios valued at less than $25,000 didn't perform materially better.

The study analyzed 1,156,000 stock trades that individual investors made through a discount broker from 1991 to 1996.

Take specific note of the dates. Just about everything went up during that time. Everybody thought they were a winner. But the risk was unquestionably, irrefutably and undeniably higher. Further, the study is inherently flawed unless you look at what these same people did with the stocks during 2000- 2003. It wasn't pretty. It was stupid. It caused losses of 40%, 50%, 60%+.

Want some more recent examples?- take Merck. Great company, great payout, great whatever. It made Vioxx. Gee, it's price is now down about 40%. Lots of lawsuits waiting in the wings. Yet such a drop had a minuscule impact on the S&P.

Want more? Krispy Creme. Enron. Worldcom. And it goes on The study is not valid now. Sure, it is possible to get a higher return. But the element of risk always comes first. You can only take such risk if you know the fundamental of diversification. How many stocks must you have in a portfolio in order to insulate due to unsystematic risk? Do you know? If not, do not buy individual stocks. .

DEBT: One-half of Americans say they worry about the money they owe, and many say they worry most of the time about their overall debts.

Most with credit cards said they carefully manage the debts on those cards, which often have high finance charges on unpaid balances. A sizable minority of them admitted to having serious problems with credit cards.

Some 16% of those with credit cards said they do not trust themselves to manage their own credit card debts.

For many, their debts cause stress; 20% of all adults in the poll said they worry about their debts most of the time.

I have a current client whose husband has thoroughly misused money till the wife had to take over. It has strained their marriage to the breaking point. She finally put him on a $500 a month personal budget but I am not sure this will work. If you don’t do a budget, everything can fall apart.

COSMETICS and ILLITERACY: (Worldwatch) Worldwide annual expenditures for cosmetics total U.S. $18 billion; the estimate for expenditures required to eliminate hunger and malnutrition is $19 billion. Expenditures on pet food in the United States and Europe total $17 billion a year; the estimated cost of immunizing every child, providing clean drinking water for all, and achieving universal literacy is $16.3 billion.

TIRED AND FAT: Studies have shown a link to obesity among those who routinely sleep less than eight hours a night, including one last month that showed people who reported sleeping less than four hours a night were 73% more likely to be obese. Lack of sleep leads to higher levels of a hormone that triggers appetite and lower levels of a hormone that tells your body it is full, offering harder evidence that lack of sleep may lead to weight gain.

Researchers found that ghrelin -- a hormone that triggers appetite -- increased by 14.9% and leptin -- a hormone that helps tell the body it's had enough food -- declined by 15.5% in people who consistently slept for five hours compared with those who slept for eight.

Of course, the Big Mac has a lot to play in this.

PRUDENT MAN RULE: A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.

In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.

In addition, one of the five “principles of prudence” is that “sound diversification is fundamental to risk management and is therefore ordinarily required of trustees.”

More prudent man rule: “The rationale of the trust law’s requirement of diversification is more than conservatism or a duty of caution, which admonishes trustees not to take excessive risks - that is, not to take risks higher than suitable to a trust’s purposes, return requirements, and other circumstances. The general duty to diversify further expresses a warning to trustees, predicated on the duty to exercise care and skill, against taking bad risks - ones in which there is unwarranted danger of loss, or volatility that is not compensated by commensurate opportunities for gain.”

HISTORICAL VERSUS FORECASTED RETURNS: (Simon) Another method used to estimate expected return is based on forecasting. A commentator suggests that investment professionals can improve their forecasting ability by starting with what’s already known. For example, it’s well known that the long term performance of the stock market is determined primarily by the dividend yields and dividend growth of stocks, which both depend on earnings growth. Bond returns are determined by interest rates, bond maturities and shifts in the yield curve. From these variables, which help drive investment returns it’s possible, to form realistic judgments about expected returns and thus make accurate long term forecasts of them. At least one study attempted to do this very thing, but the forecasts didn’t prove to be very accurate.338 This study (as well as others) suggests that estimating expected returns by forecasting the future may not be any more accurate than estimating them on the basis of historical data. Determining the validity of forecasting methods also poses a problem. No such problem exists with the historical method.

AGING: This year the proportion of people aged 60 or over will surpass the proportion of under-fives.

CREDIT CARDS: Between 1992 and 2001, the average credit-card debt among Americans over age 65 nearly doubled to $4,041.

Those between 65 and 69, many of them recent retirees, reported a stunning 217 percent increase in credit-card debt to $5,884. That's up from $1,842 in 1992. Among those between 55 and 64, credit-card debt jumped nearly 50 percent to $4,088. (The average American family saw an increase of 53 percent, to $4,196.)

INHERITANCE?: (NY Times) AARP found that by 2001, the median value of inheritances going to baby boomers was $47,000 in 2001 dollars. That compares with the average of $90,000, measured in 1989 dollars, that two Cornell University economists, Robert B. Avery and Michael S. Rendall, projected in a 1993 report. That figure was an average for the half-century from 1990 to 2040; the Cornell authors projected an average of $43,814 in 1990, rising to a high of $107,180 in 2030 before falling to $97,636 in 2040.

Data from the Federal Reserve Bank's 2003 consumer finance study reached a much less optimistic conclusion. As of 2001, only 14.9 percent of boomers expected to receive an inheritance, "suggesting that for most people, inheritances will remain an elusive, or small, contributor to their retirement security."

Absolutely true- most baby boomers will have to spend their funds because they will end up living a lot longer than they thought.

MORE INHERITANCE: Does money make any difference when people die? A NY Times article focused on what could go wrong with the distribution of assets. There were three daughters who always "got along famously" and who were each the apple of the eye for both mother and father. The father adored them and always indicated that each would be treated equally. Then the parents both got old. The mother died. Shortly after that, the father had a heart attack. When he came home- still incapacitated- the closest daughter took care of him for awhile before he died. In the interim, the father decided (was coerced?) to put this daughter on title to his house as joint tenant with right of survivorship. So when he died, this one daughter got effectively all of the estate. And she was not going to share. The other two daughters- in total disbelief- finally sued the estate.

Admittedly, this could happen with a trust as well, not just a will. But there are more caveats that can be used in a trust to avoid this (supposed) type of abuse.

FUND FEES: (Rick Ferri ) “It's a sad commentary on the entire industry that it is seen as a plausible argument that, given a choice between charging 0.65% and 2.65%, it is somehow justifiable to charge the higher amount because some advisors can't survive at the lower fee level.

This is bull. We live just fine on 0.25% per year maximum management fee. If a manager with 20 million in assets cannot survive charging 0.5% or per year, then they are bad businessmen and should not be in the business of managing other peoples money. What justification does Assante and the rest of the gang have charging 2% or more? Simple, they are crooks.”

INSURANCE: This is new- up to this point I was unaware of issue age to 90:

Issued to age 90 – Immediate death benefit;  Guaranteed level death benefit to age 120;  Guaranteed level premium;  Liberal underwriting for older ages; Minimum policy $50,000

LTC: This is what I said would happen for years (WSJ) The long-term-care insurance industry has shrunk over the last five years amid big corporate mergers (Manulife Financial's acquisition of John Hancock Financial Services being one), bankruptcy proceedings (Conseco's petition was among the largest in U.S. history) and decisions by big insurers like Aegon to get out of the business. In fact, the bulk of the business now belongs to a handful of big insurers, including General Electric's spin-off Genworth Financial, Manulife and MetLife.

the shakeout means people can expect to pay higher premiums as insurers struggle with current market forces. Recently, insurer UnumProvident boosted the average cost of a new inflation-protected policy for a 65-year-old to $3,290 from $2,296.

CATASTROPHES: Property owners who have felt the wrath of a hurricane, fire or earthquake are having lots of problems with insurance adjusters. Apparently many adjusters are not well trained and are offering low ball offers. It is suggested the use of an PA or Public Adjuster who is an independent person you can hire to represent your claim. They take about 15% of any claim that's received, but considering comments from many who had disasters and tried to work with the insurance companies, it's apparently well worth it. The real unfortunate issue is that much could be avoided if the insured's had actually READ their policy. Further, most insured's had NO video, pictures or receipts of anything they owned. So I have to ask, whose fault is it if the insurance company balks at paying on unproven estimates.

PHYSICAL ACTIVITY: (American Journal of Preventive Medicine) Even occasional physical activity can increase the life expectancy of people aged 65 and over. It tracked over 3,000 people aged 65 and over for 12 years and found that those who exercised just once a week reduced their risk of early mortality by up to 40 percent. Physical activity reduces the likelihood of death by lowering the risk of heart disease and other ailments. The researchers note that efforts to provide older people with more opportunities for physical activity are important in enhancing their health and well-being.

MEDICAID: Half of California's doctors no longer treat Medicaid patients. Only about 20%  of doctors care for 80% of Medicaid patients. The percentage of urban surgery specialists who refuse new Medicaid patents have doubled from 1988 to about 40%.

It reinforces the reason why you never want to use Medicaid as the resource for long term care  

PETS: There are approximately 340,000 policies in force covering dogs, cats, birds and exotic pets for more than 6,400 medical problems and conditions. Optional vaccination and routine care coverage is also available.

I’m going to get neutered.

THE DECLINE IN READING: (National Endowment for the Arts) Based on Census information collected two years ago, the report found that in a sample size of 17,135 adults, only 46.7 percent of adult American readers -- an estimated 96 million -- are reading what the NEA describes as "literature," which is fiction, poetry and plays. Compared to a similar study in 1982, we have lost 10 percent of our fiction readers.

 "For the first time in modern history, less than half of the adult population now reads literature, and these trends reflect a larger decline in other sorts of reading. Anyone who loves literature or values the cultural, intellectual and political importance of active and engaged literacy in American society will respond to this report with grave concern."

More women than men are reading fiction -- 55 percent of women, 37 percent of men -- but even reading among women has declined nearly 8 percent since 1982. The report also shows that divided by race, 51 percent of white people are reading fiction compared with 37 percent of African Americans and 26 percent of Hispanics. during the last two decades, young adults (ages 18 to 34) have gone from being the group most likely to read literature to the group least likely.

My point is not the reading of fiction but the reading of facts- such as contained here and in my book. I figure that of all the people who do read, maybe only 6% actually read material constructive to their lives- having a baby, health care, investments and so on. I think that is now down to 4%- maybe less.

VARIABLE UNIVERSAL LIFE (Jackson National Life) independent financial professionals who include life insurance among the products they sell, widely believe that variable universal life (VUL) products may help many of their clients achieve a variety of their financial objectives. However, a lack of knowledge and education about the product may cause them to avoid VULs and address their clients' objectives using other financial instruments.

Ya wanna know why VUL is such a bad deal for 95% of purchasers? It's right in the first sentence above- "professionals". VUL is not taught to insurance reps beyond it has a mutual fund. And diversification is not taught to brokers. So you have both knowledge elements dismissed from the get go.

Lastly, a lot of this stuff is sold as an investment. That is illegal.

OBESITY AND MEDICARE: The Centers for Medicare and Medicaid Services (CMS) announced that it is changing a longstanding Medicare policy that states that obesity is not a disease. The change in regulatory lexicon, while not specifically classifying obesity as a disease, will enable Medicare to review scientific evidence to evaluate the effectiveness of interventions such as stomach surgery, diet programs, and behavioral and psychological counseling on the health of people with obesity. Many people expect that the result of this policy change will lead to Medicare coverage for some of these treatments. It is estimated that 37% of Medicare beneficiaries are overweight and 18% are obese.

SOME BIASES AND BEHAVIORAL PATTERNS: (WSJ)

Recency bias: People tend to focus too much on what has happened recently. "That is true in terms of unfavorable, unsettling negative events, but it's also true for positive events

Anchoring: Investors become married to certain reference points that influence their decisions. For instance, an investor buys a stock at $50, and it falls to $40 because the fundamentals have changed. The best thing to do might be to sell at $40. However, many people, he explained, are prone to wait for the price to recover to the $50 they're anchored against.

Loss Aversion: Investors are reluctant to realize losses, and conversely, investors are inclined to sell (sometimes too early) because they want that positive reinforcement that comes from securing a gain. "People have a tendency to hold on to their losers and sell their winners.

Mental Accounting: The idea that we treat money differently based on the source or where we hold it. "It's incredible how people will treat tax-return money as lottery winnings or found money, though its true nature is really from wages or salary earned."

KNOWLEDGE?: A GE study noted Only 11% knew the average life expectancy for someone 65 years old today is over age 85; 57% of survey respondents over the age of 55 say they have no idea how they're going to fund their retirement; 31% save 5% or less from each paycheck; 19% know someone who has outlived their retirement or pension; 20% of all Americans have used their savings to get by this year; and only 31% think they will have enough money for retirement.

BEHAVORIAL ECONOMICS: (Kahneman) “A basic assumption is that in standard economics and in financial analysis, people are assumed to be rational. What is meant by that is not that they know everything, but that they have a consistent system of beliefs, that they act on their beliefs and that they have consistent preferences. Now, when you abandon those assumptions of rationality or similar assumptions that people make within the context of finance, and you accept assumptions that are psychologically realistic, then you are doing behavioral economics, and if you are doing finance you are doing behavioral finance.

People are probably more rational when they take a very broad view and derive their specific decisions from a broader view. The idea is to begin with strategic decisions—like how safe you want to be, what the basic allocation is going to be. These general rules should govern decisions. As an individual investor, you shouldn’t be spending too much effort in trying to guess about a particular stock or about the trends of particular economic indicators. That, I think, is one of the main lessons of behavioral economics. When people put too much emphasis on being right in very specific choices, they end up doing the wrong thing.

One of the major findings from academic studies of the behavior of individual investors is the disposition effect: When people are selling stocks from their portfolio, they tend to sell winners and hang on to their losers. It’s very natural why people do that. If you sell a stock that is currently worth more than you paid for it, then you can pat yourself on the shoulder for a successful investment. When you cut your losses on the stock, in contrast, you have to accept punishment right now for having made a choice that didn’t turn out well. It is not surprising that people prefer rewarding themselves rather than punishing themselves. But recent research by Terry Odean has shown that this is really very costly, for several reasons. On average, you will do much better if you sell losers and hang on to your winners. This is a pretty good example of normal investor behavior leading to generally bad outcomes.

People very frequently ask for advice about a specific investment—should I sell this, should I buy that? In principle, advisors should resist such requests to give advice about specific investments without knowing the whole picture about that individual’s portfolio, the amount of risks that they are carrying. People should be educated to ask for advice about the big picture, and always to consider particular decisions in the context of their overall situation and objectives.”

REBALANCING: “Dick Thaler [of the University Of Chicago] had suggested that an optimal period for reviewing your performance was 13 months. Actually what Dick was saying is that for people who have invested for the long run, the optimal period is several years. If you are highly diversified, then you may do better by just not looking at the intervening results, because responding to fluctuations will lead you to be too active. What Dick found is that you can explain the behaviors of the market as a whole by assuming that many people—I think that applies to institutions more than individuals—have the horizon of about one year. That is, they think of the outcome of current investments in terms of gains and losses where the horizon is about one year.”

I don't agree with that contention. If you purchased bonds in 1993 and let them ride, you would have been devastated by the losses as interest rates rose. I suppose someone could say that you had good diversification in 1993 but holding onto guaranteed losses is a substantial emotional risk as well.

O.K., take a look at your situation now. Did you have good diversification before 2000? Did you do it properly after 2002? So what about now as rates rise. Do you wish to hold onto them now? Sure, you may have to take some tax hit on any gains in the bonds at a sale. But better to pay a tax on a gain than to take a loss altogether.

HEALTHY?: Asian adults are more likely than other race groups to have healthy behavior in terms of alcohol use, smoking and body weight. Black adults have higher rates of leisure-time physical inactivity and obesity than white adults.

Black men are more likely than white men to be smokers, but among women the reverse is true, the study says.

The study data say adults with higher levels of education and income generally have more favorable health behavior.

39% of adults don't engage in any physical activity during their leisure time.

But about one in four Americans abstains from drinking alcohol, more than 40% of smokers attempted to quit in the past year, and 40% of Americans are in a healthy weight range. 

INTERNET AND LIFE INSURANCE: Despite widespread use of the Internet for researching and purchasing other goods and services, 79 percent of Americans say they do not go online to research life insurance and 88 percent do not purchase life insurance over the Internet.

GOOD FOR THE IRS: (NY Times) A law firm that sold what the government says were abusive tax shelters participated in fraud and should not be allowed to hide the identities of its tax-shelter clients from the Internal Revenue Service. In a significant increase in pressure on the law firm, the government wants a court to suspend the normal confidentiality of communications between lawyers and their clients, contending that the firm engaged in perpetuating a fraud, not just giving legal advice. The so-called crime-fraud exception to attorney-client privilege is most often applied to lawyers who represent organized-crime families and drug rings suspected of racketeering, not to tax lawyers suspected of civil or criminal tax fraud.

ETHICS: (Harris) Two years after the Enron scandal broke and a year after WorldCom declared bankruptcy, 92 percent of Americans say corporations must do more to improve their ethical behavior, with 56 percent saying corporations have done nothing to clean up the mess.

58 percent of those surveyed do not believe that corporations have moved aggressively to correct ethics problems, while 33 percent say corporations have been aggressive in improving their ethics.

$1.4 TRILLION: (Center for Long Term Care) Of 17,513,000 owner-occupied elderly households in the U.S., 73 percent or 12,792,000 are owned free and clear, i.e. no mortgage. Median home value (the Census tables do not provide the mean) is $107, 398. If we assume the mean average is at least as large as the median, which is a safe assumption because the really huge home equities get washed out when calculating the median, then total home equity of elderly households is at least $1.37 trillion (12.8 million unmortgaged households times $107,398). We say "at least," because (1) the mean home equity is probably considerably higher than the median and if we knew the mean, that would be our value multiplier for total unmortgaged homes and (2) of the 4,721 mortgages on elderly households (some elderly households have more than one mortgage), most have been paid down considerably so that, while the equity is not 100%, it would still be substantial, and is not included in the $1.4 trillion estimate. Based on this, we conclude that $1.4 trillion in senior home equity is probably a low estimate.

MEDICAID RECOVERY: “The Recovery Unit—Estate Division”, is dated, addressed, and reads:

“In the matter of the estate of: Recipient; _______, Our File #: _____ ‘NOTICE OF INTENT TO FILE A CLAIM AGAINST THE RECIPIENT’S ESTATE” The ________ Department of Public Health and Human Services would like to extend its condolences for your recent loss. This letter is to inform you of the laws concerning Estate Recovery. Pursuant to _(state)__ , statute _(number)__, the Recovery Unit, on behalf of _DPHHS intends to file a claim against the estate of the above named individual. According to the Department’s records, the above named was a recipient of Medicaid benefits. The Department is seeking reimbursement from the estate for Medicaid payments made on the recipient’s behalf…”

INVESTOR RETURNS: (Dalbar) Investors made less than inflation over the last 19 years. The average equity investor earned just 2.57% annually compared to inflation of 3.14% and the 12.22% the S&P 500 index earned annually from January 1984 through December 2002.

HOME CARE: “One of the most important and potentially costly components of any long-term care insurance plan of protection is the ability to receive care in one’s own home. average daily payments for home care benefits were $75 or less for 85 percent of LTCi claimants of a leading national insurer. “Nearly two thirds of their home care claims (64%) lasted 12 months or less,” . Some 44 percent of closed home care claims lasted less than six months

401(K) DIVERSIFICATION- The average 401(k) plan offered 13 fund choices in 2002 but participants on average held only 3.6 funds. Nearly 40 percent of the employees held only one or two asset classes in their 401(k) plan, primarily company stock, guaranteed investment contracts or stable value funds, or large-company focused U.S. stock funds. The average 401(k) participant holding company stock had about 42 percent in his or her employer's shares in 2002. the average 401(k) balance at year-end 2002 was about $49,000, down about 2.5 percent from year end 2001

FLAWED LOAD FUNDS. Here are costs of "running" such funds:

1. - 0.5% for annual impact of Sales commission. Most actively-managed funds are sold by brokers who get a commission in the six percent range. Of course they really don't do a darn thing for you, but the managers give the broker a commission to hustle assets. So deduct at least 0.5 percent to account for the annual impact of the commission.

2. Cash drag for another 0.6%. Actively managed funds have much higher cash reserves than an index fund. The effect of this "opportunity cost" or cash drag is a deduction of another 0.6 percent.

3. 0.7% Transaction costs. Fund managers have lots of fun buying and selling stocks, playing big-shot with your money. In fact, the typical turnover ratio is close to 100 percent annually -- that is, they're turning over their entire portfolio every single year. Bogle is a bit more conservative than Aronson in his analysis, and deducts just 0.7 percent for transaction costs.

4. 1.5% for 12(b)1 Management fees and expenses. Now subtract another 1.5 percent for the reported fees and expenses that the fund managers charge investors, including the useless and misleading 12(b)1 marketing fee.

5. 0.7% to 2.7% for Taxes. But that's not all. Now Uncle Sam wants his cut of the profits in your taxable accounts. And since that depends on an individual's bracket, it could be anywhere up to 2.7 percent. But let's be ultra-conservative at 0.7 percent.

6. 3.3% for commissions, costs, cash drag, and fees. Gross, pretax and after-tax investor return. Let's suppose your fund is generating a nice average gross annual return of 12 percent on total assets over the long term. The commissions, costs, cash drag and fees reduce that to 8.7 percent pretax. In short, the manager has already cost you 3.3 percent. Or to put it another way, the fund is underperforming the market by 3.3 percent. After-tax, what's left for the investor? No more than 8 percent of the original 12 percent is left. Less than two-thirds of your fund's returns get into your pocket, probably much less.

COMPANY COMING: The US population grew by 2.8 million in the past year (a 1% gain to 291 million), and looks as though it might hit 300 million within four years time. The South and West added the most people in the year that ended July 1 (making up about three-quarters of last year’s growth), and Nevada was the fastest-growing state for the 17th consecutive year – adding 74,000 people, a 3.4%. Also on the fast track were Arizona, Florida, Texas, and Idaho, while California, Delaware, and Hawaii bumped Alaska, Oregon, and Colorado from the top 10 this year. On the other hand, every state - except North Dakota - grew in the last year.

LTC AND PREMIUMS: (Life Insurance Selling) In the past several years, LTCI prices have risen substantially. The good news is that prices have not risen because the companies were wrong about claims. Claims are right where the companies expected they would be. The companies did not count, however, on the incredible persistency of this business.

At first, companies priced LTCI policies for about an 8 to 10% lapse ratio. They did not assume simply that people would give up their policies; they also expected that people would die before they needed long-term care.

In fact, almost no one lapses with LTCI, and people are living longer and longer. There has been a two-fold increase in people holding onto their policies, and the average age of claim on an LTCI policy is 84 or 85. There is a much greater chance the insurance companies will pay out than was expected several years ago.

Today, instead of pricing for an 8 to 10% lapse, companies are pricing for between a 0.5% and 1.5% lapse. This makes a large difference in pricing a policy.

Another part of the equation is how much money companies earn on LTCI premiums — what interest rates are.

We have had a long period of low interest rates. Insurance company dividends are down on whole life policies, and universal life interest rates are down. Companies are taking in LTCI premiums, investing them, and earning less in interest than they originally expected.

Unexpected persistency and the long low interest rate environment have been the major reasons for the increase in LTCI pricing.

Insurance companies want a return on equity (ROE) of between 10 and 13%, but on old blocks of LTCI business they are getting between 3 and 7%. That business still is profitable, but for the insurance companies to get the ROE they want, they had to increase these premiums.

Insurance companies finally are pricing LTCI policies properly, for a less than 2% lapse ratio. Also, they are using current mortality rates, which are more generous than the 1980 table.

NO NONSENSE FINANCE

McGraw Hill

From a reader: I am studying for my MS in financial planning. I use information from your site to stimulate my appetite in contrast to the traditional texts used in the course. Your site and book rocks!

UNDERSTANDING EXPENDITURE PATTERNS IN RETIREMENT: Typical married adults ages 65 and older devote 29 percent of their household expenditures to housing and another 20 percent to health care. For typical older nonmarried adults, housing expenses consume 39 percent of total spending and health care costs consume 16 percent. Given the attention paid to the burden of health care costs at older ages, it is somewhat surprising that health care is not the largest spending category among older people. One reason for relatively steep housing expenditures is that the aged are increasingly likely to hold mortgages on their homes, which tend to raise housing costs. Indeed, the   data show that 25 percent of married adults ages 65 and older are homeowners with mortgages.

 Typical married adults ages 65 and older spend 84 percent of after-tax household income, and nonmarried adults spend 92 percent of after-tax income. Household expenditures as a share of income increases with age. For example, nonmarried adults ages 75 and older spend 96 percent of after-tax income, compared with 86 percent for those ages 65 to 74. In general, economically vulnerable groups spend less in absolute terms than other groups, but spend larger shares of their income.

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

Marina Office 510 357-1554

Cell 510 459-7797

EFM@EFMoody.com

Compared with married adults, nonmarried adults tend to have higher per capita expenditures (except for the youngest age group) but lower per capita incomes. In contrast to married individuals, median expenditures among nonmarried people are slightly higher at ages 65 to 74 than at ages 53 to 64, and then are lower at ages 75 and older. However, similar to married individuals, median income declines with each successive age group. Between the youngest and oldest age groups, expenditures decline by only 10 percent but after-tax income plus assets declines by 19 percent.

GOING AWAY (USA Today) About 8% of large and midsize corporations are considering getting rid of their pensions entirely. An additional 6% are contemplating changes that would reduce future pension contributions- cash balance plans for example.

CHILD ABUSE: 4.5 million+ children are forced to endure sexual misconduct by school employees, from inappropriate comments to physical abuse