MOODY'S REVIEW
AUGUST 1997
COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR. BSCE, LLB, MBA, PhD
MASTERS OF SCIENCE IN FINANCIAL PLANNING
REGISTERED INVESTMENT ADVISER
A PIECE OF ____: Oh I'm sorry, I meant a piece of the Rock. Well, anyway, Prudential, who has been fined over $1 billion in the last few years for sales of limited partnerships and life insurance policies, has a graph for their variable life products showing what you could accumulate. The problem is they left out the 1.4% annual charge for the account and the front end load, etc. Such lack of forthrightness is not illegal under SEC guidelines (who are we paying over there???) Since they did put in a disclaimer, but the difference in the projected returns of $233,048 is overstated by $53,527. It may be legal but is UNETHICAL.
WEB SITE: WWW.EFMOODY.COM- I was interviewed by a Lori Pizanni of the weekly newsletter called Registered Investment Adviser regarding financial planning web sites. She said that my site was "one of the most interesting web sites she had thus far seen... and very, very informative." The article stated it was "strong, hard hitting and truly humorous." She later added, "Keep up the good work. Too many of today's "experts" won't be found out until the bear comes out of hibernation...but by then it will definitely be too late for many trusting (and naive) investors!"So just remember to tell your friends to take a look. Even your enemies.
MEDICARE CHANGES: A new proposal by the government wanted Medicare to reduce payments to specialists by up to 44% while increasing fees to generalists. General surgeons would see drops of 19%, cardiac surgeons up to 44%. But optometrists, dermatologists and chiropractors would see increases up to 40% more. The overall budget for Medicare would not change. Unfortunately, the Federal Trustees now say that the trust fund will run out of money in 2001. Some politicians want to throw some money at to let it go bankrupt in 2006 instead.
LONG TERM CARE: Kiplinger's had an article on long term care policies and other issues and noted that one should spend no more than 3% to 6% of income on a premium. That's (somewhat) close to the 7% stated by the California Department of Insurance.
But the article said that Medicare paid, on average for 27 days of nursing home care if one entered a home after being in a hospital for three days. What they failed to state is that such people get care only for skilled care- and that rarely happens. About 99.5% of people that go into a home are NOT there for skilled care.
They also suggest buying a three year policy but they do not distinguish between the sexes. Men go into a home and either get well or die. So a 2 to 2 ½ year period might be fine. On the other hand, women will live in a nursing home so a 4 year or lifetime benefit is better. Splitting money equally between husband and wife is almost universally wrong.
INTERNATIONAL MARKET RISK: (WSJ) When you invest overseas- particularly if you are using closed end or single country funds- you need to be aware of the extra risk. I have identified some countries before- Russia, Turkey, India, among others where you might get some great returns- but at the cost of a lot of volatility. I thought this chart- from a June WSJ- identifies how others view these risks
.
| Level 1 (Most similar to U.S. | Level 2 |
| Australia | Austria |
| Canada | Belgium |
| Denmark | Finland |
| France | Hong Kong |
| Germany | Italy |
| Ireland | Japan |
| Netherlands | Norway |
| New Zealand | Singapore |
| Sweden | Spain |
| Switzerland | |
| U.K. |
| Level 3 | Level 4 |
| Argentina | China |
| Brazil | Columbia |
| Chile | Czech Republic |
| Greece | Hungary |
| Korea | India |
| Malaysia | Indonesia |
| Mexico | Israel |
| Phillippines | Poland |
| Portugal | Sri Lanka |
| South Africa | Taiwan |
| Thailand | Venezuela |
| Level 5 |
| Egypt |
| Jordan |
| Morocco |
| Nigeria |
| Pakistan |
| Peru |
| Russia |
| Turkey |
| Zimbabwe |
STUDENT DEFAULT: This isn't ethical but you'd have to be stupid not to consider it. You can refinance a student loan under the government's direct loan program, make small payments for 25 years, AND THEN DEFAULT WITHOUT RECOURSE. The intent by the government was to help low income graduates with high debt, but now that the word is out, all sorts of people will do it. And sorry, I'm not inclined to give low income a freebie for default. If I had to pay mine, then they can pay theirs.
SOCIAL SECURITY: If you retire with full quarters of coverage but before the full retirement age, you are get less than if you had worked up to the full age as designated by social security (I went though all that to make you recognize that, while you can get Medicare at age 65, you may not get full benefits for social security since it uses retirement ages from 65 to 67). Anyway, benefits are based on your highest 35 earnings years, indexed for inflation and added together. If you work only 30 years, the five potentially highest years would be zero and therefore reduce your payments.
ASSET MANAGEMENT: People are looking to all sorts of ways to eliminate the conflict of interest with commissions. The Broker Dealer firms have come up with vast array of fee services. Smith Barney will manage a stock account with no more than 12 annual trades for a fee of $1,500 for $100,000 in assets. If there are 40 trades, the cost is $2,000 annually. Over $3,000,000 under management and the fee drops to 0.75%. Merrill Lynch charges 1.5% for assets of $100,000 to $250,000. Financial World noted the various fees charged by such firms to handle certain sized mutual fund accounts:
| Company | Minimum Invest-ment | Basic Fee % | Mutual Fund load waived | Mutual fund no load |
| Merrill Lynch | $100,000 | 0.75-1.50 | yes | yes |
| PaineWebber | 50,000 | .75- 2.50 | no | no |
| Prudential | 100,000 | .70-1.50 | no | no |
| Smith Barney | 100,000 | .75- 1.50 | no | yes |
Obviously the higher fees are for the smallest accounts and they drop the
more money is invested at the usual increments of $250,000, $500,000 and
$1,000,000. I don't charge that much and I offer a vast array of true financial
planning services. They offer charge accounts, on line services and much
prettier monthly statements than I provide. And yes, you can get to a pre
programmed financial planning program that does a "personalized plan back
at the home office. Certainly it can give some valid advice, but in terms
of paying $250 to $500, it is clearly a waste of money. Anyone that has ever
looked at my WEB site clearly knows that I think computer based programs
are mostly ill advised. (Actually, they suck).
Further, why pay someone- your broker- who doesn't even know what diversification is. The question is "How many stocks must you have in a portfolio in order to insulate it due to unsystematic risk?" If a broker can answer that definitively with a figures and a graph, you may very well have an astute broker. If not, they are simply lacking in fundamental securities knowledge. If you then insist on working with them, now you are both stupid.
LIMITED PARTNERSHIPS: I handle non discretionary accounts which means that I come into contact with investments not normally reviewed by other advisers. One type is, obviously, the limited partnerships clients may have purchased before I ever became their adviser. But these can be a bloody mess to work with since so many went into default years ago- or simply where the values have changed over time for any number of reasons. Other aspects being equal, the problems become most annoying when the interests are left in an IRA. First, the IRA trustee may levy a fairly hefty charge for having them in the IRA- perhaps more than the partnerships may be worth. Such fees may be 0.30% to 1% of the asset value. Further, there are additional distribution fees when the assets are removed. But there in lies the rub- what are the interests worth, particularly when they are distributed out of the IRA? Invariably the value by the IRA trustee comes from almost unreliable sources- some I can't figure out at all and many times the trustee won't tell me. And you can't necessarily rely on the partnership managers because 1., they won't provide a current valuation or 2., it's way too high since they are still placating a bunch of purchasers of years ago. Overall, partnership interests do invariably get reported at too high a value and that is indicated on a 1099 form to the IRS upon a distribution. That results in a higher tax liability than necessary. What's my angle? Well, I get publications that include the most recent sales of innumerable partnership interests nationally. I usually average out the high and low for the current month or three months. And if none have been reported, I can contact other B/D's to see if there has been any past experience and then prepare a report. Sometimes the IRA administrators will accept such research- others are dumber than a rope and you have to fight further..
The comment is most relevant since a class action suit was filed against First Trust just a couple months ago for this very issue. Stay tuned.
MEDICARE WASTE: In a July study, investigators said that the government overpaid hospitals, doctors and other health care providers in 1996 about $23 billion- 14% of the ENTIRE Medicare budget. Now we shouldn't expect a program this big NOT to have errors- nonetheless, a 14%over payment is ludicrous. If I did that in my business, I'd have none. Of course, they'll just tax us more or reduce services.
MORE ON JAPAN: I noted over a year ago some of the problems they were having. But I said don't count them out. That's still probably true, but there are a lot of ominous issues that may hold them back a lot longer. Part is due to an antiquated, non liberalized internal economy that forces prices high and keeps them that way. The "closed" system is what you have read about over the years as part of the inherent difficulty in breaking into the Japanese marketplace. They don't let foreigner's- in essence competition- into their consumer universe and require purchase of goods through long standing Keiretsu (Japanese) suppliers. That's breaking down somewhat since Japan has lost market share from its hayday peak of 1989- but such disbanding efforts still have a long ways to go. But finally, all Japanese will benefit from a more democratic and competitive market system.
Another item that's almost unfathomable is the huge numbers of aging elderly that will cost huge amounts of money for their care. (The number of Japanese children aged 14 and under has dropped to 15.5% of the population, from 35% in 1955. By 2010 Japan could have proportionately the smallest workforce and the largest number of elderly people of all developed countries, says a government report.) Add the bank debacle caused by every increasing- and unsubstantiated- real estate prices in the 80's, and you got one whale of a mess. Will they survive? Yes- the country is still very rich. The real estate mess is much better. But irrespective of that is the fact that massive economic restructuring of the economy is necessary- including tax hikes- for it to return to growth anywhere close to the 80's.
After all said and done, I think all American stockholders should closely analyze what has happened to Japan over the last 10 years. The point being that many many people said that Japan was the world beater, could do no wrong, the U.S. would now always have to play catch up, etc. etc. Then it's economy literally blew up. But aren't we now saying that the U.S. can do no wrong- business cycles are a thing of the past, etc. etc??? History has a tendency of repeating itself.
CHECKING YOUR BROKER: Money Magazine, Kiplinger's, Business Week and literally all the other literary whizzes have got it all wrong when researching a broker. They all suggest contacting the NASD at 800 289-999 and obtain a CRD report that shows any past arbitration awards. They couple this with also contacting your State Securities Agency which will provide even more data. (As a guide to deciphering a CRD, they suggest sending $4.00 and a self addressed stamped envelope to the National Association of Individual Investors, (NCII), 1828 L ST. NW, Suite 1010, Washington, DC 20036 and ask for "How to Check Out a Broker".) Basically a waste. Sure you can weed out those that might be unscrupulous, but it has nothing to do with competency. That's because you cannot get competency from a broker. Period. A broker- as defined as someone solely having a securities license and no other background- has never even been taught risk and reward. They are not taught standard deviation or diversification. And you never, never give money to anyone who does not have and cannot use an HP12C. To do so is committing economic suicide.
ETHICS AND MUTUAL FUNDS: Ethics tends to be an overused word. Overused since few people pay that much attention to it. Here is an example of what has been going on for some time. As fund investors, you pay expenses to a manager of a fund for the research he/she is to provide for the investment portfolio. Those managers might also pay others for their insight and analysis and "that would come out of their pocket". Not necessarily. When a manager buys stocks, they pay a commission just like everyone else (though negotiated at a low price). However, the brokerage firms may turn around and then offer analysis for "free". In other words, the research costs are being borne by the investors and NOT the managers. The SEC has said that these "soft dollars" may amount to $1 billion each year. Are all the funds acting improperly? NO. But which ones that have overstepped their boundaries remain unclear. Remember, ethics is not taught to brokers- and maybe not at home, so what should we expect?
FUND INFORMATION: Used to be more people were buying no load funds, but during the past 5 years, there were more and more "investors" who used brokers for their research. Loaded funds were 50.3% of all funds sold in 1994, then went to 53.1% in 1995 and now to 54% of gross fund sales in 1996 ($340.7 billion). About 35.5% of sales of new fund sales in 1996 were in no loads with the other 10.5% in variable annuities.
COMPANY STOCK: Here's a little gem that most retirees will never think about. Assume you bought company stock through your retirement plan. Most people would consider rolling the assets into an IRA so they could avoid tax and let the assets grow. Maybe the WORST thing you can do if the stock has highly appreciated. But what you can consider doing is taking the stock as certificates and paying taxes BUT ONLY ON THE ORIGINAL BASIS. The remaining appreciation is not taxed until you sell it later. So what does that do? It allows you to get long term capital gains on the income verus ordinary income. You also do not have to take a mandatory distribution at age 70 1/2. Further, if you retained the assets until you died, your heirs can get a form of step up in basis. AND I REPEAT- IF YOU DON'T UNDERSTAND BASIS, YOU CAN NEVER DO RETIREMENT, ESTATE OR FINANCIAL PLANNING CORRECTLY. NEVER!!!!
VARIABLE LIFE: Here is another real life example of why variable life is a bad thing to do. The figures on the policies came from an article in California Broker- an insurance trade magazine. The article did point out the inconsistencies between various products, but did not go into why you would use them in the first place. I'll use the two that showed the highest values at 20 years. Male age 45, 1,000,000 death benefit, policy endows at age 95, premiums paid for 20 years and a gross investment return of 9%. The policy was designed for maximum income, NOT insurance coverage. For other alternatives, get the April 1997 edition of California Broker.
| Carrier | Net Return | Cash Value in Years 1 10 20 | Income Year 21- 40 |
| A | 7.44% | 9,472 | 132,785 | 393,493 | 33,243 |
| B | 8.3% | 9,085 | 127,017 | 396,361 | 34,257 |
| Carrier | Death Benefit 1 10 20 40 | Guaranteed death benefit |
| A | 127,442 350,735 611,493 71,785 | 24 years |
| B | 216,485 334,417 603,761 85,733 | 20 years |
So what's the deal?
These policies cost $10,000 a year. Carrier A provides $127,500 insurance to start- carrier B provides $216,000. If I bought the cheapest insurance for life, it would be about $1,000 a year for life. That means that $9,000 would be left over to grow in a separate investment fund. Now in order for my comparison to work, I am going to put the entire amount in index funds that have low turnover- about 5%+ per year. I also assume the same return as the variable life- 9%- I must also adjust for the capital gains that are thrown off each year from the index funds. At a 30% tax on the gain, it results in net yield of 8.87%. So using that for 20 years, and you have a value of $493,828. Add the $175,000 of insurance that has grown to almost $200,000 and you have a total death benefit of $693,828- far greater than either of the best two policies. Now the best income stream from the insurance is about $34,000 per year. So with my example, I can get $49,000 but have to pay the continuing $1,000 annually for insurance. The remaining $48,000 is taxable whereas the monies from the policy is tax free. After deducting 30% tax and you net approximately the same net $34,000. But I still have $200,000 in net insurance versus the other policies at about $75,000. And my policy now has a cash value of $50,000.
With the mutual funds, you have to use index funds all the way due to low turnover. And should you sell one prior to the 20 years, you will incur a taxable gain. Not so within the policy. But the figures for the policies could actually be much lower due to higher commissions charged. And I think that to be the norm. And as it turns out, my way gets more insurance and more money with a lot more flexibility with the funds right from the beginning. Do what you want, but paying a commission for variable life seems to be a waste of money and done primarily because you wanted to use a life insurance agent to do financial planning. That doesn't make sense.
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EXPECTED RETURNS: I have noted this a few months ago but it seems that public perception of future returns is even getting "worse". The Reuters survey stated that 85% of investors expected the same return for the next 10 years that they have gotten over the past 10- and that's 15.3% annually. According to Ibbotson, the annual return from 1926 to 1996 is 10.7%. Small companies did 12.6%, but most of that excess gain came in a short period in the 80's and may not be particularly valid. Long term bonds gained 5.1% and cash investments showed a paltry 3.7%. It does show that long term investors should be in more stocks than bonds. However a reliance on 15% is not valid at all. Further, one rarely puts all assets in stocks.
NEVER HAVE ENOUGH: Over 50% of all people that change jobs do NOT roll retirement assets to an IRA or other retirement plan. They spend it.
SUITABILITY: This really frosts me since you as the consumer have no idea just how ludicrous some of the commentary is about the ability of a stockbroker to adequately determine suitability- or just about anything with securities. You MUST remember that I have taught securities classes for over 15 years- and effectively taught little of value.
The NASSA- National Association of Security Dealers has proposed some new rules about the "duty to warn" a customer about an unsuitable investment. Under the rule, broker-dealers must discuss the customer's situation and objectives, "exercise product diligence before making a recommendation, " make sure customers understand the product and to "have a reasonable and articulate basis to believe that the recommendation is suitable for the customer".
The SIA- Securities Industry Association says that the current suitability regulation provides sufficient investor protection and "expressed concern about the proposed definitions."
Do you want to know who is at the SIA? Attorneys. And if they don't know beta, alpha, correlation, diversification, etc., (and they don't), then it's little different than the tobacco industry saying that they did nothing wrong. I have never been allowed (except at a university) to teach the fundamentals of investing. They are not taught to stockbrokers. CAVEAT EMPTOR.
CREDIT CARD DEBT: From 1971 to 1983, commercial banks charged off just 2.3% of credit card loans. Since 1983, the rate has climbed to 3.8% and, in 1997, is now approaching 5%.
JOBS: One in ten manufacturing jobs is eliminated each year and new jobs are not made at the same rate.
MANAGED CARE STATISTICS:
Consumers have seen their payments go up as well between 1987 and 1993.
There are all sorts of commentary whether or not managed care is the best system. The director of the Center for Survey Research at KPMG Peat Marwick put it best- "physicians are rewarded for practicing efficiently or denying care, depending on one's ideological interpretation."
SAVINGS STRATEGY: A study by the Consumer Federation of America said that 2/3 of Americans who actually save money lack a cohesive strategy for the savings. While up to 84% of Americans are saving for retirement and emergencies, most are still putting away too little. 63% also said they have yet to save money to meet other financial goals. "An estimated 65 million households will likely not have enough to reach one or more of their major financial objectives, whether saving for their retirement, their children's college education, caring for an aging relative, etc. For those households with incomes under $100,000, those with a plan saved twice as much as those without a plan. The director of the Consumer Federation said that "our single most important message to Americans is to develop a financial plan."
LIFE INSURANCE: I was reviewing a second to die policy from an article on life insurance by the American Association of Individual Investors. A couple both age 62 were to spend $38,000+ annually to get a standard survivorship policy with a current death benefit of $630,000 that would grow accordingly.
| Policy Year | Projected Death Benefit | Projected Total Rate of Return |
| 5 | $632,554 | 42% |
| 10 | 937,211 | 15 |
| 15 | 1,367,385 | 10 |
| 20 | 1,937,742 | 8.2 |
| 26 | 2,850,908 | 7.1 |
| 29 (combined life expectancy) | 3,380,752 | 6.7 |
| 30 | 3,582,125 | 6.6 |
| 33 | 4,243,134 | 6.3 |
| 35 | 4,734,044 | 6.2 |
Standard second to die whole life policies are almost a complete waste of money. If the couple actually spent $38,000 per year, they could get a current policy of $4,700,000 that would be guaranteed for life. Therefore if the last to die was 82, the beneficiaries would get over $2,700,000 MORE by buying the cheaper policy (versus the $1,937,742).
Here's another one from AAII that suggested that at joint age 52, a couple buy a whole life policy for $20,000 for 13 years ($260,000) that would have an initial death benefit of $335,000 that would grow to $1,921,000 in 38 years (joint life expectancy) which would be 90 years of age for the last to die. I simply took $5,400 and bought a $1,700,000 CURRENT death benefit that was guaranteed for life. Admittedly, you must pay the $5,400 for life, but if you just divided the $260,000 by $5,400, it would equal 48 years of payments which would be to age 100. Admittedly if the last to die did die at age 90, my policy paid less. But at anywhere less than age 85, and my policy paid a lot more. And remember, I did not even include interest on the savings over the high policy premiums during the first 13 years. In other, I almost always can buy more insurance with the same money than what almost all the other articles indicate. Why is that? Because they have been programed to sell whole life regardless of whether or not it works versus other types of cheaper policies. There is no smoke and mirrors with what I have done- you just have to do more homework. Life agents almost universally promote the wrong survivorship policies. That said, few people should buy survivorship policies anyway since it tends to indicate poor estate planning.
WORLD'S WORST BRAND NAME: Amelia Airheart Luggage. Didn't she get lost????
MANAGED CARE SURVEY: After talking about the potential increases coming up in managed care premiums, it now appears that while the projected increases may not be too great in 1998, a survey of 31 major health insurers shows an accelerated trend in future years to even higher premiums. A survey by Sedgwick Noble Lowndes noted
The firm examines seven trends that contribute to the increase of costs in medical benefits- inflation, leveraging, costs shifting, antiselection, technological advances, social shifts and utilization. The largest component of health care cost increases is inflation at 4.1%. The other two are increased utilization at 2% and costs shifting at 1.2%.
DEFINITION OF AN OPTIMIST: Someone looking at the nutritional label on a Twinkie.
FOREIGN INDEXING: This has been discussed previously but needs an update. It goes back to the commentary as to which is the better investment- active management through the numerous managers of about 7,000 mutual funds- or passive such as the bulk of the Vanguard funds. One must first realize that the U.S. 500 index has beaten most of the actively managed funds for the last three years running. But is it the same for foreign funds? Yes and no. The very low fees of indexing is a significant offset to managed funds that might do slightly better but have much much higher expenses. The positive spin for active managers is that they can find the better stocks in the more inefficient foreign markets and exploit them- something not supposedly viable over the long term in the U.S. efficient market place. However, indexing does not allow flexibility in the use of the various countries that might have problems. And Japan comes immediately to mind since it comprises 32% of the market capitalization of the EAFE (Europe, Australia, Fare East) index. It alone had a drop of about 50% since 1989 and has, obviously, shown some negative returns. Active managers, for the most part, have simply avoided Japan until, perhaps, most recently. One interesting note from a Financial World article said that indexing was actually more volatile than the actively managed funds. That apparently is due to the fact that index funds stay fully invested regardless of the perceived negative changes in a foreign country's economics. Active managers, however, convert some stocks into cash in order to reduce any downside.
You must review some fundamentals in the foreign market, indexed or not. Outside of Japanese stocks, foreign stocks are relatively cheap compared to the U.S. with a 14 P/E ratio overall to the U.S. at 17 (2/97). Emerging markets have a P/E of 12. I still use mostly U.S. stocks simply because the potential economic picture seems strong. Yet between 1974 and 1994, non U.S. developed markets, per FW, outperformed U.S. stocks over 5 year periods 62% of the time.
EXERCISE FOR THE ELDERLY: (John Mollenkopf, MD) You may need strength training if
1. While seated on the floor, without using anything with which to pull up, can you stand without help?
2. While standing nest to a chair or table, do a full deep knee bend while holding on with one hand. Can you resume the standing position without help? Do not push up
3. Sit in a low stuffed chair or sofa. Can you stand without pushing up?
4 Sit is a straight back chair. Can you stand without pushing up?
5. Can you stand on one leg without any support for 15 seconds? Have assistance available if you feel unstable.
6. With both arms extended sideways, can you hold a 5 lb. weight or a 2 liter bottle in each hand for 20 seconds?
7. While lying on your back, can you hold both legs off the floor a few inches with knees extended for 15 seconds.
Dr. Mollenkopf says that if you answered no to all but are over 80 years of age, you are representative of your group. However, you are a prime candidate for falling down and hurting yourself and must work on weight training immediately.
If you answered no to 4 out of 7 and are in any other age group, you better get started on weight training now and maintain it for the rest of your life.
And just so you know I take this seriously, I went back to weight training about 9 or 10 years ago. In some ways, I am stronger now than when I was 18. Further, when I was 18, I wore a back brace for awhile (mild case of polio when I was young or a birth defect). Now at 53, I don't have any pain and have exceptional energy. However I do recognize that I will have to do this (along with my running) for the rest of my life. But since I don't do anything physically different than when I as 25 or 30, I figure that is a good tradeoff.
GRIEVING: I have heard this more than once and certainly read about it frequently. When someone has lost a loved one, they are apt to get a lot of comfort in the first weeks thereafter. But once a month or so has passed, many of your friends and relatives may not bring up the issue again for any number of reasons. They may feel that they don't want to butt in, or that they might say the wrong thing, that you are healing very quickly and don't need more help, etc. They end up feeling all the more helpless. But remember, they have a life too and it may not be going all that well. However, beyond that, it you need help, ASK FOR IT. They need to be honestly told what they can do to help. Do not tell them you are doing fine when you are REALLY not doing fine. By allowing others to share in the grieving, you will feel better much sooner.
REAL ESTATE PREQUALIFYING: You have probably heard about the affiliations that brokers may have with lenders, title companies etc. so that they supposedly can offer faster loan processing, cheaper rates, etc. While some are acceptable, some show major conflicts of interest with rebates of commissions to the brokers and other unethical practices. But here is a new twist on a national level. Some credit card firms have presented a new card where, if the cardholder qualifies, it provides a guaranteed loan approval for a maximum mortgages amount for six months. Instead of waiting a month or two for approval, much of the paperwork might be completed in as little as 15 days. The issue of cross selling and the split of fees is still a concern, but it bears investigation if you are going to buy a home.
FEED ME: (Associated Press) Americans are getting fatter and fatter. Due to overeating and "pandemic sloth", 35% of American adults weigh "dangerously" more than they should. 36% of all U.S. women are overweight with about 50% of Mexican and 52% black women overweight. About 33% of men were overweight with no real distinction between races. So why the big deal here? Because if you are that far overweight, you will die sooner than the actuarial tables for the normal adult and I must adjust my planning accordingly. And outside of all the other comments about losing weight, I usually just ask if you want to see your grandchildren grow up. It's that simple.
WORK FORCE: (FED Board of Atlanta)
VERY INTERESTING: An article in the SF Chronicle by Ackerman said that we really can't have inflation worries since there have been some areas that have increased so much that the American public simply can't afford them anymore. In fact, we could even see deflation.
First he mentions college expenses. They increased at a rate of 256% between 1980 to 1995 versus an 85% increase for consumer prices and 93% for the average rise in a family's income. That's a huge number for anyone sending their kids to school and he says that colleges will actually have to begin REDUCING prices.
Next he focuses on health care "since they are already well past the threshold of affordability." He is correct that, in the race to drop prices further, there have been layoffs of not only administrators but nurses as well. He also says that health care costs will need to drop.
(As far as these two issues are concerned, I think it is pure wishful thinking to believe that college and health costs will actually decline. It is true that the rate of increase must slow, but not to go backwards.)
Lastly he focuses on the excessive spending by government. While the recent agreement for a balanced budget is commendable, I really feel that a lot of off budget spending will continue, forcing further cuts in the future. Further, the politicians are looking at a continued strong economy for the next five years to end the budget deficit. Maybe yes, maybe no.
RETIREMENT: A Merrill Lynch study said that a married couple age 35 earning $50,000 per year would need to save 6.3% of its after tax income in order to stay on track for retirement at age 65. At age 45, it jumps to 16.6% (assuming they have not saved previously). But it's not happening at any age. Further, baby boomers say that only 14% would use home equity to finance their retirement. But even among those that would use homeowner equity, they would still not have enough under current savings.
LAZY: Federal health officials said that about 53 million adult Americans were physically inactive during their leisure time, including many arthritis patients who could benefit from exercise.
In a survey of 105,853 people, the Centers for Disease Control and Prevention (CDC) found that 29.4 percent of adults said that during the previous month, they never exercised or engaged in physical activity unless it was required for their job.
INSURANCE: (California Broker) A 2% drop in dividend interest rates requires three times the premium as originally projected. DID YOU READ THAT????!!!!!! It just shows how unbalanced a policy illustration can be. Adjust one issue (normally interest rates) and the whole thing can fall apart. That's what happened in the 80's where some agents presented illustration staying at 11% or 12%. Look at any interest rate charts and you can see how rates dropped around 1984 and kept on going down to 1994. But even as these rates showed a a continual decline, there were some carriers that continued projecting interest returns and dividend assumptions as high as 12 % as late as 1992. (While you can't always blame the agents for the rate assumptions since many had been told to "trust Mother Insurance company" since they had never declared a lower dividend that projected, it nonetheless means the agent was stupid.)
But what the article also noted as that "now the new policy illustrations and pricing require a professional agent to create legitimate sales and there are far fewer able to meet the challenge. Carriers have turned to other distribution sources- bank employees, stock brokers, telemarketers- which are even less able to explain today's products and find the need for coverage".
MUTUAL FUNDS: (Investment Company Institute) At the end of October 1996, there are 6,201 funds with combined assets of $3.39 trillion. Sock funds held $1.65 trillion or 48.7% of all assets and totaled 2,553 in number. Bond funds had $866.48 billion and totaled 2,652 for 25.5%. Money market funds held $876.84 billion and totaled 996 for 25.8%.
Through 1996, performance accounted for 42% of growth in total net assets; net cash flow accounted for 46% and the remaining 10% was for flows into new funds. Mutual fund assets represent 13.6% of the total of all outstanding stock in the marketplace at the end of the second quarter of 1996. 84% of funds held by investors were being sued for retirement.
The typical mutual fund shareholder is 44 years old and had financial assets of $50,000, is married and employed. The person making the investment decisions is most likely the man- 47% versus 32% for women. Joint decision account for 21%.
About 68% had purchased funds prior to 1990.
SAVINGS: Here is what Merrill Lynch says a couple needs in savings at a particular age for a good retirement.
| Household Income | Age 35 | 45 | 55 | 65 |
| $50,000 | $2,756 | 34,443 | 117,739 | 187,593 |
| $100,000 | 28,850 | 101,462 | 261,139 | 474 |
| $150,000 | 60,538 | 200,825 | 468,837 | 820,215 |
Do I use this form of allocation? Not really. These are rules of thumbs that I rarely have any faith in since they do not reflect the real life of the client I am facing. But I put them here so you can get a rough idea of where you might stand.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
2295 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127
EFM@EFMoody.com