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MOODY'S REVIEW
AUGUST 1998
COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST
REGISTERED INVESTMENT ADVISER
WWW.EFMOODY.COM
KNOWLEDGE MAKES OBSOLETE THE INEQUITIES THAT IGNORANCE AND PREJUDICE JUSTIFY
BASIS- A Mandatory understanding for proper investing
or
How to leave your kids the "same" amount of money in your estate, screw the whole thing up, and leave a legacy of resentment that can last another generation
BASIS- the amount within an investment or annuity that has already been taxed. When the asset is sold, this amount would escape additional income taxation (estate taxes are a separate issue).
Assume Dad has 6 investments- each worth $100,000
that goes to each of his six children. (This also keeps the limit under the
$625,000 lifetime estate maximum). Assume each child has a combined state
and federal tax bracket of 35%.
| Child | Asset | Taxation while Dad is alive | Taxation for Child once Dad dies |
| Sue | Annuity/Pension plan/401(K)/
deductible IRA |
Assume that all contributions were invested
pre tax. The entire $100,000 is taxable as ordinary income.
Every dollar is taxed as ordinary income |
The entire $100,000 is taxed as ordinary
income.
Sue does get the $100,000 but will need to pay $35,000 in taxes |
| Bob | Annuity/Partially deductible IRA | Assume a $25,000 non deductible initial
tax basis.
If all pulled out, $25,000 remains untaxed and the rest ($75,000) is taxed as ordinary income. |
The $25,000 remains untaxed. The remaining
$75,000 is taxed as ordinary income.
Bob will need to pay a tax of $26,250 |
| Frank | Roth IRA | Assuming over 59 ½, etc. ZERO tax. Nada, Zilch, nothing | No tax
Frank gets $100,000 |
| Mary | Real Estate | Depreciate original basis (minus land) over time. When sold, take existing basis, add back in land, subtract from sales price and tax rest at capital gain. Assuming a $75,000 LTCG, the tax might be $15,000. | * Full Step Up in Basis at the Date of Death.
No Tax Mary gets $100,000 |
| Alex | Mutual Fund | Original Basis is purchase price. Adjusted basis is original price but all capital gains and ordinary income taxed per annual 1099's. Purchased for $25,000 + additional $10,000 of tax basis= 35,000 adjusted basis. $65,000 taxed at 20% LTCG= $13,000 tax | *Full Step Up in Basis at the Date of Death.
No Tax Alex gets $100,000 |
| Betty | Insurance | Assume $100,000 whole life with $25,000 cash value. Loan not exceeding basis is available with no current tax. | Assuming no current loans, Betty gets $100,000. No Tax |
* Full Step Up in Basis: Certain assets are allowed by tax law to have their original or existing basis to be adjusted upwards to the value at the date of death. Many assets- obviously including real estate, mutual funds and stocks not in a qualified plan- get this step up at the date of death.
Annuities, 401(k)'s and other tax deferred qualified plans do NOT have such allowance. Therefore, the beneficiaries MUST pay tax on the asset as ORDINARY INCOME- which is much higher than the Long Term Capital Gains rate.
As a result, the children will net
| Remaining amount after tax | |
| Sue | $65,000 (annuity) |
| Bob | $73,750 (partially taxed annuity) |
| Frank | $100,000 (Roth IRA) |
| Mary | $100,000 (Real Estate) |
| Alex | $100,000 (Mutual Fund) |
| Betty | $100,000 (Life Insurance) |
While it is debatable that a decedent would leave each different asset, it is unquestionably true that many people have life insurance and a 401(k) plan. Therefore, just look at Betty and Sue. Betty gets $100,000 net and Sue gets $65,000 net. The $35,000 is very apt to cause a rift between the two children that may split the family forever- and it all initially looked "fine". Therefore leaving "equal" amounts to each child at death is almost irresponsible since the vast difference in net retained can cause animosity that can last for a generation or two.
Further, assuming Sue wanted Betty to give her part of her money to make the distributions equal, do you think she would do it? Even so, anything that she does give beyond $10,000 becomes a GIFT above the $10,000 annual gift limits and will require filing of federal tax forms (and additional cost for a CPA) and a reduction of her lifetime exemption.
Be very careful in your choice of investments while alive. Be equally cognizant of the distributions upon death. Your will or trust should account for these differences if you wish to avoid the financial conflict that will universally occur.
NOTE: Employer stock in a 401(k) or retirement plan have unique tax treatments that require far more planning than identified above. Make sure you see an advisor far before retirement or leaving your employer.
CHARITABLE GIFTING ANNUITY: The IRS has recently approved an annuity that allowed the donor to select a starting date that is sometime in the future. The example, provided by the American Cancer Society, talked of a donor, age 50, who was allowed to select a starting date by giving the charity three-month notice. The payments could start no sooner than age 55 and no later than age 80. How is it possible that this could work, particularly in view of the fact that a charitable deduction had to be determined? Well, the agreement established the charitable deduction as though payments started at age 60. The payouts available for starting dates prior to age 60 are slightly lower than those recommended by the American Council on Gift Annuities. The donor sacrifices a larger deduction if a starting date later than age 60 had been selected. The trade-off is greater flexibility for the donor.
OLD DRUNKS: (Brigid Schulte) Mentioned year ago, the major reason the elderly fall down is due to drinking. It is estimated that there are 3 million older alcoholics. Perhaps as many as 20% of the elderly have some problem with alcohol. More older people are hospitalized for alcohol than for heart problems. Nearly one-fourth of all those hospitalized over age 60 are diagnosed with alcoholism, with treatment costs as high as $60 billion. 25% of Medicare's costs go to pay for substance abuse among the elderly. And alcohol is the drug of choice. Doctors often misdiagnose the shaking hands, confusion and memory loss of elderly alcoholics as old age.
About 25% of patients diagnosed with dementia, many of whom are mistaken as Alzheimer's sufferers, are actually impaired by alcohol
Most older alcoholics fiercely deny they have a problem. Many live reclusive lives, calling the liquor store for the next delivery, and are nearly impossible to reach.
Families, many of whom live miles away, are often silent. Raised to respect their elders, they either leave them to their "hobby," ignore the problem, don't want to air embarrassing dirty family laundry, or are unable to confront it.
Those who do confront it find, usually after a lengthy search, that only a handful of treatment centers care for the elderly, that treatment costs can run into the tens of thousands of dollars and that Medicare has cut the inpatient treatment it covers from 28 days to five.
The federal government, too, ignores the problem, focusing instead on youths. Research on the elderly gets 2% of the addictions budget; only one of the 14 federally funded addiction research centers is dedicated to studying the elderly.
Older alcoholics have traditionally been divided into two groups: those who've had a problem all their lives, and those who begin to drink to excess only after retirement or the death of a spouse or out of depression.
But the problem is greater still since few elderly- estimated at 10%- ever get treatment. Further, 80% of those who do get treatment will relapse, either once, or for good, within one year.
DYING: The American Heart Association estimates the economic toll of heart disease and strokes will reach 274 billion in 1998 and may get worse because of the growing older population. While there is recent commentary about healthier citizens, the Association indicated that in 1995 over 570,000 heart patients underwent surgery to bypass block coronary arteries compared to 501,000 patients the year before. The average cost of was almost $45,000. In 1995 heart specialists performed almost 420 thousand angioplasty's. They also performed heart transplants on 2,345 the patients in 1996 at an average cost of $209,000. Cardiovascular diseases claimed over 960,000 lives in 1995- more than 41% of all the nation's death. And still not recognized by women is the fact that heart disease is far more prevalent and dangerous than breast cancer. Data for 1995 show that significantly more women died of cardiovascular diseases- 455,052- than caused by cancer of all forms- 281,611 women (see also other data below) . The Association estimates that more than 58 million Americans have had one or more disorders of cardiovascular disease. Of those, 50 million have high blood pressure; almost 14 million have had one more of the disorders such as angina and other four million others had strokes. Hospital and nursing-home care for heart disease patients cost an estimated $120 billion a year. Doctors bills and other charges amount to almost $26 billion. Drugs cost almost $15 billion. Home care and medical equipment cost are more than $10 billion.
STAYING SLIM: For those that had read that gaining weight after a certain age was O.K.- well, a University of North Carolina study indicates it is best to stay slim all the way up to about age 75. The U.S. Department of Agriculture also indicates previous studies were incorrect when they indicated that people could weigh more as they got older. The 1995 survey indicated that people in their 60s should not weigh more than what they did in their 30s. This coincides with a Body Mass Index between 19 and 22. Mortality seems to increase significantly when the BMI reaches 25 and above.
NAICS: (Business Week) Used to be that the government's economic statistics were based on a system that was originated in the 1930s. Now the North American Industry Classification System includes information on more than 300 new industries such as satellite communications to casinos to nail salons- in essence a lot more relevant information set in the future. The first NAICS data will not appear until early 1999 and won't be fully integrated until 2004 at the earliest. But it's going to paint a lot better picture of our new information driven economy.
INTERNET INSURANCE: Insurance companies served only 10,000 customers on the Net, compared to more than 3.6 million customers for banks and 2.7 million for brokerage houses. For those that are perfectly healthy, are getting the insurance amount they "need", and are only looking at term insurance, then the Internet might work (notice I just say, "might"). But beyond that, consumers need to seek out a good agent.
MEN'S AND WOMEN'S HEALTH: (Parade Magazine) Men live about six years less than women. The reasons are as follows
Statistically, it has been shown that men could prevent as much as 70% of their illness by getting regular checkups and tests and eating more healthfully.
But women don't have it all that easy:
Causes of death
Men all ages
Racial differences are also noted:
OBESITY: Approximately 37 percent or 100 million Americans are overweight; 30 million of these are obese. For whites, 32% of men and 33.5%t of women are overweight; blacks, 41.7% of men and 49.6% of women are overweight; Mexican Americans, 39.5% of men and 47.9% of women are overweight. As might be obvious obesity takes a greater toll on women due to the increased risk of Type 2 Diabetes. About 7.2 million American men and 8.4 million women are diabetic- though only about 50% have been diagnosed.
AUTO IMMUNE DISEASES: about 1.8 million males and 6.7 million females suffer from painful, fatiguing autoimmune disorders.
TOP KILLERS OF YOUNG MEN
| 15- 24 | 25- 34 | 35-44 |
| Accidents | Accidents | HIV |
| Homicide | HIV | Accidents |
| Suicide | Suicide | Heart Disease |
TOP KILLERS OF
WOMEN
| 15- 24 | 25- 34 | 35-44 |
| Accidents | Accidents | Cancer |
| Homicide | Cancer | Heart Disease |
| Suicide | HIV | Accidents |
MEN AND WOMEN AND DEATH. At every age, more men die than women. Here is a breakdown:
| Male | Women | |
| At Conception | 56% | 44% |
| Under age 5 | 51 | 49 |
| 30 and below | 51 | 49 |
| 50 -54 | 49 | 51 |
| Over 65 | 41 | 59 |
| Over 85 | 29 | 71 |
| Over 100 | 18 | 82 |
| All ages | 49 | 51 |
CHILDREN'S DIETS: Children who eat high calorie diets with lots of fatty foods increase the risk of developing cancer later in life. Using data from a 1937 study which recorded the diets of 3,834 youngsters, Stephen Frankel, of the University of Bristol, traced them through to adulthood and found that children with the highest calorie diet had a 20% increased risk of dying from cancer.
INVESTING: William Bernstein has articles on the efficient frontier, rebalancing, more both in an intellectual and non academic format on the Internet.
In particular, he states that a portfolio of the S&P 500 index and the EAFE will outproduce the return of the S&P 500 alone and with less risk. But most interesting in his analysis and his commentary on how most managed funds returned even less and with more risk than any of the index portfolios he analyzed.
"One gets the impression that the more degrees of freedom given to mutual fund managers, the worst they will perform. Allow them only to invest in domestic stocks, and their average results will be mediocre. Allow them to invest anywhere in anything and they will perform truly miserably."
MEDICARE SUPPLEMENTAL PLANS: These are also called Medigap plans since they pay for some of the deductibles and co insurance required under the standard Medicare policies A and B. But due to the substantially increased in costs over the last couple of years, most insurers have raised their premiums by roughly 15 percent annually each year for last two years. AARP is indicating that the increase for 1998 will be 13 percent. While plan prices vary tremendously from state to state and within a state, it may not be unreasonable to pay around $100 per month for a average coverage. With a Medicare HMO you'd pay nothing. And the :extra" $1,2000 in savings could be used to pay for a Long Term Care Policy.
SOCIAL SECURITY: In 1997, the system paid out $369.9 billion benefits- about 90 percent of the taxes received of $409.1 billion. The difference, $39.2 billion, plus $43.6 billion of interest credited to the fund, accounted for the $82.8 billion increase in the trust fund balance during the year. However, the trust fund offsets deficits in all the other functions of the federal government in all commonly reported discussions of the federal budget deficit. In other words, "creative accounting".
PROSTATE CANCER: One in 6 men get it. 33% with prostate cancer die from it within one to 10 years. The death rate doubled in the 1990's.
BREAST CANCER: It is the Number 1 cancer diagnosis in women and kills about 43,900 per year (and about 290 men). The death rate stabilized in the 1990's.
IMPOTENCE: 6% of men age 18- 24 and 33% over age 60 have problems with impotence
SUICIDE: Women attempt more suicide but men fatally committed four to seven times more often.
MARKET TIMING: According to Terry O'Dean at UC Davis, what appears to be random investor behavior might actually be psychologically mandated. Individuals tend to overweight highly publicized information and under weight regular statistical data. As a result, they are apt to bid up stocks when there is some PR news that seems worthy(?)-however it may take them months to react fully when earnings exceed expectations. This phenomenon is known as post-earnings-announcement drift. The article from Smart Money indicates that investors give routine announcements like earnings relatively little weight and wrongly see any good news as strictly a one-shot affair.
"Bear in mind that brains and learning, like muscle and physical skill, are articles of commerce. They are bought and sold. You can hire them by the year or by the hour. The only thing in the world NOT for sale is character."
Antonin Scalia
HEALTH CARE COVERAGE: There are fewer employees that have health care coverage- 61.5% in 1988 but only 56.6% in 1997. Some feel it could drop to the low 50% range as employers use more temps and contract workers. Small business employers provide even less coverage.
LOADED FUNDS OUTPRODUCE NO LOADS: (Ticker Magazine) Seems like an impossibility doesn't it? Not quite. Dalbar looked at the returns investors actually received and concluded that over the 12 year period ending in 1995, investors using direct marketed equity funds (no loads) had total returns of 97.9%, while those sold by an broker with a load produced a 114%. At first glance this doesn't make sense, but when you add in the psychology of various investors, it becomes very clear as to what is happening.
While I might rail at the fact that brokers have little training, it is still usually greater than that of the average investor. This increased understanding of the marketplace normally dictates that monies stay invested for longer term growth rather than going in out and attempting market timing as many individual investors to. Hence, though an individual investor is paying less for the no load funds, they lose that edge and more as they try to move in out of the market for some supposedly extra gain. They just haven't done their homework and it shows.
TRADE DEFICIT: Around 1983, I commented on how could the stock market rise when faced with high inflationary pressures, high trade deficit and a large budget deficit. But I learned if the market wanted to go up, it may do so irrespective of other negative implications. Admittedly, the trade deficit did cause a problem in 1987. But that impact was rather short-lived and we then went on to see a record market. Nonetheless, while the budget deficit may have been restrained most recently, there is still a skyrocketing trade deficit. Does it matter? In terms of the amount, yes, it is greater than previous. However it represents just 1.2 percent of gross domestic product compared to three percent in 1987. Literally all analysts expect the percentage to go higher as the Asian crisis affects us more through increased imports. But some of that will be off set by (hopeful) increased sales to Europe. And approximately 40%of imports are from U.S. foreign affiliates. That means that a good portion of those companies profits end up back in the U.S. anyway. In summary, while I and still concerned about the trade deficit, it is not as contentious an issue as it was in the '80s.
DEAD FOOD: The GAO announced that the government could save 8.5 million dollars by not giving food stamps to 26,000 dead people. I disagree. This is clearly reverse discrimination and the practice should continue. After all, look how emaciated dead people get in just a few weeks.
MEDICARE VERSUS HMO COVERAGE: (Atlanta Medirisk): For 409 out of 500 most common procedures, Medicare pays more than HMO's in some areas.
MALNUTRITION: (AARP & Research Triangle Institute) Between 25% and 30% of all nursing home residents are underweight with 10% to 14% experiencing significant weight loss. Of 2,100 residents in 255 nursing homes in 10 states, 31 were underweight enough to put them at risk for premature death. What was most significant- at least to me- was that in the highest quality care homes, the weight loss was apparent in only 9% of patients while in the poorest quality homes marked weight loss occurred in 23%. The article noted it was staffing, staffing, staffing. "In the homes with too few employees, a heavy patient load makes it hard for the staff to devote the 90 minutes it may take to get a patient to eat jut one 600 calorie meal."
A nursing aide might be responsible for 7 to 9 patients on the day shift and 12 to 15 on the night shift.
My point again is that if you can afford long term care policies, buy them in an amount that can assure you of the proper care. Trying to get on Medicaid may mean you or your loved one ends up in a facility that is short staffed. If you have affordable options, USE THEM
YRTOGIB: Doesn't make sense does it? Well, it's spelled backwards. But, even spelled properly, it still doesn't make sense
LAZY INVESTORS: According to SEC chairman Arthur Levitt, many investors are lazy, making them easy prey for get-rich-quick schemes on the Internet.
FINANCIAL ADVISORS: (Opinion Research Corporation International) Most investors who use a financial advisor are satisfied with the services they receive, BUT only 18% of all investors engage a financial professional. The national survey indicated that 71% of consumers invested in some sort of financial instrument, but 68% of them used amateurs, family and friends, for advice.
GAMBLING: This is a problem with adults but it is increasingly an issue with teenagers. From 1994 to 1997, researchers found that 1.29% of all adults in U.S and Canada had a gambling disorder compared with about 0.84% between 1977 and 1993. However 3.88% of teenagers currently have had a gambling disorder within their past. Further, those with alcohol and drug problems had higher rates of 14.23%
ACTIVE MANAGEMENT: Josef Lakonishok of the University of Illinois, Andrei Shleifer of Harvard and Robert W. Vishny of the University of Chicago are three professors that wrote "What Do Money Managers Do?". They looked at a database of roughly 1,000 institutional money managers from 1985 through 1993. They partitioned the S&P 500 Index into ten equal pieces by various valuation measures such as price to book, price to earnings, price to cash flow and price to dividends, etc. and reviewed how heavily the money managers owned each of the ten slices of the market.
And if active money managers were really doing their jobs and were purchasing stocks in a particular area, they would clearly be shown to own such stocks in their portfolios. Sounds absolutely logical. WRONG!! Most of these active managers just bought stuff that reflected the "middle of the road". As regards p/e ratio, 61% of these money managers' assets held stocks in the middle three areas that defined neither pure growth nor pure value. (By contrast, just 30% of the S&P 500's assets are located in the central three tenths.)
The professors called this "central bunching": the tendency of money managers to put the bulk of their assets in the same stocks that everybody else owns. This therefore is corroborating commentary to most Nobel Economic award winners that fund managers are unwilling to chance high returns because they are unwilling to chance low returns- and hence getting fired. "On average," they write, "professional fund managers construct their portfolios so that, in the aggregate, they look like the [typically valued] stock in the S&P 500."
So, should you buy active management? Probably not unless you can clearly show the research that the fund manager is heavily in the area you have researched to generate greater returns, is within the risk level you can accept and has a good history of producing returns in excess of an index. If not, you are better off using a passive approach.
401(k): (WSJ) 60% of departing employees who had 401(k) plans take the money and spend it for credit card bills, home purchases, etc. And 80% of employees with less than $3,500 in such a plan when they left spent all their money. Only 4% with assets over $100,000 did. Unfortunately, the new law allows employers to terminate plans with less than $5,000 when an employee leaves, so low wage worker will be hurt all the more since, when they get the money, they almost undoubtedly will spend it rather than rolling it over to an IRA.
SMALL BUSINESS ESTATE TAX EXEMPTION: Such businesses can exempt $1.3 million from an estate NOW- with major caveats. The business must be at least 50% of the total assets and the beneficiaries must have participated in the business for the prior five years and FOR THE NEXT 10 YEARS or the IRS can come back and penalize.
LONG TERM CARE: This should be fairly representative of the costs of buying a long term care policy when you are younger. Assume care is not needed till age 80.
| Age | Daily Amount | Annual Premium | Total Premiums Paid to Age 80 |
| 50 | $100 | $1,032 | $30,960 |
| 60 | $160 | $2,273 | $41,460 |
| 70 | $250 | $7,560 | $75,600 |
MORTGAGE SCORES: A service provided by FICO scores individual purchasers for a mortgage from a low of 450 to a high of 850. A FICO score of 680 is considered good enough to not require any further review by an underwriter. An "A-paper" loan may still be made with a 630 FICO score if reviewed by an underwriter. Some lenders offer premium pricing for borrowers with 700 or 740 scores. There is a one in eight chance that a borrower with a FICO score below 600 will be either severely delinquent or in default of their loan. There is only a 1 in 1,300 chance that a borrower with a scores above 800 has similar delinquency problems
CREDIT HISTORY: What happens if your credit reports shows inaccurate information? Well, you do have rights and you certainly need to put any dispute in writing. One article noted that it must be a certified letter to each of the three major credit reporters. Then they have to prove that their information is correct within 30 days. If not, the problem area must be deleted. The law that protects you is at
http://www.law.cornell.edu/uscode/15/1681i.html
CBI/Equifax
P.O. Box 740256
Atlanta, GA 30374
(800) 685-1111
Experian (TRW)
P.O. Box 2105
Allen, TX 75013-9505
(800) 422-4879
Trans Union
1561 E. Orangethorpe Avenue
Fullerton, CA 92631-5207
(800) 858-8336
(316) 636-6100
401(K): (Business Week) There has been a lot of controversy regarding whether or not investors in 401(k) plans were in for the long haul or would change investments at a whim. Well, when the market dropped in October last year, they tried to do a lot of market timing. During those first few days of the correction, trading volume was four times the average level. The survey noted that a lot of money went back in into international markets and some company stock in the hopes of catching the bottom of the drop. Rebalancing is fine when looking at the long term, changes in P/E Ratios, economics and so forth. But you need to remember that asset allocation constitutes about 94% of the return on a portfolio. Market timing is a scant 2%. 4% is for stock selection. But the 6% of their portfolio is where people put at least 75% of their efforts. Illogical
LIFE INSURANCE: Traditional life insurance policies may not be profitable for the company til the seventh year- primarily after paying the front end commission. Of course, it takes a lot of years for the policyholder to become profitable- they effectively pay the front end commissions. And many policyholders have a change of heart after buying the traditional policies. A study by Bragg and Assoc. said that 15.9% of all whole life policies are in force for just ONE year. In years three though five, another 5.7% lapse the policy. Universal life, which is cheaper loses about 8.1% of policyholders in the first year and about 9.5% of the remaining are closed out after the second year. After 6 years, about 40% of all whole and universal life policies have lapsed. End result? Neither the company nor the policyholder gets any benefit. Just the agent from the front end commission. That's not to say that an agent should not be compensated. But people end up using the wrong agents to begin with and that's why they are sold policies they simply may not need. Yes, you can (partly) blame an agent. But the consumers must accept at least 60% of the responsibility for not doing enough homework- if any!
That needs to be put into further context in that, according to a LIMRA study, 35% of households knew they did not have enough life insurance. But since they felt uncomfortable about trusting an agent (and undoubtedly equally uncomfortable about death in itself) they were doing nothing.
MORE INSURANCE: As stated, one of the reasons that some people do not buy insurance is simply because they do not trust insurance agents. Dow Jones Investment Adviser had some pertinent comments in November by summarizing an article with, "after talking with many persons in all corners of the industry, it becomes clear that too many insurance home offices are still run by industry veterans whose mindset hasn't changed much from the 1970's. They still think that every breadwinner should own life insurance and that people have to be tricked or coerced into buying it".
Even if you do find somebody attempting to do the job correctly, they simply don't have the requisite skills. The article went on, "the problem is that even many of the people selling the product don't have a good understanding of it. If they don't understand it, then there is no way the person who is buying it is going to have a clear understanding." "When the consumer talks to a life insurance agent, a lot of the time, neither has a clear idea of how the numbers work. The agent is trained to avoid clear answers anyway, he really has no choice." Insurance companies will "have to demistify the ir product lines or lose any chance of regaining the public trust"
AND MORE INSURANCE: Term insurance has grown from 33% of the market in 1985 to 50% in 1997. Whole life was 88% of new premium dollars in 1986 is now down to 18% of the face amount written in 1996. What has taken over? Well, of course universal life really beat up whole life. But variable life has come on to the scene during the last few years and acquired a lot of business. So, is variable any good? Nope. People are sold variable life- it is rarely bought.
ARBITRATION: An article in Hemisphere magazine noted that the "SEC by statute has oversight and regulatory responsibility" for arbitrations. True, but Jack the Ripper overseeing a hospital's emergency room is not exactly what I call beneficial. O.K., sure there is some oversight, but ask yourself this- since there are NO requirements for a broker to know anything about stock- and since there are NO requirements for an arbitrator to know about stocks- and since there are NO requirements for an attorney (of either side) to know anything about stock, any final judgement is almost universally based in part (and sometimes a large part) on an emotional argument, not a rational presentation based on facts. The article- as with most others- talks about getting referrals to brokers so you can weed out the unethical ones. Sorry, won't work. Referrals don't weed out the unknowledgeable ones- nor necessarily the unethical ones. You should get my article called Who Can You Trust. It's fairly long, but also the most complete document to date in finding a solid adviser. Too busy to read? O.K., then you are also too stupid and will probably get screwed sooner or later.
INDEXED ANNUITIES: The insurance industry has tried to provide products that take advantage of the significant gains of the stock market. But how in the world could an agent sell a security product without being licensed? Stupidly is most obvious. But the law does provide an exemption under Rule 151. This rule is a set of criteria and if an insurance product meets those exemptions, it is exempt from the securities registration.
From an LSW article, "insurance products are exempt from registration as securities under Section 3(a)8 of the 1933 Securities Act which defines insurance products as "any insurance or endowment policy or annuity contract or optional annuity contract issued by a corporation subject to the supervision of the insurance commissionser, bank commissioner, or any agency or officer performing like functions of any state or territory of the U.S." Rule 151 was adopted in 1986 as a safe harbor definition
(The value of the contract does not vary according to the investment experience of a separate account)
(The insurance company guarantees the principal amount of the purchase payments and interest credited to the policy less any deduction the company makes for sales, administrative or other charges and expenses and credits the a specified rate of interest to net premiums and interest credited thereto.)
(The insurance company guarantees that the rate of interest to be credited in excess of the minimum guarantees will not be changed more than once per year.)
O.K., let's get real. This product is sold as an investment by insurance agents who have never had any background in investments whatsoever. They should be licensed and it may happen soon.
401(k): One VP of financial education said that "participants attend boring seminars describing the plan and its investment options....." All too true. But that is because the companies have not done enough research to seek out those individuals who not only know the subject matter, but can teach it effectively as well. Most human resource people apparently think anyone can provide instruction that will suffice under 404(c) codes. But just you wait until a few law suits happen and they will change their tune real fast.
Here is another reason for some suits- fee, fees, and more fees. There are now about 900 billion in assets distributed over 250,000 plans for over 25 million participants. You'd think that with that number there would be some economy of scale regarding lowering of fees. But for many participants, the company sponsors simply found a way to get the employees to pay for all the services. However, finally, the Department of Labor is looking into the "problem". Olena Berg, Assistant Secretary of the Dept of Labor for Pensions and Welfare Benefits asked "are employees paying too much? Are they ill informed? Are fees buried or hidden?" Does the Pope wear a pointy hat?
One 401(k) research firm noted that small firm employees get hit the hardest with fees reaching 2.87% of assets managed. The lowest fees were 0.73% of assets- the average 1.29%. Now those costs were just for managing the fund. There are also administrative costs such as record keeping that may be charged directly to employees. In fact Access Research noted that the charges to employees for such work was now being paid by 24% of employees- up from 7% just two years ago. And employees may get charged indirectly. Some fund companies like Merrill Lynch and Fidelity low ball administrative costs and then try to make them back by high expense ratios. Perfectly legal- though not ethical.
Watch for changes as time goes on with reduced fees and more insightful and beneficial education. It's about time.
ALZHEIMERS: Dementia doubles about every five years with about 5% affected at age 65 to about 35% at age 85. 60% to 70% of senile dementia is Alzheimers. People who go to school longer have less risk to Alzheimers. This "increased cultural reserve" simply forestalls the disease to a later age- perhaps by five years- at which point you may simply be dead. In the Netherlands, 22% of those diagnosed with Alzheimers elect assisted suicide. The two worst ways to die are AIDS and Alzheimers
Alzheimers is the Death of the Mind Before the Death of the Body
WAR: Two million children have been killed and more than 6 million seriously wounded in wars and civil wars around the world in the past decade alone.
NUTRITION: The American Institute for Cancer Research estimates that if people were to eat just the recommended five or more servings of fruits and vegetables each day, overall cancer incident rates could decline by as much as 20%. It is also estimated that 33% to 50% of breast cancers could be prevented by diet and related factors and as much as 33% of lung cancers and 75% of colon and rectal cancers could be avoided though dietary choices.
INCOME DISPARITY: (Business Week) A book titled Unhealthy Societies: The Affliction of Inequality notes that mortality increases for the poor in societies where the disparity between the rich and poor is more pronounced. But several studies, including one at Harvard, showed that "income disparities were associated with higher state death rates from cancer, heart disease, infant mortality and homicide." That means that irrespective of the poor, race issues, etc. overall mortality was higher in areas with more financial inequities. And since the U.S. is getting more of the haves and have nots, this problem will only get worse.
DOW DOGS: You have undoubtedly heard about investing in the 10 Dow stocks with the highest dividends, hold them for a year and then adjust the portfolio to pick up those that fit the new criteria for the next years. In the past 50 years, this would have resulted in an average nontaxable annual gain of 16.7% versus the Dow's 13.7%. Of course one has to pay taxes on any gains in those stocks that had to be sold. And now that long term gains require 18 months for the best tax benefit, such gains should be taxed at the much higher (normally) ordinary income rates. Studies now show that unless the stocks are in a non taxable account, it simply may not be worthwhile to invest on a taxable basis.
INTERNATIONAL PENSIONS AND THE CONTINUATION OF THE STOCK MARKET: (BW) Many of the European pension funds are underfunded and may be reaching a crisis point. Others simply pay out to much to pensioners- France pays nearly 70% of an employees gross salary; Germany about 50% and Britain and the Netherlands at about 30%. Employees are concerned that they may not ever get what they are "owed" are taking an initiative to investing the marketplace by themselves."But Europe's move to a single currency could be the catalyst for (further) change. That's because budget minded limits mandated under the European Monetary Union regulations make in increasingly difficult for government to subsidize state pensions." Some estimate that all the reforms will increase European pension assets by ninefold to $9 trillion by 2020.
Of course not all of that will go into the stock market, but a heck of a lot of that WILL go into various funds that might sustain long term growth for some time to come. Interesting.
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