MOODY'S REVIEW

DECEMBER 1997

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

ERROLD F. MOODY JR.

BSCE, LLB, MBA, PhD

MASTER OF SCIENCE IN FINANCIAL PLANNING

REGISTERED INVESTMENT ADVISER

VITAMIN E: (University of California at Berkeley Wellness Letter) This well recognized letter stated further significant benefits of using Vitamin E. for fighting serious illness. "Because of the increasingly promising news about Vitamin E -- generally in doses far too large to get from food -- we continue to recommend Vitamin E supplements (200 to 800 IU daily)"

Cambridge and Tufts Universities that show Vitamin E may play an important role in preventing heart attacks and may strengthen the immune system. The article concluded that Vitamin E has shown the most potential in the prevention of heart attack.

COMMISSIONERS (NAIC): While I have previously discussed the changes the NAIC is making to policy illustrations, here is the most recent summary. An insurer or its producers shall not

• Represent a policy as anything other than a life insurance policy. (Too bad Met, New York Life, Prudential couldn't have figured that out previously)
• Use or described non guaranteed elements in a manner that is misleading or has the capacity or tendency to mislead.
• State or imply that the payment or amount of non guaranteed elements are guaranteed
• Use an illustration that does not comply with the requirements of this regulation
• Use an illustration that at any policy duration depicts policy performance more favorable to the policy owner than that produced by the illustrated scale of the insurer whose policy is being illustrated.
• Provide an applicant with a incomplete illustration
• Represent in any way that premium payments will not be required for each year of the policy in order to maintain the illustrated death benefits, unless that is a fact
• Use the term vanish or vanishing premium or a similar term that implies the policy becomes paid up, to describe a plan for using non guaranteed elements to pay a portion of future premiums
• Except for policies that can never develop non-forfeiture values, use an illustration that is lapse supported
• Use an illustration that is not self supporting

An agent that does not comply is subject to fines, loss of license and termination by carriers. The only problem is that the regulations are NOT mandatory- the NAIC is a voluntary organization and the states must decide whether to stipulate the rules within their state.

I repeat this comment- life insurance is unquestionably the most difficult area of finances to understand- particularly since the companies do not explain how they developed the products. And when you put investments along with the insurance, it becomes even more difficult. After doing the research, I have concluded that when you need insurance- just buy insurance. Any investment angle should be purchased SEPARATELY and that includes cash value.

Never buy insurance from (just) an insurance agent! There are far more astute people to use.

UNBELIEVABLE: In Vanguard's Spring Retirement Resource bulletin, the had WRONG tax information regarding the removal of employee stock from a retirement plan. It took over a week with the IRS and several individuals at Vanguard to get it straightened out, but they never bothered to correct their error.

PENSION DISCREPANCIES: Almost all retirees receiving pensions believe that the money they get has been accurately calculated. Not so- as much as 50% of the pensions may be in error. One firm- National Center for Retirement Benefits, 800 666-1000- found that incorrect interest rates assumptions had shortchanged 7,130 GTE employees in the amount of $18 million. There are other firms that can help and they all take a piece of what they can find as an error- if any.

If you want more information on your pension rights, go directly to the Pension and Welfare Benefits Administration at 800 998-7542.

INTERESTING STATISTICS: Monday is the worst day of the week for the market. Since 1952, the average Monday has shown a negative return (though recent Monday's are getting better). Every other day of the week is more up than down (Friday at 57%)

The last four days of the month and the first day of the following month produce the highest returns. The market has risen 52.4% while the best five days have produced 56.4% per the Stock Trader's Almanac.

December and January are the two best months while September is the worst. (A lot of people pick October),

Since 1832, the election year and the year just before have produced stock market returns that are more than 7 times greater than during the other two years of the election cycle.

The worst year is the year after an election. Since 1932, there have been 22 losses and 19 gains for a net loss of 3%. In the year before an election, the market had 28 gains and 13 losses for a net gain of 295%.

The worst year of a decade is the seventh. Since 1885, the market has declined 8 out of 11 times in a year ending in a "7". The market has always returned positively in a year ending in "5".

Do these number destroy the efficient market theory? Perhaps not quite, but very VERY close.

ASSISTED SUICIDE: See where Oregon's law for doctor assisted suicide is valid? "A competent terminally ill person can ask a doctor to prescribe a lethal medication." Good for the Supreme court. Sure, some of you may not like this, but I have had enough crap that has happened in my life not to allow a totally degenerative existence to be extended by some twits that never knew me. Yes, society has the right to tell me to drive 65 miles an hour on the freeway. But it has no right to tell a COMPETENT person who is dying that the last few days or weeks of their lives must be infused with added undeniable pain, suffering, mess and indignity. Dying sucks- no sense in making it worse (only 20% die "nicely and quickly". The other 80% is in mess and pain.)

COBRA- If you retire and are not yet age 65 and therefore not covered under Medicare, you can opt for continued coverage with COBRA under your companies health plan for 18 months. You pay 102% of the premium.

FAIR PRICE: (WSJ) Instead of valuing the entire portfolio at the end of the day, the SEC has allowed funds to use "bits of info" like the trading of futures to determine the value of the underlying stock. But it is being reviewed in light of the significant market drop a couple months ago.

MEDICAL CARE: A Business Week article said that only 17% of employees spent more than 1 hour reviewing health enrollment plans. They noted that informed consumers had forced hospitals so improve practices after they were exposed to market forces

ALCOHOL: (Brookdale Center on Aging) The largest segment of the alcoholic population in the United States is made up of widows over the age of 65

REGISTERED INVESTMENT ADVISERS: There are 20,000 investment adviser websites and about 100,000 websites relating to broker declare activities. But there are only 20,000 licensed investment advisers in the United States.

S&P 500: (Forbes) Standard & Poor's estimates that up to 8% of the U.S. stock market's $9 trillion in total capitalization is indexed as of 1997, up from 7% of $4 trillion five years ago. Most of that money is in institutional funds like pensions, but a lot of individuals have bought these funds during the last few years. Apparently, about 20% of the money going into mutual funds up through March of 1997 went into indexed funds. That's up from less than 3% in 1994.

The S&P 500 is an index weighted by market capitalization rather than weighted equally among all 500 stocks. That means the most popular stocks account for the bulk of the index. Though there are 500 stocks in the index, the stocks at the top -- Coca-Cola, Philip Morris, Microsoft -- have a weighting several hundred times that of stocks at the bottom such as Alexander & Alexander, Armco and Giddings & Lewis. The standard deviation of the index, measured by the Vanguard 500 index fund, was 10.2% over the past five years. That translates into a normal daily movement of 0.6%. Over a more recent period- the past three years- the standard deviation has climbed to 11.6%. In 1996 the S&P 500 moved up 1% or more on 21 trading days and down 1% or more on 17 trading days. That's three times the number of days experiencing a 1% move in 1995.

That said however, one must realize that the deviation in the 90's has been considerably less than the historical averages and that we may be simply returning to the mean.

WHERE TO DIE(?): Here is another quirk in medical treatment for the dying. Dartmouth researchers of 37 million patients in 1994 and 1995 found that many on the East Coast are twice as likely to die in a hospital as people in the West. Older people in Miami, New York City and parts of South Texas are especially likely to spend the dying days in a hospital. They also found a five fold difference across regions in the percentage of patients who spend some of the last six months of their lives hooked up to tubes in an intensive care unit. The variations exist even though there is no evidence "that residents tend to be any sicker or to live any longer in the places where patients receive the most medical treatment." They said that some of the government's spending on dying patients- now about 1/3 of all costs of Medicare- is simply not needed.

Some inequities- about 46% of patients in Miami are treated in the hospital's intensive care unit during their last six months of life.

Medicare patients in Newark NJ and parts of NYC may spend up to 20 days in a hospital during their last 6 months of life. Those in Salt Lake City spend just 5.3 days.

Medicare spends an average of $16,571 for hospitals in Manhattan during a patients last 6 months of life. In Oregon, the cost is about $6,000. The average national cost is $9,000, $12,543 in Chicago, $14,212 in Miami and $15,399 in Harlington, Texas. (Such costs do NOT include doctor bills and patients out of pocket expense which would probably double the cost.)

Nationally, about 35% of all Medicare deaths occur in a hospital.

Now, my father died in a hospital just a few months ago. He was stuck on tubes and tubes while he entered the never never land of terminal death. They finally put him on a morphine drip so he go the peace he needed. Was it costly? Yes. Was all of it needed? No. Where is the line drawn? I don't know but terminal suffering should be shortened by allowing a certain death to occur earlier, and with more dignity.

OLD VERSUS NEW S&P: The changes in the S&P underlying stocks has provided an index with higher growth, more global, less cyclical and more diversified than it has ever been before.

MEDICARE PART B: Participants only have to pay 25% of the actual cost of care (don't ask me who thought that up) and due to the budget shenanigans will not be raised in 1998 from its current $43.80 per month (which is simply deducted from an individual's Social Security payments)

CANCER: A cure for cancer is apparently not around the corner. Doctors have found the rate of cancer deaths actually rose an average of 0.3 percent per year between 1975 and 1994, compared with a 0.1 percent rise from 1950 to 1975. It peaked in 1991 and is apparently declining a bit because fewer people have been smoking in recent years.

Most notably, when comparing younger and older cancer victims, they discovered that the death rates for people 55 and older has increased by 15 to 20 percent even as the death rate among people under 55 has decreased by about 25 percent.

Lastly about 80% of most cancer is preventable- diet , exercise, staying out of the sun, etc.

GENERATION SKIPPING TRUST: These are sometimes known as a dynasty trust since it is an attempt to pass assets down to later generations. Each person has the ability to pass $1,000,000 ($2,000,000 for a married couple) to later generations without additional taxation (though still subject to standard estate taxes.) In essence, these are long term trusts that can extend 21 years beyond the death of the last to die of all the trust beneficiaries. So if your youngest grandchild is a newborn and lives to age 85, then the trust can extend for 106 years (85 + 21 years). The key to the scenario is that while the trust does not escape initial estate taxes, it does escape taxes later on as the assets are distributed from the trust because the principal has already been taxed. The amount that the principal can grow to is enormous. Assume the trust was funded with $1,000,000 (probably with life insurance in order to leverage any funds to the maximum) and the estate tax is paid from other funds. Further assume it grows at 8% (2% less than the historic average for stocks) for 106 years before the final distribution. That's $3,490,744,654!!! However I'll be a little more realistic by using just $100,000 at the same time and return. That's still $349,074,465!!!!!! The trustees are normally given broad latitude to use the trust principal and/or principal for the benefit of the beneficiaries. One has considerable latitude that almost means full ownership (though never quite) and also might include spendthrift provisions that restricts a beneficiaries ability to the money and also protects the assets from creditors. Such clauses can also prevent a beneficiary's spouse from attaching the assets in case of a divorce. There can be an incentive to beneficiaries in that they won't get any money unless they can prove they are productive working members of society. (I did that on some straight trusts. The child had had problems with the law and would only be able to get an inheritance if he could show to the trustees satisfaction that he was working and not in problems with the law. Otherwise, it went to charity.)

CHILDREN: (National Center for Health Statistics) Children without health insurance are 6 times more likely to go without needed medical care, 5 times more likely to use the hospital emergency room as a regular source of care, and 4 times as likely to have necessary care delayed than children that are insured. A study by the Children's Defense Fund indicated that 2.6 million uninsured children -- one in four uninsured children -- were unable to obtain needed medical care in the past 12 months. Additionally, 2.3 million uninsured children- about one in four- either used the emergency room as their regular source of care or had no regular source of health care.

• Uninsured children living in the South and West were significantly more likely to lack a regular source of health care- (25% uninsured children in the South and West)- 11% in the Northeast and 15% in the Midwest.

• In families earning below $20,000 a year, "delayed medical care was reported twice as often for white children than for black children."

• Uninsured Hispanic children were significantly more likely to lack a regular source of health care -- one in three (33 percent) uninsured Hispanic children, compared to one in six uninsured White (17 percent) and Black (18 percent) children.

NURSING HOME OCCUPANCY: Surprisingly to many people, it's on a national decline:

• Occupancy of nursing homes fell nationally one and one-half percent from 1995 levels to 83% in 1996. Hawaii led the nation in declines with 11%, followed by Ohio at 5%, and AR, WY, LA, ME, NV, OR, and IA each with declines of between 3% and 4%.

  
  

• States with increases in occupancy were DC (7%), AZ (3%), CT and RI (3%), DE (2%). Smaller gains were posted in CO, NJ, NC, UT, WI, and WV.

  
  

• While the number of nursing-home residents remained virtually constant in 1995 and 1996 at about 1 ½ million, the number of residents who paid privately fell 2.3%, continuing a trend. Medicaid was the primary payer for about 68% of residents. Medicare's number's in nursing homes increased 12% over 1995. (Cowles Research Group)

401(K) LOANS: 1/3 of all 401(k)'s have loans. The GAO estimates that those that take loans will have 30% less at retirement than those that do not

STOCK HISTORY: Since 1925, stocks have returned 10.7% annually, Intermediate bonds 5.2% and inflation at 3.1%

SOCIAL SECURITY INCREASE: Due to the efforts of Volcker and Greenspan, inflation has dropped. As such, SS payments in 1998 will increase just 2.1%

The average monthly benefits are

Retired Worker	$765
Retired Couple	1,288
Widowed Mother with two children	1,522
Elderly widow(er)	731
Disabled worker	1,198
Supplemental Security Income- individual	494
Social Security Income- couple	741
Maximum annual earnings subject to SS tax	68,400, up from 65,400

CALIFORNIA LONG TERM CARE PARTNERSHIP: This is a plan that allows you get on Medicaid while still leaving assets to your beneficiaries. Assume you bought a California LTC policy for $40,000. Once you entered a home and had used up the $40,000, you could go on Medicaid but still leave $40,000 to your heirs- unlike the basic Medicaid requirements that requires effectively all assets to go to the state once you are on Medicaid. The "stupid" part is that, while all California agents must take a full 8 hour course to sell regular LTC policies, the California program requires an ADDITIONAL 8 hour program. That's a big joke since, as an instructor for the regular 8 hour class, I can tell you that there is little that can be provided in another 8 hours. So there are hardly any sold. Only 4,800 were sold in the first 2 ½ years. They say that that is successful. Not to me. I think they could have (and should have) sold a lot more were they more realistic in their licensing requirements.

FIGURES CAN LIE AND LIARS CAN FIGURE: Mark Carhart, a finance professor at the University of Southern California, did a study on diversified equity funds between January 1962 and December 1995 to incorporate those funds that went out of business during that time and what impact they might have had on the return of the market overall.

Out of 2,071 funds, 725 (35%) are no longer around due to combining with other funds or just going out of business. His study showed that about 3.6% of all funds terminated annually.

If you analyze all the diversified fund returns during that time, it shows a 10.7% compounded. That compares favorably with the S&P 500 at 10.6%. But if you include those funds that are no longer around (and must have a bad return to have gone out of business), the average return drops to 9.5%.

He also found that those funds that took the greatest risk had the greatest chance to fold (seems logical). 242 of 614 aggressive growth funds terminated between 1962 and 1993 (39.4%) 277 of 827 long-term growth funds (33.5%) and 206 of 630 (32.7%) growth & income funds went under (not much better statistically).

Part of the key to that study is just how much extra return the aggressive funds provided. Statistics indicate that during this period, growth & income funds returned 10.8% compounded annually; long-term growth funds, 11.5%; and aggressive growth funds, 13.5%. But, after deducting for the returns of terminated funds, growth & income funds returned 10.39% compounded annually; long-term growth, 10.44%; and aggressive growth, 11.6%- a considerable drop.

The 725 funds showed very low returns during their last five years of existence (expected) were scary in more than one way. They underperformed the average fund by about 20 points (remember 44 Wall Street?) They also charged much higher annual operating expenses; 1.44% versus 1.07%. (If you don't think nothing like this could happen now, recognize that the Steadman funds charged up to 3% and just recently went out of business).

The point that needs to be addressed is that one cannot invest in a vacuum. Most of these terminated funds may have had some good years, but when they stumbled, many investors paid no attention, didn't want to admit they made a mistake or simply held on hoping the funds would come back (remember that's exactly what happened with Steadman and other funds.) If you had paid attention, you would have rebalanced the portfolio to adjust for the lousy performance.

STOCKS AND THE CAPITAL GAINS TAX: A CBO study said "76.6% of U.S. families owned assets such as stocks, bonds, real estate, businesses and homes that could potentially produce a capital gain. Excluding homes, about one-half of families owned assets that could be affected by a capital gains tax cut. Investments that generated capital gains accounted for about 38 percent of the total wealth of families, homes accounted for another 28 percent and pensions for 19 percent."

"About one-third of taxpayers reported at least one transaction with a capital gain or loss over 10 years."

"Older people accounted for a ``disproportionately larger'' share of taxes paid on capital gains. People 65 years and older accounted for 12 percent of all taxpayers in 1993, but they paid 30 percent of capital gains taxes."

"Excluding homes, nearly one-half of all families own at least one capital gains asset, and thus, taxes on capital gains potentially affect a significant portion of the population.''

"In 1992, about 30 percent of families with incomes under $20,000 owned capital gains assets, not including homes. That percentage rose to 50 percent for families with incomes $20,000 to $50,000. More than 90 percent of families with incomes of more than $100,000 held such assets."

I am not positive what impact the lower capital gains tax will have. It could bring in more tax money as people that have withheld assets from the marketplace find a cheaper way to sell and may deluge the market with assets. But it could also reduce the amount of tax overall. Further, it is doing nothing directly to the lower and lower/middle class families who won't get enough money to save from this lowered tax.

GOING UP AND DOWN: US stockbrokers totaled 649,000 in 1996, vs 434,000 in 1991. The Securities & Exchange Commission (SEC), which had a budget of $369 mil in 1996, contained 934 regulators and was involved in 453 enforcement actions.

FINANCIAL CALCULATOR: Think my comments about brokers, insurance agents and financial planners and the HP12C don't have merit? Here is an Email from a recent visitor.

"My wife and I have saved $50,000 and were about to begin investing for retirement etc. with Wells Fargo Securities--when I came across your incredible web page--and found out no one there used or knew of a HP12C. Needless to say, we are holding off on any investments with anyone until we are significantly more educated on whom to trust, our budget and goals etc."

That's exactly what I want you to do- more research. And end up using only those people who have the requisite fundamental background. If it is you, fine. Otherwise, hire somebody to get you going in the right direction. And if at least one of you does not know how to use the HP12C, then you are almost doomed to failure- or at least too much risk.

NEW MEDICARE: Starting in 2003, you will be locked into the Medicare plan you select for at least 9 months before you can change. The selections are

1. Standard Medicare A and B. But you pay for deductibles and co-insurance. If you want those covered in some manner, you need to buy a Medigap plan.

2. Medicare HMO's- these are used by about 14% of all enrollees. You pay nothing extra for the coverage. You are restricted to the HMO's plan and physicians

3. Medicare Preferred Provider Organizations (PPO). A PPO consists or physicians that join together to offer coverage. You can see someone outside the PPO, but you need to pay the higher fees.

4. Medicare Sponsored Organization- This is a new form of an HMO put together by physicians and hospitals rather than the insurance companies. If there is a cost overrun, they eat it.

5. Private Fee for Service- A plan sets up its own fees since Medicare allows a 15% surcharge. But patients will have to pay more so its use for the bulk of people is limited.

6. Medicare Dropouts- A doctor would be allowed to charge any fees they wanted. But they are also restricted in billing through Medicare for two years and it is debatable that many doctors will take that risk. Again, only for the most wealthy.

EDUCATION CREDITS: The Hope scholarship credit provides up to a $1,500 credit for the first two years of college per student. The Lifetime credit can be used for any year of education and including education which is not part of a degree program. The credit begins at 20% of $5,000 and phases up to 20% of $10,000.

Both credits are phased out for joint filers with an adjusted gross income of $80,000- $100,000.

FUNDS AND TAXES:

Fund	Before tax	After tax	Tax Efficiency	Turn over
Fidelity Magellan	22.77%	19.51%	85.68	155%
Vanguard 500	28,72	27.5	95.73	5
Investment Co of America	23.69	21.62	89.76	17
Washington Mutual	27.34	24.52	89.67	23
Fidelity Growth and Income	26.10	23.67	90.33	41

401(K): (WSJ) There has always been a disparity between the rich and poor in regards to the amounts contributed to 401(K0 plans. A KMPG study showed that 90% of those earning $75,000 or more participate in their company plans compared with 67% of all workers offered such plans. The Labor Department's 1993 Current Population Survey shows 70% of the 2.2 million workers earning more than $75,000 are offered a plan while only 10% of the 15 million workers earning under $10,000 are offered a savings plan. KPMG's study also shows that companies with at least 200 employees, highly paid workers contribute, on average, 6.7% of income while the non highly paid contribute only 4.73%

KMPG showed a gap between participation rates among the highly paid (more than $66,000) in 1966 and the lesser paid of 26%. In 1995, the gap was only 14% with 77% of highly paid participating in their plan compared with 63% of the lower paid. The gap has been widening since 1993. In part it is due to the poor presentation of facts on investments to the lower paid workers.

BILL SHARPE: Vanguard interviewed the Nobel prize winner on some of the issues he thought important regarding investments. You will undoubtedly note the similarity in the issues I have expressed for years.

• One should look to the past to get some history for what my happen in the future. Further, investors MUST recognize what happened in the 1973/74 debacle since investors lost about 45% of their money. Sure it came back, but you would have had to wait about 13 years for the returns to have equaled what you would have received in Treasury instruments. His quote-"it was a terrible time".
• Think about the future and whether or not it will be like the past. Well, I'll tell you- how well you do in the future is dependent primarily on how much you read current national and international economics.
• The biggest decision is how aggressive you want to be. Nope, here I totally disagree. How aggressive you would like to be is almost solely dependent on your budget. If you tons of money, you can do just about anything. Otherwise, your budget for the future determines how aggressive you HAVE to be in order to meet those goals. And you also have to know how long your are going to live. A standard male at age 65 has 15.2 years to live; a female has 18.8 years. You then figure out whether or not you have enough. If not, you need to invest more aggressively- otherwise you go on welfare or worse.
• There are a lot funds that aren't what they appear to be. That's because a lot of funds/companies invest globally- or sometimes not at all. Putting 40% into a U.S. diversified fund may actually show that they already have assets in assets abroad- or a lot in cash.
• Investing globally- few people really invest overseas even though the U.S. market is less than 50% of the world's equity market. While true that people use what is more comfortable, I note that over two years ago every one was saying "you need to go overseas now to get the good returns!" But I looked at the U.S. market and "stayed home". It should have done much better than other countries due to the solid economics and low inflation (it did). I have used some emerging funds most recently though for diversification.

  "YOU SHOULD NEVER PICK AN ACTIVE MANAGER JUST BECAUSE HE OR SHE IS IN THE RIGHT ASSET CLASS. IF YOU WANT TO BE IN AN ASSET CLASS, DO IT CHEAPLY AND PRECISELY; PICK AN INDEX FUND"

Bill Sharpe

The point above is that the use of an active manager is to pick assets OUTSIDE of an basic asset/index class; those companies that are beaten down or some other "novelty". I do use active managers, but I still use- and have always used- some form of indexing as the bottom of my investment pyramid. It's one thing to let your ego dominate part of your investment strategy- it's another thing to think you are so good that the basics do not apply to you. That's called being stupid.

LITERACY: (Older Americans) A few months ago (June) I wrote about the 1992 literacy survey and the fact that there are vast numbers of Americans who are incapable of understanding the sophistication that is endemic within investing. But in a book by Helen Brown called Literacy in Older Adults in America, she noted the importance of literacy in order to live productive lives. "Literacy helps older persons to learn new things, read for pleasure , be informed, handle everyday tasks and take care of their needs".

The Education Department's study revealed

• About 71% of adults age 60+- about 29 million- demonstrated limited prose skills, performing in the lowest two levels of prose literacy as defined in the study. This compares to 41% of adults under 60.
• About 68% of older adults- about 28 million- appeared to have difficulty finding and processing quantitative information in printed materials.
• About 80% of older adults demonstrated limited document literacy such as filling out forms, reading and following directions and using schedules. That represents about 29 million persons 60 years of age or older that have limited quantitative skills versus 44% of the populace under age 60. As might be expected, those age 60 to 69 performed better than those age 70 to 79 who, in turn outperformed those age 80 or older.
• However, the percentage of older Americans who said they perform various types of literacy activities very well was about the same as younger persons, yet the average literacy proficiencies of older adults were much lower than younger adults.
• The number of older adults who receive help from family and friends with literacy tasks is far lower than the numbers who appear to need such help

So, what explains the difference between the young and old? Some may be obvious, but here are the factors as defined by the U.S. Department of Education.

• Those with higher education show increased skills throughout
• Older Americans have less schooling than younger individuals.
• Older adults had far more visual impairments than younger adults.

The National Adult Literacy Survey did review the correlation between adults' employment and voluntary civic participation.

• Those who were employed, volunteered or voted had higher literacy skills than those who had retired or did not participate in other activities.
• Adults 60 and older were more likely to report that "they did not learn certain literacy skills at all, or that they learned them at home rather than at school."

What about those who continue to learn?

• Older adults that regularly visited their library outperformed those that didn't. They also noted it was not only for the reading but that the library also provided a social outlet
• Older adults who relied on newspapers and magazines outperformed those who relied heavily on television and friends.

Unfortunately, during a week, an adult spends over 15 hours watching TV and only about 2.8 hours reading

• Older adults were less likely than younger adults to read or write letters, fill out forms or use arithmetic in everyday life
• Lastly, "older and younger workers performed various types of work related literacy tasks with about the same frequency. But older employees tended to display more limited literacy skills than their younger workers"

  The above is therefore very indicative of why so many seniors are prime for scams. They simply do not possess the skills to help themselves, but think they do.

"Good literacy skills help older persons lead more productive lives and comprehend self care information..." And society benefits if seniors are perceived as productive individuals who continue to learn and contribute.

OVER 40?: Doctors are urging baby boomers to make sure they get annual checkups and not let problems persist. They noted three basic hidden health risks of hitting the forties: 1) dismissing common symptoms that seldom have medical implications for young adults, but could point to serious disease in older patients; 2) routinely self medicating with over-the-counter medications; and 3) for women, overlooking the head-to-toe biological changes that coincide with menopause.

REVERSE MORTGAGES: Here is a new one from Fannie Mae. Most "normal" reverse mortgages have you taking a loan against an existing home equity and "purchasing" an annuity. You pay interest but it is accrued against the equity in the home and is netted out when you die or leave the property. But the new Home Keeper loan allows one to sell their old home and buy another yet STILL get an annuity for life. Here is an example from Business Week

Assume a woman age 76 has a $75,000 home that is clear of debt. She want to buy a $115,000 home and use a reverse mortgage. Based on her age and equity, Fannie Mae gives her a $60,000 loan for the new home at 1% higher than the conventional rate. She then uses the $60,000 plus $55,000 from the sale of her old home to buy the new home and can live there without making any more monthly payments. She keeps the $20,000 from the $75,000 sale of her old home. When she moves or dies from the second home, the house is sold and the loan balance gets paid off from the equity.

In addition to the extra 1% loan origination fee, there is also a 1% insurance fee which protects the bank in case the person lives too long and goes beyond the equity in the home.

But there are other problems since the programs are not consistent among lenders. One analyst found that the amount a 75 year old could borrow on a $150,000 could vary as much as $30,000. Ouch!!! Fannie Mae can provide more info at 800 732-6643. But these are primarily last ditch methods of "financial planning".

CASH: A Smith Barney exec said that 33% of Americans still had assets in cash and that "we haven't been nearly as successful in financial planning as we think". A planner noted that "brokers have a very hard time doing planning. They're too transaction oriented." A Financial Planning article noted the following for the aging populace..." the changing demographics mean a push into so-called comprehensive financial planning, something many experienced planners have been gradually moving away from. This group will face some of the most complex issues there are to face, but no one is pulling all this information together in one place". Well, guess who is? Me!. Check out my WEB page and you will see more comprehensive material than Vanguard, Fidelity, Merrill Lynch, etc. COMBINED.

GOING UP: Recent statistics note that, once again, college costs are increasing faster than the rate of inflation- bout 5% for this last year. For public institutions, the costs of tuition are $3,100 and room and board at $4,400. Private colleges average $13,670 for tuition and room and board at $4,400. Since 1980, college costs have DOUBLED while family income has only gained 10%. I knew there was a reason I didn't have children.

OBESE: About 14% of all children over the age of 6 are obese. If the parents are obese it significantly increases the chance the child will be obese-odds are from 40% to 79%. Further, if a child was fat between the ages of 10 to 17, there is a 64% chance of being obese as an adult even if their parents were slim. (Mine weren't necessarily slim- only slightly overweight. I was fat- at least 60 pounds overweight when I was 19.) I can control my weight somewhat through exercise, but after 34 years with this body, I can clearly tell you it is what you eat that really makes the difference.

DIETS: ( Harris poll) A review of 2,001 overweight adults indicated that 64% had gone on a diet at some time. On average, those who had dieted did so 11 times. 65% said they met their weight goals but only 1:9 actually stayed there.

Successful dieters said they lost 34 pounds- but many gained back 31 pounds. Women tend to diet more but more men reached their target weights. (Bet it was due to the fact that men exercised more. Women traditionally do not exercise that much).

SECURITIES ABUSES: Another round of abuses by brokers were due to

• Abusive cold calling practices. Most of the firms and branches relied on high-pressure, scripted telephone cold calling techniques that include falsifying experience and performance, as well as other outright lies.
• Sales practice abuses. Examiners found an army of unlicensed agents who are accused of falsifying records, conducting unauthorized trades, and failing to complete trades.

Then there was failure to report complaints, etc. but after lying and cheating, the rest is superfluous. How to stop this? Simple. Don't buy anything over the phone. Anyone who reads a lot would clearly recognize the problem. People that don't read tend to do stupid things. Unfortunately, greed also enters the arena and even people who know better opt for the "easy" money.

WAGE INEQUALITY: (FED Board of San Francisco) The difference in wages between the haves and have nots has widened. The most notable difference is between high school and college educated workers but is also noted between groups with the same measurable skills. The article addressed the obvious- skilled versus non skilled workers- and the fact that industry's requirement for technology is only going to make this separation all the wider.

Other factors are that significant numbers of middle class managerial jobs have been eliminated- probably never to return. The there is immigration and the increased female labor force. But each of these impacts is considered relatively minimal.

They did have this interesting response-"...recent welfare reform initiatives are likely to increase the supply of low skilled job seekers. This will place added downward pressure on the wages of those at the bottom of the distribution, at least in the short run."

Lastly, in years past- up to around 1980- the difference in wages between college and non college educated individuals meant that more families looked to provide their children a college education. But with the huge increases in college costs between 1980 forward, fewer families have been able to afford the extra costs. Hence, more separation of the masses.

Some of you have noted my previous comments- the difference between the haves and have not is no longer just working harder. It's having enough money to buy the technological instruments to keep you in the 21^st Century. Those that learn computers will get ahead. Those that don't will rarely be able to get anywhere. Finally a lot of this will blow up by 2010.

500 INDEX: Of the 500 stocks in the S&P 500, 100 of the largest accounted for 75% of the entire index's return. (Top 100 returned 23.4%, next 400 returned 15.2%) A total of just 6 stocks provided 1/5th of the indexes total 20.1% return through June. The average S&P stock managed "just" a 17% increase. The average stock equity fund earned a much lower 13% return. O.K. did you pick those six- or at least the 100 best stock. No? What, are you stupid? Actually no, because I didn't pick them either. I use index funds to some degree because I do not possess the skills to know which stocks will outproduce others and therefore I am willing to accept an average for some portion of the portfolio. In other cases, I use managed funds where I think an active manager can make a difference. And it's all combined with asset allocation. So, do I get the highest returns of all portfolio's managed? Of course not. Are they diversified and consistent with current economics? Do they individually fit with the client's risk profile? Yes and yes. I can't do much better than that. If you follow this same regimen, you won't spent countless hours trying to time the market or buy individual issues based on rambling egocentric discussions at a cocktail party. And you should do just fine. The only caveat is that you MUST recognize national and international economics.

REBALANCING: This was NOT happening during the major drop a couple weeks ago. Apparently small investors were net SELLERS during the drop and the subsequent rally the following day. If true, that has me worried since a prolonged drop could be a real problem for the market since small investors may leave enmass and cause further market decline.