COMMENTARY ON ECONOMIC AND PLANNING ISSUES
ERROLD F. MOODY JR.
MASTER OF SCIENCE IN FINANCIAL PLANNING
LIFE AND DISABILITY INSURANCE ANALYST 0626414
REGISTERED INVESTMENT ADVISER
THE INEFFICIENT MARKETS ARGUMENT FOR PASSIVE INVESTING (Steven Thorley)Index fund proponents often argue in favor of passive investing because they believe that the modern U.S. equity market is informationally efficient. Market efficiency is the assertion that stock prices already reflect the best possible estimate of fair value, so there is no reason to actively buy and sell individual securities. However, for most investors, the assumption that the stock market is not efficient makes the argument for passive investing through indexing even stronger. Even if prices routinely deviate from fair value, about two-thirds of all active investors will underperform index funds every year. Further, if market prices are not efficient and investing is a matter of talent, then the investors in the underperforming majority will tend to be the same from year to year. Thus, indexing is preferred for most investors.
In addition to making the argument for passive investing given inefficient stock prices, this paper presents the following clarifications to conventional wisdom: 1) a high percentage of mutual funds underperforming the market index is not evidence that the market is efficient, and may in fact be evidence of an inefficient market; 2) as individuals and institutions opt out of active investing and index, the market may become more competitive, not less; 3) properly measured, about two-thirds of all active investors will underperform index funds every year, independent of who chooses to actively invest, or the direction the market takes; 4) the proportion of small-cap oriented investors that must underperform small-cap indices is even higher than two-thirds, despite the fact that the small-cap sector may be less informationally efficient.
AMT: By 2005, 65 percent of married couples with two children and a combined income between $75,000 and $100,000 will pay the alternative minimum tax.
REMEMBER THE IPO MANIA? As part of the proposed $1 billion settlement against more than 300 companies that sold IPOs during the dot-com boom, the lawsuit reveals CacheFlow's insane one-day pop wasn't an accident.
Top customers were given impossible-to-get shares of the hot IPO only if they agreed to keep buying the stock after it began trading, at prearranged, escalating prices. The investment banks not only collected lucrative trading fees, but also made a splash. But common investors, unaware the stock was soaring because of these secret deals — not the strengths of the business — assumed the company's prospects were better than they really were.
Can’t we all just get along?
SEEMS TRUE: A Farmers Life Insurance Company survey showed that twice as many middle income Americans are better at planning for annual family vacations to places like Disney World than they are at planning for their retirement. Surprisingly. They spend about the same amount of time planning for their annual vacations as they do for their retirement or a child's college education.
COLLEGE INSURANCE: The cost of college is an increasing burden for many families. In the 2003-04 school year, the average cost of attending a private college rose 6% to $19,710, while for a four-year public college it rose 14% to $4,694. Over the decade ended in 2003-04, average tuition and fees rose 47% at the public colleges and 42% at private colleges in constant dollars.
The insurance plans typically cost around $200 for the school year and provide a complete refund of tuition for the term if a student has to leave for "medical" reasons. They do so by making up the difference between the institution's refund and the total tuition. (Universities' refund formulas differ significantly: At Duke University, if a withdrawal occurs in the fifth week, the school refunds 60% of the money, compared with 20% at Brown.) The insurance company's reimbursement is less generous if those reasons are related to mental health, however: In that case, the refund is typically 60% of what was paid. The plans typically don't cover other major reasons for college students' dropping out, such as academic difficulties or family problems.
At the private grade-school level, the plans typically cost about 2% of the year's tuition, anywhere from about $100 to $250 and possibly more at a boarding school. But unlike the college plans, these are more generous, refunding tuition for any reason, from a family move to a dismissal, though for nonmedical or mental-health reasons, the reimbursement is less than 100%, more typically in the 60%-to-75% range.
School Solutions, an offshoot of a British insurance company, began offering a version of a tuition-insurance plan that has been popular for years in the U.K. Its Tuition Protection Plan differs from the other plans in that it can pay as much as $20,000 a year in tuition in the event that a parent dies or becomes terminally ill, through grade 12. The annual cost of the plan varies depending on how expensive the school is. For an extra $75 a year, a parent can add two years of college-tuition coverage.
Markel Insurance is testing its own tuition-insurance plan at 25 private primary and secondary schools. Its product costs 1%-2% of tuition, or roughly $250 to $500, and can cover 100% of tuition owed if the student withdraws for medical reasons -- and typically 75% of it for other causes, such as a family move or a disciplinary dismissal.
GOOD FOR THEM: The IRS review will look at all types of charities and tax-exempt foundations, including hospitals. The review will consider:
• Whether compensation is excessive.
• Whether pay was accurately reported.
• Loans and the sale, exchange or leasing of property to officers and others.
"Non-profit hospitals have to be prepared to demonstrate not only that they are paying salaries within some reasonable range of industry standards, but also that executives are bringing measurable value in key areas of operations, including community benefits.
Federal law says non-profit, tax-exempt organizations cannot operate to the financial benefit any individual.
In the mid-1990s, Congress passed rules that have come to be known as "intermediate sanctions giving the IRS authority to require individuals who make "excessive" compensation from a non-profit to pay the money back, plus a 25% fine.
LTC: A Skilled Nursing Facility is a nursing home where patients can get round-the-clock medical and nursing care. Medicare may pay for this care if all the following conditions:
" He has Medicare Part A;
" He has been hospitalized for at least three days in the past 30 days;
" His doctor determines that he needs skilled nursing care seven days a week or skilled therapy services at least five days a week;
" He requires skilled care for a medical condition that was treated during the hospital stay (or for a condition that occurred while he was receiving skilled nursing care, for instance, if he broke his hip while receiving skilled care for a stroke);
" He receives services in a Medicare-certified SNF.
Inpatient rehab hospital: Generally, patients must require frequent involvement from a doctor as well as 24-hour rehabilitative nursing care for Medicare to cover their stay in an inpatient rehab hospital. In addition, they must require care from several types of medical professionals and be able to tolerate three hours of therapy a day.
NOT THAT BRIGHT (USA Today) The academic skills of the typical U.S. 15-year-old are average compared with most of the industrialized world, but a larger proportion of American teens see themselves holding top-paying jobs in the future,
U.S. students' reading performance sits around the middle of a 27-nation pack, just five points higher than average; math performance is five points lower than average. U.S. students also rank below average in high school graduation rates and just about average in school "engagement," or how much they participate and feel a sense of belonging.
But when asked what kind of job they expect to hold by the time they're 30, 80.5% of U.S. students said they'd have a "white-collar, high-skilled" job, far exceeding the average of 62.2%. U.S. girls had even higher expectations of themselves, with 85.8% expecting a top job by age 30. Among all nations, only students in Mexico had higher expectations.
The large number of U.S. students with poor basic skills has brought down America's average. "The best in the U.S. is as good as the best in the world," he says. "What drags you down is the worst (performers)."
JUST LIKE SOCIAL SECURITY RUNNING OUT OF MONEY: An independent analysis of the Pension Benefit Guaranty Corporation suggests that the agency will go broke in 2020 if current financial conditions persist. Even if things improve, so that fewer pension funds fail than in recent years, the agency is still expected to run out of money by 2023.
If the pension agency goes broke, one of two things would happen: the retirees who rely on it would stop getting their checks, or the taxpayers would have to bail the agency out. The agency currently pays benefits to more than a million people whose pension plans have collapsed. It also guarantees benefits promised to 43 million more people.
The Social Security trust has been subjected to repeated analysis: its current forecast says it is likely to run out of enough money to pay full benefits in 2042, absent remedial measures. Even in Social Security's worst-case outlook, the money probably would not run out until 2031.
LIFE: (Bureau of Labor Statistics) Americans over the age of 15 on average sleep 8.6 hours a day and full-time workers on average clock in 8.1 hours on the job. That's more work than occurs in many European countries, but still leaves time for other activities.
The findings also confirmed the picture of an increasingly sedentary society that spends about eight times more time a day (2.57 hours) watching television than exercising (0.3 hour) and three times more than socializing (0.78 hour).
Men work about an hour more (8.01 hours on average among full- and part-time workers) than women do (7.06 hours among full- and part-time workers), but working women are juggling more responsibilities: They spend about an hour more a day than working men doing household activities and caring for household members.
Nearly one in five Americans -- 18.6 million individuals -- reported spending time working at home. Well-educated workers were the most likely to bring their work home. Thirty-three percent of college graduates, or 9.6 million individuals, do some work from home, compared with 13% among workers with no more than a high-school degree.
DEBT, DEBT, DEBT: (Dennis Cauchon and John Waggoner) The long-term economic health of the United States is threatened by $53 trillion in government debts and liabilities that start to come due in four years when baby boomers begin to retire.
A USA TODAY analysis found that the nation's hidden debt — Americans' obligation today as taxpayers — is more than five times the $9.5 trillion they owe on mortgages, car loans, credit cards and other personal debt.
This hidden debt equals $473,456 per household, dwarfing the $84,454 each household owes in personal debt.
The $53 trillion is what federal, state and local governments need immediately — stashed away, earning interest, beyond the $3 trillion in taxes collected last year — to repay debts and honor future benefits promised under Medicare, Social Security and government pensions. And like an unpaid credit card balance accumulating interest, the problem grows by more than $1 trillion every year that action to pay down the debt is delayed.
Big payments on the debt start coming due in 2008, when the first of 78 million baby boomers — the generation born from 1946 to 1964 — qualify at age 62 for early retirement benefits from Social Security. The costs start mushrooming in 2011, when the first boomers turn 65 and qualify for taxpayer-funded Medicare.
GROWTH VERSUS VALUE: A growth stock's earnings are expected to increase faster than those of the market as a whole, and a growth stock usually has a high price-to-earnings ratio. Typically, growth stocks are not dividend payers.
A value stock is one that analysts think has good fundamentals but has been ignored by the market or beaten down because of some bad news that hides basically good prospects. A value stock's price-to-earnings ratio is generally low, and it typically does pay dividends.
the price-to-sales ratio of the Russell 1000 growth index, divided by the price-to-sales ratio of the Russell 1000 value index, produces a ratio showing that growth stocks are the cheapest they have been since Russell began collecting this data in 1979. Inversely, by this measure, value stocks are the most expensive they have been since then.
The low premium on growth stocks is partly attributable to their steeper fall in the three-year market slide that began in 2000. From its peak on March 2, 2000, to its low on Oct. 7, 2002, the Russell 1000 growth index fell 64.2 percent. The value index dropped 36.2 percent from its peak on May 21, 2001, to its low on Oct. 9, 2002.
The high cost of value stocks can also be explained by many investors' flight to safety in the value sector as the markets plunged. And investors have stayed there this year. Russell's value index is up 4.6 percent through Friday and is now just 1.9 percent from its record high. The growth index is down 1.9 percent for the year and is still 101.3 percent from its all-time high.
SLURP: Saudi Arabia, Kuwait, the United Arab Emirates, Iraq and Iran possess 61 percent of the world's proven oil reserves Add the other six members of OPEC, and the cartel controls three-quarters of the world's 1.15 trillion barrels of reserves.
AH, HECK, IT'S ONLY MONEY: Citigroup Inc., the No. 1 U.S. financial services company, was sued by an investor who says she was defrauded into putting her money into a class of mutual fund shares that cost too much. Kathleen Fitzgerald of Great Neck, New York, said she bought more than $400,000 in Class "B" shares of three mutual funds sponsored by Smith Barney, a unit of New York-based Citigroup. Fitzgerald contends Salomon Smith Barney, as the unit was then known, failed to tell her investors with more than $100,000 might avoid "unnecessary" fees by instead buying Class "A" or "L" shares, which have different fee structures.
How can you avoid some of this problem? Simple- when the prospectus requires more size to define the loads than it does to define the investment, it is time to take a walk.
LIFETIME: New Predictions
Current Age Male Female
0 76 80
30 77 81
50 78 82
60 80 83
65 81 85
1980 Predictions
Current Age Male Female
0 70 75
30 72 77
50 74 79
60 77 80
65 78 81
THIS WILL BE INTERESTING: The Internal Revenue Service ordered one of the nation's biggest law firms to disclose the names of 600 wealthy clients who bought tax shelters that it considers abusive.
The law firm took in at least $72 million in fees for its tax shelters. Several clients are already suing Jenkens & Gilchrist for selling what they say were worthless tax shelters.
The shelter was called Cobra — for currency options bring reward alternatives. It used foreign-currency trades to generate losses whose only purpose was tax avoidance.
Tax shelters generally involve the use of complex transactions with no business or economic benefit other than to create paper losses and gains. The gains are taken by a partner who does not pay taxes in the United States, like an offshore bank or an Indian tribe, and the losses are taken by the buyer of the tax shelter to offset real financial gains. Typically, the transactions involve several layers of partnerships and other enterprises.
RETIREMENT: More than half the paid workers ages 25 to 64 don’t own retirement savings accounts of any kind. Of older workers ages 55 to 64, three out of four lived in households with retirement savings of zero to $56,000
HEALTH COSTS: Health care is projected to account for 15.2 percent of U.S. gross domestic product (GDP) in 2004, compared with 11.1 percent fifteen years ago. During this period health care spending increased at an average annual rate of 7.5 percent per year (in nominal dollars) and 5.1 percent per year when adjusting for inflation (using the GDP deflator). During the past three years, the cost of health insurance has increased by an average of 12.5 percent per year.
Between 43 and 61 percent of the total nominal change in spending between 1987 and 2000 is attributable to the fifteen most costly conditions. Our “best guess” estimate, adjusted for double-counting, approximates the share to be 56 percent. Most of this change is concentrated in the five most expensive conditions: heart disease, mental disorders, pulmonary disorders, cancer, and trauma, which account for approximately 31 percent of the overall change in spending between 1987 and 2000.
Treatment of mental disorders nearly doubled, and cases involving a pulmonary disorder, such as asthma and upper and lower respiratory diseases, increased 50 percent. There also was a substantial rise in the treated prevalence of hypertension and diabetes.
For several medical conditions, the rise in treated disease prevalence was a key factor accounting for the rise in spending. It accounted for 59 percent of the increased spending on mental disorders and figured prominently in the rise in spending on cerebrovascular disease (stroke and cerebral ischemia, 60 percent), pulmonary conditions (42 percent), and diabetes (50 percent).
In eight of the top fifteen conditions, a rise in the cost per treated case, not rising numbers of cases treated, accounted for most of the growth in spending.
population growth has also contributed to the rise in spending by medical condition. In our tabulations, it accounted for about 19–35 percent of the increase in condition-specific spending across the top fifteen medical conditions.
SMALL CAP EFFECT: (Ken Fisher) The small-cap twits do a different stupid thing, by the way. They see the long-term excess return on small cap and miss that it comes from three two-year periods of 1933-34, 1943-44, and 1976-77, all emerging similarly from big bear markets. When you take away those three similar periods out of that long history, then big-caps do better. If removing three two-year periods ruins your long term trend, then you don’t have robust statistics and that completely undermines the statistical underpinning to the so called small-cap effect.
METLIFE AUTO & HOME ADVISES CONSUMERS TO CONSIDER THE FOLLOWING BEFORE PURCHASING HOME INSURANCE:
What's covered? Understand what the policy will cover-and what it will not. Determine in advance what your expected out-of-pocket responsibility will be in the event of a loss.
-- Does the insurer place a cap on what it will pay for property damage? Many insurers will only pay up to the amount listed on your policy, whether or not that amount is sufficient to cover the actual rebuilding costs, which rise over time due to increases in the cost of labor and materials. There are insurers, however, that offer "uncapped" coverage, meaning you receive full payment, even if it is more than the amount of your coverage-providing greater peace of mind.
-- Is an inflation factor built into the policy? Look for a company that offers an "inflation guard." Your level of coverage will automatically increase every year to keep up with the level of home repair inflation in your area.
-- Does the insurer offer replacement cost coverage for contents? Insurance companies will cover a home's contents for "actual cash value," which includes depreciation: roughly, the older the age of the contents, the less they are worth. Some carriers, however, allow you to purchase coverage for contents on a replacement cost basis.
-- In the event of a loss, can the insurer guarantee the work performed? Many insurers have developed a familiarity with local contractors. If you choose one, they can offer guarantees that these reputable, licensed service providers will stand behind necessary repairs.
Finally, an important consideration is flexibility. For instance, insurance needs for a brand new home are different than that of a Victorian. Talk to your agent and select the level of coverage you need, including additional coverage for important items, such as jewelry or computers.
It is my opinion that financial planners will have to get licenses in property and casualty insurance along with continuing education. It's too important an item to cover in just 2 hours max as part of the educational package for CFP's.
LOAD VERSUS NO LOAD INSURANCE. Almost all no load mutual funds will have lower expenses than a loaded fund and, all other things being equal, outproduce a loaded fund.
But what about insurance? The initial position taking by consumers is that a no load or load load policy will outproduce a commissionable product. That's certainly what the illegal and incompetent fee only planners would have you believe. Invariably they point to Ameritas as the premier no load policy that consumers should buy since there are no commissions. On its face, it seems logical. But insurance policies are not transparent. You can compare Ameritas to other loaded commissionable products and they will beat most of them. The problem is that you are not buying a guaranteed policy. They sell the standard universal life policy that may rise in value depending on interest rates. But other costs may rise as well- mortality, expenses and so forth.
My point is, if you want insurance, buy insurance. Period. Just buy a no lapse policy. As long as you pay the premiums, you have your insurance.
Here is the difference:
Ameritas: 60 year old, preferred male, $500,000- $12,480 annually for life. Not guaranteed
Same but guaranteed for life 21,261
No Lapse company 1 7,062
2 8,140
3 7,908
There you have it. Yet another reason why the fee only planners do such a disservice to the public. Guaranteed commissionable insurance is $4,000 to $5,000 annually less than the most marketed no load. Do the math.
MEDIGAP POLICIES: Weiss analyzed more than 800,000 premium rates among 129 insurers offering Medigap insurance in 2004 and found that wide disparities in Medigap rates continue to exist for all plans. The national average cost of a Medigap policy for a 65-year-old female ranged from $1,113 to $3,323. Disparities in pricing on specific plans vary even more dramatically; for instance rates for the popular Plan C varied from a minimum of $615 to a maximum of $6,271
TAX CREDITS: Risk and return are typically the foremost considerations when we are evaluating potential investments for suitability for our clients. Return usually encompasses yield and the capital appreciation of an investment over time. An additional consideration in the context of return is the role of tax credits which are available as a feature of the investment. Tax credits often are granted by the government as an incentive to taxpayers to engage in activities the government and society deem necessary or appropriate. There are two important government programs directed at benefiting low income persons which programs provide tax credits to investors.
Community Programs
One of the programs, based on legislation enacted in 1986, is the low income housing tax credit. This program is run by a state agency in each state and is designed to encourage developers to create low income housing by supplying tax credits for housing projects that meet minimum set aside requirements for low income housing. The states may offer tax credits equal to $1.75 multiplied by the state population, and states may match all or a portion of this credit amount, so the amount of these credits may be substantial. These requirements are either at least 20% of the units in the development project must be rented to tenants earning less than 50% of the median income for the area or at least 40% of the units must be rented to tenants earning less than 60% of the median income for the area. These occupancy requirements apply to the property for an extended period, at least fifteen and for as much as thirty years.
An investor in a qualifying development project will be permitted to participate in the tax credit attributable to the overall project. The annual tax credit is based on the present value of 70% of the costs associated with the project if it is not federally subsidized and 30% of the costs of federally subsidized projects. The rough equivalent of these limitations is a tax credit of nine percent of the total qualified costs for new construction or rehabilitation or four percent of the qualified costs for acquiring a building or for federally subsidized projects. (A somewhat different rule applies if the funding is through tax exempt bonds). The tax credit is applicable each year for up to ten years while the investor is permitted to recover its underlying investment only after at least fifteen years have elapsed. Note that the qualified costs are those associated with the units that are occupied by low-income persons and not the costs of the entire project if it is open to higher income persons.
LTC: (NY times) (American Council of Life Insurers) baby boomers buy about 1:5 of every five individual LTC policies; older people buy almost all the rest.
LTC: MetLife’s Long-Term Care IQ Test, a national poll testing Americans’ knowledge about long-term care insurance (LTCI) and long-term care related issues, reveals that most Americans lack a basic understanding of long-term care. Only about one in three (37%) Americans between the ages of 40 and 70 have the information they need to help them make decisions about their long-term care needs. Only 2% of individuals who took the test received a grade of “B” or better; 7% received a “C” grade on the test; 28% barely passed the test with a “D;” and 63% received an “F,” a failing grade.
55% of individuals between the ages of 40 and 70 incorrectly associate long-term care exclusively with nursing homes. Only one in five (18%) respondents correctly identify their home as the most likely place where long-term care services are provided. The National Alliance of Caregiving and AARP indicate that more than half (55%) of long-term care recipients live in their own home.
The cost of long-term care services is also one of the areas where Americans have the greatest gaps in their knowledge.
Only 27% of respondents correctly identified the average annual cost of receiving long-term care in a nursing home.
41% mistakenly believe that they are entitled to basic coverage for long-term care in addition to health insurance from the government at retirement.
63% did not correctly estimate the cost of waiting to buy LTCI until an older age.
Most Americans don’t understand how long they will live, or how likely it is that they will need long-term care. Fewer than four in ten (39%) respondents recognize that a 65-year old has a 50% likelihood of living another 18 years, and 72% did not know how likely it is that an 85-year old will need help with his or her daily living activities.
Additionally, 41% of respondents believe long-term care is an entitlement that all Americans are eligible for when they reach retirement age. This same proportion also cites Medicare, Medicare Supplement (Medigap) or disability insurance as forms of insurance that pay for this care. However, generally, Medicare doesn’t pay for long-term care and neither do Medigap or disability insurance.
“Many baby boomers have misconceptions about long-term care and often do not realize that the need for care can happen at any age, and that Medicare does not cover the costs. “As more and more boomers find themselves caring for their aging parents, they often become more aware of the emotional, physical and financial issues that result when a loved one becomes ill and needs help with day-to-day activities. This experience can serve as a wake-up call, helping them see the need to put their own plans in place.”
LIFE: People who make more than $75,000 a year are far more likely than those who make $25,000 or less to say they are "very satisfied" with their lives, by a margin of 56% to 24%, according to Associated Press polling. However, people who are married and have college degrees were more likely to be "very satisfied" than others who had equal incomes.
Most parents are "very" concerned about the amount of sex (60%) and violence (53%) their children are exposed to on TV. And they are more concerned about that content in that medium than they are about the Internet (16%), movies (10%), music (7%), and video games (5%).
DISABILITY INSURANCE: (JHA) As of the middle of this year, short-term disability, in terms of new sales and earned premium, had shown steady growth from the year before, while new long-term disability sales remained flat.
Carriers report a 7% jump in new STD sales premium, a 3% rise in new STD lives and a 1% increase in new cases. Meanwhile, new LTD cases rose 4% and new LTD lives decreased 8%.
JHA researchers note that some insurance carriers saw STD sales grow more than 25%. They speculate that as health care costs continue to rise, STD may be an easier sale to employers and employees. Meanwhile, insurance companies appear to be targeting smaller LTD cases with higher average premium per live. Hence, LTD earned premium is still growing moderately.
EDUCATION: - people with less than a high school education have an unemployment rate of 8.8%
- high school graduates with no college have an unemployment rate of 4.8%
- people with some college have an unemployment rate of 4.0%
- people with a bachelor's degree or higher have an unemployment rate of 2.6%.
REAL ESTATE ESCROW: The funds are disbursed to cover the following
demands:
1) property taxes due
2) principal and interest on the loans with which the seller has encumbered the property
3) any miscellaneous involuntary liens - old refuse bills or water bills or whatever else might encumber the property
4) the commissions due to the Realtors as specified in the sales contract
5) all of the costs generated by the new lender and the mortgage broker
6) fees generated by the escrow company itself. Escrow fee, title insurance fees, notary fees, and other fees that they paid for and are recovering such as messenger and Fed-Ex fees
7) miscellaneous fees generated by other parties such as the county recorder, cities or counties for transfer taxes, or the appraiser
8) the rest goes to the seller
A refinance is somewhat simpler. Funds come from the new lender and, perhaps, from the borrower and cover items 1, 2, 3, 5,6,and 7 above.
Ultimately the purpose of the escrow is to protect the property rights and financial interest of all parties concerned.
HEALTH: At least 57 million, or one-third of U.S. working-age adults, deal with some kind of long-term illness, such as diabetes, heart disease or depression. And they have become particularly vulnerable to soaring health-care costs: More than one in five are in families with problems paying their medical bills
Low-income people with chronic illnesses are bearing the brunt of this erosion in employer-sponsored health care. About 42% of those with health benefits and incomes within 200% of the poverty level -- or $36,800 for a family of four -- say their medical bills exceeded 5% of their income in 2003. That is a huge leap from the 28% who reported medical bills swallowing the same chunk of their paychecks in 2001.
Among uninsured people dealing with chronic illnesses, 40% reported out-of-pocket costs surpassing 5% of their income, slightly less than the 42% in 2001.
FLP MUST BE VALID: In a typical family limited partnership, a parent transfers assets, such as stock or real estate, into a partnership formed with the children. Most of the shares in the partnership are given to the children. Parents retain a small ownership stake and sometimes are the general partner, which means they can make management decisions about the assets. The children often are limited partners, with less control. The value of the children's limited shares often can be discounted 20% to 40%, thereby lowering the gift-tax bite.
The IRS has tried for years to challenge certain family limited partnerships as tax-avoidance techniques. The agency scored a victory last year, when a U.S. Tax Court judge threw out the family limited partnership of a deceased Texas businessman, Albert Strangi. The judge found that Mr. Strangi had maintained too much control over the partnership. He still lived in the house given to the partnership, but the partnership didn't receive rent until more than two years after he died,
The new ruling involves the estate of the late Theodore Thompson, who created two family limited partnerships with his children, Betsy Turner and Robert Thompson. At age 95, the elder Mr. Thompson put 95% of his assets -- or about $2.8 million -- into the two partnerships, leaving little to live on. For instance, one of the partnerships gave $12,500 back to Mr. Thompson for his personal expenses at his daughter's request.
The Third Circuit Court found that not only did Mr. Thompson continue to draw on partnership assets, but the partnership's function also in essence lacked a valid business purpose. For instance, most of the assets given to the partnership were securities, but the shares basically sat in the partnership. The court ruled that simply placing the shares in a partnership doesn't necessarily constitute a valid purpose.
AVAILABILITY BIAS: the tendency of people to give too much weight to readily available information.
Mental accounting- the name given to the propensity for people to compartmentalize their money by placing it in different mental "buckets". Rather than examine their portfolios as a whole, they make decisions in pieces, not recognizing that each marginal decision affects the entire portfolio.
GROWING OLD: The population over 60 is expected to grow to 82,501,033 by 2025 up from up from 44,158,531. In 2025, that group is expected to account for 24.6% of the population up from 16.5% in 1997.
BLOATED DEBT: From the beginning of 2001 to the end of 2003, the economy added $1.317 trillion in gross domestic product and $4.2 trillion in debt.
That means that each new dollar of economic output was accompanied by $3.19 in new debt. So now, for the first time, the debt-to-G.D.P. ratio stands at more than two to one.
Throw in financial credit - the debt that investment banks and others use to finance trading activities and the like - and total debt has more than doubled since 1994.
JOHN BOGLE ON THE VALUE OF INTERNATIONAL INVESTING. "In the long run it's reasonable to assume that international returns are likely to be similar to U.S. returns once you wash out the dollar. The problem with international is that 25% of all revenues and profits of all U.S. companies are international. So I don't think you're diversifying further.
Well, academics say the markets fluctuate differently, and that makes a big difference. I say anyone who wants to use reduced standard deviation as a reason for owning international has to be able to define standard deviation. If you understand that, then go ahead and invest in international.
But when markets fall apart, does international diversification help? Just when we need it most, international diversification lets us down. In the bear market the international MSCI EAFE index fell harder than broad U.S. indexes. What good did international do you? People like to use standard deviation as a measure of risk. But when it comes to international investing, I think risk should be defined by how risky the nation is. Is Mexico riskier than the U.S.? I say categorically yes. There's a lot of risk out there in international. Risk in international is defined by national stability, economic growth, culture, tradition, possibility of uprisings, and other things. So in my mind you're increasing the risk in a portfolio, not decreasing it as was your original goal. There's also currency risk in international investing.
I'll make a couple points. First, there are next to no consumer that has a clue to standard deviation. Second is the volatility of correlation. You don't know what it is until well after the fact. Lastly, the dollar has been weak right now. Will it stay that way? Do other currencies change irrespective of the dollar? Answer all those correctly and maybe you can do active allocation. But hardly anyone will get the answers.
OBESITY: UnumProvident researchers, who declared earlier this year that STD claims had jumped tenfold over the past decade due in large part to obesity, studied 1.3 million claims filed between 1996 and 2003 for conditions in which weight gain either is a risk factor or with which it is strongly associated.
The analysts found a 4,000% increase in syndromes that are primarily symptom-based, such as fibromyalgia, chronic fatigue syndrome, irritable bowel syndrome or gulf war syndrome; a 100% increase in hypertension and diabetes; a 78% increase in musculoskeletal disorders; a 63% increase in cancer; a 46% increase in back disorders; and a 17% increase in cardiovascular disease. UnumProvident calls these findings "alarming," noting that they illustrate the burden of suffering and increase in healthcare costs attributable to the obesity epidemic.
The National Business Group on Health says increasing obesity and related health issues hurt the well-being of an employer's workforce and threaten the bottom line. It cites National Institutes of Health findings that peg the price of obesity at $123 billion, or 9% of total U.S. healthcare costs. Treating type 2 diabetes - usually attributable to obesity -- alone consumes $8.8 billion. Additionally, NBGH says it attributes to obesity some 39 million lost work days, 239 million restricted activity days and 63 million physician visits.
It is also for this reason that I stated years ago that LTC premiums would have to go up. There were a lot more illnesses that would occur due to obesity and causing more care. But it would also take MORE people to do the same care, It's tough enough rolling over someone that weighs 150#- but you need two people if they weigh 250#. More caregivers in a facility means more money to pay for them. I believe that is one big reason (pun intended) why premiums have escalated. The companies are seeing the results of the studies above.
A SURVEY OF HIGH NET WORTH CONSUMERS WHO HIRED AN ADVISERS
34% did not like the adviser's advice
32% said the advisor was not proactive in maintaining contact
31% said fees were too high
36% said they were not getting financial planning advice
42% were not getting retirement planning advice
63% no estate planning advice
79% no life insurance advice
85% no charitable strategies advice.
NO NONSENSE FINANCE
During the last few months of marketing for my book, I have been interviewed by the Wall Street Journal, New York Times, National Underwriter, many national newspapers, done numerous radio interviews, and have been interviewed on TV including NBC.
If you want to give a nice gift for Christmas, you can buy my book at Amazon.com, and some local bookstores. It covers all the areas of finances in a direct manner way and will certainly help all readers who are willing to read and think. I’ll also make about $.20 which will help me buy lots of gifts.
MERRY CHRISTMAS
HAPPY NEW YEAR
HAPPY HANUKKAH
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
Life and Disability Insurance Analyst
2232 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127
Marina Office 510 357-1554
Cell 510 459-7797