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
YOU KNEW THIS WAS COMING- DIDN'T YOU?: More and more developers are canceling or delaying condominium projects as home sales slow, construction costs soar and lenders balk at financing units that might not sell.
S&P: Just 19% of U.S. mutual funds that have existed since mid-1980 were able to beat the S&P 500 through mid 2006. The average return of all such funds was 10.9% compared with 10.4% for the average newsletter portfolio and 13.0% for the S.& P. 500.
RECOGNIZING A STROKE- “STR”
Sometimes symptoms of a stroke are difficult to identify. Unfortunately, the lack of awareness spells disaster. The stroke victim may suffer severe brain damage when people nearby fail to recognize the symptoms of a stroke.
Now doctors say a bystander can recognize a stroke by asking three simple questions:
S * Ask the individual to SMILE.
T * Ask the person to TALK to SPEAK A SIMPLE SENTENCE
(Coherently) (i.e. . . It is sunny out today)
R * Ask him or her to RAISE BOTH ARMS.
Be ashamed to die until you have won some victory for humanity
RETIREMENT: (Paul Hodge, Harvard Generations Policy Program) The top one-third of the boomers will have lots of choices, and the bottom one-third will be working until they drop just to keep food on the table . "The middle third will muddle along." (Or as I say, there will be a lot of Wal Mart greeters who will die that way.)
Nearly half of today's workers won't be able to fund a comfortable retirement if they keep saving at their current rate. The Center for Retirement Research at Boston College found that 43% of working households in 2004 were at risk of having too little income to fund retirement. That's up from 31% in 1983.
OY! To reduce inflation by one percentage point, the unemployment rate has to rise by about two percentage points for a full year.
NASD BACKS OFF ON "BAD BOY" RULE - State securities regulators are upset that NASD has softened a proposed "bad boy" broker disclosure rule. The rule would allow for the public disclosure of the entire disciplinary file of registered representatives who have three or more disciplinary actions in the prior 10 years. Under current procedure, NASD does not reveal unproven or pending customer complaints that are over two years old or customer settlements under $10,000.
Actually, most complaints are never on file anyplace for the public to see so the whole issue is effectively moot.
BOOMERS BEWARE – Apparently boomers are being targeted by con artists with a variety of scams. People over 60 represent 30% of financial fraud victims and the wealth controlled by that age group is expected to grow. In fact, baby boomers already have some $8.5 trillion in investable assets. Here are some specific fraud scenarios to look out for: criminals posing as charitable organizations offering monthly annuity payments to investors who surrender their savings, investments that tie up older peoples' cash for many years and some "free-lunch" events.
GREAT SAFETY IDEA – If you or any of your clients don't have a home security system, here is an idea for you. Keep your car keys next to your bed on the night stand. If you hear a noise outside your house, just press the panic alarm on your car. It will go off from most everywhere inside your house and keep honking until your battery runs down or until you reset it with the button on the key chain. Works well when traveling too.
PSYCHOLOGICAL DISTRESS: Six psychological distress questions were included in the adult component of the National Health Interview Survey. These questions asked: "During the past 30 days, how often did you feel 1) so sad that nothing could cheer you up, 2) nervous, 3) restless or fidgety, 4) hopeless, 5) that everything was an effort, or 6) worthless?" Response codes (0--4) for the six items for each person were summed to yield a point value on a 0--24 point scale. A value of 13 or more was used to define serious psychological distress.
THE VOLATILITY OF CORRELATION -Important Implications for the Asset Allocation Decision (William Coacker)
The severity of how much correlation changes, even over longer periods of time, has not been adequately understood.
The paper analyzes the changing correlation of 15 asset classes measured against the S&P 500 over a 35-year period, and the impact of those changes on asset allocation decisions. It measures the correlations in rolling one-, three-, five-, and ten-year time series, from 1970 to 2004.
The article also evaluates whether 15 asset classes have helped or hurt in years the S&P 500 has declined, and whether growth or value styles are more correlated to the index.
The average variance in correlation measured 0.98 over one year and 0.25 over ten years. In short, the relationship among many of the asset classes appears to be inherently unstable.
Large value provides more diversification benefits than large growth, and small value provides more diversification than small blend or small growth. Emerging markets may provide higher returns and greater diversification than developed nations. But the low correlations of small value and real estate may not hold up during the next broad market decline.
Correlations exhibit uniqueness, meaning periods are distinct from previous time periods. For example, international stocks' correlation to the S&P 500 was 0.48 from 1970 to 1997, but 0.83 from 1998 to 2002.
Rather than rely on historical correlations, a more comprehensive and dynamic approach is needed in making asset allocation decisions.
Observations
Most relationships of these 15 asset classes to the S&P 500 were unstable:
The average variance in correlation over one year was 0.99.
The average variance over three years was 0.57.
The average variance over five years was 0.43.
The average variance over ten years was 0.27.
Assuming a variance of 0.20 or greater as lacking consistency, then 13 of 15 asset classes over three years, 12 of 15 over 5 years, and 9 of 15 over 10 years had inconsistent relationships to the S&P 500. If the assumption were tightened to variances of 0.15 as lacking consistency, then 14 of 15 asset classes over three years, 12 of 15 over 5 years, and 12 of 15 over 10 years had inconsistent relationships to the index.
Relationships in down markets have also been inconsistent. Among equities, large value was most likely to outperform the S&P 500 in down years, but not always. Small value and mid-value also tended to outperform the index in down years, but not with reliable consistency. All growth styles usually lost more than the index in down years, but not always. International and emerging markets had an equal occurrence of losing less and losing more than the index.
Me- tough stuff to follow, but mandatory. You cannot do an allocation without current and projected correlation. But it is not taught to advisors.
CHEAPER TO DIE: (Employee Benefit Research Institute) couple needs $295,000 for a typical husband and wife with an average life expectancy of 82 and 85. If they both live to 95, they will need about $550,000 to cover premiums and out-of-pocket expenses.
YOUTH RISK BEHAVIOR SURVEILLANCE Unhealthy and risky behaviors are often established during childhood and adolescence and extend into adulthood. To monitor health-risk behaviors among young people in the United States, CDC developed the Youth Risk Behavior Surveillance System, which monitors a sampling of students in public and private schools across the country in grades 9-12. This report presents findings from the 2005 Youth Risk Behavior Survey, which indicate a positive trend of a decreasing prevalence of unhealthy behaviors among the nation's youth since 1991. However, many young people continue to engage in risky behaviors that vary across cities and states
MORE CORRELATION: (Merrill Lynch) As of early 2006, small stocks were 94% correlated to the broad Standard & Poor's 500-stock Index -- which means, in simplified terms, in a year when the S&P 500 rose, an index of small stocks also rose 94% of the time. By contrast, as recently as six years ago, the figure was just 62%.
The MSCI EAFE index, which measures emerging markets, now shows 96% correlation to the S&P, up from just 32% six years ago.
Even commodities like oil and precious metals are increasingly moving in tandem with stocks. The Goldman Sachs Commodity Index, which tracks 24 commodities, moved from a correlation of negative 14% in 2000 -- in other words, it tended to fall when stocks rose, and vice versa -- to a positive correlation of 33% at present
OIL- In 2005, world oil use was estimated at 82.6 million barrels a day. The U.S. burns a quarter of that.
401(K): Defined-contribution plans represent a major organizational form for investors’ retirement savings. Today more than one third of all workers are enrolled in 401K plans. In a 401K plan, participants select assets from a set of choices designated by an employer. For over half of 401K-plan participants, retirement savings represent their sole financial asset. Yet to date there has been no study of the adequacy of the choices offered by 401K plans. This paper analyzes the adequacy and characteristics of the choices offered to 401K-plan participants for over 400 plans. We find that, for 62% of the plans, the types of choices offered are inadequate, and that over a 20-year period this makes a difference in terminal wealth of over 300%. We find that funds included in the plans are riskier than the general population of funds in the same categories.
When we examine one category of investment choices, S&P 500 index funds, we find that the index funds chosen by 401K-plan administrators are on average inferior to the S&P 500 index funds selected by the aggregate of all investors.
SLEEP: In recent decades, adults have gone from sleeping for an average of 9 hours to about 7 hours.
VALUE STOCKS? (WSJ) Since the late 1960s, value funds have generally outperformed growth funds. But since 1977, indeed since 1987, there is little to choose between the two. Indeed, for the first 30 years, growth funds rather consistently trumped value funds.
BABIES: Fewer teenagers are having babies or dropping out of high school since the start of the decade, but slightly more live in poverty with parents who don't work year round. A report by the Annie E. Casey Foundation charity found that measures of health and income for children and teens are no longer improving as much as they did in the 1990s.
JUST A BUNCH OF REALLY STUPID PEOPLE: Diabetes experts declare that what is heading toward America is the equivalent of a medical tsunami. They issue warnings about obesity and the link between expanding waistlines and diabetes. The reality is that many people are unwilling to take that on the necessary changes in eating and exercising, and many of their doctors are too busy to make sure they do.
HOT MARKET: (Small Business Administration) small businesses represent 99.7% of all employers, employ 50% of the U.S. non-farm private sector employees and account for more than 50% of the nation's non-farm GDP.
PAYING A BROKER: (John M.R. Chalmers, Lundquist College of Business) We estimate that mutual fund investors may have paid as much as $3.6 billion in front end loads in 2002, $2.8 billion in back-end loads and another $8.8 billion in 12b-1 fees, in addition to the $23.8 billion paid in 2002 for investment management fees and other operational expenses.
Funds sold through the broker channel do not appear to charge lower non-distribution fees; brokers are not directing investors to less expensive funds. Brokered funds do not perform better than direct-channel funds. We find that funds sold through the broker channel have lower raw and risk adjusted returns than direct-channel funds, even before distribution expenses are deducted. Broker-sold funds reflect different asset allocations that change over time, but when risk-adjusted, these recommendations produce an aggregate Sharpe Ratio similar to that of direct channel funds.
While biases like overconfidence, mental accounting, and loss aversion characterize individuals, little research has focused on whether distribution professionals attenuate—or magnify—these biases. For example, while investors might have bounded rationality—and be unable to process the mountain of information on the thousands of funds available—paid professional advisors might be able to help them sift through all of this data and make better investment decisions.
Parties who advise clients about investments and sell them financial products may owe their clients certain duties that are higher than “caveat emptor.” At a minimum, brokers are subject to NASD rules, which include a requirement that they recommend suitable investments for their clients. Financial advisors, as fiduciaries of their clients, owe an even higher standard of care, and must put their clients’ interest ahead of their own.
* Conclusions and Future Work
Our study of mutual fund distribution channels and the customers who use them attempts to understand how the various channels differ and the nature of the relation between channel and consumer behavior. We begin with a positive hypothesis: the prominence of funds sold through brokers implies that brokers provide consumers with valued services.
Our study has identified few, if any, of these benefits.
The bulk of our evidence fails to identify tangible advantages of the broker channel. In the broker channel, consumers pay extra distribution fees to buy funds with higher non-distribution fees expenses. The funds they buy underperform those in the direct channel even before deductions of any distribution related expenses. Even before accounting for distribution expenses, the underperformance of broker channel funds (relative to funds sold through the direct channel) costs investors approximately $9 billion per year.
As a whole, the broker-channel funds exhibit no superior asset allocation. With respect to behavioral biases, the pattern of evidence depends on the specification chosen. There is no consistent evidence that funds sold through the broker channel exhibit substantially greater or less trend-chasing behavior. Finally, realized flows of money into individual funds appear to flow into brokered funds with larger front end loads and 12b-1 fees, consistent with the notion that paying more to the sales force may influence consumer buying behavior.
MY REPLY: I have read the above paper. While I agree with the assessment, I find the paper- and literally all others similar- lacking in one major fact gathering area. There is and almost always has been an assumption that brokers are “professionals”. In that context, one assumes that they have the ability to actually read and decipher a prospectus; they can comment intelligently on risk; they can find suitable investments. Why? While I might “accept” that illogical position by the likes of Money Magazine, Kiplinger’s- even the WSJ and the NY Times et al- it is wrong for professional articles to continue to make that assumption.
The fundamentals of investing have never been taught to a broker. Such issues of alpha, beta, correlation, diversification, asset allocation, standard deviation and more have never been required in order to offer investments to any member of the public. The subjects are not tested as part of licensing training. And what is not tested is not taught. Having taught the Series 4, 6, 7, 8, 24, 26, 52, 63 securities licenses as well as investment and real estate classes for universities, I continue to find a failing with authors regarding the ‘professional’ status of investment advisers. Validation of material required for licensing is available at the professional offices of securities licensing firms- Dearborn and Securities Training Corporation- which are located in all major U.S. cities. They have the manuals on file for the various courses. I have retained some from the 80s and 90s. You won’t find alpha, Bill Sharpe, correlation........ Therefore you won’t find- cannot find- knowledge and competency with brokers.
The NASD and the SEC focus on suitability- yet they never have provided any insight as to what is “suitable” given the requirements or conditions of an investor. The NASD, in recent response to my commentary about arbitrator education, simply indicated that they are to provide only procedural direction, not substantiative. Attorneys are bereft of such knowledge- it has never been provided with a law degree. Chuck Levitt- past Commissioner of the SEC- said that diversification was “not putting all your eggs in one basket”. That is a completely useless statistical measure for risk or suitability. I bet none of the other SEC commissioners and staff have a clue.
In short, if one does not know what diversification is by the numbers, you cannot determine risk. If you cannot determine risk, you cannot determine suitability.
As regards financial planners- the most prominent (marketed) designation is the CFP. While it provides an insight to many areas, the knowledge base is about one mile wide and one inch deep. The CFP represents nothing more than about one semester in money. That’s it. It is inherently flawed in offering any significant advice to clients. One pundit noted that there are about 140 different areas in the investment study section for the designation and nothing on how to do asset allocation. I go further- the material on standard deviation as defined in a 2003 study manual is wrong. Diversification is totally outdated.
I do admit that advisers of any type might offer some sound advice- a janitor in a hospital can logically and ‘knowledgeably’ tell an obese person to lose weight. However, the whole point of your article as to whether brokers et al are offering added value is moot. They are effectively clueless to the fundamentals of investing. They do not get it with continuing education- it is not offered.
So back to the bottom line- if you do not know diversification by the numbers, you cannot determine risk. If you cannot determine risk, you cannot determine suitability. The entire industry is based on a highly marketed perception of “professional advisers”. The perception is wrong. The education of such advisers is almost nil. That consumers do not get much has been effectively preordained. Your study confirmed it- but missed the real reason for the default.
THEIR REPLY: Thank you for your thoughtful comments. Our purpose in writing this article was to study the performance of funds by distribution channel. The training of those that sell funds is certainly of interest but not something that we have data to address--at least in this paper.
MY COMMENT- It is hard to believe that they do not have the data. But none of the researchers do. That's true because they universally have never taken the Series 7 (or whatever) exam and are clueless to such teachings. It's more than unfortunate because most of those journalists do not even have the same (limited) knowledge as the brokers. Broker sold funds do not do as well. The costs are higher, if nothing else. But they are sold by brokers because people trust them and assume they have the expertise to pick the right allocations. If the public was told that the brokers were inherently stupid, they wouldn't buy broker funds.
It's all very logical- but only if you read. People that don't read, don't know and will never find out. There is only a handful of people who will read their article. Fewer still that will read and properly interpret my remarks. So the system will not change very much, if at all. Marketing prevails.
SAVINGS: (Bill Bersnstein) Assuming 100% of the income will be needed during retirement, Bernstein stated that according to his calculations, a 20 year old who works at least 40 years will have to save and invest around 25% if his salary to retire at age 65 and draw out about 4%. This is assuming a conservative 60/40 stock/bond mix. Bill said the rather high savings rate of 25% is needed to offset lower equity returns. He added that most people save a lot less therefore they can forget about any hope of retirement unless they drastically reduce their retirement budget expenditures.
MORE RICH FOLKS - (Spectrem Group) the number of very rich Americans (over $5,000,000 in investable assets) is up by 26% and the number of millionaires is up 11% to 8.3 million. Further, many of the very rich are making more international investments.
"I've had a perfectly wonderful evening. But this wasn't it. "
Groucho Marx
CONVOLUTED RULES ON MEDICARE: My doctor referred me to a specialist who doesn’t take assignment, and the specialist made me pay up front. He said he would bill Medicare and I would be reimbursed, but when I got my paperwork from Medicare, it didn’t include this appointment. Is the specialist required to file a Medicare claim? Do you think it was a scam?
Reply- Most likely it is not a scam, but it is a good thing that you are reading your Medicare Summary Notice (MSN).
The MSN is a summary of claims for health care services that Original Medicare processed for you during the previous three months. The statement includes submitted charges, the amount that Medicare paid and the amount you may be required to pay (see a sample). The MSN is not a bill.
As a non-participating provider, a doctor who does not take assignment (Medicare’s approved amount for services), your specialist is allowed to request that you pay in full and up front for services. But he is still required to file a claim with Medicare. If he doesn’t, you won’t be reimbursed the 80 percent of the Medicare-approved amount (50 percent for mental health services) that you are owed. You should know that as a non-participating provider he is also allowed to bill up to 15 percent more than the Medicare-approved amount for most services. (For example, if Medicare approves $100 for the appointment, he can charge up to $115, of which you should be reimbursed $80 by Medicare.)
Note: Some states may have stricter restrictions on what doctors may charge you. For example, in New York doctors can only charge you 5 percent more than the Medicare-approved amount for most services. Call your State Health Insurance Assistance Program (SHIP) to find out more.
Generally, doctors file claims with Medicare soon after they provide services, but your specialist could just be behind in filing his claims. You should know that there is a limit on how long he can wait to file though. After you receive a service, your doctor generally must file a claim with Medicare by the end of the next calendar year. For example, if you received this service on June 15, 2006, then the doctor has until December 31, 2007, to file.
However, if the service was provided between October and December, your doctor has until the end of the second calendar year to file a claim with Medicare. So, if you received the service on October 1, 2006, then the doctor has until December 31, 2008, to file.
Because MSNs are now only mailed four times a year (quarterly), it may be sometime before you see that the claim has been filed. You can wait and see if it is on your next MSN, or you can call and ask the doctor if the claim has been sent to Medicare. Should the specialist miss the filing deadline or if he refuses to bill Medicare, you should take action.
A refusal to bill Medicare at your expense is often considered to be Medicare fraud and should be reported. You can report the problem to the administrators at the clinic or hospital where your doctor works;
your Medicare Part B carrier;
your State Attorney General’s office;
your state medical licensing board.
To locate the appropriate contact in your area, see the link in Spotlight on Resources below.
Doctors will be reprimanded for their refusal to follow Medicare policy and may lose their right to bill Medicare altogether.
Doctors who wish to charge their Medicare patients whatever they want must officially opt out of Medicare. These doctors do not submit any claims to Medicare and are not subject to the Medicare law that limits the amount doctors can charge patients. If you see one of these doctors, the doctor must have you sign a private contract that states that you understand you are responsible for the full cost of the services. Medicare will not pay for any of the cost of services you receive.
HOW TIMES HAVE CHANGED. The average height of a civil war man was 5'7" and about 147 pounds. Body mass index of 23- very normal. Today the height is 5' 9.5" and a weight of 191. Body mass index of 28.2- close to obese.
Common chronic diseases such as respiratory problems, valvular heart disease, arteriosclerosis and joint and back problems have been declining about 0.7% a year since the turn of the 20th century.
VA SALES AND EXCHANGES - Variable annuity sales were up, but total net flows were $20.5 billion last year, compared with $40.2 billion in 2004. This would indicate that many VAs are simply being exchanged for other VAs. Other reasons for the lower net flows are increased regulatory scrutiny and negative media overage.
LYING: Most people report telling lies on a fairly regular basis and being largely untroubled by them. When pressed, people say their lies are innocuous.
Nor can the world be divided cleanly into cheaters and honest people: A variety of ingenious experiments show that large majorities of people can be induced to do the wrong thing, depending on the circumstances.
Among the most potent motivators to cheat is the sense that one has lost the limelight, is falling behind and will be judged harshly. People are also more likely to cheat if they think other people are cheating.
But people who do the wrong thing are fully aware of what they have done, right? Not always.
"We have a whole quiver full of rationalizations,"
"When you are talking about a moral issue, it is something we feel we ought to do. But the fact we label it as 'moral' means it is probably not something we want to do. "So we are in a bind of wanting to do what we don't want to do."
"Moral language is really the language of victims. "We use it more to condemn other people's behavior than we do to motivate our own."
C. Daniel Batson, psychologist at the University of Kansas
UNDERSTANDING PENSIONS: cognitive function, numerical ability and retirement saving, As the degree to which individuals are expected to provide their own resources for retirement increases, there is a correspondingly increasing importance of individuals being able to understand the financial choices they face and to choose savings products, portfolios and contribution rates accordingly. In this paper we look at numerical ability and other dimensions of cognitive function in a sample of older adults in England and examine the extent to which these abilities are correlated with various measures of wealth and retirement saving outcomes. The key findings are: a) Relatively large fractions of the population can be seen to have relatively low levels of financial numeracy and these numeracy levels decline systematically with age. b) Numeracy levels are correlated with measures of retirement saving and investment portfolios, even when we control for other cognitive ability and education. c) Numeracy is correlated with knowledge and understanding of pension arrangements, and with perceived financial security, even when we control for other cognitive ability, education and the level of overall retirement saving. The lessons of our analysis are threefold, even though at this point we have only crosssectional data available on which to base our analysis. Firstly, it shows yet another dimension in which inequalities amongst older individuals are apparent. Second, the analysis suggests that in the short run there may be a role for targeting simple retirement planning information at low numeracy, low wealth, low education groups. Third, it suggests that a longer run policy goal might want to target numeracy levels more generally in order to reduce the fraction of the population with low basic skills. Whether such a policy would have knock on effects on to retirement planning arrangements, however, is a more difficult question to answer on the basis of the conditional correlations we present here. On this topic in particular, there is much further work to be done.
Only one person in two billion will live to be 116 or older.
NOT GETTING ANY?: (AARP Public Policy Institute) Through 2004, most baby boomers hadn't received any inheritance. The breakdown:
Amount of inheritance Pct. of boomers
None 80.8%
Up to $20,000 4.6%
$20,001-$50,000 4%
$50,001-$100,000 3.1%
$100,000+ 7.5%
JUST HOW STUPID CAN YOU BE?: The NASD fined four broker-dealer affiliates of ING Group NV ($7 million for promoting the sale of favored mutual fund shares in exchange for getting business from those funds.
The NASD said that between 2001 and 2003, the ING broker-dealers provided 10 mutual fund complexes with marketing benefits that other fund firms did not receive. It said these benefits included yearly sales targets, special placements on ING intranet Web sites, and increased access to ING's sales force. Eight of the 10 complexes paid some fees by directing $25.7 million of brokerage commissions to the broker-dealers, while the others paid fees in cash
None admitted guilt.
Bite me
YOUNG FINANCIAL ILLITERATES - Which tends to have the highest growth over periods as long as 18 years: (a) A U.S. government savings bond; (b) a savings account; (c) a checking account, or (d) stocks? This was one of 30 multiple-choice knowledge questions in a financial-literacy test given to 5,775 recent high school seniors. Only 14% of the 12th-graders answered correctly...(d) stocks. Also, just 23% of the students in the latest test understand that interest on savings accounts may be taxable and only 40% realized they could lose their health insurance if their parents become unemployed.
HEALTH: More than 80 million American adults are smokers, obese or both and face an increased risk of poor health and an early death, researchers said on Friday. Roughly four percent of Americans, or 9 million people, fall into both categories with a disproportionate number among the poor and those who have a low education. "Nearly 41.5 percent of adults (81 million aged 18 or older) in the US are obese or smoke and about 4.7 percent smoke and are obese.
23.5 percent of adults were obese and 22.7 percent smoked.
DEPRESSION AND NURSING HOMES: A total 13,261 respondents said they had "felt sad or depressed much of the time" during the past year of the survey. By the end of the study period, 2,005 of them -- 13 percent -- had been admitted to a nursing home, Harris and Cooper report in the Journal of the American Geriatrics Society.
Diabetes and heart failure were the most strongly associated with subsequent nursing home admission, but depressive symptoms was the third greatest predictor, surpassing other chronic heath conditions like cancer and arthritis, study findings indicate.
Other factors associated with an increased risk of nursing home admission included older age, low income and decreased physical functioning. In fact, for each additional impairment on a rating scale of a senior's ability to perform daily living activities, the risk of nursing home admission increased by 27 percent.
The relationship between depression and nursing home entry may be due to depression's effect on disease states and lifestyles, the researchers speculate. Studies have shown that depressed individuals may have higher levels of certain risk factors for high blood pressure and cardiovascular disease, for example, while other studies have linked depression to increased alcohol drinking and poor diets.
On the other hand, depressive symptoms may simply be a marker of another condition, such as early Alzheimer's disease.
WORLD OIL DEMAND TO RISE 37% BY 2030. (Energy Information Administration) Demand will hit 118 million barrels per day (bpd) from today's existing 86 million barrels, driven in large part by transport needs.
The US will still be the single largest consumer of petrol, with the EIA predicting it will consume 27.6 million bpd, up from this year's 20.8 million.
"I've just learned about his illness. Let's hope it's nothing trivial. "
Irvin S. Cobb
RISK: When risk is measured as the standard deviation of returns across time, this implication is confirmed — standard deviations are in fact lower. However, a hedge fund manager or 130/30 manager has more choices at his control, like short selling and derivatives. These choices create a risk that we call implementation risk. Two managers with identical standard deviations, implementing the same strategy, can have substantially different performance results, primarily because of the way they employ the tools available to them. Implementation risk is cross-sectional, whereas return risk is cross-temporal. Two low-volatility return paths can lead to substantially different wealth accumulations.
implementation risk is the price that is paid for what hedge fund marketers call “free leverage.” The pitch works like this: By going 130% long and 30% short you get 160% of your assets working for you (130% plus 30%), without any net increase in market exposure — a winner. Despite common belief, this free leverage does increase risk, namely, implementation risk. The key point is basic. Investors ought to know all of the risks they are taking. The benefit of long-short investing is in expanded opportunities. But this is a two-edged sword. Without skill you’re as likely to lose more as you are to earn more. Implementation risk tells you how much more, and reinforces the need for greater due diligence.
PENSIONS: The Pension Protection Act of 2006 contains several areas of pension plan reform, including new rules for automatic enrollment in 401(k) plans, changes in funding requirements of defined benefit plans, and extension of contribution limits under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), among many other changes.
Automatic Enrollment
The Pension Protection Act contains several new rules to encourage employers/plan sponsors to adopt automatic enrollment in order to boost employee participation in 401(k) plans. The new provisions governing automatic enrollment in 401(k) plans are effective for plan years beginning on or after December 31, 2007.
Here is a summary of the most important provisions relating to automatic enrollment.
Employers must provide notice to participants upon automatic enrollment explaining: rights to elect out of the plan or change contribution levels; time periods for contributions; and how contributions will be invested in the absence of any election or direction from participants.
The Act provides a non-discrimination "safe harbor" for both the ADP and ACP tests for plans with automatic enrollment. Plans qualify for the elective deferral safe harbor if: the contribution rate is at least 3% during the first year; 4% during the second; 5% in the third; and 6% for the years following. The plan is permitted to specify a percent up to 10%.
A plan satisfies the contribution safe harbor by either making matching contributions of 100% of elective deferrals up to 1% of compensation, and an additional 50% between 1% and 6% of compensation, or by making a non-elective contribution of 3% of an employee's compensation for all eligible employees.
Employee contributions must be vested in two years to qualify for safe harbor treatment.
Plans may give participants a 90-day period to elect out of the plan and withdraw the contributions the plan made on his/her behalf and the earnings related to those amounts. Such distributions are not subject to the 10% penalty that normally applies to early distributions (i.e., prior to age 59 ½). This rule applies to 401(k), 403(b), and certain 457(b) plans that have automatic enrollment.
A plan is treated as complying with section 404(c) of ERISA, which provides limited protection against fiduciary duty violations, if it: provides participants with proper notice of their rights to elect out of the plan; and invests contributions in accordance with soon-to-be established Department of Labor (DOL) guidelines. The DOL guidelines will set forth rules for investing contributions made through automatic enrollment where the participant did not elect otherwise.
Note: The Act does not require 401(k) plans to adopt automatic enrollment, nor does it require plans to follow the safe harbor design specified in the new rules. However, 401(k) plans that do not follow the Act’s safe harbor provisions must continue to comply with existing regulations.
Prohibited Transaction Exemption
The new law allows employers to obtain financial advice for participants without running afoul of prohibited transactions under ERISA fiduciary rules.
A fiduciary that is a registered investment company, bank, insurance company, or broker may give investment advice to participants and not be treated as engaging in a prohibited transaction if: the fee does not change depending on a participant’s investment choices; or the advice is based on a computer model certified by an independent third party. This exemption becomes available for investment advice given after December 31, 2006.
New Plan Design
Under the Act, a new type of "hybrid" plan that combines features of both defined benefit and automatic enrollment 401(k) plans has been created. Employers with 500 employees or fewer may establish these plans beginning in 2010, provided they have a single plan document and trust fund. Plan sponsors operating combined defined benefit/automatic enrollment plans need only file one Form 5500 annual report.
In addition, there will be specific rules regarding minimum benefit and contribution levels, vesting, and uniformity of benefits, rights, and features.
EGTRRA-Governed Dollar Limit Increases
Many EGTRRA provisions related to amounts and limits on contributions and pension benefits were set to expire at the end of 2010 and revert to pre-EGTRRA limits. The Pension Protection Act eliminates that expiration date and establishes new amounts, allowing employers to continue operating their plans under EGTRRA provisions.
THE UNITED STATES: BIG SPENDERS, BUT ONLY FOR A FEW
The U.S. spends more on health care per capita, yet has the largest uninsured population of any advanced, industrialized country. Compared to 19 other wealthy countries that belong to the Organization for Economic Cooperation and Development (OECD), the U.S. health care model fails miserably, with 16% of the population lacking health insurance in 2004. Ireland, Austria and Finland spend half of what the U.S. spends on health care, as a percentage of GDP, and cover 99-100 percent of their respective populations.
CONTROVERSIES INVOLVED IN ARBITRATION CASES
Type of Controversy* 2002 2003 2004 2005 6/ 2006
Margin Calls 366 244 168 78 27
Churning 824 665 449 315 130
Unauthorized Trading 930 789 520 395 147
Failure to Supervise 2,633 3,230 2,743 1,828 756
Negligence 2,522 3,500 3,398 2,225 1,003
Omission of Facts 1,178 1,949 2,195 1,123 397
Breach of Contract 1,958 2,328 2,723 1,987 890
Breach of Duty 4,236 5,565 5,426 3,514 1,505
Unsuitability 2,644 3,198 2,697 1,926 793
Misrepresentation 2,623 3,280 3,230 1,826 671
Online Trading 95 74 4 7 6
*Each case can be coded to contain up to four controversy types. Therefore the columns in this table cannot be totaled to determine the number of cases served in a year.
The real problem is that the bulk of all cases will never be handled properly at the arbitration level since brokers and planners have never been taught the fundamentals of investing. But even worse for consumers with a problem, neither have the arbitrators nor any of the attorneys. I have never met a securities attorney who knew the correct definition of diversification- nor was even that interested in learning.
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
MEDICATION ERRORS HARM HUNDREDS OF THOUSANDS ANNUALLY (Institute of Medicine) Mistakes in dispensing drugs are so prevalent in hospitals that, on average, a patient will be subjected to a medication error each day he or she occupies a hospital bed. The panel of experts estimated that drug errors cause at least 400,000 preventable injuries and deaths in hospitals each year, more than 800,000 in nursing homes and facilities for the elderly, and 530,000 among Medicare recipients treated in outpatient clinics. Many of these medication errors could be avoided if doctors adopted electronic prescribing, if hospitals had a standardized bar-code system for checking and dispensing drugs, and if patients learned more about the drugs they take, the report said. Common errors include doctors writing prescriptions that could interact dangerously with other drugs, nurses putting the wrong medication -- or the wrong dose -- in an intravenous drip and pharmacists dispensing the wrong dose. Electronic prescriptions would bring an end to deciphering illegible handwriting but cannot guarantee that a drug order is typed correctly.
CAREGIVING: (MetLife Mature Market Institute, National Alliance for Caregiving) Lost productivity due to demands of caring for aging family members costs U.S. employers more than $17 billion per year.
For caregivers providing the most intense levels of care, the cost per employee is $2,441 a year, or a total of $17 billion,
For all employee caregiving, the average cost is $2,110 per year, or an annual total of about $34 billion.
The study defines intense care as lasting from 12 hours to 87 hours a week.
Since 1997,costs of caregiving have increased nationwide by about $4 billion for both levels of care