FEBRUARY 1996
COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR. BSCE, LLB, MBA, MSFP, PhD
CERTIFIED FINANCIAL PLANNER
REGISTERED INVESTMENT ADVISER
CONSUMER PRICE INDEX: You may have heard about certain adjustments
to the CPI- bringing it down a tad because it is supposedly overstated. Greenspan
indicates it might be from 0.5% to 1% overstated each year. That would be
helpful to almost all people- save for those relying on Social Security which
is still scheduled to goes up by inflation each year.
LOW INCOME HOUSING: In order to promote the construction of low income
housing, the government offered tax credits to investors in limited partnerships.
For an investment by the very rich, they could get a $1 for $1 credit against
taxes. Apparently per a Chronicle article, their return averaged 17%. The
House and Ways committee voted to kill the bill and one representative called
it "corporate welfare". Initially I was a little concerned since low income
housing probably won't get built by anyone else. However, while there certainly
is some good in the program, the article noted the huge costs of development.
Some affordable housing units have costs more than $200,000 PER UNIT to build.
A project next to the Farmer's Market in San Francisco costs $11 million
for 46 units. That's $239,000 PER UNIT! That's several times more than
conventional housing. They already have over 1,400 applicants (I don't blame
them- I'd like to live there to.) The director of the California Department
of Housing and Community Development also estimates that only $.50 to $.60
of very dollar goes to construction. The rest is eaten up by "soft costs,
including the whole cottage industry of syndicators and attorneys." (Your
friends and mine.) That's also, as one newscaster calls it, "The Fleecing
of America". Apparently the law will be retained in some measure, though
they are saying it might contain some costs control provisions.
Yea, right.
401(K): Under a law that became effective 1995, corporations that
offer 401(k) plans must offer investment information to its employees- a
fact that I have commented upon several times previously. Most corporations
feel that any info provided would be construed as advice thereby subjecting
them to increased fiduciary liability from disgruntled investors/employees.
The mutual funds used in a 401(k) are also leery of making any type of comments
that can be construed as recommendations to a certain fund. But a FW article
noted that employees are certainly not getting the info they need because
of a KMPG Peat Marwick survey showed that more than 50% of all participants
still invest in fixed income securities, only 33% invest in stocks but 38%
invested in their company's stocks. An SEC director says that "what employees
need is guidance". Bette Briggs, chief of fiduciary interpretation at the
Department of Labor concurs in stating "we encourage employers to provide
guidance". FW went on , "the bottom line is that most companies are providing
generalized advice to a large mass of employees. Most are staying away from
providing specific fund recommendations". Fine, but what has been lost in
this commentary is the fact that a tremendous amount of info can be provided
that is NOT constituted as advice. For example, one can provide LOTS and
LOTS of product info about a fund by simply reviewing the prospectus. There's
literally NEVER any advice contained in these- just loads of statistical
info that needs to be gleaned out and deciphered properly to EE's. The problem
that exists is that the people providing the seminars to date have rarely,
if ever, done formal seminars to any audience previously. Secondly, most
of them have such a limited background that they don't know what is relevant
to begin with.
BUSINESS VALUATIONS and TRANSFERS: Business owners can have a substantial amount of their estate tied up in the business which can be taxed at full value upon death. As regards the valuation, an owner essentially cannot put his own value of the business since it will not be accepted by the IRS. And letting the IRS do it is stupid. So literally all texts suggest the owner hire an independent and QUALIFIED business appraiser.
Also if there are separate business interests, certain minority and lack of marketability discounts may apply.
A lack of marketability discount applies typically to a closely held business- such as family business for example- since their stock is not actively traded on an exchange. Therefore a seller's value is reduced due to the difficulty in finding a ready and willing buyer to purchase the business.
Minority discounts are valid for transactions where a controlling
interest- more than 50% ownership- has not passed to another party. As an
example, if a shareholder gives/sells his 25% of XYZ company to another,
a minority discount could be taken since a 25% interest is not enough for
full control of a company. By the same token, passing 51% interest could
actually have a premium attached since a controlling interest was given.
Discounts may even be taken when transfers are made to a controlling shareholder.
In a Private Letter Ruling 94-32001 a father owned 49% interest in a family
business. At death he transferred the total interest to his son who already
owned the other 51%. Of course one's immediate reaction would be to price
the father's interest at full value since it went to his son. But the father's
interest was actually allowed a minority discount since it was valued at
what a willing buyer . The valuation was not impacted by the relationship
to the recipient nor by the amount of control experienced by the recipient
after the transfer. Another ruling applied a slightly different ruling. In
this case, a father took his 100% interest and gave 30% to each of three
children, 5% to his wife and kept 5% for himself. He attempted a 75%
marketability discount of 75% of the fair market value of the gifts. But
the IRS came back and said that if one child aligned with another for a total
of 30%, they would have a swing vote and therefore denied part of the discount.
In a separate case where each of the children received 20%, the IRS said
a swing vote does not apply since two children joining together would not
have enough to control the business.
BUSINESS TRANSFERS, IMPENDING DEATH and ANNUITIES: In a related case to that above, a mother held 60% ownership in a business, one child held 20% and two other children held 10% each. In contemplation of an impending death, mother sold one half her interest- 30%- to the 20% child for a private lifetime annuity. The other 30% of her interest was redeemed by the company. This effectively left the child with a 71% interest in the company- far more than a simple controlling interest. Mother tried to get a minority discount both to the stock gifted to that child as well as the 30% that was sold/redeemed by the company. The IRS determined that the transfer and sale effectively was one transaction with the child essentially being transferred a controlling interest in the company. The valuation was therefore INCREASED rather than decreased.
Secondly was a separate issue of the valuation of the annuity. these
are valued by the actuarial expected age of the annuitant. But the point
here was if the life expectancy can be reasonably determined to be shorter,
then the shorter time frame will used in the valuation. Since Mom was expected
to die soon, the government tables overstated the value of the annuity and
therefore Mom sold her interest to her child for less than the fair market
value- a "bargain sale". The IRS therefore deems the bargain sale element
to be a gift which is subject to gift taxes. O.K., so some of this was a
little involved. But what should have been clear is that Mom absolutely should
have done her estate planning much much earlier. She should have used an
estate expert. She could have avoided almost all the hassles with the
IRS.
401(K): These voluntary retirement plans are finding more acceptance
with employees- though perhaps because they have little choice since other
plans have been eliminated. That said , however, women are lagging the field.
Only 62% of women join a 401(k) plan versus 70% of men. And women tend to
put in only half as much into the more aggressive investments as stock. The
first part I think is due more to the fact that women make less money and
are far more apt to be running single households. In their mind, they can't
afford to invest more. In the latter past, it's due to their limited
understanding of investments overall. (No, men are not necessarily that much
brighter, if any. But they are inherently more aggressive- hence more stocks).
IMPAIRED RISK: When one thinks about insurance, they usually are healthy and won't have too many worries about passing a physical. But some people have had past illnesses- heart disease, diabetes, etc. Can they get insurance? Almost positively. Here are some recent examples from Midland.
A 58 year old male, non smoker applies for $250,000. He's 6'0'' tall but weighs 300#. Has history of hypertension and diabetes for 10 years, both controlled with medications. Average blood pressure is 165/95. Approved as a standard non smoker user
A 39 year old female non smoker applies for $100,000. Has history of aortic valve replacement, slight ventricular hypertrophy and hypertension though under treatment and well controlled. Blood pressure 130/85. Approved as standard non smoker user plus $5.00 per thousand flat extra or as an approved standard non smoker user with graded death benefit
A 66 year old male applies for $75,000. A pipe smoker, 6'3" but weighs in at 425#. History of prostatitis, osteoarthritis, had hypothyroidism but controlled with medication. Approved as standard tobacco user plus table 6 rating and face amount reduced to $50,000.
No, it's not perfect, but it does show that insurance can be had
by most people. There aren't that many firms that handle impaired risk, but
when you need them, they are the only places to go. It is completely illogical
to go through a regular insurance agent. The standard firms do not have
underwriters that are competent to understand these risks and invariably
you waste your time and that of the clients.
INDEX FUNDS: Over the last decade ending in 1994, index funds outpaced
78% of all equity funds.
LARGE VS SMALL: How have large and small cap (between $60 million
and $600 million) have fared over the last eight decades?
Small Cap Large Cap
1920's -4.5 19.19
1930's 1.38 -0.5
1940's 20.69 9.17
1950's 16.9 19.35
1960's 15.53 7.81
1970's 11.49 5.86
1980's 15.83 17.55
1990's 14.47 11.53
AVG 12.22 10.19
Though the average look fairly close- 12.22% versus 10.19%, $1 in
small cap would have grown to $2,843 while $1 in large cap would have grown
to $811. So, should you put most of your money in small cap? Absolutely not.
But it's a viable considerations if past history is a precursor to future
events.
ADULT DAY CARE CENTERS: For info contact Partners in Caregiving at
910 716-4941
DR. DEATH: Jack Kevorkian, the doctor involved with physician assisted suicide, was recently joined by several other doctors in issuing proposed guidelines for patients who would use such services. I think they are worth noting- if for the simply reason that I would have no compunction to terminating my life if I found it did not meet the standards I had set for continuing my life. After all, I would not allow my cat to die a prolonged, pain filled and degrading death. I figure I should be treated with the same respect and dignity.
RESTRAINED: A lot of changes have happened at nursing homes- most
for the better. Since laws were enacted in 1987, there has been a reduction
in tranquilizers, sedatives and use of physical restraints. A recent study
said that fewer than 20% of residents are now restrained versus 40%+ in the
1980's.
CHILDREN GUARDIAN: If something should happen to you, who will take care of your children? It's a question that few people have addressed simply because they have not done a will. Assuming that one is to be done, there are several issues that need to be addressed. First is the fact that you need two sets of guardians- in case the first is unwilling or unable to serve. Secondly, don't just chose these same guardians to manage the money that will come from the estate and insurance proceeds. Having the capability for managing two eight year children has nothing to do with the competency to manage $750,000 of assets. Some estate planning attorneys have offered these questions
MORALLY REPUGNANT REVERSE MORTGAGES: An 83 year old retired nurse
in San Mateo got a reverse mortgage through Providian Corporation- a Fortune
500 Company located in Louisville. However the company charged her an origination
fee of $3,000 plus 7% of the value of the home- a total of $16,665. That
was equivalent to a 62% annual rate of interest since her signing the agreement
in 1993. She was paid $52,000 in 2 1/2 years but owed $84,000 in fees, principle
and compounded interest. For the first year alone, she got $13,716 but already
owed $35,336. Providian Corporation has sold 2,000 reverse mortgages between
1989 and April 1993. Some of the people, like her, were deteriorating mentally,
but certainly not all 2,000. Bet at least 1,700+ were sold something and
had little idea of what they were signing, the repercussions or the availability
of other financial avenues to seek. Sad and stupid.
MERRILL LYNCH: Merrill says it did nothing wrong in the sale of risky
investments to Orange County that failed and caused county to go into bankruptcy
on its municipal obligations. What is interesting is that in the first half
of 1995, it spent $564,000 in lobbying the California government that, in
one part, would have forced local governments to stop dealing with firms
under investigation for security violations.-i.e. Merrill Lynch. The bill
never made it out of committee. Good business by Merrill? Yes, absolutely.
Ethical? Your call.
MARKET TIMING: Given a set of circumstances, almost anything can
look good or show a track history of good to superb results. Market timing
is an attempt- usually through a computer generated analysis of facts and
perceived conditions, to tell an investor when to get in and when
to get out. The Chartists Mutual Fund Timer newsletter told investor in April
1994 to sell their stock holding because of the impending doom in
equities. His subscription base is going from around 23,000 just over a year
ago to perhaps about 9,000. Statistically, market timing just doesn't work-
it's asset allocation that determines usually what your return will be. Some
of you may also remember Howard Ruff and the correct calls he made years
ago about the impending doom in the market. He must have made millions on
the services he sold thereafter- primarily the newsletter Ruff Times. I don't
think it's even in circulation anymore because his calls after that were
laughable.
NATIONAL INSTITUTE OF NEUROLOGICAL AND COMMUNICATIVE DISORDERS AND STROKE: 9000 Rockville Pike, Bethesda, MD 20892 has info on Parkinson's disease, epilepsy, head and spinal cord injuries, stroke, etc.
KNOW WHEN TO HOLD THEM, KNOW WHEN TO FOLD THEM: As many readers and students have heard me discuss in the past, you should never buy an investment unless you already know how and when you will sell it. To do otherwise tends to indicate that you fell in love with the investment or have simply become nonchalant about reviewing its activities or that of the economy. Financial World had a recent article that complements the comments I have made. To whit: "Even shrewd buyers often prove to be lousy sellers. They stay too long in investments that should be sold." They commented upon the wrong decision that many investors made in 94- selling the wrong thing at the wrong time and, particularly, not getting back in the market when things changed. "....unless you pay as much attention to selling as buying- not acting too soon but not waiting too long- your returns are likely to be subpar". Admittedly hindsight is 100% perfect so anyone can look back and hit the buys and sells perfectly. Nonetheless, you probably should have done something in 94 but then taken advantage of the growth in 95.
Why don't people do this? "Maybe they have been so successful with an investment in the past or maybe they inherited it from a relative and don't want to part with it" What ever the reason, there often tends to be an emotional attachment to a particular investment". As I have repeated ad nauseam in the past, you are not married to an investment. If it doesn't work out, sell the sucker. The difference is between recognizing that something may not have done as well as expected or has simply run its path versus being stupid. (Sorry, sometimes the truth hurts.) I must add that I have many times run into the situation where investments have been inherited. One woman did not want to sell her grandmother's investments. Illogical. Remember, there is no such thing as emotion with investments.
FW went on to say, "if you are waiting for someone else to sell, forget it. There's a great army of stock market analysts, brokers, financial planners and mutual funds salespeople whose sole aim in life is to get you to buy what they are selling. Seldom, if ever, will any of these folks tell you it is time to sell. And when they do, it may not be in your best interest. .....How often has a telephone rep or broker or planner admitted that Fund X, which once seemed so promising, is in fact a beat and you should move to Fund Z?" They also commented on individual securities in that "....you could wait forever before a Wall Street analyst warns your that a previously touted stock should now be sold. You have to understands the code said one analyst. If analysts rates a stock a candidate for long term growth, that a euphemism for "sell"'. If the analysts merely rates a stock a "hold", you 'd probably be wise to sell short". As far as I'm concerned, my clients are aware that I don't like any of the investments I use. I mean that sincerely. Like is an emotional term that sometimes means that not enough research has been done on the investments. I simply do the homework necessary to reasonably determine if the investment selected will produce the desired result given the time frame selected and the risks involved. If it does, fine, I'll use it. If the statistics change, I have no alternative but to adjust. There's no emotion, there's no ego. If you let the emotions enter, you're apt to make bad decisions throughout- second guessing, trying to prove you're better than the market. It's illogical and foolish. The real kicker is not reacting too soon nor not soon enough. Sure, in 1994, I would have liked my timing to be better. But overall the changes I made were fairly consistent with the conditions presented (Greenspan, GDP, etc.). That's about as good as I'm going to get.
Lastly, FW stated that "sometimes the decision to sell an individual
stock doesn't originate with the investor but with the stockbroker looking
to turn a fast buck. more than a few unscrupulous brokers have been known
to sweet talk unskilled investors into shifting from one stock to another
for no good reason except to generate commissions." Well, as I have always
stated, you should never buy stocks from stockbroker anyway. Secondly, use
someone on some type of a fee arrangement in order to avoid the commissionable
sales.
BETTER REVERSE MORTGAGES: Fannie Mae will offer reverse mortgages
this year. The "Home Keeper Mortgage" is designed to let anyone over 62 who
owns a home or one almost paid off to borrow up to $203,150 worth of equity.
It will offer an adjustable rate mortgage that lets the borrowers receive
monthly payments, draw upon a line of credit or use a combination of the
two. Upfront fees for appraisals, monthly servicing fees, insurance fees,
exit fees, etc., still will take a chunk but will certainly not be anything
like Providian. Nonetheless, reverse mortgages are last gasp planning measures
that should be avoided.
ASSET ALLOCATION: A hypothetical asset allocation of 55% stock, 35% bonds and 10% cash set up by the Wall Street Journal outperformed most of the models by the big brokerage houses.
SPLIT DOLLAR: This commentary is rather obscure and deals with corporations and collateral assignments of insurance. Generally, a split dollar policy is where an employer buys a cash value policy for an employee (usually the highly compensated who the ER is trying to retain on a long term basis) and where the EE may pay some portion. Since the benefit goes to the EE, he or she will be taxed on the pure "cost" of the coverage- usually defined as the IRS PS 58 tables or the life insurance company's alternatives rates which tend to be lower- minus any portion of the premium the EE pays. Now to complicate the matter, recognize that when the employee dies, the policy will be included in his/her estate for estate tax purposes. And since we are usually talking about heavy hitters, the insurance proceeds may be subject to a tax as high as 55%. This is normally the situation where the deceased is the insured and has incidents of ownership. (Incidents of ownership include the right to change a beneficiary, right to take loans, surrender the policy, etc.) Where the decedent is the controlling shareholder, a corporations incidents of ownership in regards to owning a policy on the shareholders life will be attributable to the controlling shareholder. If the corporation has an incident in ownership in the policy where the death proceeds are payable to someone OTHER than the corporation, then the shareholder will be required to include the proceeds in his or her estate. Any attempt by the shareholder to assign his or her rights to a third party will be void if the corporation retains any incidents of ownership. Split dollar agreements make the agreement more complicated because both the ER and EE share in the costs and benefits of the policy. However, it apparently is possible to draft an agreement under certain conditions that will avoid the scrutiny of the IRS and where the proceeds will remain out of the decedents estate.
Wasn't that fun? Of course not. But it does help to document how
difficult insurance planning can be. It's not only the law, but the fact
that none of the insurance companies ever really provide the necessary
documentation to understand exactly what their particular policy will do
versus another. All said and done, it is yet another reason why you never
buy insurance from (just) an insurance agent.
TRUSTEES: If you have a living trust, you have had to select trustee
that will act in your behalf if you die or become incapacitated. Of course
if you're married, your spouse is the normal first trustee. Regardless, you
need to select alternative trustees in case someone is unable to unwilling
to serve. So what are the responsibilities of the trustee? One group of attorneys
indicates that all state law effectively impose the highest standards of
integrity and business judgment. My first comment is don't use someone you
trust. Say what? Well, invariably one tends to select someone they may have
known for some time. My point however is that trusting them to borrow your
car or babysit your kids is categorically worthless when reviewing the activity
of investing perhaps several hundred thousands of dollars of estate proceeds,
running your business, caring for your family, etc. etc. Find someone that
has the capability to perform the function and then try to establish trust
AFTER THAT. Competency first. The trustee should not have any conflict of
interest. Your interests must always come first. And though I realize that
many people like corporate trustees- and I do recognize that you don't have
to worry about someone becoming incapacitated or dying- my experience with
corporate trustees is one of the most distasteful I have ever encountered.
I really think they were the reason weapons were invented.
SOFT DOLLARS: Mutual funds include most costs in the expense ratio.
But they don't have to include the cost for commissions paid to brokerage
firms for the purchase and sale of the individual securities. That's an off
line item that is included in the Statement of Additional Information which
no one reads- save someone like me. You'd think that these huge funds would
get better deals than the average consumer. Not necessarily so. Some funds
are actually charged MORE since they include soft costs in the commissions-
research of stocks, access to hot issues, getting first phone call when an
analyst makes a recommendations and, believe it or not, for such items as
furniture, computers, publication subscriptions, printing custodial costs,
etc. What seems the most difficult issue is for research. Why pay a fund
for research if a separate brokerage firm is dong it?
COLLEGE AID: Sometimes earning money hurts your opportunity to get
aid. For example, if a student earned over $1,980, he or she would see reduction
in aid by $.50 for every $1.00 over $1,980. And if they saved that money,
the reduction increases to $.85. You can say that that doesn't make sense,
and that's true. But laws- especially tax laws- have never had to make sense.
FUNERAL COSTS: More than 2 million funeral are arrange by Americans annually. The Federal Trade Commission developed some rules in 1984 regulating certain funeral practices. Basically, you can pick and choose what you want and the funeral home is to give you a written list of the services and prices available.
If you call on the telephone, the funeral provider is to
The written general price list is to include info on embalming, cash advance items (i.e. newspaper notices, flowers, pall bearers, clergy honoria), caskets for cremation and other required purchases
As regards embalming, the funeral info must not falsely state that embalming is required by law and, except for certain circumstances, must disclose that in writing. Further, they may not charge an unauthorized fee for embalming. They must disclose in writing that you can choose direct cremation or immediate burial if you do not want embalming. Lastly, they must disclose in writing that certain funeral arrangements- such as viewing the body- may make embalming a necessity.
The Funeral Rule requires a written itemized list of each of the items to be purchased and the total price. You can then select what to add or delete.
Funeral Directors are prohibited from indicating that anything will preserve the body forever. They also cannot indicate that a casket or vault will absolutely keep out dirt, water, etc.
As with any type arrangement, try to get as many of these details ironed out BEFOREHAND- before someone dies. Admittedly, few people like to think about that when they are young. However, I selected cremation at least 20 years ago. It's all in my will. Do you have a will?
For further info, contact the Conference of Funeral Service Examining
Boards, 15 Northeast 3rd Street, PO Box 497, Washington, Indiana 47501 812
254-7887. It represents licensing boards in 47 states and provides info on
laws and accepts and responds to consumer inquiries or complaints about funeral
providers.
Continental Association of Funeral and Memorial Services, 6900 Lost
Lake Road, Egg Harbor, WI 54209, 800 458-5563. Has info, encourages cost
efficiency and advance planning
Cremation Association of North America, 401 North Michigan Ave.,
Chicago, IL 60610, 312 644-6610
International Order of the Golden Rule, PO Box 3586, Springfield, IL 62708, 217 793-3322
Approximately 1,500 members
Jewish Funeral Directors of America, Inc., 250 West 57th Street,
#2329, New York, NY 101097, 212 582-9744
National Funeral Directors Association, 11121 West Oklahoma Ave.,
Milwaukee, WI 53227, 414 541-2500. Largest education and professional association
with about 14,000 members
National Funeral Directors and Morticians Association, 1800 East
Linwood Blvd., Kansas City, MO 64109 816 921-1800. About 2,000 black funeral
providers.
National Selected Morticians, 1616 Central Street, Evanston, IL 60201, 708 475-3414
Free info. Members must comply with Code of Good Funeral
Practice
Pre Arrangement Association of America, 6321 Bury Drive, Ste 8, Eden
Prairie, MN 55346, 612 937-5879
Funeral Service Consumer Assistance, Program National Research and
Information Center, 2250 E. Devon Ave. Ste 250, Des Plaines, IL 60018, 800
662-7666. Designed to help assisting consumers and funeral directors with
disagreements.
COLLEGE: Here's some more info for parents sending their kids through
college. First there a pluses in that a lot of aid is available to the student,
particularly one who can keep a B average. On the other hand, a family that
earns about $50,000 a year should expect to pay 1/3 of the cost of an Ivy
League school, half the cost of a private school and 80% of the cost of a
state school.
FUNERALS: Helping a Friend or Neighbor Cope With a Loss (Rivendall Resources)
Before a Funeral
After the Funeral
Most of all, just listening since your concern and presence will
help.
PHYSICIANS DIRECTIVE: You set these up so that if anything happens
to you, your wishes about extending care are made known to your doctor. One
of the fundamental issues you may want to consider is the distinction between
ordinary and extraordinary treatment. Ordinary means has been defined as
all medicines, treatments and operations which offer reasonable hope of benefit
for the patient and used without excessive expense, pain or other inconvenience.
Extraordinary means are those which would cause an an intolerable burden
and, if used, would not offer a reasonable hope of benefit. Of course there
is obviously the overlapping that can occur and differences of opinions between
doctors and your agent.
RICH VS. POOR: The US has the widest gap between the rich and poor
in a study of 17 wealthy industrialized countries. The OECD said that a person
in the US "who made it into the highest 10% in 1987 received 5.9 times more
income than someone who had just fell into the 10% of the people with the
lowest income." The smallest gap was in Finland where the difference between
rich and poor was only 2.6 times. I believe the discrepancy in the US could
even widen due the lack of technological skills at the bottom. It will cause
more and more friction between the haves and have nots. It could result in
more wholesale layoffs, strikes and riots. I figure a lot will hit the fan
by 2005 to 2010.
THUMBS UP: Mentioned some months ago, LA required all persons recording
deeds to put their thumb print on the document. It cut down scams tremendously.
I thought it was an excellent idea that should be repeated statewide. Well,
guess what? Starting soon, every person who signs a deed must leave a thumb
print in the journal of the notary public. Only an idiot would leave that
type of trail.
LOAD VS NO LOAD: (Los Angeles Times) Surprising to me with all the
advertising about no load funds is the fact that about 2/3 of all funds are
loaded.
TOTTEN TRUST: Many people use these, though they be unfamiliar with
the above term. It usually is a bank account where the account holder has
designated another to receive the funds upon the holder's death. The beneficiary
essentially has no rights however and the holder may change the beneficiary
at any time. Further, some states allow the account holder to alter or revoke
the beneficiary through a specific provision in a will. However is extremely
poor planning to try and correct something through a will that should have
been done directly.
CLOSED END FUNDS: Burton Malkiel, long a proponent of market efficiency,
says that one can actually beat the market by buying closed end funds at
a significant discount and then selling them as the discount narrows.
Unfortunately, info on closed ends tends to be somewhat sporadic, as far
as I'm concerned, and the funds tend to have more volatility and risk. The
Institute for Econometric Research found that from 1981 to 1992, closed end
funds selling at a premium at the start of the year rose just 8% per annum
over the following 12 months while closed end funds that started the year
at a discount returned 17% annually.
DIAL 1- 900 STUPID: The SEC closed down a firm that was promoting
investments in 900 telephone numbers where investors could double their money
within 90 days. The Better Life Club of America (don't you just love some
of these names?) took in more than $35 million and only invested just a little.
Wonder where all the rest went? Now I know some readers criticize me for
being somewhat harsh with my comments, but c'mon, doubling money in 90 days?
DEPRESSION: If you have never had depression, say a little prayer
to God. It is absolutely insidious. A new study of more than 10,000 men and
women over 65 noted that depression triples the risk of a stroke. One doctor
noted that "if elderly people have depression, it complicates their medical
risk across the board." Many elderly under depression don't take medicine
or treat their problems correctly because, "so what- nobody cares what happens
to me anyway." Of the 32 million Americans over 65, about 6 million suffer
from some level of depression. Of these, at least 75% goes undetected and
untreated. Studies of elderly people who committed suicide as a result of
depression have found that 3/4 visited a doctor within a week of their deaths,
but only in 1/4 of the cases did the doctor recognize that the patient was
depressed.
ETHICS: SEC Chairman Arthur Levitt said at an industry meeting on ethics that investors always need to keep a broker's financial conflict in mind when evaluating investment recommendations. "We all know that product specific sales contests, up front money, extra compensation for proprietary products and similar practices can sometimes foster conflicts of interest between brokers and clients. There's a lot of room for improvement out there." He also admonished investors about the obligation to become better informed. "I'm telling people it takes a lot of work to be an investor; a lot of research; and a lot of time. I've known people to spend more time comparison shopping for paper towels than for investments- there's absolutely no excuse for that."
From seminars I have done, I offer the same commentary- though I
am usually not so nice. After all, when you have helped people who have lost
money, you get a little tired of hearing the sole excuse, "but I thought
I could trust him!" Invariably, the loss has come because the investor did
not do any homework- primarily reading. But someone always
pipes up that they are too busy, both spouses are working, the kids take
up too much time, etc., etc. Sorry, unacceptable. If you don't have the time
to read, HIRE SOMEONE THAT DOES. If you won't do the homework so that you
can reasonably assure yourself and your family some future security, you
probably should not have been allowed to breed.
UNEMPLOYMENT: By 1/1/96, approximately 3 million people had been
laid off from work since 1989.
MORE READING: Employers say one fifth of U.S. workers are not fully proficient in their jobs. (That falls in line with a study several years ago that said that "more than 10 million workers in small businesses (about 40%) have trouble doing their jobs because their basic skills in reading, writing and math skills are so low. 23% of manufacturing workers and 11% of management are functionally illiterate. Other estimates put the illiteracy rate at 20% of working adults overall." )
A study for the Department of Education also says that employers
express a lack of confidence in the ability of schools and colleges to prepare
young people for the workplace. Further, the ER's tend to disregard grades
and school evaluations and rely more on the applicant's attitude, behavior
and job experience. (That is far different from Japan where schools and employers
try to work together.) The researchers were surprised at how much animosity
was displayed to the young people in the employer community. Why has that
happened? In my mind it's the lack of responsibility that society, until
most recently, has placed on the responsibility of family in bringing up
a child. If one never teaches ethics, integrity and the requirements of knowledge
and responsibility - after awhile, it just ain't there.
BUSINESS CONTINUATION: An FW article said that two out of three closely
held businesses fail to continue after the death of the owner due to a lack
of adequate business estate planning.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
2295 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127