MOODY'S REVIEW

JULY 1997

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

ERROLD F. MOODY JR. BSCE, LLB, MBA, PhD

MASTER OF SCIENCE IN FINANCIAL PLANNING

REGISTERED INVESTMENT ADVISER

HEL: Home equity lines of credit are used by many homeowners since they get deductions for interest on a home versus zero on regular personal interest. A survey by the Consumers Bankers Association shows that the average loan is for five or six years and that one in five is traded in for another as they seek out better rates. The average borrower makes $57,467, has held the same job for eight years and lived in the same house for 8.6 years- fairly stable and conservative borrowers. The average loan is $33,280 and the main reason for the loan is to consolidate debts; the second is for home improvement and the third is for college education.

MENTAL HEALTH: (Gail Sheehy) Men have a tough time with depression as they grow older. And this feeling of despair can reduce the will to fight off diseases that happen as they get older. Studies have show that if you can stay mentally active and emotionally positive, your entire system will "perk up" substantially and be available to fight off "whatever ails you". Dr. LeShan, author of "Cancer as a Turning Point" has studied the psychological means of rebuilding the immune system by rebuilding a person's enthusiasm for life. Approximately one half of his patients with initially poor prognoses have responded with long term remissions and are still alive. And they have more zest and involvement with and for life.



STOCK MARKET VOLATILITY: Articles have recently noted that the market has had an increase in volatility during 1996 and that might have some investors worried- if it were not for the fact that their investments were increasing so much. But there are a couple of reasons. First, some funds have highly volatile stocks in them- technology for example. Further, a 100 point change doesn't mean nearly as much with the Dow at 7000 then when it was a 4000. Lastly, the higher volatility means the market is simply moving back to historic levels. 1991, 1992, and 1993 were the three least volatile years in the stock market's history. Normally the market swings with a standard deviation of about 21% annually- about what some statistics show now. It will have an impact on consumers once the market's rise stabilizes. Some/many will leave the market.



ULTRA SMALL CAP: Yes there is more risk, but a study by John Montgomery of the smallest of companies indicates that the reward outshines most other categories of stocks over time. He indicated that when things were bad, ultra small caps dropped 63% more than the S&P would. But when the market moves upward (far more often), ultra small caps did 87% better. And ultra small caps come back faster as well. Of the worst inflation adjusted 10 year returns periods for 1926 to 1995, it was the only group that had a positive return. I am using some of this but only in small amounts cause all the numbers aren't in yet. But it does look promising.



AVERAGE MUTUAL FUND INVESTOR: The Investment Company Institute did a survey of 1,165 households and said that the average investor is middle class, 44 year old, has financial assets of $50,000 and bought his first fund shares before 1990.



BAD TRUSTS: You may have noted some (potential) abuses in the use of irrevocable trusts- most notably where I mentioned that trustees took out loans on insurance in the trust and then gave the funds to the grantors. Others where the trustee sold the policy for viatical settlements and gave those funds to the grantors. I feel very uncomfortable about these. My personal opinion is that the loans or sales of insurance policies simply allow the grantor/owner the right to "have your cake and eat it too" and could be attacked by the IRS. I really would like to see a private letter ruling. Anyway the WSJ noted on April 4 that the IRS is cracking down on trusts where such arrangements claim that they allow the owner to retain full benefit from business or personal assets while reducing or eliminating taxes. The trusts are usually small and set up by "fringe financial advisers".



FINANCIAL ILLITERACY: This study was done in 1996 but bears witness to the fact that investor knowledge is still extremely lacking. The non profit Investor Protection Trust stated that "financial illiteracy is aggravated by the reckless behavior on the part of investors, two out of three of whom do not have a financial plan."

"This data suggests that millions of investors, particularly women and older investors, are sitting ducks for investment fraud and abuse. These are not encouraging findings for a society that is moving increasingly to a self serve approach to personal finance. Better informed decision making is going to be critically important as Americans find themselves confronted with more and more choices they must make about major money matters, such as the investment of retirement savings." Princeton Survey Research Associates said that "the study finds that less than one fifth of investors surveyed are truly literate about financial matters specifically related to investing. Most lack basic knowledge about the meaning of financial terms and about the way different investments work. The least knowledgeable investors are female, have not attended college and are age 65 and older".

Lastly, Barbara Roper of the Consumer Federation of America also said that "the appalling lack of basic financial knowledge revealed by this study calls into serious question the ability of Americans to make sound, informed financial decisions that would allow them to achieve those goals." Of the 1,001 families surveyed nationally, the following is noted. (I suggest that you look at the previous work on illiteracy overall, You will find that much info is almost correlated directly.)



GOING UP: The competition in managed care was so intense that they squeezed out much of the waste and kept costs low(er) . But now with many of the less healthy joining the ranks -along with a reversal of some limited forms of care- the costs of medical care are going to rise- perhaps at twice the rate of inflation for the next few years according to a SF Chronicle article. It just means that finding the best coverage at the best price is going to get tougher. If I was researching what managed care facility to use, I would buy The Agent's Guide to Managed Care by California Broker, (818) 848 2957, Kate Kincaid editor. $10.00 and well worth it. It will reduce your search time immeasurably. I would also suggest you review the article HMO's herein.



MEDICAL FRAUD: A man was charged $15,000 by an attorney to "help him qualify for MediCal" after his wife had already gone into a home. Wasted money because their assets were limited to begin with. Another woman was advised to put all her funds into an annuity but when she wen to apply for MediCal, the annuity did not meet the correct life expectancy requirements and she was denied. You have got to be VERY careful of the use of annuities since you really can't leave any assets to your beneficiaries- as many salesman would like you to believe. They sell them because they make a nice commission.



401(k): (WSJ) Hard to believe this could happen, but the laws for 401(k)'s are not set up the same as regular pension plans. For example, instead of a 10% limit on certain type investments- such as company stock- there is no such restriction. As such some small funds have been "messing" with the retirement funds of employees and bought some unbelievable investments for the plans use. Such investments" include a winery, parking lot, antique violins, trailer parks, Persian carpets, palms trees and Heaven knows what else. It's amazing what ego, investment naivete, financial pressure and outright stupidity can do. However a proposed change in the law is being thwarted by some companies since they like their big EE's to load up on company stock. A September WSJ article noted that an investigation of 246 of the largest employers with 401(k) plans showed



INVESTMENT PERCENTAGE
Company Stock 42%
GIC 24
Equity 18
Balanced 6
Bonds 4
Cash 3
Other 2



Another study indicated that about 25% of the $675 to $700 billion in 401(k) plans are invested in ER stock. This is horrendous diversification. Education of the employees has a long way to go. Law suits against employers have a long way to go.



WHAT WORKS ON WALL STREET: James O'Shaughnessy's book on the historical returns of the stock market pretty much discount the aspect of random walk. Random walk essentially states that the market is a "crap shoot" and that one can do no better than the market over time. Yes, there may be certain pockets where a certain system might work, but it will all end up the same when a longer period of time is addressed. But the book's analysis of different investing philosophies clearly shows that if one follows certain paths, it is possible to consistently outproduce (or underproduce) the market. Some of the books comments:

1. History shows that the smallest stocks- those with capitalizations between $25 to$100 million actually did worse than buying a sampling of all stocks. That certainly goes against the grain of most current philosophies- though other studies have recently supported such numbers.

2. Mid cap stock with capitalizations between $500 million and $1 billion- which many people feel has the best opportunity for returns- actually did worse than those stocks with capitalizations over $1 billion.

The initial implications for me are in regards to index funds. Since they buy the entire grouping of a certain type of stock- small, mid or high cap- the historical evidence could be overwhelmingly clear as to what type of index to utilize. Other notable issues:

1. Low Price Earnings (P/E) ratios do make a difference, particularly with large capitalization stocks, but not nearly as much with low cap stocks. He quotes, "buying high P/E stocks, regardless of their capitalization is a dangerous endeavor."

2. Price/Book ratio is a better gauge than P/E ratios. The book value is essentially what the company is worth in a liquidation. The lower the price of the stock as compared to its net worth, the more of a value is perceived by the purchaser.



DERIVATIVES: (Fed Board of Atlanta) A derivative is a contract like an option, futures, interest rate swap, etc. where one party contracts to pay another $x if a certain occurrence happens. They can get pretty esoteric and costly if one picks the wrong side of the transaction. Secondly, even if you are on the right side and do win BIG, it doesn't mean that the contra party will actually "pay up". However, many derivatives are controlled by the Chicago Mercantile Exchange and they have lots of buyers and sellers which tend to limit any major loss in case one side is incapable of paying. The FED Board was asking "what happens if there was a severe meltdown in the market- could the Chicago Mercantile Exchange survive the blitz?" They see problems primarily since the new options- interest rate and currency rate swaps- have only been in existence a few years but have sustained very high growth. They ended with a cautionary note but indicated that banks could be stuck in the middle. After the real estate debacle of the 80's, the last thing we need is a bunch of bank managers screwing up another type of investment. It simply means we need to stay vigilant whenever a fund uses a lot of derivatives. Vanguard doesn't.



CHINA: There are definitely some major profits to be made in emerging markets but you sure do take a risk. For example, you can try China- could provide substantial returns. BW had this figure however- "20% to 40% of Chinese bank loans to the state sector are nonperforming." When you see that, things can go very wrong very quickly.

HMO'S: So how much does an HMO spend per dollar of premium per person? Well, California recently did a study of the 15 largest HMO's in the state and showed a considerable variance- and it probably is one of the best ways to ever find the HMO you want to use.

On average, HMO's spend 82.5 cents of each health care dollar on medical care in 1996. Kaiser spent as high as 96.5% in to medical care but California Care Health Plans spend only 74.3%. Here's a table of the 15.
# of Enrollees Med

Care

 Admin. Profit
Kaiser 4,874,500 96.5 3.0% 0.5%
Prudential 750,000 87.4 17.8 -5.3
CIGNA 705,000 86.0 14.2 -0.2
FHP 902,000 83.8 11.5 4.7
PacifiCare 1,200,000 83.6 10.7 5.7
Omni 127,000 83.5 16.2 0.4
Blue Shield 304,000 82.4 18.7 -1.1
Universal 105,000 81.7 15.4 2.9
Care

America

 198,888 81.9 17.4 0.7
Aetna 397,000 81.4 12.5 6.1
Health Net 1,367,000 80.1 11.6 8.3
Lifeguard 158,000 80.1 11.6 8.3
Maxicare 140,000 79.5 10.4 10.1
Foundation 602,000 77.4 16.9 5.8
California

Care

 2,150,000 74.3 15.2 10.5



This table is not perfect, but after just a simple review, couldn't you tell me which one(s) you would use??

IPO's: (CFO) As commented upon most frequently, IPO's are not meant for the faint of heart- nor for the faint of pocketbook. That's because most of the goods ones will never get the general public- they all would have been subscribed to the institutional investors. Further, from the article in CFO magazine, "To get an idea of what it is like to negotiate the price of an IPO, picture a marathon floating poker game. ".....company players want to sell high and spread the stock around, investors want to buy low and get big chunks. Further, "a deep reminder about the IPO game; a successful pricing buoys the aftermarket for only so long." Sure, you may get lucky with a Netscape, but analysts are wondering when the fundamentals will bring it back down to earth.

ACCELERATED DEATH BENEFITS: If you are terminally ill, some life insurance companies may pay you part of the policy during the last 6 months (perhaps 12 months of your life). The cap is usually set at $250,000 by many companies. Some policyholders may opt to sell their policies instead. These are called viatical settlements and the cost to the seller can be 20% and more. It's much cheaper and easier to simply use your own insurance company, so why don't the ill do that? Basically since the policyholders don't know about accelerated death benefits. So who's responsible for notifying them? It would seem that the agent would be the logical choice, but since there is no commission involved, many may not make the effort. California's Department of Insurance requires viatical licensees to disclose or advise any applicant for a viatical settlement contract at the time of solicitation, but some viatical licensees just use only a one line disclosure format- hardly a significant disclosure.

One benefit, however, of the viatical settlement is that some will go out as far as two, three, four and even five years in allowing a sale. But since an accelerated death benefit is probably not allowed till just a year before death, the policyholder may have already incurred massive debt, lost a house or been found financially unable to take some medical tests.

Another aspect is the two year inconvertibility period. Should a claim be brought within this time frame, the insurance company may balk at paying. They might also be able to prove that the questionnaire was fraudulent if a claim was placed so soon. Dying is not fair nor easy, but these opportunities do provide some financial flexibility if used properly. The trick is to know what to use and when.



PENSION PLANS: Here is one good reason why people don't have enough for retirement. Among small employers- firms with less than 25 employees- just 19% offer some sort of retirement plan.





ELDERLY: (WSJ) One in six elderly falls below the poverty level.



YIELD CURVE: (FED Bank of New York) Many types of prognostications are used to figure out where the economy is going to go. One method relates to the difference between ten year T-notes and three month T-bills. "Expectations of future inflation and real interest rates contained in the yield curve spread seem to play an important role in the prediction of economic activity." The offered the chart below with corresponding odds of a recession when the spread increased.



Estimated Recession Probabilities Four Quarters Ahead
Recession Probability Value of Spread (Percentage Points)
5% 1.21
10 0.76
15 0.46
20 0.22
25 0.02
30 -0.17
40 -0.50
50 -0.82
60 -1.13
70 -1.46
80 -1.85
90 -2.40

It may be one of the great leading indicators for the current time sine many others have not held up well at all.

ELDERLY: The elderly are living longer and better. A national government study showed a 14.5% decline in the rate of older people who are unable to take care of themselves. Also, the percentage of those over age 65 who are disabled dropped to 21.3% from 24.9% (still, that's a large number, and most are in their 80's). The results are due to better medical treatment and the fact that the elderly are learning to take better care of themselves. This trend appears to be continuing and will have a good impact on Medicare and Medicaid as fewer elderly may need these services. However, since there are more and more elderly overall, I'm not quite sure how much the savings might end up being.

COLLEGE: According to the National Association of College and University Business Officers, only 10% of college students pay full tuition. Part of that is due to the fact that institution supported aid has risen about 31% since 1990.



PETS, PETS, PETS: As stated quite frequently, pets can help the elderly live longer. Independent studies have shown lower blood pressure and lower blood levels of harmful cholesterol and triglycerides. Another showed pet owners had fewer medical visits. Patients in wheelchairs were less depressed, less dependent on caregivers and more active outside of the home. Those with dogs did even better than owners of cats probably because they got outside to walk the dog .

And for those of you who understand the loss of a pet, there are now pet cards that you can send when a pet dies. It can help many during a time of grieving.



ECONOMIC FREEDOM: (BW) Though mentioned previously with info from the Federal Reserve Board, Business Week noted that, beyond anything else, the countries that promote freedom in their economic market place are the ones that tend to grow and prosper. The less government uses resources, the greater the growth of a country. A report showed that Hong Kong ranked first followed by Singapore. The U.S. and Switzerland were tied for fifth and then Britain and Taiwan. So what is the impact in investing? It would seem clear to utilize those countries with the least amount of government intrusion and taxation which would- at least on paper- produce the greatest rewards. That's not to say that other countries won't have good returns- look at China, Turkey and others where control of everything is the key to government survival. But I am not sure significant monies should be invested in these economies unless it is really discretionary money.



IF YOU CAN'T SAY WHAT YOU MEAN, YOU CAN NEVER BE WHAT YOU SAY



LIMITED LIABILITY CORPORATION: This is a form of ownership of a business where you can protect some of your assets while at the same time passing through losses directly to individual returns. There are general and limited partners so an owner can still control the control the business. It's like an S corporation but may provide other positive elements such as limited liability for all members, no double taxation, more than one class of stock and no limit to the number of members. You'll have to check each state for the unique features they may require and they are not cheap to set up, but the LLC may offer benefits not available under other avenues.

MEDI-CAL PLANNING: Here is some legal planning. If you transferred $10,000 to your daughter on the beginning of March and you entered a home in June, you would still be eligible for MediCal. How is that possible? The old rules still apply. Divide the "gift" by the average monthly costs for nursing home care ($3,402 is the average private pay rate) and this would result in three months of non eligibility. Therefore, since you did not apply until June, your ineligibility period is up and you can be accepted for MediCal. The look back period is 30 months, so under the above guidelines, you could have transferred $102,060 and still have MediCal coverage if you waited till the 30 months were up.

A home can be liened by MediCal if it remains in your name when you die in a nursing home. One way to exempt that is to indicate that you intend to move back home. You then may transfer your home to the at home spouse without penalty. Caveats apply.



MEDICARE PART B: Medicare covers for physical therapy when it is deemed medically necessary and whether or not someone is expected to improve. Medicare Part B covered only for restorative potential. Now it appears that they will also cover therapy for maintenance therapy. While good news for patients, where will this extra money come from???????

BASIS, BASIS, BASIS: I continually harp on the mandatory understanding of basis and the step up at death for certain assets. I am not going to do all that again but simply say that you should visit my web page where this info is detailed extensively. Suffice to say however, is that there can be serious tax ramifications if you leave the a wrong type assets to your beneficiaries. Such assets include IRA's, 401(k)'s, lump sum pensions, annuities, etc. These can be fully taxed as ordinary income versus ZERO tax on other assets. A study by Shoven and Wise noted that such taxes can run as high as 96.4% leaving heirs less than 1/6 of the amount they could have received had the assets been left OUT of a pension. If you do not understand basis, you CANNOT do retirement and estate planning properly.



CASKETS: A funeral director stated that caskets comprise 40% of a funeral's bill. As with a lot of consumer items, there are now specialty shops that sell these at a discount up to 50%. Admittedly one does not like to do comparison shopping for items like this, but savings this large cannot be dismissed.

BANK MUTUAL FUNDS: (FED Board of St. Louis) With all the commentary I had been hearing about the supposed HUGE inroads the banks were making in securities sales, I assumed they were taking a greater and greater share of the market. Apparently not. "Despite individual success stories, the banking industry as a whole does not appear to be gaining market share or generating significant revenue through investment product sales. This might reflect public reluctance to purchase these products from banks. Highly publicized exposes on unethical practices by a few commercial bank brokers may have contributed to a decline in the public's willingness to buy investment products from a bank. An American Banker survey noted that the proportion that would buy a stock or bond mutual fund from their bank had declined 5 points to 24% overall." Finally the FED noted that "without changes in consumer attitudes or a greater willingness by banks to market investment products aggressively, banks are likely to remain bit players in the mutual funds market for some time to come."

As added concern, I will leave you with this. My major concern has always been that bank agents are woefully undertrained. But that same comment goes to almost all licensed agents. The NASD tests and licenses. The NASD does NOT train to provide competency. Without additional comprehensive knowledge, the consumer remains are risk in the sale of most securities and insurance.



STOCKS VERSUS BONDS: These show why people use the stock market. $1,000 invested annually:

Return of 19 year Treasuries, 1965- 1996- $126,890

S&P 500 Index- $364,420 Nuff said.



INSURANCE: This area is a little esoteric but important nonetheless. So why the commentary anyway? Because insurance is unquestionably one of the most difficult areas to understand and it is rarely done correctly. That's one of the reasons I teach the various insurance subjects at least a couple times per month so that agents might learn how it (supposedly) should be done. The model commentary below is from an insurance company that will use the NAIC- National Model Illustration Regulation and is designed to promote professionalism. The NAIC does not have the teeth to enforce these "suggestions", but sooner or later, many states will undoubtedly enact similar regulations.



1. A Basic Illustration as defined by the Model Regulation or an Illustrated Disclosure Statement must be provided during the sales presentation

2. A basic Illustration or Disclosure Statement signed by the proposed insured must accompany the application. The illustration must match exactly the insurance applied for

3. If the policy is applied for other than as illustrated, the Disclosure Statement signed by the proposed insured will need to be submitted with the application. The home office will mail you a revised illustration along with the policy to deliver to the applicant for their signature. The signed Revised Illustration must be the returned to the home office.

4. If a singed Basic Illustration or Disclosure Statement does not accompany the application, processing of the application will begin. No application however will be approved by the Underwriting Department until an illustration or disclosure has been received. Because a Basic Illustration is required at the point of sale, we will closely monitor agent activity regarding applications submitted without a signed illustration or disclosure.

5. If a policy is issued other than as applied for, the home office will mail you a Revised Illustration along with the policy for you to deliver to the proposed insured for his or her signature.

To comply with the NAIC regulation, any time the home office provides you a Revised Illustration, as described in three through five above, a second copy will be mailed directly to the proposed insured.



BASIC INSURANCE ILLUSTRATION: The NAIC Model Illustrations has three sections



1. Narrative Summary- a detailed summary of the policy, riders and an explanation of terms

2. Numeric Summary- a summary of the values for certain mandated years using an average guaranteed and current interest rates and charges called "midpoint assumptions".

3. Policy detail- a ledger of the guaranteed and projected values for all years.



Concept selling or any yellow pad representation of values does NOT quality as a Basic Illustration under the Regulation.



So what will happen? Well, it will make it a lot harder to sell insurance by the seat of your pants. However, very few consumers will ever really get involved with this since death and dying are issues they do nor wish to deal with. But this will definitely help the industry provide more knowledgeable and professional reps.



INSURANCE SUCKS: This gives you the reason why there is justifiable rage against the industry. Shortly after writing the above, I got a solicitation by an insurance company to sell their annuities for which I would get a 10% commission AND THREE DAYS AND TWO NIGHTS SPECIAL VACATION. There was no discussion on the yield, surrender period, payout options or anything else. Just the monetary incentives to sell. Consumers have every right to be wary of many insurance salesmen/women.



TAXES: This won't make your day. Nearly 2,400 taxpayers with the highest income paid no taxes in 1993 versus just 85 in 1977. The number of people that made over $200,000 increased 15 fold in that period, but the number who paid no taxes increased almost twice to 28%. The alternative minimum tax was enacted to force such taxpayers to pay a reasonable amount, but it is obvious that the attorneys and CPA's have been able to manipulate the laws to their client's benefits- and to the general consumers' detriment.



ECONOMICS: (Ifo) The world economy is expected to expand around a real 3.3 percent this year, primarily because of the fast growth in Asia and Latin America.

Ifo's survey of 450 international experts showed the Latin American economies were expected to grow 5.2% this year and Asian economies were expected to grow by 4%. Western Europe showed lower growth at 2.3 % and North America at 2.8%.

FUNERALS: An article in Kiplinger's noted that it normally costs about $375 to open and close the grave between 9am and 3pm and about $700 after 3 pm. Weekends may range from $1,000 for a Saturday before 1pm to $1,500 after 1 pm and on Sunday.

Total for an "average funeral is approximately 6,750.

You can get cremated cheaply for about $500 to $700.

Embalming is not is normally not required unless the body is transferred across state lines or when there is open casket viewing.

Ceremonies are usually cheaper when held in a church than in a funeral home. If the body is transferred, the typical costs is $125. If the body is some distance, you may have to hire two funeral homes. The costs for embalming and transportation is about $1,100 on average.



Approximately 22,000 funeral homes nationally handle about two million deaths per year for an average of 91 funerals per mortuary.

Cremation is more often the choice nowadays and account for 21% of all funerals- up from 7% in 1975.

Some homes will offer discounts. Contact the Funeral and Memorial Societies of America, 6900 Lost Lake Rd. Egg Harbor, WI 54209, 414 868-3136 for a local member. It is an association of nonprofit consumer operated memorial societies for simplicity, dignity and economy in funeral arrangements. Information and referrals.

ANALYST SHORTAGE: (WSJ) Due to the ever increasing number of mutual funds, there is a shortage of analysts covering the marketplace. And for those that do, they have significantly less experience than their predecessors five years ago. Their average age is 28. Not one Fidelity analyst following the stocks in the Standard and Poor's 500 index has more than 6 months experience in the industry. That should be a glaring reason right there to potentially look for some index funds in a portfolio.



WHAT CAUSES INFLATION: According to the FED Bank of ST Louis's president Louis Melzer, it is the rapid growth of money and not economic growth that is responsible for inflation.

"Persistently high rates of money growth, however you define them, translate into persistently high rates of inflation." He noted that "persistent inflation arises when the prices of goods and services can all rise at once if the amount of currency in circulation is expanded enough. Thus, (the) monetary system can produce inflation. This is the basis for the assertion that inflation is a monetary phenomenon." He did admit that price spikes can temporarily affect the economy and stressed that "temporary inflation is by its very definition, less of a concern to monetary policy-makers. If it is temporary, it will dissipate on its own accord and requires no policy action."



NURSING HOME CARE: (National Council on Aging and John Hancock) Some 69% of Americans are concerned about how they would pay for long-term nursing care. About 60% of Americans are concerned that they or their spouse will need such care. But only 13% of Americans own a long-term care insurance policy, and only 11% say that they have done a great deal of planning for long-term care. Another 41% have done some planning and 48% admit to doing little or no planning. Part of the problem may be ignorance, since only 30% of respondents passed a quiz on basic facts about health care. Some 73% of respondents incorrectly think that Medicare will pay for long-term care.

PET INSURANCE: I mentioned the use of this before, but here are some policies.

Veterinary Pet Insurance is the largest provider with 75,000 policies. It's minimal coverage- Major Medical 40- costs $59 annually for a puppy or kitten and $109 for a 10 year old animal. You get maximum coverage of $1,000 per medical incident and $5,000 per year.

Their VIP Advantage Plus (don't you just love these names?) Costs $171 annually for a puppy or kitty and $299 for a 10 year old animal. You get $4,000 per incident and $12,000 per year. Both required a $40 deductible and a 20% co payment on the first $180 of charges.

A Kiplinger's article noted however that the coverage varied extensively between the two policies. A fracture requiring a pin would pay $325 maximum under the cheapest of their policies but up to $880 under the most expensive plan. Payments for diabetes ranged from $295 to $800- a huge difference when the care of your pet is on the line and your finances are limited.

Coverage does not include routine maintenance- vaccinations, dental cleaning nor does it cover pre existing conditions. A recurring problem would only be covered if there had been no treatment required for the six months prior to the time the policy went into effect.

TAXABLE AND NON TAXABLE RETURNS: The average stock diversified mutual fund earned 91.9% in the last five calendar years. But only 71.5% after tax.



MARKET TIMING: (Nejat Seyhun) A finance professor reviewing the market from 1926 to 1994 found that 99% of the total return was earned in 5.9% of the months. Over the 68 year period, the overall return was 12%. But if you removed the best 48 months, the return falls to a minimal 2.9% per year. So if you are really good, you would be able to get in and out and maximize the return. Are you really that good? Sure, some market timer newsletters have been successful, but literally only for set periods of time. Over long stretches, I don't believe there is any way of knowing what will happen in the future with consistency.

RISKS AND DYING: (Parade) Americans die most of

1. Heart Disease- mostly caused by fatty diet, failure to exercise, high cholesterol and high blood pressure

2. Cancer can be caused by toxic chemicals, but also by genetics, viruses and smoking and other preventable activities

3. Stroke- same as heart disease

4. Lung disease- obviously the main problem being smoking

5. Accidents most which are caused by human conduct.

6. Pneumonia/influenza

7. Diabetes

8. HIV/AIDS though will probably be less in the future due to protease inhibitors

9. Suicide

10. Liver disease/cirrhosis which may be caused by excessive alcohol abuse.

A professor noted that " by changing personal behavior, people could reduce their risk of dying early by 70% to 80%." Eight of the ten causes of death (excluding pneumonia and diabetes) are often due to human behavior.



REAL ESTATE MORTGAGES: Identified previously, borrowers are divided by alphabet- A, B, C- and reflect their credit rating for the purchase of a home. A is the top of the line; B for those who have been as late as 60 days in the last 12 months on a credit card or who have an overall debt to household over 40%. They are often charged 1% more on a mortgage than an A borrower. C borrowers may have been late 30 days two or three times on their home loan and 60 days late on a credit card several times. They may be charged 2.5% more. D category pay top rates- assuming they can get one at all. Freddie Mac and Fannie Mae's usually wanted just the best creditors- the A category. But Freddie Mac is now going to buy up to $2.5 billion of the less credit worthy loans. That will shave a little off the rates for the B's and C's. Their acceptance of these loans is due to the risk evaluation tools that were developed over the last few years. They can better spot the B's and C's and work to forestall further problems.



INVESTMENT MANAGEMENT: As readers will note, I have continued to practice all aspects of financial planning rather than just focus on the management of the assets. While it is clear that that has been "where the money is", it also seemed clear to me that when the market changes- and change it will- that people will become more focused on the "real" areas of their lives. This includes all the areas of planning that these financial planners let slide- insurance (life and long term care), estate planning, and the emotional areas of living. An article in Dow Jones Investment Adviser noted, "I believe the financial planning profession will, within the next 10 years, experience a mass extinction that will look depressingly like the awful carnage that followed the limited partnership collapse. You'll have a large group of professionals who seem to own the market and are among the most high profile, best compensated, most envied people in the business, and suddenly they won't be there anymore. But a lot of nobodies from that other branch (financial planning) will just as suddenly become the profession once again." I'm one of the latter.

Further, "financial planners will quickly develop new survival skills- what we today call psychological counseling skills or the ability to sit down with a client and find out what the client wants to do with his or her life. They'll become coaches and guides for their clients. People will hire a planner if they want a happier, better more fulfilling life" I have focused on this for years- and I believe that anyone who has read my newsletters will agree. Finances is a key to a good life- but it is far from the only thing.



MUTUAL FUND TURNOVER: According to Lipper Analytical Services, the average equity mutual fund will have a turnover of stocks of about 85% in 1997- up 10% from 1993. The average growth and income fund has a 65% turnover. But that sure is different than the buy and hold attitude we are told as investors to consider and utilize.



OPTIONS: (BW) Here is another way for some executives to provide substantial benefits to their beneficiaries. Executives may receive nonqualified stock options. The exec may exercise these options and provide large returns. However, the taxes may be equally large if the assets are taxed in the estate (up to a 55% tax rate). But the exec could take such options and transfer them immediately to a trust for the benefit of his children (though others may be included). He will have to pay gift tax on the value of the options gifted over $10,000 annually (and/or use up his/her lifetime $600,000 exemption)- which is a standard transfer. But when the options are later exercised, the exec must pay ordinary income on the value of any appreciation above the price when gifted. That could still be substantially better than having the kids pay the tax and certainly better than the 55% bracket, but it does leave the exec on the hook for some substantial sums that would need to be paid to the IRS. (If the exec dies before the options are exercised, the estate is liable for the income tax (though I do not know if they put money away for the subsequent exercise.) This type of transfer is only recently available due to new interpretations that allow companies to transfer the options. Tax favored options where any gain realized from the date of the transfer to the time of exercise is taxed as capital gains and are not available for this transfer.

DEATH: My father died June 22. Everything I have ever read and heard about the pain and degradation of dying in a hospital, he experienced. He even attempted suicide because the agony and depression got so bad. It was his desire to remain alive as long as possible, but he underwent massive physical and emotional changes that I would not wish on anyone. During the last two weeks he finally did recognize the futility, but the hospital still tried every measure to keep him alive. I do NOT fault them, however, since there were many times where he had rallied in the past years when they thought he would die. But, mercifully, they finally put him on a morphine drip and he got the peace he desired. My sister has borne the brunt of all this since she lives on the other coast with them. Through her I also see the burdens of caregiving and the tolls it is has physically and emotionally taken on her. Yet she has been extremely strong through all this.

Dying is a part of life, but only 20% of us will die neatly. The rest die with some degree of pain and mess. I decided long ago I would entertain none of the heroic and extensive measures to prolong life and, after this episode, I reaffirm those desires. Make sure you decide how you want to die.

Medical directives should be utilized by everyone.


ERROLD F. MOODY JR.

BSCE, LLB, MBA, MSFP, PhD

2295 W. Ave 133

San Leandro, CA 94577

Phone & Fax 510 352-4127

EFM@EFMoody.com