MOODY'S REVIEW

JULY 2000

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

ERROLD F. MOODY JR.

MASTER OF SCIENCE IN FINANCIAL PLANNING

LIFE AND DISABILITY INSURANCE ANALYST

REGISTERED INVESTMENT ADVISER

WWW.EFMOODY.COM

SMOKE THIS!: Researchers have discovered that cigarette smokers are over four times more prone to blood infections and meningitis than nonsmokers.

One ailment that antibiotics will never stamp out is premature formation of opinions

ASTHMA: Asthma is a lung disease that is characterized by three airway problems:

Obstruction (mucus build up in the airways)

Inflammation (swelling of lining of airways)

Hyper-responsiveness (over active airways)

More than 17 million Americans, including close to 5 million children, have asthma.The prevalence of asthma increased 75% from 1980 to 1994. There are more than 5,300 deaths from asthma annually. There are 1.8 million emergency room visits annually due to asthma.

Most doctors believe asthma is a chronic disease that develops from an interaction of genetics and environment.

NOBODY HAD A CLUE: I got a letter from a Vanguard fund I use that has over 100 stocks. Yet it also notes that it is NOT diversified. Anybody know why?"

Well the answer comes from the law and from a prospectus and effectively has NOTHING to do with the diversification of a fund under systematic and unsystematic risk (meaning the number of stock held). The SEC requires this statement- If a mutual fund is diversified, it means that "at least 75% of the assets are invested so that no more than 5% of the stock is invested in any one company nor that the fund owns more than 10% of a company's outstanding stock".

What happened was that just a few stocks had grown so much that they exceeded the 5% limit and they had to notify investors. And probably not a one understood what was going on.

MEDICARE FRAUD: (Department of Health and Human Services) Well over half the Medicare payments made to outpatient rehabilitation facilities over a one-year period were questionable in nature.

MONTE CARLO: There has been a lot of commentary about Monte Carlo simulations but for well read planners (partly an oxymoron) it is almost nothing different than statistics of past results. I have provided commentary for years on the issue but in discussing this with various planners, they rarely had a clue to what I was talking about. So here is more. I'll assume you know what standard deviation is and that the standard deviation for one year is 20%. The market is returning 10% (almost exclusively what I use in any long term calculation). You want to know how the standard deviation changes over time.

"This standard deviation can be determined by dividing the standard deviation by the square root of the number of years held. So a 20% standard deviation held for five years shows a 8.95% (20%/2.24) standard deviation. Everything seems so much better when you see that. Supposedly you can then expect the same average return of 10% but only a 8.94% downside drop in 68% of the time. That's sure a lot better. That sure what is presented in any of the articles. That's fine and dandy and it's a lot easier to swallow a 8.94 % movement than it is a 20% movement. If I go to 10 years, the deviation drops to 6.32%. Why this looks better and better. At 20 years, it's only 4.72%- probably within the acceptable risk range of most people.

What is never discussed is the fact that what happens if there is a big loss that actually DOES happen in the initial ownership of the assets (or actually at any point). What happens if there is a one time standard deviation drop in the first five years? A real mess, that's what. In order to determine what actually goes on, you take, for example, the projected average and multiply by the high and low standard deviation to the power of the number of years. $100 x (1.1894) 5th or $238 on the plus side or the low side $100 x (1.101) 5th power = $105 on the bottom. If the returns simply average the overall 10%, you would get $162. If things really went great, you could get as high as $238. But if things went bad, you only get $105. That's about 35% less money than you expected. Can you live on 35% less money than expected???????"

Don't understand all that? Don't understand the ramifications when I talk about 1973/74? Then you are not an investor.

Now all this research does not mean I can make the right calls all the time. That's impossible. But because of so much research, once in awhile I can get things right. Look at the March issue of Worth magazine, page 68. They show 25 top funds. My core funds consist of 3 of the top 9. I have used them for years. And it's all due to reading.

INNOCENT SPOUSE CLAIMS (FSO) In 1998 Congress passed a law allowing an "innocent spouse" to obtain relief from the tax debts of a divorced or separated partner. The change has resulted in a backlog of more than 46,000 claims to the IRS, which admits to being surprised and unprepared for both the number of claims and the complexity in determining which ones are legitimate.

ALZHEIMERS (Dr. Steven T. DeKosky) An estimated 14 million Baby Boomers are living with a sentence of Alzheimer's disease today. They will begin to turn 65 in 2010 and will enter the age of highest risk for the disease about 2020. By 2025, California will lead the nation with 827,392 cases of Alzheimer's disease, followed by Florida with 712,962.About 35% of people develop Alzheimer's by age 75, and the percentage rises with age. By 85, almost half of all people get the ailment."

The disease process starts at least 10 years before the symptoms of the disease appear. Among those with mild cognitive impairment, 12% to 15% will convert to Alzheimer's disease each year. Within 5 years, half of those who now have mild cognitive impairment will actually develop full Alzheimer's disease. By that time, so much irreversible change in brain will have occurred that medical science will probably be able to do little about the further progress of the disease.

Want to know how to forestall Alzheimers? From a researcher in a 1998 seminar. Start with a fuller tank. How's that?? He was referring to someone who runs out of gas at age 80. Since most people start with less than a full tank, they suffer earlier the misfortunes of Alzheimers till they die at 85 due to the disease. However, for people who always fill up their tanks regularly, they start with a fuller tank and, while they may also die at age 85, they never entered the minefield of Alzheimers. So what is a full tank???. Education, reading, intensive thought process. Such people have "more brain cells" to work with and it simply takes longer to be affected by the disease. So your intensive "brain effort" today can lead to a more vibrant and less disease riddled late state of life.  Your choice.

TRUSTS: General trust costs from a midwest attorney. Should give you an idea what to expect. Much higher in major cities and from attorneys that have pretty offices. Most recently a California attorney quoted a living trust at $1,800- far too excessive .

Personal Privacy Plan $ 1,800.

Expanded Personal Privacy Plan $ 3,000.

Two Tiered Limited Liability Company $ 1,700.

Standard Revocable Living Trust $ 500.

Family Limited Liability Company $ 1,250.

Family Limited Partnership $ 1,250.

Family Protective Trust $ 1,550.

Family Guardian Trust $ 650.

Standard Limited Liability Company $ 750.

UNEMPLOYMENT RATES: (Greenspan) Output per hour in the nonfinancial corporate sector had increased since 1995 at nearly double the average pace of the preceding 25 years.

"And because technological change has spawned so many opportunities for businesses to expand the range and value of their goods and services, the introduction of new efficiencies has not led to higher unemployment."

GENERATION-SKIPPING TRANSFER TAX EXEMPTION. (Bob Gallo) "The generation skipping transfer tax (GST tax) is a tax on gifts or bequests made to grandchildren. This tax is in addition to any estate or gift taxes paid and is set at a flat rate of 55%.

However, each person has a generation skipping transfer tax exclusion of $1,000,000 ($1,010,000 in 1999). To illustrate how the GST tax and the $1,010,000 exclusion works. Let's say that you have a $3,000,000 taxable estate and that you decide to disinherit your son and leave your entire estate to your grandchildren. (or maybe your son already has enough) At your death you would pay an estate tax on the amount in excess of your $675,000 estate tax exclusion.

Your estate tax would be $1,070,250. Leaving $1,929,750.

Because your grandchildren and not your children are receiving your estate, your remaining estate will also be subject to the GST tax, to the extent that it exceeds the GST tax exclusion. The amount over your GST tax exclusion is $919,750. This excess amount is subject to a 55% GST tax. This GST tax is $505,862.50, leaving your grandchildren with $1,423,887.50.

Your combined estate tax and GST tax is $1,576,112.50."

Over half the estate went to taxes. Better learn how to do better planning

LTC One study indicates that about 25% of all elderly over age 65 have a pre existing condition that would preclude coverage by a LTC company.

Targeted Tax cuts can help middle class families meet crucial issues, whether it is saving for a college education, buying a new home, preparing for retirement or taking care of an aging relative. But we think that massive unpaid for tax cuts could put the expansion at risk by putting uupward pressure on interest rates, undermining the fiscal discipline that's brought us to this point and making it more difficult to address the crucial issues of strengthening Social Security and modernizing Medicare.

Treasury Secretary Lawrence Summers on Tax Cuts

NURSING HOME NURSES (The Gerontologist, Mozes) The quality of care provided in nursing homes across the United States is being jeopardized by inadequate nursing -- in terms of numbers of staff and the training they receive. "Though in many homes the quality is excellent, in a lot of homes the quality is not as good as what people would like.... And there are quite a few studies that show that when you have a higher level of staffing, the quality of care in the nursing homes is better." Other surveys indicated that there was a general shortage of staff and that what staff there is, lacks the proper expertise needed to provide quality care. In terms of time staffing, the panel concluded that nursing homes with 100 beds or more need to have one full-time RN director of nursing, one full-time RN director of in-service education, continuous training programs, and a minimum of three RNs on duty for an equivalent of 10 minutes per resident per day. They also suggested that there be at least one RN nursing supervisor on duty 24 hours a day 7 days a week. In terms of numbers of staff, the panel set a minimum ratio of 1 licensed nurse for every 15 residents during the day, 1.2 during the evening, and 1.3 at night."

VIATICAL RETURNS: An owner of a viatical company says that returns for purchasers run from 5% to 47% (depends on lifetime) with an average of 16.46%. And such returns are apparently in line with NAIC requirements.

SAFE HARBOR 401(K)  (April Caudill) "New rules became available starting Jan. 1, 1999, and provide a design-based alternative to nondiscrimination testing. In return for satisfying notice and funding obligations, employers sponsoring a 401(k) safe harbor plan are freed from the hassles of annual testing and from having to make annoying corrective distributions to highly compensated employees. Furthermore, employers who already have another plan in place covering the same employees as the 401(k) plan (such as a money purchase plan) may already be satisfying the funding requirement.

Employers setting up (or switching to) a safe harbor plan can meet the funding requirement either of two ways: (1) match elective contributions dollar for dollar up to 3 percent of compensation and 50 cents on the dollar for 3 percent to 5 percent of compensation, or (2) provide nonelective contributions to every nonhighly compensated employee eligible to participate in the plan of an amount equal to 3 percent of compensation".

FINANCIAL LITERACY. (Jumpstart Coalition and Coalition for Personal Financial Literacy) In a recent 45 minute test to high school seniors, the average grade was only 52%. In 1997, the grade was 57%. They commented- "If people are well informed, they can take advantage of choices. If not, they become vulnerable."

ASSET ALLOCATION (NY Times) "S.& P. 500 index funds are less diversified today than ever. Last year, only 31 stocks accounted for all the S.& P. 500's 21 percent gain. By contrast, in 1995, 341 stocks were responsible for the index's 37.6 percent climb. Put in a slightly different way, as of March 1, the 10 largest holdings represented 25 percent of the total market value of the S.& P. 500. Technology stocks have become a much larger part of the index. They account for roughly one-third of its value, up from 9 percent just 10 years ago. Investors who bought an S.& P. 500 index fund in March were paying a median trailing price-to-earnings ratio of 42 for the top 20 stocks in the index, compared with a median of 29 for the overall index.

"The Leuthold Group, a market research firm in Minneapolis, have studied some of the most popular stock indexes and found some surprising discrepancies between what the indexes are and what they are assumed to be.

For instance, the S.& P. Mid-Cap 400 index, which purports to be representative of companies in the middle tier of stock market capitalization, has a sizable proportion -- 16 percent -- of its value in what many people consider to be large-cap stocks, those with capitalizations of about $8 billion or more. Furthermore, about one-tenth of the companies in the index qualify as small companies, with market caps of less than $1.2 billion and more than $550 million. As a result, only three-quarters of the index is made up of midsize companies. S.& P. Small-Cap 600 index, in which 15 percent of the companies are in fact mid-tier. Almost one-third of the index is made up of stocks with market values of $250 million or less -- microcap companies by most measures. That means that just 77 percent of the companies in the small-cap index are truly small companies."

What I wanted to focus upon was the current commentary about how planners who had "stayed the course" in basic asset classes are being vindicated because of recent surges in the international arena- mainly emerging markets- and small cap stocks. Oh really?? The suggestion is that one should have stayed in emerging funds after the fiasco in Indonesia years ago. To do so was economic folly. Huge losses sustained and not one shred of valid evidence it was coming back soon. That said, it obviously would recover. But is it viable to consider such an investment when Japan is apparently still mired in its neverending recession? Maybe it is O.K. I'll wait.

How about small cap and value funds? Possibly- but I still think the larger cap will do better. Technology has made them quicker and more intelligent.

Lastly, such comments about "allocation" specifically and intentionally miss basic asset classes like real estate (which is still terrible) and precious metals (UGH!). If a planner had also kept those assets during the last 5 years, I can't believe he/she would have any clients. At least any bright ones. This is not to say I am always right, pick the perfect investments and so forth. But alternating between one and another financial journalist or magazines hot picks is unreliable at best.

UP TO CODE??? (Katherine Salant) In 17 states there are NO residential building codes. Even where they are, "it still says nothing about the quality of construction materials or workmanship of the useful allocation of space." Many jurisdictions now use the International Code Committee International Residential Code. An inspector may spend between 5 to 14 visits to view work.

EUROPEAN TECHNOLOGY (NY Times): Many investors think they see Europe on the verge of a high-technology explosion. "Dot-com start-ups are appearing across the Continent and attracting venture capital, while the Internet refashions the way mainline European companies do business."

So maybe this is the focus for the future. Could very well be. But I am not so inclined to jump in because of the beaten Euro. I did not want a European investment strategy unless the Euro did well (which I thought it would in 1999). But it has been crippled and until it shows some resiliency to the dollar, I'll wait. 

REIT CORRELATION: (Property) "Correlation of REIT's with stocks is going to center around 0.4 with the normal range being 0.3 to 0.5. The correlation between direct owned real estate and stocks is more like 0.2"

History repeats itself, which is good because most people don't pay attention the first time anyway.

BREAST CANCER: (Journal of the National Cancer Institute)Women who develop breast cancer after age 55 tend to have a less aggressive type of tumor and most older patients live about as long as the women without breast cancer in their age group.

CESAREAN SECTIONS: The Public Citizen Health Research Group in Washington, D.C., estimates that half of the nearly 1 million cesarean sections performed every year in the United States are medically unnecessary.

LONG-TERM CARE INSURANCE IN 1997-1998: (HIAA) "The number of policies sold rose from about three million in 1992 to almost six million by June 1998. Furthermore, the long-term care insurance market has grown an average of 21 percent each year from 1987 to 1997.

"Our data show that the average household income for people who purchase long-term care insurance is about $35,000 a year." (My comment- that seems low for an expenditure of $1,500 or double if both spouses are covered. You should not spend more than about 7% of your income. I would need more data to be more specific.)

Services covered by the eleven sellers identified as having sold 80 percent of all individual and group association long-term care insurance policies in 1997 include nursing home care, care at an assisted living facility, home health care, and alternate, hospice, and respite care.

As of June 1998, the employer-sponsored market has seen a 40 percent average annual growth rate - to about 800,000 policies cummulatively - and more than 2,000 employers offered a long-term care insurance to employees and/or retirees.

In 1998, the average annual premium for a policy with a $100 per day nursing home care/ $50 per day home care benefit, four years of coverage, and a 20-day elimination period was $274 at age 40. At age 50, the premium for the same policy was $385; at age 65, the cost was $1,007; at age 79, $4,100. With a 5 percent inflation protection feature, the policy had an average annual premium of $595 at age 40; $888 at age 50; $1,850 at age 65; and $5,880 at age 79.

Half of all individual and group association policies were sold in nine states: Florida, California, Pennsylvania, Illinois, Texas, Ohio, Washington, Iowa, and Missouri. Florida accounted for nearly 10 percent of all long-term care insurance policies sold in the U.S.

Market penetration - a number based upon the number of policies sold in each state and the number of people age 65 and over in that state - is highest in Colorado, Iowa, Kansas, Missouri, Montana, Nebraska, North Dakota, Oregon, South Dakota and Washington.

DRUGS: (American Medical Association.) Opiate drugs are being used more often to treat severe, chronic pain, but this rise has not led to wider abuse of the drugs. The proportion of all cases of drug abuse that involved opioid analgesics actually declined from 1990 to 1996.

ABUSE: Animal abusers are five times more likely than non-abusers to commit violent crimes against people.

A READER'S QUESTION- The Fed lowers the interest rate and the stock market rises. Later the Fed raises the interest rate and the stock market rises. How can these two observable occurrences be consistent?

My reply- "You are misconstruing the intelligence of the market. It does not have to make sense and in many cases, does not. The question is even more advanced with the valuations of tech stocks which have no income. Additionally there are so many other extraneous factors that there is rarely one factor- P/E, unemployment rate, manufacturing, etc.- that override rational thought."

GIFTS (IRS) More than 80 percent of the 1,651 tax returns reporting gifts of $1 million or more that were audited last year understated the value of the gift.

The average understatement was about $303,000, on which about $167,000 in additional gift taxes was due. The I.R.S., its auditing and legal staff shrinking in recent years even as the number of complex tax returns grows, lacks the resources to find most of the Americans who understate the value of their gifts and estates or even fail to report any transfer of property. The I.R.S. has just 78 lawyers assigned to gift tax audits, each of whom is responsible for auditing more than 3,300 gift tax returns this year.

Of the more than 250,000 gifts of less than $600,000, only 1 in 400 is even audited, while among gifts of $600,000 to $1 million, fewer than 1 in 55 is audited. By contrast, the I.R.S. has been auditing 3 of every 4 gifts of more than $1 million, but says that this is inadequate and that it is hiring 3 more lawyers so it can audit 85 percent of returns reporting very large gifts.

The Taxpayer Relief Act of 1997 gives the agency three years to audit gift tax returns -- or accept them as filed.

MONTE CARLO LIFE INSURANCE. Long time readers know of my dislike for the sophomoric budgets that are coupled with sophomoric retirement plans. The point is that using a "set" rate of return for equities simply doesn't reflect reality. We also have statistical evidence by the likes of Bill Sharpe showing the expectations from an equity portfolio will rarely return the projections offered by the simplistic retirement scenarios of Quicken, Vanguard, et al. The key is the use of certain monte carlo probability projections that show the odds of "xyz" actually happening (the best real life "negative" example is 1973/74).

But such projections need to also be identified in variable annuity and variable life projections. For example, if you tried to minimum fund a variable life policy at around age 40/45 with the standard 12% projections, you may find that it has only a 30% probability of lasting till age 100 (and if you didn't buy a permanent policy to last your lifetime, why did you buy it in the first place??). In other words, sometime in the future there is a 70% probability you would have to add more money to keep the policy afloat. The illustrations don't show that, the agent's don't make you aware of it (doubt that but a handful would recognize the problem), your attorney most assuredly doesn't know statistics- probably doesn't have a calculator- and your CPA wouldn't know a mutual fund from a bat.

Don't buy insurance from an insurance agent.

LET'S BE CAREFUL OUT THERE: Viatical Settlements-From A February press release from the Florida Insurance department- "For more than a year now, we've been digging into the viatical industry. "Our investigation so far suggests widespread fraud." "Properly managed, the viatical industry can provide valuable support to people in their most desperate hour of need. But the kind of fraud engaged in by those charged today poses a serious threat to the continued viability of the industry by undermining investor confidence."

The State was proposing to expand the state law governing viatical sales by the terminally ill to also cover the sale of life insurance policies of seniors and others.

"Advertising may be described as the science of arresting the human intelligence long enough to get money from it."

OLD?: A Los Angeles Times poll of retirees found that three of four respondents felt younger than their actual ages--about 19 years younger on average. Those in their 70s and 80s said they felt as if they were in their 60s. Those who were in their 60s said they felt they were in their early 50s.

Most interesting- Nearly a quarter of those polled said they had retired too soon.

Character is much easier kept than recovered.

SEC , ON LINE TRADING AND "REALISTIC GOALS": (NY Times) "Since the advent of the Internet, the number of households that trade online has exploded, and more consumers are seeking information online and choosing to trade without an adviser. As a result, the SEC fears that too many inexperienced investors are making trades without realistic financial goals. "(What an understatement!!!!!)

"There are a number of companies out there that provide information so customers can perform calculations to their own portfolios." "This is a justifiable concern: You have fairly inexperienced investors who have access to lots of information, but there is no human adviser to put the information in context."

As a result, the SEC has recognized the need to let online brokerages offer some investment guidance. It is now considering a proposal that would allow brokers to give investment advice provided they follow certain rules, according to a SEC attorney.

A broker has two main responsibilities before giving advice, Fornelli said: It has to ensure that the customer is aware of its role as adviser and broker, and it must get the investor's permission before making any trades."

Lovely thoughts- but I don't think it will work. You must remember that brokers have NEVER been taught the fundamentals of investing (alpha, beta, correlation, standard deviation, DIVERSIFICATION) and I don't think a SEC or NASD attorney would even have a clue. It's not the fox guarding the chicken coop- but it ain't much better.

WHAT A PAIN: (Arthritis Foundation) Sixty percent of a Gallup poll indicated that they had regular pain but "just had to live with it." 42% said they experienced pain every day and 89% reported pain every month. Only half had seen a doctor in the last three years for pain

OLD: Elderly people who live alone, have no friends or have bad relationships with their children are 60% more likely to develop dementia that those who have satisfying social contacts.

CAREGIVING (National Alliance for Caregiving and National Center on women and Aging, November1999) Caregivers forfeited $659,000 over their lifetimes in lost wages, Social Security and pension contributions. About 22 million families are currently providing care.

HMO DICHOTOMY: Medical costs are increasing by three to four percent a year, yet most Medicare HMOs get an average annual revenue increase from the government of about two percent. That's why so many have left the business and why their Medicare patients are being forced back into regular- and more expensive- basic Medicare.

SAVINGS (ENews) According to a Schwab OneSource survey of younger investors (age 41 and younger), about half do not expect Social Security to contribute to their retirement income at all; just 1% expect Social Security to be a primary source of retirement income. Instead, more than half (52%) expect their mutual fund portfolios to be a primary source of retirement income. Interestingly, 70% say they plan to retire before age 60 and nearly half (45%) claim to be saving 10% to 20% of income for retirement; 42% anticipate a return of 15% or higher on their mutual funds prior to retirement. 

TECH STOCKS: Of the 34 leading tech stocks in 1980, only Intel was good. 22 don't trade anymore; 11 have underperformed the S&P 500 and 3 of the 11 have lost half their value.

PRESCRIPTIONS: Elderly people without insurance for drug costs typically pay 15 percent more than people with insurance for the same medicines. Per Blue Cross and Blue Shield Association, spending for prescription drugs is likely to continue to rise at double-digit rates over the next five years, and 40 cents of each new dollar spent on drugs will go for drugs that currently are in development Per the School of Pharmacy of the University of Maryland, drug spending will increase by 15-18 percent a year for the next five years. It also reveals that 60 percent of future expenditure increases are attributable to continued increases in the price and utilization of drugs on the market today

MORE CAREGIVING: (Journal of the American Medical Association) The mortality risk for elderly caregivers who are "experiencing caregiver strain" is 63% higher than for elderly non-caregivers. Recent statistics indicate that a Geriatric Care Manager can cost up to $150 per hour.

YO FATSO: The percentage of obese Americans has increased 50% in the last two decades; since 1985, the average adult weight has increased 10 pounds. Per the Centers for Disease Control and Prevention: In 1998, 52.8% of all Americans were overweight and half were dieting. 62.7% of those said they exercised by only 28% said they exercised the minimum 30 minutes a day five times per week.

LIFE INSURANCE: I saw a lengthy article by Kathleen Pender of the LA Times where, through her interview of Ameritas, she essentially stated that variable universal life is a great tool due to its flexibility. Bite me.

Folks, there are different types of insurance- though mostly defined as term, whole, universal and variable. Term is for a set period of time but becomes prohibitively expensive over life. Standard cash values policies can work, but will someone tell me why an astute persons just doesn't consider and buy just plain insurance? Of course I don't expect many people to understand what the comment addresses- so I will tell you. There are policies over at least the last 15 years that, while they may have cash value, it is incidental to the purchase. In fact, you would essentially NEVER consider a loan because the policies would probably lapse. But they are guaranteed for life- even past age 100- and are far cheaper. Of course few are sold since the insurance companies would almost shoot themselves in the foot for recommending a cheaper product that works easier than the machinations of split dollar, retirement monies and all the rest of the drivel. Companies literally always focus on the standard cash policies. But you almost have to be a mathematician to figure out the illustrations of one company to another (even within a company. I won't even bother with such calculations at this point.) Secondly, the subject/type of policy is not taught to Certified Planners of any type, to ChFC's, etc. Further, an attorney wouldn't know insurance from a football nor would a CPA. You have to do a lot of homework- but that is rarely done by any consumers.

As to the viability of variable: Assume you have a $1,000,000 policy with $400,000 cash. It is the only thing you own. You die. Benefits go to your son. How much does he get? $1,000,000??? Nope.  $874,700. If you did not immediately know the answer (or at least the implications) you are definitely not an astute investor.

Say you took that same policy and transferred it to a trust. What are the implications? It would mean that, this year, you would have $325,000 left for your lifetime exemption. If you did not immediately know the answer (or at least the implications) you are definitely not an astute investor.

Say you sold your policy- even to your daughter. What are the implications? Transfer for value and ordinary income. If you did not immediately know the answer (or at least the implications) you are definitely not an astute investor.

MORE RETIREMENT: Consumer Federation of America says 56% of households are lagging in saving for retirement. Families with higher incomes tended to have adequate savings, while only 23% of households with annual income of $10,000-$25,000 had a sufficient cushion. More than half of U.S. households have saved less than they should for a comfortable retirement, and 59% of Americans expect their standard of living in old age to be lower than it is now.

HOME HEALTH CARE: Literally everyone wants to stay in a home when impacted by ADL's. But the past reduction in Medicare spending is forcing more elderly into hospital and nursing homes. Spending on home health care dropped by 45% in during the last two years from $14.9 billion in 1998 and $17.5 billion in 1997 to about $9.7 billion today. About 3.6 million people received medicare home health services in 1997. (The spending cut is also causing reductions in coverage even where home health care is provided. Home health agencies are avoiding patients with chronic diseases and long-term illnesses, especially diabetes.) If nothing is done, such  spending will drop an additional 15% next year.

Now, there is no question in my mind that previous home health care spending was totally our of whack. A lot of coverage was nothing more than a substitution for nursing home care- and at a substantially premium. However the huge reduction in coverage and the increase in hospital care is offsetting part of the savings. A compromise will need to be made. But the elderly cannot assume 24 hour home health care is an inviolate benefit of the citizen.

LTC POLICIES:(United Seniors Health Cooperative) You'll pay in the neighborhood of 40% more for a policy with a nonforfeiture benefit rider attached to it.

ALMOST 10%!!!!: More than 1600 of the nation's 17,000 nursing homes have filed for bankruptcy since last fall. Most of the homes continue to operate as they work out their financial problems in bankruptcy court. The reasons given for the financial woes of the industry vary. Some site Medicare cuts Congress mandated in 1997 are the cause; others cite mismanagement.

The end of the human race will be that it will eventually die of civilization."

Ralph Waldo Emerson

PLANNING IS STILL NEEDED WHEN YOU CO HABITAT- The number of live-in, opposite-sex couples increased from 523,000 in 1970 to 4,236,000 in 1998, the Census Bureau says. Within about 18 months, most of those couples either marry or split up.

And those that marry then split up anyway.

PRICE WEIGHTED DOW (USA Today) "Originally, Charles Dow just added up the prices of the 30 component stocks and divided by 30. Over the years, that divisor (30) gradually shrank because of stock splits and substitutions of one stock for another in the average. Today, the ''divisor'' is actually a multiplier (0.20145268). The process still starts by adding up the 30 prices. That means the Dow is a price-weighted average. General Electric is the most influential stock in the Dow because it has the highest price."

The Nasdaq contains 4,728 stocks, or every stock traded on the Nasdaq Stock Market. But as a result of its capitalization-based weightings (largest SIZE of company, not price), the Nasdaq composite paints a far too rosy picture when the largest-cap Nasdaq stocks are leading the market. For example, in 1999 Cisco rose roughly 131% and the Nasdaq composite gained 86%. The average Nasdaq stock, however, gained less than 10%. Think about that- though the same relationship has existed with the S&P for quite some time since it is also based on pricing by capitalization.

So what about the Wilshire Index that covers just about everything? Same skew in numbers due to capitalization. But I have said for years (though that doesn't make me right) that large cap companies will dominate the stock arena for many years to come since they have been able to utilize technology and innovate far more efficiently than before.

LTC: By 2030 the total national expenditures for home- and community-based long-term care will more than quadruple, from $41 billion today to a projected $193 billion. A separate ACLI study, "Who Will Pay for the Baby Boomers' Long-Term Care Needs?" found that the total national expenditures for nursing home care could reach $330 billion by 2030, which equals today's entire Social Security budget.

Other long-term costs will zoom also in the next 30 years, the ACLI predicts:

Adult day care, which currently costs an average of $50 per day (or $12,981per year), will increase to $220 per day (or $56,100 per year).

Assistance by a home health aide, which now costs $61 per visit (or $15,743 per year at five visits per week), will cost $260 per visit (or $68,000 per year).

An assisted living facility, which currently averages $25,300 per year, will cost $109,300.

Nursing home care, which now averages $44,100 per year, will cost $190,600 per year.

The ACLI also found that half of long-term care policyholders who are receiving benefits said that they would have to move to a nursing home without their insurance benefits. More than 70% said that their LTC insurance policy pays all of the costs of the services they need. The findings illustrate "the importance of taking personal responsibility for your financial future and for your future long-term care needs."

"By 1999, the Dow Jones industrial average had more than tripled in five years. But personal income and gross domestic product rose less than 30 percent, and almost half this increase was because of inflation. Corporate profits rose less than 60 percent. The size of the stock market's gains, therefore, appear to be unwarranted, and unlikely to persist. It is a serious mistake for political and business leaders to acquiesce in such high stock valuations. All of our plans for the future, as individuals and as a society, hinge on our perceived wealth, and those plans can be thrown into disarray if much of that wealth evaporates tomorrow."

Robert Shiller

SOCIAL SECURITY: SS has agreements with 18 other countries which coordinates SS benefits and eliminates double taxes for workers who divide their careers between the United States and foreign employers.

COMMISSIONS (ENews) The SEC says that most advisers who take commissions have a "serious conflict of interest with clients." According to an article in the 4/24 Investment News, the SEC stance came as a shock to many commission-based advisers, since "the new ADV form would require advisers to disclose all conflicts of interest, including 'soft dollars.' They would also be required to say how they deal with the conflicts and would have to state how much clients pay for brokerage fees, fund expenses and other costs."

But I repeat- paying either commissions OR fees to a twit is irrelevant to me. It is the competency that truly counts. And not that many are competent.

FEWER PEOPLE ARE COVERED: (LIMRA) Individual life insurance sales made modest gains in 1999, with new premiums up 3% over 1998 and face amount increasing 8%. Unfortunately, for the 16th consecutive year, the number of policies sold was less than the year before...just over 11 million policies were sold in 1999, the fewest number sold since 1970. Average policy face amount was $127,000.

If you need insurance- certainly if you have a family- buy it. And normally if you do not need insurance, don't bother with it. (Me for example- I have NO ONE financially dependent upon me. Therefore no need)

By the same token, if you WANT to leave money to someone, don't leave cash, don't leave an annuity- in fact, don't even leave a mutual fund. Buy some cheap life insurance. Insurance, properly done, is a pool of money that is based on "actuarial leverage". If you die, the beneficiaries get a lump sum far greater than the cost of the insurance. Of course, if you live a long time, some of the leverage is lost. So what? Didn't you want to live anyway??

REVERSE MORTGAGES: (Scripps) In the last 10 years about 55,000 homeowners have used reverse mortgages. The market may be as high as 3 million. A typical user is a 76 year old woman with a median income of $10,400 who lives along and has no children. A unique comment is that about 60% of the reverse mortgages are paid off for reason other than death (moving to another home or nursing home, for example) - and this is undoubtedly very expensive to the homeowner dues to the large fees and other costs such as high interest rates.

"Democracy means government by discussion, but it is only effective if you can stop people talking."

Clement Atlee

THE FIX IS IN: SPAY/USA is a program that provides referrals to vets who offer low cost neutering and spaying. 800 248-SPAY. They have a program called Start Targeting Once Percenters where they'd like to get 1% of pet owners to spay or neuter their pets. It could stop the needless killing of 6 MILLION cats and dogs each year. Call the number and get referred to a low cost center. Just to be sure, I got myself neutered. My neighbors are very happy now.

"Save a little money each month and at the end of the year you'll be surprised at how little you have."

Ernest Haskins

ELDER ABUSE. In 1996, 225,000 reports of elder abuse were filed in California. But it is estimated that they represent only 1/14th of actual cases.