STROKES: From 22% to 25% of patients die within a year of having their first stroke. Those who survive can face serious disabilities. About 1.2 million Americans report difficulties in daily living due to strokes.

Common Problems: A study observed patients 65 years and older for six months after their strokes. It found that: 50% had paralysis on one side of their body. 35% had symptoms of depression. 30% couldn't walk without assistance. 26% needed help with daily activities. 26% were in nursing homes. 19% had speech or language problems.

Costs: Stroke-related expenses are expected to reach $54 billion this year in the United States. Here is where some of the money goes: Hospitals, $13.7 billion. Nursing homes, $12.8 billion. Home Health care, $2,7 billion."

STATE PENSIONS: (Wilshire Associates,) Falling assets combined with continued growth in liabilities caused state retirement systems to plunge from a $180 billion shortfall in 2002 to more than double that -- $366 billion -- in 2003.

Leading the way in unfunded liability in both 2002 and 2003, Illinois has a $43.1 billion shortfall -- equal to 197 percent of its state budget. Illinois was one of 16 states that have unfunded pension liabilities that exceed the state's total budget. For the state retirement systems covered in the study, pension assets fell four percent or $77 billion, from $1.8 trillion in 2002 to $1.7 trillion in 2003. Among those same systems, liabilities grew six percent or $109 billion from $2 trillion in 2002 to $2.1 trillion in 2003. The ratio of pension assets to liabilities, or funding ratio, for all 123 state pension plans combined dropped from 91 percent in 2002 to 82 percent in 2003. The median state pension plan has a funding ratio of 79 percent.

There are only two states, Florida and North Carolina, that have pension plans that continue to have assets that exceed their plans liabilities while 14 states maintain pension plans with funding ratios that fall below 70 percent with West Virginia the lowest at 40 percent. Of the state retirement systems covered in the study, 93 percent are now underfunded, up from 79% in 2002 and 51 percent in 2001. The average underfunded plan has a ratio of assets to liabilities equal to 77%".

FAT: (HealthPartners Research Foundation) Physically fit employees get along better with co-workers and take fewer sick days than out-of-shape employees. On the other hand, obese employees reported more difficulty getting along with coworkers, while severely obese workers missed significantly more days of work. .

CREDIT CARDS: Among the 185 million card-holding U.S. consumers, the average person carries three bank-issued credit cards, four retail credit cards and one debit card.

ACTUALLY, MOST OF THEM WERE GREEDY AND STUPID: The Treasury and the I.R.S., said they would not allow a theft deduction for the loss of value of stock bought on the open market, even if the stock declined because of crimes committed by corporate officers (Enron, Worldcom). The Treasury said it understood that some taxpayers had been advised that they could take such deductions but its wrong. The I.R.S. states "the service will disallow a deduction for a theft loss" stemming from "a decline in the value of stock that was acquired on the open market for investment."

They are absolutely correct. Nobody forced them into buying anything. There is fraud committed every day by all sorts of industries and people. If you want to reduce your exposure, buy a whole mess of stocks. But then I have to ask, how many stocks do you have to buy to insulate your portfolio due to unsystematic risk? Don’t know? Then you shouldn’t be buying stocks. Unfortunately 99 44/100% of brokers and planners don’t know the number either.

NEW YORK INSURANCE DEPARTMENT: Unless licensed as an insurance agent, insurance broker or insurance consultant with respect to the relevant kinds of insurance, no person, firm, association or corporation shall receive any money, fee, commission or thing of value for examining, appraising, reviewing or evaluating any insurance policy, annuity or pension contract, plan or program or shall make recommendations or give advice with regard to any of the above.

No person licensed as an insurance agent, broker or consultant may receive any fee, commission or thing of value for examining, appraising, reviewing or evaluating any insurance policy, bond, annuity or pension or profit-sharing contract, plan or program or for making recommendations or giving advice with regard to any of the above, unless such compensation is based upon a written memorandum signed by the party to be charged and specifying or clearly defining the amount or extent of such compensation.

I bet there is nary a single fee only planner in the state who is properly licensed. There may be a couple NAPFA members- but probably not more than 15%.

HERE IS AN INTERESTING STORY. A CFA heard a presentation by Jensen (Jensen’s alpha) describing all the various attributes of asset allocation. Very detailed. He got through and then made the comment, "so where can you find such an allocation? If you know, tell me because I can't find it." The point being that all the statistics can point you to some form of allocation, but it is all based on past history. All the statistics change immediately. So what you started with is gone the minute you allocate it.

FEES: NASD reminded securities firms they should have reasonable grounds for believing that a fee-based account is appropriate for a particular customer, in light of various factors such as the customer’s financial status, investment objectives and fee structure preferences.

Fee-based accounts, including some wrap accounts, typically charge a customer a fixed fee or percentage of assets under management in lieu of transaction-based commissions. NASD-regulated firms increasingly are offering customers fee-based accounts that charge a fixed fee and/or percentage of assets under management as an alternative to traditional commission-based charges for brokerage services. Many of these firms have expanded their fee-based programs to cover traditional brokerage accounts that do not include investment advisory services.

NASD reminds firms that before opening a fee-based account for a customer, they need to have reasonable grounds to believe that type of account is appropriate for that particular customer. Customers may have reasons, unrelated to the cost structure fee-based accounts, for deciding to handle their investment services on that basis, but all material components of the fee-based accounts, including the fee schedule, services provided and the fact that the program may cost more or less than paying for the services separately must be disclosed to the customer. Firms that administer fee accounts should make reasonable efforts to obtain information about the customer’s financial status, investment objectives, trading history, size of portfolio, nature of securities held, and account diversification.

With that and any other relevant information in hand, firms should then consider whether the type of account is appropriate in light of the services provided, the projected cost to the customer, alternative fees structures that are available, and the customer’s fee structure preferences. In addition, there must be a supervisory system in place to monitor on an ongoing basis whether a fee-based account remains appropriate for a particular customer, and should review their sales literature, marketing material and other correspondence related to fee-based accounts to ensure the information is balanced and not misleading.

OVER 80 PERCENT OF SENIORS OWN THEIR HOMES RATHER THAN RENT: Of the 17,513,000 owner-occupied elderly households in the U.S., 73 percent or 12,792,000 are owned free and clear, i.e. no mortgage. Mean home value of householders age 65 or older is $113,071. Multiplying 12.8 million free and clear homes of the elderly times the mean value of $113,071 gives $1.45 trillion.

There are 3,838,000 elderly home owners with one or more mortgages, the median outstanding principal amounts of which are $34,147. Assuming the value of the mortgaged homes is the same as the homes with no mortgage and that the median principal amount approximates the mean, then the average equity in these mortgaged properties would be $113,071 minus the remaining loan balance of $34,147 or $78,924. Multiplying the equity in mortgaged homes owned by the elderly by the total such homes (3.8 million) gives an additional $302.9 billion in home equity held by elderly households.

Adding the $1.45 trillion in unmortgaged home equity of seniors to the $.30 trillion of equity in mortgaged homes gives a total of $1.75 trillion.

LIFE INSURANCE- The bulk of the public- actually lots of planners unfamiliar with underwriting- think that only the best clients can get insurance. Certainly those that have had something like a kidney transplant would never be accepted. Take a look at these to see what is possible

Kidney Transplant: 54 year old male; kidney removed in '98 due to cyst, subsequently client had kidney transplant, no cancer and no kidney disease, blood pressure controlled by meds, also anti-rejection medication. $500,000 universal life at Preferred Nonsmoker!

Cardiac: 53 year old male; client had a 5-way bypass in July of '02, all vessels were significantly blocked, at present blood pressure and cholesterol controlled by meds, height/weight is 5'10" and 190lbs, client has been without symptoms since surgery with good follow-up with his cardiologist. $750,000 fifteen year term at Super Standard!

Occasional Smoker: 64 year old male; smokes two cigars a day, partner in law practice, never smoked cigarettes, had a cardiac work up three years ago that came out normal. Purpose of coverage is key man. $1,000,000 ten year term at Preferred Nonsmoker!

Multiple Sclerosis: 39 year old male; diagnosed with MS (slow onset progression) in 1996, works full time and leads a normal life without using a cane or wheelchair. Purpose of coverage is personal. $100,000 UL at Super Standard.

Cholesterol/Occ Smoking: 63 year old male; cholesterol at 273 (normal 140-200) and chol ratio at 6.06 (normal is 1.0 to 3.7), also smoked a cigar in the last 12 months, client's Dr. is aware of cholesterol issues and is treating with diet and maintaining a follow-up schedule, no coronary artery disease in family. $600,000 twenty year term at Preferred Nonsmoker.

Almost anyone can get insurance no matter what their condition. But it takes time and you need to use the right firm that knows how to present the material correctly to the right underwriter at the right company.

MEDICAL DEBT: Over eight out of ten Americans who have outstanding medical debt say that these debts are either a major or minor burden, preventing them making purchases of large ticket items, such as houses, cars or major appliances. Of those with medical debt, 17% say this debt is not large enough to prevent their purchases. Of those surveyed, 16% owe on debt associated with a medical or dental procedure, including the purchase of prescription drugs, while 84% have no outstanding medical debt. 21% of the respondents have neither medical or dental coverage, 49% have dental insurance and 76% have some form of medical insurance, including Medicare.

LIFE SETTLEMENTS: (University of Pennsylvania's Wharton School and Criterion Economics LLC) Holders of life insurance policies who sold their policies to life settlement providers last year received $242 million in excess value that would have been forfeited to insurers.

TOO FAT: (UNUMProvident) The workplace impact of obesity continues to constitute a “weighty” economic issue, with obesity-related disabilities costing employers an average $8,720 per employee per year. The report says companies lose more than $12 billion annually due to increased health-care utilization, lower productivity, increased absenteeism, and elevated health and disability premiums related to the condition.

HEALTH CARE: Small firms with three to 199 employees experienced annual health-care premium increases of 15.5% from 2002 to 2003, while firms with 200 or more employees got away with a 13.2% hike

YOUR TAXES: (IRS): On average, it takes filers 13.5 hours - nearly two working days - to pull together their records, decipher tax-law changes, fill out Form 1040, and send it in.

The IRS increased its audits of individuals and couples making more than $100,000 last year, focusing most of the extra attention on people making $250,000 or more. Still, even high-income taxpayers faced low odds of being called upon to document their expenses and deductions. Despite the 24 percent increase for taxpayers who earned $100,000 or more, the IRS audited only one in 95 returns filed by big earners.

FAKES: What's worse than expensive, persnickety health insurance, or no insurance at all? Fake health insurance. Some 200,000 policyholders nationwide have been duped by scam policies in recent years, the General Accounting Office reports. Some subscribers didn't discover this until after they fell ill and filed claims for benefits. The health insurance plans they or their employers had purchased did not exist, and the toll in unpaid bills topped $252 million.

EXERCISE: (HealthPartners Research Foundation and published in the Journal of Occupational and Environmental Medicine ) respondents who engage in moderate exercise have higher work-quality and better job performance than those who lead sedentary lifestyles. According to the study, physically fit employees get along better with coworkers, and take fewer sick days than out-of-shape employees. Subjects with high levels of cardiovascular fitness perform more work, using less effort

LTC: ( LongTerm Care Insurance Sales Strategies) What's the combined value of long-term care insurance protection currently in-force? According to their 2004 study, it is $550 billion.

'Some six million Americans now own long-term care insurance and insurers already pay out over $1 billion in annual claims.'

"Sales of long-term care insurance have been surging recently by about 18% a year, with younger buyers leading the way. The average age of customers--72 in 1990-- has plunged to about 58, (HIAA)."

HISPANICS: More than a third (34%) of the Hispanic population in the US is living with parents that are financially dependent on them, compared with just 5% of workers overall. Further, 51% of Hispanic workers worry about having enough money to care for elderly parents/in-laws, compared with 29% of non-Hispanic workers,

DON'T UNDERSTAND: Drug labels, consent forms and other health information often include too much jargon for most Americans to understand -- a problem that can lead to poorer health and higher costs.

Medical experts reviewed more than 300 studies and found language used by doctors, insurance companies and researchers is often above a high-school level. Information meant only for the public also includes highly technical terms.

About half of all American adults, or about 90 million, read below a high school level, and half of those have trouble finding information on charts, forms and labels.

Less literate adults are less likely to follow healthy lifestyles or take preventive steps, and they are more likely to be hospitalized and use emergency services, it found.

One study showed poor reading skills increased costs by $29 billion in 1996. The Institute said that figure could grow to $69 billion a year.

AND FRANKLY I DON'T BLAME THEM: A Greenwich Associates research report found that only a third (35%) of defined contribution plan participants use the 401(k) Internet information tools provided by their companies. Not only that, but according to the estimates of executives at mid-size pension funds, the number of participants taking advantage of them to their full extent seems to be a mere fraction of that. So after rolling out Web sites designed to help 401(k) participants more effectively save for retirement, corporate plan sponsors are now coping with an uncomfortable realization: Most people don’t use them.

So, what's the problem? People are uncomfortable about the internet overall, primarily because it is not personalized. They want hand holding, no matter how much they state to the contrary. Unfortunately, the hands that will hold them will not be very knowledgeable. Not too many advisers learned much from 2000- 2002.

THIS SITUATION WILL NOT CHANGE AS LONG AS CONSUMERS KEEP PICKING REPS BY REFERRALS: (Bureau of Investigations) "We're seeing complaints where senior citizens are being coaxed to liquidate CDs, stock accounts and savings accounts and roll them into an annuity.

UNTIL RECENTLY, PARENTS HAD ONLY ONE EXPLANATION FOR THE BAFFLING BEHAVIOR OF TEENS: Clearly, they were hijacked by their rampaging hormones. But more and more, experts are discovering that the real reason for the eye rolling, sullen behavior, and burning desire to do stupid things that mark the turbulent adolescent years isn't just teens' surging hormones--it's their brains.

Not long ago, neuroscientists thought that the human brain finished developing at an age when kids still believed in the Tooth Fairy: By age 6, a child's brain has already achieved 95 percent of its adult structure. And research, much of it based on brain scans of infants, shows that neural connections form at a dizzying speed during the period from birth to age 3. But brand-new research has uncovered a second period of rapid brain development, stretching from preadolescence through the early 20s (peaking around 11 for girls and 12 1/2 for boys). "The brain is undergoing more change now than at any other time, except just after birth."

New connections are being made throughout the adolescent brain, even in the gray matter where we do most of our rational thinking. What's more, the brain is feverishly reshaping itself, "pruning neural connections at the rate of 30,000 per second producing a leaner, meaner brain."

The biggest changes are occurring in the brain's prefrontal cortex, located right behind the forehead, which governs "executive" thinking: our ability to use logic, make sound decisions, and size up potential risks. Knowing that this decision-making area is still under construction explains plenty about teens. Researchers have found that even in those who generally show good judgment, the quality of decision-making fizzles in moments of high arousal. Emotion, whether happiness, anger, or jealousy--particularly when teens are with their peers--overrides logic, making even the smart ones momentarily dumb. (Never happened to me.)

RETIREMENT (Thrivent) More than half of non-retired adult Americans have either not begun saving or report having saved less than $10,000 for retirement. Thirty-six percent have not yet begun to save for retirement and another 16 percent have saved less than $10,000. In addition, the survey also found that 62 percent of Americans have never estimated how much money they will need for retirement. Seventeen percent of non-retired Americans have saved $10,000 to $49,999, 9 percent have saved $50,000 to $99,999, and 6 percent have saved $100,000 to $249,999, 2 percent have saved $250,000 to $499,999, 1 percent have saved $500,000 to $999,999, and 1 percent saved $1 million or more.

RANDOMNESS: (Nassim Taleb) One can study randomness, at three levels: mathematical, empirical, and behavioral. The first is the narrowly defined mathematics of randomness, which is no longer the interesting problem because we've pretty much reached small returns in what we can develop in that branch. The second one is the dynamics of the real world, the dynamics of history, what we can and cannot model, how we can get into the guts of the mechanics of historical events, whether quantitative models can help us and how they can hurt us. And the third is our human ability to understand uncertainty. We are endowed with a native scorn of the abstract; we ignore what we do not see, even if our logic recommends otherwise. We tend to overestimate causal relationships. When we meet someone who by playing Russian roulette became extremely influential, wealthy, and powerful, we still act toward that person as if he gained that status just by skills, even when you know there's been a lot of luck. Why? Because our behavior toward that person is going to be entirely determined by shallow heuristics (cognitive rules of thumb) and very superficial matters related to his appearance.

There are two technical problems in randomness — what I call the soft problem and the hard problem. The soft problem in randomness is what practitioners hate me for, but academics have a no-brainer solution for it — it's just hard to implement. It's what we call in some circles the observation bias, or the related data mining problem. When you look at anything — say the stock market — you see the survivors, the winners; you don 't see the losers because you don't observe the cemetery and you will be likely to misattribute the causes that led to the winning.

PLEASE, NOT ANOTHER DESIGNATION: “The American College announced the creation of a new educational designation designed to provide financial advisors with the education needed to effectively serve those planning for retirement. The new designation, the Chartered Advisor for Senior Living (CASL) is a milestone in higher education in that it was created with active curriculum design support by financial advisors.

Earning the designation requires individuals to pass five College-level courses and meet specific experience, ethical and continuing education requirements.” Oy! .

PLANNING FOR THE FINANCIAL INDEPENDENCE AND SECURITY OF A DISABLED CHILD (Philip H. Mondschein, Esq)

“How can I provide for my child’s financial needs when I am no longer alive?” People are concerned that, by leaving an inheritance directly to their disabled child, this will usually disqualify the child from most means tested public assistance programs. If the parents make an outright gift to another sibling can they be assured that this child will properly look after the disabled child?

The solution to the problem is to create a trust known as a “supplemental needs trust” for the benefit of the disabled child. The purpose of the trust is to preserve eligibility for public assistance programs, such as Supplemental Security Income (SSI). In most states, eligibility for SSI automatically creates eligibility for Medicaid, which may be the only health insurance the disabled child is able to receive. In addition to maintaining public assistance eligibility, assets held in the supplement needs trust may be used to substantially improve the disabled child’s quality of life by providing goods and services above those provided by federal and state agencies.

There are two main types of trusts. The third party "supplemental needs trust" and the self-settled "special needs trust." The third party supplemental needs trust is a trust which is usually created with the assets of a parent or grandparent for the benefit of the disabled child. The trust may be created while the parent is alive or at death through a testamentary trust under the parent’s will or revocable trust. As long as the child cannot revoke the trust or compel distributions, assets held in the trust will not be considered an available resource and will not disqualify the child from receiving public assistance.

During the child’s lifetime, depending on the laws of your particular state, the trustees may be granted broad discretionary authority to use trust assets to purchase goods and services not otherwise available from governmental programs. These may include supplemental medical, dental, diagnostic work and treatment, nursing and attendant care, travel and entertainment, supplemental housing, support and transportation. In drafting the trust, the attorney will have to take into consideration both federal and state law. In some states the mere existence of the trustee’s ability to use trust assets to provide food, clothing or shelter will disqualify the child from receiving public benefits. However, in other states direct payments to third parties for food, clothing or shelter known as "in-kind support and maintenance" will only cause a reduction in the disabled child’s SSI for the month.

Upon the death of the disabled child, assets held in the third party supplemental needs trust may pass to other family members and the trust is not required to reimburse the state for public assistance furnished to the disabled child under the state’s Medicaid program.

What happens when a parent fails to create a supplemental needs trust, during lifetime or at death, and the disabled child receives their inheritance outright, or the child receives funds as a result of a personal injury award? Fortunately, all is not lost. Under the Omnibus Reconciliation Act of 1993 ("OBRA ‘93") Congress specifically authorized the transfer of assets to a self-settled special needs trust, also known as a "1396p(d)4(A) trust," as a means of preserving public benefits. Under OBRA ‘93, the trust must be funded with the assets of a disabled individual under 65 years of age, by a parent, grandparent, legal guardian or the court. As with the third party supplemental needs trust, the trustee may be granted authority to provide benefits over and above those provided by public or private financial assistance.

The major drawback to the self-settled special needs trust is that, at the death of the beneficiary, the state will have to be reimbursed for Medicaid benefits provided to the disabled child prior to distribution of trust assets to other family members.

In choosing a trustee to administer the trust, the family should consider the size of the trust assets, the financial ability of the individual and the expected duration of the trust. Where the assets of the trust are small the appointment of a family member who has some investment experience to serve as trustee may be the only practical solution. However, where the assets of the trust are substantial and the trust is anticipated to last for twenty or thirty years, the appointment of a corporate trustee to serve along with other family members is preferable.

Whether the trust is created as a third party trust or a self-settled trust the advantages are many. The disabled child is able to secure immediate eligibility for public assistance such as SSI or Medicaid. While on Medicaid, the child is able to obtain services at significantly lower cost than the private pay rate. Some programs and services are only available through the Medicaid program. Even if the state Medicaid program has to be reimbursed once the trust is terminated, the availability of public assistance will permit the funds held in the trust to go further in improving the child’s quality of life.

The attorney who drafts the supplemental needs trust must take into consideration a broad range of both public and private benefit programs, including Supplemental Security Income (SSI) and Medicaid, as well as income, gift and estate taxes issues. In addition to peace of mind, the greatest flexibility is achieved when the trust is set up by a parent or other third party either during lifetime or at death, rather than passing the funds on to the disabled child. As in many endeavors, the most successful outcome is achieved by planning ahead.

PRIVATE ANNUITIES: (WSJ) Private annuities also come with three big tax benefits.

First, the money transferred to your kids immediately reduces your wealth, which could mean some tax savings down the road (if your estate is over $1,500,000). There also isn't any gift tax owed, because you are cutting a deal with your children, rather than making them a gift. But to avoid hassles with the IRS, you cannot have any medical condition that suggests you are likely to die within the next year.

Second, as with an annuity bought from an insurance company, you will have to pay income taxes on only a portion of the sum you receive each month from your children. The reason: Part of your annuity income is a return of principal, and thus isn't taxable.

Finally, you can fund a private annuity with appreciated assets. Suppose you plan to pay for your annuity with $500,000 of stock with big unrealized gains. If you bought an annuity from an insurer, you would have to sell your shares and pay the capital-gains taxes, leaving you with less money to fund the annuity.

But with a private annuity, you don't have to take this tax hit. Instead, you could simply hand over the shares to your children. For your kids, the cost basis becomes $500,000, which means they could immediately sell and pay no capital-gains taxes.

This maneuver, however, does boost the tax bill on the annuity payments you receive. Your monthly payments will now be a mix of income, capital gains and return of principal

NOT WORKING: (NY Times) Nearly one in five men age 25 to 54 with less than a high school degree did not work even one week in 2002. The nonworking rate for college graduates was only 3.3 percent. In central cities, 10.8 percent of men spent the year without work, compared with 7.1 percent elsewhere.

Just 3 percent of men accounted for more than two-thirds of the total number of years that men spent not working in the period from 1987 to 1997.

Nearly two-thirds of nonworking men age 25 to 54 received income from some source in 2002. Among those with unearned income, the average amount was $11,551, with the largest sums coming from Social Security and disability payments.

The income sources varied with the reason for not working. In the 1990's, the sick and disabled received 53 percent of their income from Social Security and 25 percent from workers' compensation insurance and private disability payments; the retired received 52 percent from retirement income and 19 percent from assets; and those who said they were unable to find work received 38 percent of their income from unemployment compensation.

Wives are also an important source of financial support for nonworking men, but only 42 percent of male nonworkers between age 25 and 54 are married, compared with 68 percent of their employed counterparts. Twenty-nine percent of nonworkers live with their parents or other relatives, substantially higher than the 9 percent of workers in such a living arrangement. More than 40 percent of nonworkers who live with their spouse or parents also have other relatives present who contribute income to their household. Thus, financial support for nonworkers seems to be a family affair.

529 PLANS: Baby Boomer households were most likely to be aware of the so-called 529 college savings plans (54%), versus 42.8% of Matures with 529 plan familiarity and 40.5% of GenXers. Yet, it is Generation X that has the most children under 18 in their house (57 million), followed by Baby Boomers (36 million) and Matures (4 million). Across all three generational groups, the most important factor in selecting a 529 plan was the ability to control assets and to control related distribution options, selected by 42% of matures, 53% of Boomers, and 45% of GenXers.

ALZHEIMERS: Even though 26% of Canadians have a family member who has been diagnosed with Alzheimer's disease and 20% have a friend or acquaintance who has been diagnosed, a recent poll indicates that 3% of respondents had never heard of the illness and 1 in 10 knew nothing about it. Another 15% said they knew a great deal.

BAD PRACTICES (Bill Jahnke) Longtime readers know that I have never accepted the stay the course mantra of the planning and "money manager" industries. The reason that so many advisers went in that direction is that they simply do not have the background to do independent thinking. Remember, the CFP is effectively nothing more than one semester of college and does not contain enough information and knowledge to do much more than buy a software package based on some set of historical numbers.

Per Jahnke in part, "Many investment practices are based on the beliefs that markets are macro-efficient and that historical returns provide a reasonable basis for estimating future returns. According to the doctrine, investors should allocate as much to stocks as their tolerance for short-term volatility permits, and to stay the course regardless of investment performance unless the client’s circumstances change. Unfortunately, all of the assumptions underpinning the asset allocation policy doctrine are false and the acceptance of the doctrine supports a number of bad practices.

The pricing of asset classes does not operate in accordance with efficient market theory and equity returns are not governed by a stable return-generating process: the time series of stock market returns exhibits fat tails, short-term serial correlation and intermediate-term mean reversion. The “rational man” assumption, central to market efficiency, is false. The vast majority of investors do not base their investment decisions on a dispassionate valuation of well-informed, long-term cash flow projections.

The assumption that historical returns provide an acceptable basis for projecting asset class returns is false for the simple reason that the economic forces that generate returns are ever changing. It is hard to place much credence in the idea that the returns earned in the past adequately describe current investment opportunities and risks, when asset class valuations in terms of price/earnings ratios, yield curves, and economic conditions often deviate from historical norms, which themselves are evolving. The idea that historical returns or historical risk premiums can be extrapolated was promoted by database vendors and consultants, and it carries the tenuous assumption that the practice is consistent with a belief in the macro-efficiency of markets. There is no necessary link between the two.

Acceptance of the asset allocation policy doctrine has resulted in a number of bad practices. The doctrine promotes the belief that stocks are less risky than bonds in the long run, portfolio returns are largely determined by asset allocation policy and a random draw from a known distribution of asset class returns, and the distribution of expected returns converges on the geometric mean return over time. In this idealized world, the risk of investing is reduced to the probability of loss in the short run. In the real world, the uncertainty that investors face is the prospect of not meeting their financial objectives. In the real world, there is no guarantee that stock and bond returns will converge on long-term return expectations. Defining the risk of investing as the probability of loss in the short run is bad practice.

The asset allocation policy doctrine supports the practice of making projections of the probability of loss. The accuracy of return distribution projections, whether short or long term, is dependent on how much information regarding future returns is contained in historical data. Given that there is much about the future that is not discernable from analyzing historical returns, one should expect large errors in projection of returns and the distribution of returns.

“When past performance of securities are used as inputs, the outputs of the analysis are portfolios which performed particularly well in the past. When beliefs of security analysts are used as inputs, the outputs of the analysis are the implications of these beliefs for better or worse portfolios.”

Harry Markowitz

A growing list of researchers have challenged the practice of extrapolating the historical equity risk premium on a number of grounds, including that it is too large relative to the variability of stock returns for investment horizons longer than a year; that the premium reflects a secular expansion of the market’s price/earnings ratio, which should not be expected to continue; that the stock market is overvalued by traditional valuation yardsticks; that the premium should be lower because society is wealthier; and that future returns for stocks will be disappointing because of diminished earnings growth prospects due to excess capacity, global competition, the issuance of options, and the under-funding of pension and medical benefits. Extrapolating the historical equity risk premium is bad practice whether or not it is adjusted for the secular expansion of the price/earnings ratio.

Blind adherence to the asset allocation policy doctrine resulted in an over-estimation of the equity risk premium, which supported the emergence of the equity cult and contributed to formation of a stock market bubble in the 1990s. Overstating the equity risk premium has resulted in an over-commitment to stocks for many investors and the under-funding of financial plans.

Financial planners add value by continuously evaluating the financial planning implications of alternative economic scenarios, investment solutions and lifestyle choices, managing costs, and counseling a margin of safety in saving and investing. Anything less is bad practice."

And bad practice is exactly the mainstay of the industry. It won't get better till the industry is retrained.

TAX CHEATING: Tax evasion is growing, but the Internal Revenue Service cannot reverse the trend and protect the interests of honest taxpayers because its ability to enforce the law is declining. It estimated that the I.R.S. will have slightly fewer employees in 2005 than in 2002 despite growing numbers of taxpayers.

A 10 percent increase urged by the Oversight Board would bring the I.R.S. budget to $11.2 billion. That level of funds would allow the I.R.S. to pursue 700,000 people who owe back taxes, instead of the 500,000 in the administration's proposal, as well as pursue 1,000 more promoters of tax-evasion schemes, though the board said that the I.R.S. would still fall far short of fully enforcing the law.

MARGIN BUBBLE? (WSJ) investors have borrowed $174.4 billion to buy stocks as of July, the most recent complete data. That marks a 25% increase since the end of last year. That is still substantially below peak levels of nearly $300 billion of margin debt in early 2000.

Margin use through brokerage firms registered with the NASD has more than quintupled since the end of last year to nearly $26 billion. That actually exceeds the $21.4 billion investors borrowed through NASD firms at the market peak in March 2000. Margin debt reported by firms regulated by the New York Stock Exchange are substantially larger at $148.5 billion but have grown just 10.5% this year.

RETIREMENT STUPIDITY: GE Financial reports that 68% of survey participants believed they would need at least 75% of today's income when they retire, but fewer than 25% have more than $100,000 in retirement savings; 45% didn't know what an annuity is; and 41% were unfamiliar with the concept of retirement planning. "

I simply cannot comprehend that 45% don't know what an annuity is. But, by the same token, it's close to 50% that think Medicare covers for LTC, so ..................