March Newsletter 2001

MOODY'S REVIEW

MARCH 2001

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

18% OR 20% CAPITAL GAINS? (Even I have problems with this one) (NY Times) For investors in the 28 percent or higher tax bracket -- a group that will include most taxpayers with the ability to take substantial capital gains -- the new law allows the 18 percent maximum tax rate only for assets acquired in 2001 and after.

MENTAL ABILITY: People with diabetes and high blood pressure are more likely to suffer a decline in mental ability as they age, a study says. Researchers said the findings indicate that getting diabetes and hypertension under control before age 60 might reduce mental impairment later in life. The researchers believe that both diseases cause narrowing of the arteries, which triggers both noticeable and unnoticeable strokes that produce incremental brain damage.

STUPID: A 29-year-old Austrian man who allegedly lost more than $400 million of investors' money by betting the wrong way on Internet stocks pleaded guilty to securities fraud. At the age of 23, he convinced 300 investors to give him $500 million for a hedge fund. Fraud is inexcusable. But giving $500 million to a 23 year old with no experience is stupid.

FRAUD: The SEC's online Internet enforcement center receives 300 to 400 complaints of fraud every day- up from 3 or 4 in 1996. And it will only get worse since Forrester Research projects that number of people trading on line will reach 2.4 million by 2003.

POVERTY: Of the 43 million uninsured Americans, slightly more than half (23 million) have annual incomes below 200 percent of the federal poverty level.

LTC: Nine percent of seniors can expect to spend five years or more in a nursing home. And if you reach age 65, studies show you've got more than a 70 percent change of needing some kind of long-term care before you die.

AIDS: 36 million are infected with AIDS and 21 million have already died. The number is 15% higher than the worst case scenario indicated years ago.

NO MORE JUMBO FRIES!: The Journal of the American Medical Association found the risk of death from stroke, coronary heart disease, and cardiovascular disease is greatly increased for obese people with a high-sodium intake, compared to non-overweight people with a high- sodium intake. And Fertility and Sterility suggests that reducing abdominal fat may be helpful in reducing the risk of noninsulin-dependent diabetes mellitus in postmenopausal women. Overweight children tend to have an inflammation in their bloodstream that causes heart problems later in life.

TREES: (Counsel of Tree and Landscape Appraisers) Single-family homes with mature trees average a 2% higher value than single-family homes without trees.

STOCK ANALYSIS? (NY Times, Oldstein) "What passes for research on Wall Street today is shocking to me. "Instead of providing investors with the kind of analysis that would have kept them from marching over the cliff, analysts prodded them forward by inventing new valuation criteria for stocks that had no basis in reality and no standards of good practice."

The fact is, although brokerage firm stock gurus are still called analysts, their day-to- day pursuits involve much less analysis and much more salesmanship than ever before. Per Levitt of the SEC, "The competition for investing banking business is so keen that analysts' sell recommendations on stocks of banking clients or potential banking clients are very rare."

MUTUAL FUND FEES: (NY Times) "Current disclosure practices inform investors only of the fees they are likely to incur, and only in percentage terms and hypothetical examples in prospectuses. The commission staff recommended that funds be required to disclose specific dollar amounts of operating fees, sales loads and other fees to shareholders at least twice a year."

HERE IS A KEY POINT IN THE MARKETING OF ANNUITIES. A recent brochure quoted a 5 year guaranteed rate of 7.0%. Say, that's better than anything I have ever used or seen. But I was pretty sure what was gong on so I asked for the brochure. Sure enough, the rate was guaranteed exactly as stated. But once the 5 years was through, the only way you could get the money was through a forced annuitization of an additional 5 years where the rate was guaranteed to be no lower than 2.5%. Do you see what is happening? They give you high returns up front but can simply take them all back and more. Will they sell lots of these? Oh yeah! Probably several million to people who trust their agent.

YOU AIN'T GONNA GET MUCH: (USA Today) The Securities and Exchange Commission has fallen badly behind in its collections of illegal gains from stock swindlers and other scam artists, leaving many fraud victims waiting for refunds that might never come, a USA TODAY analysis of SEC records shows. The SEC, the federal government's investment industry regulator, collected just 16.9% of the more than $1.7 billion in illegal gains that financial violators have been ordered to hand over since 1995. The recovery rate -- about $1.69 of every $10 owed -- represents a sharp drop from the 50% collection success found in a review of 1987-94 collections by the General Accounting Office (GAO), the investigative arm of Congress.

USA TODAY analysis found the SEC has not collected one penny in 10 large cases involving violators who collectively owe $540 million under so called disgorgement orders.

Some violators declare bankruptcy, forcing the SEC to wait with other creditors for any remaining funds. Other violators are in prison. Some say they're broke, a claim the SEC works to verify before granting repayment waivers. Still others have moved the illegal gains to offshore accounts, where legal barriers may thwart recovery."

I understand the emotional crisis that many of these "investors" are going through- not to mention the obvious financial issue. And I would be nice and tactful to them if they were in front of me. But since they are not, I'll tell you why they lost money. They trusted the salesperson. Very simple. And even if the trust was justifiable, the next issue is that you can never put too much money into a high risk scenario. Never!

If you want to use friends, neighbors, co-workers, same race, religion, organization, etc. as the rationale for your investing and insurance, you may just get the same screwing these people are faced with. And effectively little help from the SEC.

SERIES EE: More than $7 billion in matured savings bonds are unredeemed. Series E bonds sold from May 1941 through November 1965 can earn interest for 40 years. Bonds sold since December 1965 earn interest for 30 years. Any bonds issued in May 1960 or earlier have stopped earning interest.

BYE, BYE: In the 1990's, 5% of funds were merged or closed EACH year.

JUNK BONDS (NY Times) The junk-bond default rate was 5.4 percent for the 12 months through November 2000. The record default rate, reached during a recession and a junk-bond market collapse in 1991, was 10 percent. As of mid-December, 32.8 percent of high-yield debt was considered distressed -- with yields at least 10 percentage points higher than the rate for long-maturity Treasuries.

War is a series of disasters which result in a winner.

LONG TERM CARE (Brandeis) The percentage of Americans over 65 residing in a nursing home dropped from 4.6% in 1985 to 4.2% by 1995 with the sharpest decline in those age 85+. Residents of homes are increasingly older and sicker representing predominantly their "last stop."

SHE WAS SO FAT THAT .......... (NY Times) 25% of all American women over age 50 are so fat that they cannot be measured in traditional ways. Only 5% of men fit that category. But since the study was done in 1994 and the percentage of obesity has gone up dramatically, both statistics are already outdated. As stated previously, obesity will force major increases health premiums in the future. And it will invariably cause an increase in LTC premiums.

HEALTH COSTS (NY Times, Hewitt) ) Employees of large companies will pay 18 percent more, or $1,401 on average, in 2001. The employers' health care costs will rise 9.8 percent to $4,026 per employee. Combined costs for these companies and their workers will rise 17 percent. In the federal employees' health plan, the nation's largest, monthly payroll deductions will rise 14 percent to $74.23 in January for most single employees, and increase 21 percent to $175.30 for families.

This is one BIG and initial reason why inflation will go up and why the economy will slow down. Also why the FED will reduce rates even more.

THE ADMINISTRATION ON AGING (AoA) released "A Profile of Older Americans 2000," the annual report about the status of America's older population. The report includes the latest key federal statistics on older Americans in 12 subject areas, including information on income levels, poverty, size and growth, health status, racial and ethnic composition, education, employment, housing, living arrangements, geographic distribution and marital status. "One of the highlights of this report is the notable drop in poverty rates among older adults.

Noteworthy information in the report includes:

The older population (65+) numbered 34.5 million in 1999.

About one in every eight, or 12.7 percent, of the population is an older American.

Almost 2.0 million persons celebrated their 65th birthday in 1999 (5,422 per day).

Older women outnumber older men at 20.2 million older women to 14.3 million older men.

About 31 percent (9.9 million) noninstitutionalized older persons live alone (7.6 million women, 2.3 million men).

Three of every five older women age 85+ live alone.

By the year 2030, the older population will more than double to about 70 million.

The 85+ population is projected to increase from 4 million in 1998 to 8.9 million in 2030.

Members of minority groups are projected to represent 25 percent of the older population in 2030, up from 16 percent in 1999.

The median income of older persons in 1999 was $19,079 for males and $10,943 for females. After adjusting for inflation, these figures represent an increase of +1.9 percent in "real" income from 1998 for women and +2.8 percent for men.

The Social Security Administration reported that the major sources of income for older people was:

Social Security (reported by 90 percent of older persons)

Income from assets (reported by 62 percent),

Public and private pensions (reported by 44 percent), and Earnings (reported by 21 percent).

"Money is better than poverty, if only for financial reasons."

Woody Allen

ELDER CARE COSTS (National Center for Care Giving) A recent survey of caregivers indicated that an average of $659,000 was cost in wages, Social Security and pensions contributions due to time taken off, passed up promotions, quitting their jobs or retiring early. It will get worse.

CYSTIC FIBROSIS (CF) is a serious, life-shortening genetic disorder that affects the mucus-secreting glands, primarily interfering with the functions of the lungs and digestive system. CF is the leading genetic disease of childhood; it is caused by a defective gene that may be carried by either parent. Close to 4% of the population carries the gene that causes CF. If both parents are carriers of the CF gene there is a 25% chance that their child will inherit the gene from each parent, and will be born with CF.

While there is currently no cure for cystic fibrosis, medical developments over the past decade have extended the life expectancy of a CF child from late teens to about age 30.

LIFE: Of the world's 6 billion people, 2.8 billion live on less than $2 a day and 1.2 billion on less than $1 a day. Eight out of every 100 infants do not live to see their fifth birthday. Nine of every 100 boys and 14 of every 100 girls who reach school age do not attend school.

CONSUMER PROTECTION?: The SEC took offense with comments that the SEC commissioner was not protecting consumer interests. An SEC official noted that "The chairman is committed to protecting investors." Bite me. The issue being addressed is not even worthy of note. What is is (You know what the definition of is is, don't you?) the fact that the SEC has never required brokers to know the fundamentals of investing. The lack of knowledge is certainly not helping anyone. And since the consumers and (supposed) advocates are unaware of the basics, they are asking questions where, if they got the answer, they are incapable of applying the information correctly anyway.

IRA: The Investment Company Institute, a mutual-fund trade group, estimates that IRAs now hold $2.5 trillion in assets, nearly half of which is in mutual funds.

POVERTY: 22% of elderly divorcees live in poverty

POOR BABIES: (NY Times) 52 CEOs at 200 of the largest companies in the country are now holding worthless stock options in their own companies. Last year, these options were worth billions of dollars, but all that value was wiped out by the drop in their companies' stock prices.

WHERE'S THE BEEF?: When viewing foreign investments, this is the type of stuff you have to read on a daily basis. It does NOT mean you react daily. But if there is continued news, it allows you to make informed, objective decisions on investing. (AP) "After a multi-billion dollar scramble to get in to Brazil, set up factories here and tap a potentially huge market, the world's big automakers are asking: "So where are the customers?" Brazilians, still recovering from the 1999 devaluation of the real, are buying only half the cars automakers expected. And neighboring Argentina, the closest and largest export market, is facing economic slump and effectively trying to block Brazilian imports." Japan is still reeling, South America is going no place. Maybe Europe?

Paradise is exactly like where you are right now...

only much, much better

Laurie Anderson

HIAA, LIFEPLANS, INC. SURVEY: Most Americans do not believe that the government will pay for most long-term care services within the next 10 years. Survey respondents also believe that consumers will have to assume greater responsibility for their long-term care needs.

People with long-term care coverage are getting more "bang for their buck." In 2000, 77 percent of long-term care insurance policies cover both nursing home and home health care, compared to 37 percent in 1990. Over the past five years, the average daily nursing home benefit has increased by 28 percent -- higher than the rate of inflation. Meanwhile, during the same time, average annual premiums have increased only 11 percent.

People are buying long-term care insurance at a younger age. One-third of all individual long-term care policies sold are purchased by people between the ages of 55 and 64. Meanwhile, the median income of current buyers of individual long-term care insurance is $42,500.

Substantially more buyers and non-buyers of long-term care insurance believe they have greater than a 50-50 chance of requiring nursing home care. In 2000, 65 percent of buyers, and 55 percent of non-buyers of long-term care insurance believe that they have a greater than 50-50 chance of needing nursing home care. This compares to 26 percent of buyers, and 25 percent of non-buyers in 1995.

PAYING TAXES: Internal Revenue Service data obtained by the Joint Economic Committee show that the top one percent of tax filers paid 34.75% of federal personal income taxes in 1998, the latest year for which data are available. The 1998 share paid by the top 1% reflects an increase from the 33.17% level posted in 1997. The 4.21% share paid by the bottom half of taxpayers was virtually unchanged during this period.

BIG BOYS: (Weisenberger) Today, 10 out of 538 mutual fund families control more than 33% of the assets in the industry. At the end of August, Fidelity held $693 billion in assets to claim the top spot, and Vanguard Group held nearly $523 billion as the No. 2.

CREDIT CARDS: (Claritas) only 42% of African-American and 51% of Latino households hold credit cards, compared with 67% of whites

WANT TO SUE YOUR ATTORNEY? Well, you will get your "chance" with estate planning attorneys that don't address long term care. I have repeatedly stated that every financial planner that exists who is doing any comprehensive analysis of estate, retirement- or even just basic financial planning- has a mandatory direct fiduciary responsibility to review the elements of long term care. But it is not simply just turning over a client to an agent. Agents are woefully undertrained in LTC -IF AT ALL- (even in California where there is a mandatory 8 hour class on LTC) and cannot be relied upon to read a LTC contract and have the foggiest idea what do to. Certainly the consumers aren't because, in a study just two years ago, 48% of the elderly believe that Medicare will cover for long term care. (You wanna know how much Medicare covers for - effectively 0 days and 0 dollars)

Nonetheless, is the problem really severe? I submit so. From FSO- "The courts gave tentative approval to a $14,700,000 settlement involving long-term care insurance. The companies involved are Commonwealth Life and Acceleration Life...appropriately named since some policyholders saw their premiums rise 629% in ten years, topping out at more than $8,000 per year." Add in American Traveller's that also raised rates to the point where the insured could no longer afford and you get some idea of the problem (I addressed separate problems with American Traveler's two years ago. Even for those people who retain such policies, they will not get the coverage expected.) Unfortunately, many consumers bought the polices based on price (and what the agents offered them).

Anyway, are attorneys any better in analyzing a contract? Sorry- unless they are licensed and directly involved in the analysis of long term care policies overall, a personal selection by them will be highly suspect. Referring them to a agent who is a golf buddy won't hold up in court either when the courts look at an elderly person who ended up in a Medicaid ward or was forced to spend $100,000+ for care that could have been alleviated by the purchase of a good policy when healthy.

You are going to see a lot of cases in the future where estate attorney never dealt with the issue at all. But you can't be an Estate Planning attorney without a LTC background and an insight to how it works. This scenario is no different from fee only planners. Without a license to get all the material, they are lacking the necessary info and are incompetent. Without an interest, and you have someone who doesn't care. Not knowing and not caring can never be used a defense in court.

Anyway, here is yet another way to determine if your LTC agent/planner/attorney/small furry animal is really concerned about coverage. Literally all urban areas have a separate Area Agency on Aging in their county. A wealth of information is available. Have you visited one? Has your agent? If you haven't and you use an agent that has not as well, your success may be limited. But just so we are all on the same page- even if I do all my research, can I absolutely guarantee that the product I select will end up being the best under all conditions or that rates would not rise on a guaranteed renewable policy? No. But did I do my homework and did I have the background to approach the issues intelligently and professionally? Yes. And I submit that's what makes the difference in all your planning

CFP's: From a student CFP who has seen some of my recent comments about the inadequate CFP training, "It seems that they teach you things (i.e. facts) but they don't teach you HOW to use any of the various products or how to apply good solid judgment to recommendations you might make. I enjoy reading your daily commentary. It's a great way to learn things to prepare me for my eventual career. The CFP course only teaches me what I need to pass the test, not the things that will make me a good planner."

Let's be careful out here.

MANAGED CARE: HMOs have also found their efforts to contain costs outfoxed by drug companies, whose direct-to-consumer advertising stokes demand for expensive prescription drugs, driving up the health plans' drug costs. And patients are empowering themselves by clicking on an estimated 100,000 health care Web sites (who's counting?) offering everything from solid science to nostrums, and then bombarding doctors with questions that can stretch office visits and spur more tests and prescriptions. For these and other reasons, health care inflation is returning to double-digit territory after several years of restraint.

Kenneth S. Abramowitz, an analyst at Sanford C. Bernstein, the annual cost of coverage for a typical family in an HMO is $7,000; in a network of preferred physicians and hospitals, $9,000; and in traditional unmanaged health insurance, known as indemnity plans, $12,000.

PREDATORY LENDING: (NY Times) Big banks and other institutions that have expanded into the growing business known as subprime home equity lending, so called because it caters to homeowners with less than top-quality credit. But the industry's growth has been accompanied by complaints from consumer advocates and state regulators about deceptive sales practices and home equity loans structured in ways that, they say, increase the likelihood of default and foreclosure.

There has even been a backlash by Chicago's mayor to halt such practices through "an ordinance that would require every financial institution seeking to do business with the city to attest that it has not engaged in predatory lending, either directly or through an affiliated company."

MORAL HAZARD: (NY Times) In regards to foreign loans, the issue is moral hazard, a "technical term that means investors take too much risk because they know that if all goes wrong, they will be protected by the central bank from having to absorb severe losses. Such aggressive investing can drive financial prices to unsupportable levels.

Moral hazard is not the only factor that pushes asset prices to irrational heights -- greed has no small part. But many believe it contributed significantly to the Asian financial crisis of 1997."

PAST PERFORMANCE (Investor Home)"Numerous studies had demonstrated persistence in performance in the 1970s and Malkiel confirmed these findings. Malkiel specifically examined the issue of survivorship bias - the fact that poor performing mutual funds tend to disappear (commonly by merging into more successful funds "thereby burying the fund's bad record with it." See also Cherry-Picking). Approximately 3% of mutual funds disappear every year. The result is that most long term performance records do not include the records of poor performing funds that no longer exist. By examining all mutual funds that existed at the time, Malkiel determined "that survivorship bias is considerable more important than previous studies have suggested." Malkiel admits that the analysis provided some support for the buying funds with excellent records since they outperformed during certain periods and do no worse than the average fund. However he presented three caveats. First, the results are not robust, second, the returns are not actually achievable because of load charges and third, survivorship bias has to be accounted for. He concluded that

"It does not appear that one can fashion a dependable strategy of generating excess returns based on a belief that long-run mutual fund returns are persistent."

"... funds have underperformed benchmark portfolios both after management fees and even gross of expenses."

"... while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s."

"... we have been unable to fashion a dependable strategy by which an investor can consistently achieve excess returns over long periods of time."

"Most investors would be considerably better off by purchasing a low expense index fund, than by trying to select an active fund manager who appears to possess a "hot hand."

Malkiel also discussed Forbes Magazine "honor roll" which ranks mutual funds for performance in both up and down markets. Over the 16-year period from 1975 to 1991, the "honor role" underperformed the S&P 500. Further, the results ignored load charges which would have reduced performance.

Malkiel also analyzed mutual fund fees to determine whether higher fees resulted in better performance. The study found "essentially no relationship between gross investment returns and expenses." Malkiel concluded that "The data do not give one much confidence that investors get their money's worth from investment advisory expenditures."

"Nobody ever went broke underestimating the taste of the American public."

H. L. Mencken

401(k): (Spectrum Group)

82% of all employers provided matching contributions

37% of employers who match provide $.50 on the dollar

37% who match provide employer contributions at 6% of pay.

MEDICAID: Annuities are billed as a way to get around Medicaid requirements and pass on assets to beneficiaries (but who wants to die in a Medicaid ward??) However, this is interesting- "In a letter from HCFA Regional IX to the California Department of Health Services, dated January 24, 2000, the U.S. Health Care Financing Administration ruled that a state has the option to recover Medicaid expenditures for the annuity policyholder from the surviving beneficiary of the annuity."

LTC: When you buy a policy and indicate the third party who is to receive copies of the statements (a good idea to insure that premiums are not missed due to senile dementia,etc.), you may be giving out names as unintentional referrals. The marketers of such insurance are instructing agents in seminars to get more than one "third party" and then go after them as referrals for more sales. They don't address the statistics of underwriting or time in business to such agents- just go after the referrals and sell. However, outside of this commentary, no one is going to tell policyowners their friends are going to get on a list and contacted Just be aware of what is going on.

Half the worry in the world is caused by people trying to make decisions before they have sufficient knowledge on which to base a decision.

Dean Hawkes

INSIDER TRADING IS ILLEGAL- BUT SO WHAT? (NY Times) "Two professors studied some 324,000 stock trades made by officers at more than 10,000 public companies from January 1985 to November 1997. They concluded that insiders at technology companies profited greatly by trading on nonpublic information." The statistics are rather involved, but the bottom one was this- "While some technology-related information should be kept secret from competitors, it gives an advantage to insiders and well-connected investors. Do insiders exploit this informational advantage, at the expense of uninformed investors? Our answer is an emphatic yes."

AUDIT LITE (NY TimesDue to the new focus on "be nice to taxpayers", auditors are being pulled off cases of high income individuals, told to settle quickly and simply, even with tax cheats. The IRS collected $1.3 billion less over the past year. The IRS is now going to focus on lower income people who misuse the Earned Income Tax Credit. They will start enforcing some codes regarding abusive trusts, but it appears that a lot of tax money that should have been paid fairly will never be collected. One IRS employee noted, ""Please don't call us tax collectors in the newspaper. "We don't collect taxes anymore. We aren't allowed to."

The number of people reporting over $1,000,000 showed a substantial increase to 142,500 in 1997- up from 87,000 in 1995. That's a 64% increase. Such people also have more complex returns. But are there even enough IRS employees to handle regular cases. Nope, the full-time I.R.S. staff has been reduced to about 82,000 people which is down 14% from 1995. The I.R.S. has had its resources cut nearly 29 %.

"Fewer than one in 300 tax returns will be audited this fiscal year, down from one in 217 two years ago and one in 63 in 1981. For wealthy individuals with gross income of $100,000 or more, fewer than an estimated one in 150 returns will be audited this year compared to one in 33 in 1992. The IRS will sharply reduce audits of the other 16 million businesses in America, the vast majority of them privately owned, and of the rapidly increasing ranks of high-income Americans, who tend to file complex returns. The percentqge of corporate returns that are audited is expected to fall to just above 1 % for the current fiscal year from just under 3 % in 1992. "

"In the year ended Sept. 30, the I.R.S. seized property 161 times, down from 10,000 two years earlier. Levies on bank accounts and paychecks fell to 504,000 from 3.1 million two years earlier."

VIATICAL SETTLEMENTS: Gloria Wolk has put out a lot of material on the problems the elderly are running into with scam artists and the sale of life policies. However, she is not against them per se and notes, "Viatical settlements provide a remedy for an emergency situation, one that causes socioeconomic havoc for individuals and families, and all who care about the terminally ill person. When all other assets are gone or the family home is in jeopardy, there really is no other solution, primarily because insurance companies are not doing a good enough job."

TAX SHELTERS: In 1997, about 15% of American income went to taxes. In 1990, it was about 13%. However, corporations are doing "better". They paid 26 cents on the dollar in 1990 but only 20 cents in 1997. According to the Treasury and IRS, much has to do with tax shelters. Abusive tax shelters cost the government $10 billion annually.

CHILDREN (NY Times) About two out of five children spend at least some of their lives living with their mother and an unmarried partner. Less often children will spend time with their father and his unmarried partner.

MEDICINE: Estimated medical mix-ups kill as many as 98,000 Americans each year.

Honesty is like an icicle; once it melts, that's the end of it.

JAPAN (NY Times): "Japan is graying faster than any other industrialized country. In 2000, people 65 and older are expected to account for 17.2 % of Japan's population of 126.9 million. By 2020, they will account for 26.9 % of a population that will have shrunk to 124 million. By contrast, this year Americans 65 and older should account for a little under 12.7 % of a population of 275 million. By 2020, they will account for 16 to 17% of a population that will have risen to 325 million.

Public and private pension systems are teetering toward insolvency, a result of poor management and a very low birth rate, which has meant fewer young workers paying into a pension system that must support their elders. The birth rate in 1998, the latest year that figures are available, stood at a record low. The older population is growing with the life span -- the average Japanese man can expect to live 77 years, the average woman, 84 -- so it has a greater need for medical care, assisted housing and other support services, as well as larger nest eggs to help pay for them."

Sound like us as well. The U.S. is better overall because of the innovative work and living styles. Regardless, our elderly and economic system are facing these same dilemmas. Hopefully we can learn some vital lesson from Japan- assuming it makes it.

LOAD AND NO LOAD FUNDS: (Dr. Paul B. Farrell) "....the many ways mutual fund returns are overstated by this tacit conspiracy of fund managers, brokers, professional planners, and, unfortunately, by an often unwitting and naive financial press more interested in ad dollars and circulation than their integrity as an advocate of the individual investor:"

1. returns totally ignore sales charges

2. fund returns ignore increasing expense ratios

3. they ignore risk factors between funds

4. they minimize the impact of taxes

5. statistical problems in multi-year comparisons

6. they fail to account for hyperactive turnover

7. they don't reveal gimmicks used by new

401(k): (Bill Sharpe) "The 401(k) plan was never designed to be a primary retirement vehicle, but increasingly it will be. "People need help and there are two models: teach them enough to make decisions themselves, or give them advice from people who are experts."

Further from a NY Times article, "Companies are not taking the responsibility of educating their people in terms of the risks and responsibilities. Yes, the individual is empowered now that information has become a commodity. But in a bull market, with Internet stocks, you see a genius mentality where people think they can do no wrong."

And, "There's a tremendous amount of misinformation in the financial marketplace. "There have been two lawsuits that have become well known. At the heart of both cases is the duty of the employer to prudently select the investment options and to monitor them on an ongoing basis. That's going to be the most common basis for a suit by employees."

For employers, the benefits of educating employees include a greater number of workers participating in tax-advantage retirement plans.

O.K., so let's take a look at that rhetoric. First, it is extremely difficult to teach people what to do because it involves reading. Very VERY few people will make that concerted effort. Further, if one is taught, the student must end up knowing diversification by the numbers. Doesn't happen. Never seen it done. Why's that? Because the teachers don't know diversification. (Remember it is NOT taught in basic training to brokers, insurance agents, attorneys or CPA's.) Even if they did, it's rare- if at all- if the subject is ever taught. Why's that? Because most employers and fund advisers think it is impossible for employees to understand systematic risk (true if you are a lousy teacher.) Or because the truth would put the fund companies and the employer further at risk or reduce sales. (Now that is ABSOLUTELY true). Let me be clear- if you have not been taught systematic risk as part of an investment allocation (pyramid of investing), then you have NOT been taught risk. If you have not been taught risk, you cannot understand the merits of the rewards.

So there is unquestionably a lot of misinformation- or I think a lack of information at all. Certainly a lack of what is necessary to know. Companies have not taken responsibility because they have transferred it over to the fund companies who refuse to educate the employee (or are simply incompetent in providing correct info). But the rationalization won't hold up in court that well. Further, simply adding more fund options ADDS a level of unsuitability to the overall mix and therefore increases the employers exposure. Why do the employer's do this? Because they are caught up in the same euphoria of the market as well and think that they have personally done well because they understand the basics of investing through reading one issue of Money magazine or getting lucky with the fund's suggestions. But employers will rightfully get hammered when the market changes.

PAIN FOR A LIFETIME: Researchers at the National Institutes of Health found that painful trauma, like that caused by medical procedures on premature infants, caused newborn rats to become much more sensitive to pain as they grew older. The reason, said NIH researcher M.A. Ruda, is that pain causes the developing nervous system of the very young to grow more of the nerve cells that carry the sensation of pain to the brain.

PRESCRIPTION DRUGS: The elderly now spend about $1,200 a year on drugs but this is expected to rise to $2,810 by 2010. Families USA says that prescription drugs now account for about 10% of seniors' health costs -- and will likely rise to 13.3% in 2010. Although elderly Americans make up 13 percent of the population, they pay 42 cents of every dollar spent on prescription drugs. The average senior's cost per prescription has grown from $28.50 in 1992 to $42.30 this year, and could go to $72.94 in 2010.

"Anarchy - it's not the law, it's just a good idea."

LONG TERM CARE FRAUD: (Insure.com) Conseco Senior Health Insurance Co., a division of Conseco Inc. in Carmel, Ind., and American Travellers Life Insurance Co. (ATL), which Conseco bought in 1996, "wrongfully and fraudulently" concealed from their customers the likelihood of premium increases in long term care policies sold between 1988 and the present, according to a lawsuit. marketed long term care products that were intentionally underpriced and loosely underwritten in order to sell more policies to less healthy seniors.

"In general, rates on Conseco's long term care policies have been changed in accordance with policy terms and approved where necessary by state insurance regulators."

"This policy is guaranteed renewable for your lifetime. We cannot cancel this policy as long as you pay the premiums. We can change the renewal premium rates. We can only change them if they are changed for all policies in your state on this policy form. Notice of any changes will be sent at least 31 days in advance."

Long time readers might remember that I crucified American Traveler's policies years ago for potential fraud upon the public. But an awful lot of people have been sucked into a purchase because the price was cheaper. And because they trusted their agent. Both tend to be wrong ways of planning.

LONG TERM CARE: For every person in a nursing home in America today, there are two or three more people living at home who have equal or greater disabilities, half of whom are bedbound, incontinent or both.

And do you know who does the bulk of the caring? Women.

"Be more concerned with your character than with your reputation. Your character is what you really are while your reputation is merely what others think you are."

John Wooden

VEGETATIVE STATE: In 1996 a study showed that after assessment with SMART (sensory modality assessment and rehabilitation technique) 43% of the patients who had been admitted to the brain injury unit and believed to be in a vegetative state had been wrongly diagnosed. The technique, which has been refined and developed over the past four years, provides a structured sensory program that records patients' response to sensory and environmental stimulation over two weeks. If they respond in a consistent and meaningful way it will be picked up. Means of communicating with the patient can then be set up that improves his quality of life.

ARE AUSTRALIAN FUND MANGERS ANY SMARTER?: A report says that only 2% Australian equity managers demonstrated skill at outperforming the benchmark over the past five years once fees were deducted. Over 10 years fund managers did slightly better with 7% able to beat the Assirt benchmarks."There are very few geniuses out there and the hurdles are high when you take into account fees and taxes."

''Even though the intensity of oil consumption is markedly below where it was 30 years ago, it still has the potential to alter the forces governing economic growth in the United States.''

Greenspan

INSURANCE AGENTS: A Zogby America poll of 1,035 adults showed that about 1/3 of those polled said they did not trust insurance salespeople to do an adequate job and to treat them fairly. The remaining 2/3 were split about equally between those who felt that insurance salespeople could be trusted and those neutral on the question. Young people and females were significantly more likely to trust insurance salespeople.

Well, young people haven't been around long enough and women are simply nicer people.

But that isn't the issue. Insurance agents- as well as brokers and planners are notoriously incompetent. No, not in all areas. But the problem that I have seen is that such incompetency tends to overlap others leading to products that should not be sold and fees that should not be charged.

NURSING HOME: National Center for Health Statistics of the Centers for Disease Control and Prevention, there are 17,000 nursing home facilities in the United States, with at total of 1.8 million beds and 1.6 million residents. The average nursing home has 107 beds. Sixty-seven percent of all nursing homes in the U.S. are privately owned. Twenty-six percent are non-profit with the rest being government-owned. More than 75 percent of nursing homes are certified by both Medicare and Medicaid. The overall occupancy rate was 88% in 1997, while it was 92% in 1987.

LIFE RANKING: In a survey by Columbia University and the National Institute of Health, ''Loving family relationships'' was ranked as important or very important by 99% while financial security was a point behind at 98%. In third place was religion and spiritual life at 86%. 82% of 500 adults rated a satisfying sex life as important or very important. Job satisfaction was last in the survey, rated as important or very important by only 79%.

COUNT YOUR BLESSINGS: More than 2/3 of births in Russia have complications and every second newborn discharged is suffering health problems. The number of normal births declined form 43.5% in 1992 to just 30% last year. 53% of newborns discharged from the maternity clinics already suffer form a chronic ailment or a disease requiring prolonged treatment.

"EVERYONE IS ENTITLED TO BE STUPID, BUT SOME ABUSE THE PRIVILEGE."

MORNINGSTAR (Money, Zweig). "A five star rating does predict future performance significantly better than you could if you just looked at the fund's past return. With five star fund you are unlikely to do no worse than average, but a five star fund stands about the same chance of remaining superior as a three star has of becoming superior."

MONEY: The richest 225 people in the world have a net worth equivalent to the annual income of the poorest 2.5 billion people in the world.