At Arm's Length: 10.23.04

Who spends an average of $4900 a year on health care but still ranks among the worst covered population of developed countries? Which developed nation, when measured against other developed countries, has the worst mortality rate, lowest life expectancy and highest infant mortality rate? Which country has over ten million 25 to 34 year olds without any sort of health coverage at all while adding another 1.4 million to the ranks of 45 million who have nothing to protect them?

The answer is George Bush's America. Aside from replacing him in the upcoming election and not for this reason alone, the health care problems of this country are far beyond acceptable and growing worse. If suggesting that we look north to our Canadian neighbors for help, then I am on record as suggesting that adopting a system of socialized medicine is the next best way to fix what seems unfixable. But it won't happen.

Both candidates have suggestions to repair a problem that has grown larger with each passing year. Mr. Bush would like to institute a sort of medical rationing called Health Savings Accounts or HSA. (You can find information on this type of plan here but it is important to note that the difference between medical savings plans and the current offering is control. In a MSA, the employer controls the plan,; in a HSA, the employer is in charge.) This plan, which has received an icy reception from the very businesses it was designed to help, is as expensive in some instances for the employer as current plans, many of which are not even considered.

United Health Group, an insurer of over 18 million employees has begun to offer the plan to its subscribers. Even with rising costs, the plan has seen only 150,000 show any interest at all and with only one in three employers even bothering to offer the plan to its employees.

Accused of creating a plan that provides the wealthy another hefty tax deduction, the President's plan is not realistic enough to attract the average wage earner, the one who is most likely to lose his or her insurance because of high costs.

The employers have found things about the plan that they do not like as well. The first is portability. Employers like loyalty and health benefits have been the main attraction, especially over the last several years, that keep employees working for the same company. With a health savings account, the employee may now leave and take their plan with them.

Families currently suffering from chronic and long term illnesses and who may also be low income will find the plans wholly unsuited to their paychecks no matter how much their employers contribute to help.

The employers, in many instances will have the same contribution to the employees plan as it does under current HMO plans.

Does Mr. Kerry have a better plan? Possibly but it is not a cure-all for the ailing system. Once you disregard the high cost of government that the GOP insists will be created by this candidate's plan, taking catastrophic illness off the list of employer based plans is a logical choice. While this does nothing to address the high cost of healthcare, his program for reinsurance is a step in the right direction, albeit an expensive one. When asked how he would cover the costs, he pointed towards the misdirected tax breaks that were awarded the top earners in the country.

Its unfortunate that Mr. Kerry has not attacked the President on the flu vaccine shortage. This is a tragic misstep that will cost lives this year. Indicative of a growing problem because of reliance on big business to control the marketplace, prices for drugs and medical care will continue to rise without restraint.

Using litigation costs as a reason medical care costs have risen is a mote point. These cost should be present in any industry and are designed to act as system of checks and balances.

But single payer systems will attract only a few adventurous souls. Our current system is built around insuring only the elderly with Medicare and the poor with Medicaid. The rest of us, unfortunately are on our own. This is becoming an ever-increasing and often unaddressed drag on the economy.

Even with developed nations whose workable social medical plans are transparent enough for even the most jaded critic, there is little chance that special interest groups will roll over for the sake of the economically challenged. The best we can hope for is some relief from the extended costs of long term illness, the kind that devastates the working class of America.

At Arm's Length: 10.17.04

I mention in my book, "Building Wealth in a Paycheck-to-Paycheck World", that it is often the conservative strategy that wins the race. I also say that some part of your portfolio should be positioned for some growth even at the expense of added risk. But for those who have chosen to just sit on their hands and their cash over the last year or more, you may have found your nest egg has remianed relatively unscathed. At least on the surface.

Those months when you put your cash in savings rather than active investing have rewarded you with a pittance in return but more importantly, a return on your investment. Many mutual fund managers are pointing towards six percent losses for the year and calling themselves well-positioned for the rally. But you have not paid heed. Instead, you kept pouring your money into these accounts and waiting.

But your winning strategy could have been much more profitable without much more risk. I have often talked about money market accounts as the safest place to put money that is poised for investments. It can, because of its check writing provisions be used as a daily account outside of a 401(k) or other retirement plan. But that safety and convienence, and the supposed return you receive, might be costing you more than you imagine.

First of all, be clear on what you have and what we are talking about here. Money Market Funds are different than Money Market Deposit Accounts. The differences are subtle but worth noting especially if you have the later type of account. Money Market Funds are accounts that buy a basket of monetary securities whose rate of return is directly tied to the short term rate that is often in the news along with Federal Reserve Chairman Alan Greenspan. While he attempted to stimulate the economy with historic low interest rates, those with money market funds suffered the long term loss of returns on their retirement funds. The elderly, who tie a good deal of their nest egg in such accounts have been the unwitting losers in the low rate environment.

Money Market Deposit Accounts are used by 401(k) plans and brokerages. These accounts are designed to be jumping off points for future investments and as a result are often kept at banks and in this business of pennies and I mean that literally, these types of funds can impact your potential return by as much as .10%. That is ten cents to the dollar.

Investors should if at all possible, move those funds into a better paying money market fund with low expenses. I mention expenses because not all funds are alike and believe it or not, the expenses can look like losses against the possibility of better returns.

This is important because, as I write this, even the best paying fund is lagging behind inflation by about half. It is the rate of inflation that you are trying to catch and beat with your fund.

The industry average expense rate is about 0.55% so let that be your benchmark for your lower expenses. Anything above that number means there is an increased chance that your yield might actually be less than your cost of parking your money. Once you find something like the Vanguard Prime Money Market Fund, a nod toward the low expense kings of the fund world, move all of your money to the fund. Spreading the risk in money market funds is only adding to complications you don't need.

Some funds come with an added bonus. Finding a fund that has a tax-exempt status can often benefit the long term investor and this would have been true during the last year or so. There are other places favored by those trying to protect and defend their cash but these investments may not survive the light of day.

Long nestled in the retirement warmth of 401(k), those employer sponsored investment plans many of us use without clear and concise understanding, are the kind of conservative investment that many feel should be made available outside such arrangements. The Stable Value Fund is a good example of conservative investing that grabs more return than a money market fund will while its yields easily outpace inflation.

Trouble with these funds is not as complicated as it seems but is worth noting. Stable Value Funds invest in short term bond funds with short maturity dates. The trouble is the "insurance wrap" has caught the attention of the S.E.C. as these funds are making their way out of 401(k)s and to the general investor. And while the Security and Exchange Commission asks the tough questions I'll try to explain why.

That pesky insurance wrap is designed to protect the fund from huge swings in interest rates. Bonds, as you may or may not know, especially in the short term, are directly affected by changes in short term rates. As bond prices go up, the yields go down. Funds who are forced to buy new bonds to replace maturing ones may not be receiving the same yield. That could push returns lower. These insurance contracts protect the fund from those kinds of huge swings. But the cost of this insurance is not always easy to see. This lack of transparency is what has caught the attention of the S.E.C.

Many folks are herded into these types of funds when they join the company plan but fail to make any real allocation choices. But outside, in the real world of investing conservatively, the choices must be see through. Always thinking in terms of pennies is the hallmark of such investment styles and that strategy has paid off in this current market. Understanding every samll expense, being able to account for it, and making your plan accordingly gives the conservative investor the edge they seek. We could all learn a lesson.

When looking at any type of yield focused bond fund, look for stability. The net asset value or NAV should be as stable as possible, never fluctuating more than ten cents either way. NAV is how the holding within the fund are valued. This is important in these typoe of funds as the underlying investment is subject to shifts in value and yield. Because of this, these types of funds discourage short term trading by charging redemptions fees. In the interest of full disclosure, these funds will warn you in advance.

And what of the tried and true Certificate of Deposit? As the commercial says, "life comes at you fast" and conservative investors should be aware that they are not excluded by the onslaught of life's events. It might seem slow and stodgy and on the surface, nice and safe, but when rates and investing environments change, the locked in return of a CD does not. That could lead to missed opportunities as your money market fund rebalances itself.

And lastly, taking your money to higher rate institutions such as credit unions and internet banks is an option worth considering, it should be used for short term positioning for future moves and not for long term parking.

The previous week's articles.

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