by Archie M. Richards, Jr., CFP^®
August 25, 2003

In response to a listener's call, a prominent radio talk show host on money matters made three suggestions - all of them wrong:

1) "Long term," to the host, meant two years. Nonsense! You should plan on holding individual stocks for at least five years. If you own a broad array of index mutual funds and you don't need the money, why sell them ever?

2) The host said that stock prices "don't always" move in accordance with current news. Ha! Stock prices usually don't move in accordance with current news. Today's news generally becomes reflected in stock prices 4-to-6 months before. Today's price changes begin discounting the news we won't know about for another 4-to-6 months.

True, today's news may influence today's price briefly. But unless the direction of today's short-term move matches the news that will be reported 4-to-6 months hence, the short-term effect doesn't persist.

3) The investor wanted to buy 100 shares of Proctor & Gamble (PG). The host approved, but he suggested buying 50 shares the next day (he was talking after the market had closed). He also suggested buying another 25 shares two days later, after PG's earnings were reported, and the final 25 shares if and when the stock fell further.

Poor advice! Here's why:

• The majority of times, stock prices don't fall; they stay about the same or go up.

• Even if the host knew what earnings Proctor & Gamble would report, he did not know how the stock price would react.

• If Proctor & Gamble's price rose instead of fell and the listener didn't buy the full 100 shares, he'd feel as if he'd lost. He would not have lost. He'd have bought the stock he wanted, just not enough of it. But feeling like a loser induces bad investment decisions. Fewer decisions triggers less unfavorable emotions, producing better results. Don't work at it so hard. Let the market do the work.

• Tripling the number of purchases triples the commissions. This makes higher costs certain. But the benefits, as explained above, are uncertain. A poor tradeoff. Over time, increased trading worsens the returns.

On all counts, the radio talk show host's advice was cockeyed.

Doris wants to buy a reverse mortgage from which she'd receive monthly income. She's looking toward the time she'll have to move to a nursing home. She asks whether the monthly income from the reverse mortgage would continue being paid to her, or would it have to be paid to the nursing home.

(For more on reverse mortgages, see www.archierichards.com for the column dated July 14, 2003. Call 888-REVERSE to reach my favorite supplier of reverse mortgages, Financial Freedom.)

As soon as you leave your home to enter the nursing home, Doris, the reverse mortgage would come to a halt, and the income would stop. Your house would be sold, and you'd receive a check for the amount not needed to repay the mortgage loan.

Assuming that your inquiry pertained to qualification for Medicaid, I asked Alan Stucky, an elder law attorney in Amarillo, Texas, about the consequences of your receiving the proceeds of your house.

Alan responded that, unfortunately, you won't qualify for Medicaid support unless the value of your stocks, bonds, cash, and other assets total no more than $2,000. If the proceeds of the house increase your assets to more than $2,000, you'd be required to pay for your own nursing care until the assets total no more than $2,000 and you again qualify for Medicaid.

Nursing or assisted care administered in your own home is generally more agreeable and less costly. Medicaid seldom pays for home care. But if you can stay home, you'd continue receiving income from the reverse mortgage for as long as you remain there.

Purchase long-term care insurance that allows for home care. Adding this provision is not only desirable, it also reduces the premiums. Every little bit helps.