Friday, February 29, 2008

Boy, I Feel Much Better – Bernanke and Bush Agree – No Recession

Politics are funny. Candidates running for President are telling you how everything is a train wreck and how they will fix it. President Bush and Fed Chairmen Ben Bernanke will tell you that everything is fine.

Yesterday, President Bush and Ben Bernanke, in separate speeches, acknowledged (the obvious - that we are in an economic slowdown. However, they both assured the country that we are not heading into a recession. Of course, this is the same set of politicians that was assuring the country that this real estate bust would not be a problem.

You are never going to hear a politician acknowledge something until it is obvious. Until the economic growth numbers come out negative, it will be the same old political spin. Does anyone actually think that we are going to avoid a recession?

Let’s look at the reality of things:

Personal income for most consumers is not increasing and has not increased in a long time
Corporations are hesitant to invest money to expand because of the uncertainty
Investors are hesitant to invest money because of the uncertainty
Consumer spending is vanishing
There is no solution to the foreclosure crisis in America
Oh year….. $ 100 plus oil

Yep, things look good to me.

I really hope that our next President handles things more effectively and realistically. It is the policies of this Administration that has landed this country in the mess that we are currently facing. It is the same Administration that continues to tell the American people “all is well.” Unfortunately, the reality of the pain that is being felt by consumers is telling another story.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Thursday, February 28, 2008

Prudent Investing is a Combination of Growing AND Protecting Investments

If you listen to the financial services industry, there is only one way to invest. The only strategy that the financial advisor community has focuses on is growing investment accounts. It is a performance-based system for investing.

The problem is that there is very little emphasis placed on protecting investments when the markets go through rough times. What happens when if a bear market comes along? The advisor community doesn’t have a strategy for that type of environment. Thus, they remind you that you are a long-term investor and to just “ride it out.”

This strategy is dangerous for one reason. You make money in the bull markets and you give most of that money back during the bear markets. That is the danger of the one strategy investment process.

The focus is always on the good years. It is all about performance. Now the financial services industry bases the notion of performance on an illusion. If you were to look over the last 79 years, the stock market (represented by the Dow Jones) gained money 66% of the time and only lost money 44% of the time. Therefore, the conclusion is that the emphasis should be on the positive good growth years because there were as much 1/3rd more good years. Why care about the loss years since there are more growth years?

Well there in lies the illusion. The stock market might have lost only 44% of the time. However, the negative years had much more of a negative effect on investment values than the benefit gained from the positive years. The reality is that there is major importance to be placed on protecting your investments from the bad investment years.

Think about these percentages for a moment:

If you lose: % required to break even

-10% +11%
-20% +25%
-30% +43%
-40% +67%
-50% +100%
-60% +150%
-70% +233%

You could easily lose 50% of your money in a bear market over a short time period. Unfortunately, it would take an investment return of 100% just to break even. It would take a long time to recover.

Take for instance the greatest stock market crash of all time. The 1929 stock market crash created an 88% loss in just a mere 3 years. It took 3 years to wipe out 8 years of investment gain. Then it took another 22 years just to get back to even again.

This is why it is important to have a strategy to protect against loss. Negative years in the stock market can be much more devastating then the benefit from the good years.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Wednesday, February 27, 2008

Are Your Investments Protected Against Risk?

One of the areas that I will be covering at my seminar is the concept of diversification. Diversification is your main tool to combat risk in your investment portfolio.

So what is diversification? It is the process of spreading your investment risk across all types of investments that historically don’t move in the same direction. The key is that the investments balance each other out. For instance, if stocks are going down, bonds are hopefully going up. Maybe you are using alternative investments or real estate investment trusts. It is all a balance.

Unfortunately, most investors confuse diversification with quantity. The thought is that they are covered for risk as long as they have their money spread out over many different investments.

I was meeting with an individual and he made the comment that his 401(k) plan was well diversified. He showed me his portfolio. His money was spread out over nine different mutual funds. The problem is that his money is 100% invested in stock. The probabilities are high that in the event of a market downturn, all nine of those mutual funds will move in the same direction. That is absolutely no diversification at all.

If you are going to use a buy and hold approach with your investments, then you will need to use a strategy that I call extreme diversification. This would require you to spread out money over all many different types of investments so to balance out risk.

Another way to diversify your money is simply looking at it from the standpoint of how much you have invested in stocks, bonds, and money markets or fixed type of investments. The percentages that you use will greatly impact the amount of risk that you are taking.

For more information about the seminar go to this link – there is very limited seating left.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tuesday, February 26, 2008

Is Alan Greenspan Responsible for the Real Estate Problems?

Yesterday I had the opportunity to interview Bill Fleckenstein on his book Greenspan’s Bubbles – The Age of Ignorance at the Federal Reserve Board. Throughout the book, Bill goes through the almost arrogant attitude of Alan Greenspan and how he thought that he could control everything through the Federal Reserve Board and the manipulation of interest rates.

In the book, Bill writes about some of the financial catastrophes that Alan Greenspan had a part in which include:

The Stock Market Crash of 1987
The Savings and Loan Crisis
Y2K
The Tech Bubble
The Housing Crisis and Credit Crunch

The book is a disturbing account on how things really work at the Federal Reserve Board and how out of touch they are with reality.

At one point during the real estate boom, Alan Greenspan actually encouraged the use of adjustable rate mortgages as a way to finance real estate. Now adjustable rate mortgages are the problem today and I would suggest that they are the main reason so many people are losing their homes.

The irresponsibility of that ringing endorsement of adjustable rate mortgages by Alan Greenspan came at a time when interest rates were at historic lows. Translated, they had no place to go but up. That would make an adjustable rate mortgage a horrible mortgage for new home or a refinance.

I asked Bill (who has closely followed Greenspan’s career), “What was Greenspan thinking when he endorsed the use of adjustable rate mortgages?” It was real silent on the other end of the phone line. I could just picture Bill shaking his head and then saying, “Who knows?”

Unfortunately, Ben Bernanke is equally as overconfident that the Federal Reserve Board can just fix things. I think that in time we are going to discover that the Federal Reserve Board has very limited power over this current credit crunch.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Monday, February 25, 2008

New Credit Card Legislation in Congress – Political Sound Bites or Actual Laws?

I am seeing a trend in Washington. It seems that Washington is falling into this habit of introducing real strong legislation aimed at helping consumers against credit card companies as well as programs to help people who are facing foreclosure. They are announced with big fanfare. Then, as if nothing were ever announced, you hear nothing about them again.

There was a strong piece of legislation aimed credit card company reform that was being discussed on Capital Hill last year. I made the statement then that it would be a miracle if it ever became law because it was a good piece of legislation that would regulate the unethical practices of credit card companies and help the debt strapped consumer.

Either politicians have good intentions and actually think that they can get good consumer legislation passed or our politicians are just going through the motions in order to look like they are actually representing the people of their district. Realistically, it is a little bit of both.

Politicians, regardless of their intentions, will come up with pretty common sense solutions that really would help consumers. The problem is that good solutions for the American voter and consumer don’t make good political solutions. After all, it is big business that lines the coffers of politicians. Thus, these pieces of legislation fall by the wayside.

The latest is a bill of rights for credit cardholders designed to level the playing field between credit card companies and consumers. The bill is aimed at preventing major credit industry abuses while fostering fair competition between card issuers.

Most of the bill is fluff. They want to force credit card companies to be clearer about the terms and conditions. Of course, that is really not going to solve anything. The right credit card legislation has two important details.

First, it would not allow credit card companies to arbitrarily raise interest rates. This is referred to as the universal default clause where you sign on the dotted line, giving the credit card companies the right to raise rates for any reason.

Second, it would forbid excessive fees charged by credit card companies.

Those are the two fixes that are needed in the credit card industry. If those two simple laws went into effect, we would have made some real good progress.

To take it a step further, Congress should limit how high credit card companies can raise your credit card rates. Currently, they shift that burden to state government. This is a real serious issue for consumers. I wish someone in Congress could tell me why 30% plus interest rates are fair to the consumer?

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Friday, February 22, 2008

Watch out for the Salesperson who Guarantees a Return

When the stock market is losing money, companies come out of the woodwork promoting investment products that guarantee returns. People are much more susceptible to “guaranteed” investment products when the market is an emotional roller coaster.

I had a client email me today asking about an outrageous claim that one radio host was making this afternoon as she was guaranteeing an 18% return in a year in her investment program.

Legitimate investment strategies are highly regulated by both the Securities Exchange Commission and the National Association of Securities Dealers. There are very strict laws the prohibit anyone licensed to represent securities to make implications or outright guarantees of investment returns.

If that is the case, then how do these programs broadcast on the radio and make outrageous claims? Well most of the time, they are not true investment products but actually insurance products that look like investment products.

So, if you are approached by the next great guaranteed investment, ask the following questions:

- If the return is guaranteed over a period of one year, ask if you will receive your original investment at the end of the period plus the guaranteed return with no strings attached. So, for the lady claiming the 18% guaranteed one year return, I would want to know that I could get back my original investment plus that 18% in a check with no strings attached.

- If the return is tied to one of those equity indexed annuity products where they promise you will never lose money and you will also make money when the stock market goes up, ask them if you are guaranteed to get the investment balance that you see each year on your statements with no strings attached.

- If you get the answer of yes to any of these questions, then ask to get it in writing with a written explanation of the guarantee.

The reality of the situation is simple. The only guarantee that can be made when it comes to investing are risk-free investments such as a CD. If you are attempting to make a return greater than what you can make above and beyond a risk-free investment, then you are taking risk of some type. There is no free lunch. However, there are promises and guarantees with many strings attached.

By the way, if anyone can provide an investment with a huge return and guarantee, please let me know. I would stop taking risk and trying to manage money and just sit back and reap the rewards of a nice fat guarantee. Of course, so would everyone else in the investment business and no one would take risk.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Thursday, February 21, 2008

Is Long-Term Care Insurance Worth It?

Let’s face it, you can insure just about anything these days. There is insurance for just about everything. You could even find yourself in a situation where you had so much insurance coverage that you are barely able to make the premium payments.

The best case scenario is to have insurance and never need it. However, when tragedy does strike, you are thankful for every premium payment that was made. I had a first-hand experience with long-term care coverage for my mom. My mom, who has Alzheimer’s, spent about a year and a half in a nursing home prior to her death. Fortunately, the long-term care insurance paid for everything.

With or without my personal experience, I have always though that long-term care insurance should be a part of a person’s retirement plan.

You have to address the question – How will you pay for a long-term illness that requires a nursing home stay? Do you have enough money in investments or in monthly pension benefits to cover $ 4,500 to $ 5,000 a month in nursing home expenses? Do you really want to push that burden on your family? These are some tough and important questions.

So, here are some things to consider when evaluating long-term care insurance:

Can you self-insure? I have some clients who have plenty of income each month from social security and pension plans, so that if a long-term care expense were to occur, they could pay for it. Of course, they can easily pay for the long-term care insurance as well. It might be that you figure you could self-insure part of the cost. Thus, you take out a smaller insurance policy to take care of the gap between the cost and what you can pay.

What are your family members’ thoughts? It is important to consult with family members about long-term care. It is the family members that can end up suffering the most when these things are not taken care of ahead of time. It might be that a son and/or daughter might be willing to help pay for some of the long-term care just to make sure that everything is covered. This ends up becoming a family risk. Make sure everyone gets input.

What long-term care benefits are the most important to you? You can get a long-term care policy loaded with all of the bells and whistles. You also get a big fat premium payment. I think that the must-have benefit is the inflation rider. You definitely want the insurance to keep up with inflation. However, other parts of the policy are negotiable.

When applying for a policy, you get to choose the waiting period. This is simply the number of days that you wait prior to the coverage starting. If you think that you could afford 180 days without coverage, your premium could be much lower. Of course, the most expensive policy would provide coverage from Day 1.

The other benefit is length of coverage. The most expensive is coverage for a lifetime and then it goes down to coverage for just a year or two.

Make sure that you customize your policy to where it makes sense for your needs and your pocketbook.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Wednesday, February 20, 2008

The Government’s 30 Day Mortgage Bail-out Band-Aid

Treasury Secretary Hank Paulson announced yesterday that 6 of the major banks have come to an agreement to freeze the foreclosure process for 30 days. This is for borrowers who are more than 90 days late. The program is called Project Lifeline.

Now how is that for a plan of action? Are things that bad that the Government has to recommend halting the foreclosure process for a measly 30 days just to figure out what to do next? For most homeowners that are in trouble, an additional 30 days does nothing more than postpone the inevitable.

Well, the foreclosure problem is that bad and looks to get much worse. The Government has a real problem on their hands that could have been prevented if they would have done their job.

Let’s look at this for what it is at face value. We could face an alarming number of foreclosures in 2008 and 2009. Of the homeowners that are in trouble or will be in trouble, a percentage were victims of predatory lending. I would suggest that the vast majority understood they were taking out a loan based on a low payment and buying more home than they could afford.

The system is way too complicated for a government intervention and bail-out. The consequences would be enormous. Someone should tell the Democrats about the consequences. Senator Clinton, with all of her “I told you so”s, chimed in again today saying that she is the only one that has been warning about this and has been for a year. Of course, her solution is to freeze interest rates for years and save the day. Oh Hillary, if it were that easy. Incidentally, this has been a news story for well over a year now. Just like Al Gore didn’t invent the internet, she didn’t warn the world of the impending foreclosure problem.

Then there is my favorite. Now Senate Banking Committee Chairman Christopher Dodd is a real piece of work. He thinks that the Government should buy these loans and re-work them. Seems to me that if his committee was overseeing the banking industry effectively, these irresponsible loans and loose lending standards would have never happened. Just like every other good politician, his solution is to just let the government flip the bill for the problem.

How about pointing to the banking community who created this problem? How about forcing them to rewrite these loans at today’s rates on 30-year fixed notes, regardless of credit? If the homeowner cannot still afford the payment, then nature must take its course. Is Congress protecting the banks or doing its best to protect the consumer? It really is tough to tell.

A program should also be set up to help those who can prove that they were a victim of predatory lending. That group would include everyone who was allowed to buy a home without proof of income. That is a clear example of predatory lending. This problem and solution should be on the shoulders of the banking community.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tuesday, February 19, 2008

Successfully Disputing Information on your Credit Report

Making your credit score the best that it can be isn’t rocket science. Fortunately, you really don’t need to pay those services big dollars to do something that you can easily do yourself. However, you do need to know how to go about the process the right way.

Remember, that on your credit report (and you have 3 of them – TransUnion, Equifax, and Experian.), all items should be classified in one of three ways.

1) Correct
2) Inaccurate – information is correct; however parts of it need to be corrected
3) Mistaken – the information is not yours and needs to be removed

There really is nothing that you can do if it is correct. If you have a bankruptcy or a collection item on your credit report, then it stays until it serves its time. Each negative item has to stay on that credit report for 7 ½ years past the first missed payment.

The information is inaccurate (balance or date is incorrect, etc.) then it is important to dispute the information and request that it is corrected.

Mistaken information definitely needs to be disputed and requested to be removed on the basis of mistaken identity.

As you would guess, the three credit reporting agencies all have their own ways that they want you to go about the process.

TransUnion – They have three different ways to dispute. If you mail it in, they have a form that needs to be filled out. For complete information including forms and addresses, click here.

Equifax – They also have 3 different ways to dispute information. They are the easiest to deal with because they don’t require any additional forms. For complete information including forms and addresses, click here.

Experian –They have one way to dispute. In order to dispute an item, you must buy a credit report from them so that you have a credit report number. They are running a racket. Then you dispute everything online. What a rip-off!! For more information, grab your credit card and go here.

So, here are a couple of tips:

1) If it is a minor item, dispute online or over the phone. If it is a big item, always dispute through the mail using certified mail with a request to send you a receipt. This is the most effective way.
2) When disputing something, include as much evidence to support your claim as possible.
3) If you want to get around the Experian credit report fee, you can always dispute the same item with another credit reporting agency. Most of the time, an item will be reported on at least two of the three credit reporting agencies. If you dispute the item with one agency and they rule in your favor, they then communicate with the other agencies and have them correct or remove the information.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Monday, February 18, 2008

Don’t Confuse a Marketing Solicitation with an Actual Offer

The mortgage marketing machine is running in overdrive and aimed at getting your mortgage. For the most part, the teaser rates promising ridiculously low rates are gone. Mortgage companies now have moved on to other ways to get your business. Now the method of choice is the personalized offer.

Mortgage companies armed with information on your mortgage are sending out personalized offers to refinance your mortgage. The solicitation is designed to look like a done deal. It is an offer much better than the current mortgage. The marketing message leaves the impression that only a signature is required and the low rates are a given.

One listener wrote me about an opportunity to get her rate lowered from 9% to 5%. She was hopeful that this was a good deal for her.

Well, yes it is a good deal……if she qualifies. Yes, it is a good deal if she qualifies and the deal is not back-loaded with excessive penalties. If you are paying high interest rates on your mortgage and are facing the prospects of an adjustable rate mortgages, you still have to qualify for a new lower interest rate mortgage.

What if you don’t qualify? Could there still be an opportunity for a new mortgage? I am currently working on a story for the Under the Radar Newsletter that uncovers one bank’s offer to refinance a mortgage at a higher interest rate. Why would anyone be interested in a higher interest rate?

Well, this bank is doing it under the pretense of a debt consolidation/mortgage plan. Not only were they going to charge almost 1.5% more in interest on the total loan, they were also going to charge 4% in fees to close the note. What’s worse, this bank called the listener on his cell phone and pitched the deal.

His credit score is 596 (considered a poor credit score) and they want to offer this deal because he is a “preferred customer.” Be watching for that story in the Under the Radar. This is clearly predatory lending.

Rules of thumb:

- If you need to refinance, do so only if the overall interest costs are reduced.

- Those with a good credit score and substantial equity in their home have more options available to them.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Friday, February 15, 2008

Congress Doing Its Part To Make America Great

I don’t know about you but when I go to sleep at night I want to know that our Congress (who we pay with tax payer money) is working hard to do several things: Help protect America, the economy, the markets, and our rights.

So, it just gives me the greatest feeling in the world to know that Congress is taking the time to look into this whole Roger Clemons steroid scandal. This is a great use of tax payer money. They really need to get to the bottom of this situation and find out the truth. Who is telling the truth? Who is lying? This is hugely important in a time when we are at war, a time when our economy is sinking into a dark hole, and people by the thousands are losing their homes.

You solve that steroid problem, and then you have the answer to America’s housing situation. An added bonus to some of the members of Congress was a pre-hearing autograph session with Mr. Clemons (true story – he was signing autographs for random members of Congress).

Let me set the stage – You have all of these politicians sitting forum style facing a row of people set to grill their “guests” with questions. Next to each member of Congress was a name tag. What struck me as a little “elitist” was that you didn’t see the first and last name of the member. You just saw either “Mr.” or “Mrs.” and then their last name. It reminded me of fraternity pledgeship. “Always refer to me by my last name and never my first. Look me in the eye when spoken to. Never speak unless I acknowledge you.”

Is it the business of our Congress to stick their nose into everything that has nothing to do with their chief role in this country? To me, that is a complete waste of time and resources to figure out who is lying and who is not lying about steroid use. Besides being lightly entertaining on ESPN reruns, it has nothing to do with the important issues that we face as a country. Quite frankly, if polled, I would think that the greatest portion of America really cares less.

As I do more research on the activities of Congress, one question really continues to come up. What do they really do? For instance, most of the solutions recently proposed by Congress as an answer to America’s housing crisis have been just a little more than political sound bites and not real answers. They sound great. Beneath the surface, there really isn’t anything to them.

Credit laws are in place to protect the credit industry more than the consumer. They sat back and watched the mortgage problem boom as if there was no way there could be a problem. Surely those advertisements to buy a home for nothing down, 1.2% interest for the life of the home, and no closing cost loans were not a scam. How could any member of Congress truly concerned about the American people ignore what was blatantly obvious. The truth is there is no policing of the mortgage industry.

To the members of Congress – With all due respect, please spend your time revamping mortgage laws in order to protect the citizens of this country. Please restructure all of the credit laws so that they are fair and balanced. Get some real solutions together to help the homeowners who your system failed. This is not a bail-out plan that we need. We need a plan to help those who have faced or are facing foreclosure to get back on their feet.

Finally, create laws as if you couldn’t get elected again because of a term limit.

The biggest mistake that we ever made in this country was not limiting an individual’s ability to retain power. Career politicians are the problem. If we thought it was a good idea to limit the number of times a President could get re-elected, why wouldn’t it be a good idea for the Congress?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Thursday, February 14, 2008

Is Debt A Sin?

Debt is a tough subject for most to discuss. I would suggest that it is the biggest financial challenge facing Americans today. So, where does the Bible stand on debt?

Since we talk a lot about debt here, I wanted to give you some Biblical views to consider today. We will talk about various ways to reduce the impact of debt or to negotiate debt that is in collections. We will often even discuss what happens if you walk away from debt. It is my role to answer your questions and give you the facts of the situation.

I have always felt that when people call in with these tough questions, they want straight facts and not an answer designed to make them feel guilty for their situation. If you are like me, it is easy to feel guilty without the help of someone else. I also don’t always give unsolicited opinions on their situation. It is not my role to pass judgment. Prudent Money should be a safe place for you to come and get information.

Having said all of that, I do want to take the time to share with you my views on debt from a spiritual perspective. In taking about twelve key Scriptural references in the Bible, these are my conclusions. It comes down to moral obligation, dependence, and freedom.

1) I believe that you should always pay back what you owe. Debt is a contractual and moral obligation that we make with someone. Whether or not we like the terms and conditions, at some point we did agree to them.
2) Paying back your debt takes your relationship with Christ to whole different level. Paying back debt brings us back to a level of dependence of Christ. It is the strength of that level of dependence that forms the foundation for a strong relationship. I have often said that it is debt that brings Christians to their knees and back to God.
3) If we are in debt, we are not free as we can be to serve. We want to be 100% free to serve in our relationship with Christ. If we are not in a place to where we can commit 100% of our time and attention to Christ, then we are a slave to man as it says in 1 Corinthians 7:23. We also want to be free to serve others as well.
4) Christ doesn’t want obligations above the relationship with Him. If you are in debt, you are completely obligated. Until you get out of debt, it is hard to be in a place where you can give 100% of yourself. Debt can become something that develops a life of its own.
5) Most debt problems are created due to not living a Matthew 6:24 life. There comes a time when we have allowed money to be a god. It is so easy to enjoy all of the immediate short-term gratification that debt can give. It can be powerful feeling from a powerful stimulant. The key is getting back into God’s financial will for your life. It is only there that you can start your road back to freedom.

So is debt a sin?

Money was written about more than anything else in the Bible. God knew that we needed instruction on dealing with money. He knew that it would get in the way. Debt is a powerful tool of commerce. If used correctly, it can be a good prudent strategy in how we handle His money.

The key is using debt the right way. If you are going to borrow money, know how you are going to pay it back. Know without a doubt you are not making a commitment that will not in any way get in the way of your relationship with Christ. If you have debt, commit to a game plan to where you can get out of it. Make the two objectives freedom from everything and dependence on Him.

The Bible does not specifically say that debt is a sin. There are many things in the bible that are not specifically mentioned as a sin. It is letting those things get out of control and get in the way of your relationship with Christ that becomes the problem.

That is the problem with debt. It can happen in an instant if we are not guarding our wallets and our hearts.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Wednesday, February 13, 2008

Uncertain Times is the Theme of 2008

You can go back and say that things in the stock markets are always uncertain. There are always the unexpected problems that appear that create the greatest risks. The stock market hates uncertainty. Unfortunately, we could be in a historic time of uncertainty that lasts a very long time.

I interviewed Mike Larson yesterday on my program. He is the Senior Real Estate Analyst on Money and Markets. For more information, his website is www.moneyandmarkets.com.

Many of the tougher questions about where the real estate and credit crisis leads were met with the response that it is so hard to tell because no one really knows the extent of the risk. Thus, we can paint all types of scenarios going forward. The bottom line is that debt is the problem and we are a country that is in trouble with debt. It has a reckoning day and doesn’t just go “poof” in the night.

I would encourage you to listen to the podcast interview with Mike. This really gives you an idea of what we are up against as a body of investors.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tuesday, February 12, 2008

Another Week, Another Government Bail-Out Plan

It seems like very two weeks the Government is coming out with some type of bail-out plan for the American consumer. Last week, it was the stimulus plan announced by the Government. Weeks before, it was Project Hope. Today, it is Project Lifeline.

Here is what all of these plans have in common:

1) They are nothing more than sketchy announcements where the details are to be worked out into the future. Unfortunately, that never seems to happen.
2) They are never as advertised. For instance, the Government announced that they will make it easier for people with Jumbo Loans to get refinanced. Unfortunately, if you look at the fine print, very few will benefit.
3) They are nothing more than political sound bites. Hillary Clinton announced today that President Bush is finally doing what she said to do all along. With all due respect, Senator Clinton, I wouldn’t put my name behind the so-called solution that President Bush is suggesting.
4) They are all band-aid approaches that only time will fix. These plans just prolong the pain.

So what is the solution? I think that the Government needs to get out of the way and let this credit crunch fix itself. That could have some consequences. However, those consequences will not go away. We either face them today or face them tomorrow.

Congress needs to write strong mortgage rules and regulations that will prevent fraud from occurring again. Unfortunately, the way they would like to enforce the mortgage industry is a real soft approach. They need to get tough with that industry.

The train has left the station and the problems are very real. Unfortunately, all of the political sound bites in the world are not going to correct this problem (that the Government allowed to happen in the first place).

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Friday, February 08, 2008

Marketing that is an Insult to your Intelligence

“This just in – The government has been saddled with 1000’s of foreclosed homes and they want to get rid of them. They do not want to be in the business of owning real estate. Now, in this special offer, you can get a list of the homes in your area. We will send you these special lists so that you can buy your home at an incredible value. Now listen to this special instruction. If your name starts with the letters A through N, please call today. If your name starts with the letters M through Z, do not call today. We will not take your call. You can call tomorrow.” – Advertisement heard on the radio

So, I called. Unfortunately, I was calling on the wrong day. I asked the lady why she was taking my information when I wasn’t suppose to be calling. She said that they just say that to control phone call activity. You have to be kidding me.

In the script that she read, she stated that this list contains homes that will be sold for less than $ 1,000. They will even pay your first month’s mortgage payment if you buy from their list. In addition, they will send you all of these special offers. Of course, there is a free trial offer.

If someone could buy a house for under $ 1,000, do you think that they would tell anyone their secret?

Why do I point out something as ridiculous as this marketing message?

I point it out because this company would not be marketing this scam if they weren’t making plenty money. People are falling for this marketing message.

Please don’t keep these businesses in business by falling for their scam. If it sounds too good to be true or even to the extent of being ridiculous, then it probably is too good to be true and it is very ridiculous.

Even if they had a legit service, would you want to do business with anyone who uses sleight of hand marketing?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Thursday, February 07, 2008

Getting out of High Interest Debt the Right Way

I received an email from a listener asking whether or not I thought that it was a good idea to seek consumer credit counseling and get all of this debt consolidated? As always, my typical answer is that it is not a good idea. Those services are usually not as advertised and can make a situation much worse.

I asked the listener to just send me a synopsis of his debt situation. After looking at it, going to one of these services would have been a tragic mistake for the following reasons. First, it was not an enormous amount of debt. Second, he was able to make the monthly payments. Third, his credit scores were such that he had other options. Finally, he could actually pay the debt off in a reasonable timeframe.

So if you are facing this situation, here are some questions that you need to ask.

Are you able to make the payments? The answer has to be yes. As long as everything is current, you do whatever you have to do to keep it that way. So figure out a way to stay in the good graces of the creditors.

Do you know how long it would take to get out of debt? This is crucial. Regardless of your interest rates, you need to know how long it would take, at your current pace, to get out of debt. Simply use a debt calculator and calculate how long it will take to pay that amount of money off. Then use the debt funneling method of getting out of debt.

Debt funneling is a process that can help you get out of debt faster. When you look at your debts, they come in all shapes and sizes. The smaller ones will pay off first. Once you pay off a debt, you take that monthly premium payment and then apply it to the highest interest rate card. You keep repeating that process until the majority of the money is going to the highest interest rate card until everything is paid off.

Do you know your credit scores? Many times, a person’s credit score is good enough to transfer and combine all of that debt into a low interest rate card. Without knowing your credit score, it is impossible to know if that is an option.

The ideal credit score is above 700. Between 650 and 700, you still have options. However, they start factoring many more things into the equation. If you can get that low interest rate card, then you really have gone a long way to solve your problem.

What if your credit scores aren’t any good? Then you start the process of rebuilding your credit scores. You pay everything on time and talk to your card companies about what it will take to get those interest rates lowered. Some credit card companies have programs for this type of thing.

The keys to getting out of high interest rate debt are:

1) Stay current with your payments – at all costs
2) Work on your credit scores so that you can decrease your interest rates
3) Determine what options are available to you to lower interest rates
4) Commit to the process and accept the fact that it will take a period of years to complete
5) Understand that debt consolidation is a convenience and not a prudent strategy unless your overall interest rate is lowered
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Wednesday, February 06, 2008

What Wall Street Doesn’t Want You To Know About Market Timing

We have been talking about whether or not it is a good idea for you to move a portion or all of your money to a safe place because of what is happening in the stock market. Basically, that is referred to as market timing. You are attempting to pick the best time to take your money out and then the best time to put it back in.

Wall Street says it is a horrible strategy and one at which investors never can succeed.

A Barron’s article in the fall of 2001 published an article that showed what an investor would have made if invested in the S&P 500 index from February 1966 through October 2001. During that 36-year period, an initial investment of $1,000 would be worth
$11,710.

A study done by Birinyi Associates performed a compliment study to the one in Barron’s. They stated that if an investor missed the five best days every calendar year, that the
$1,000 would have shrunk to $150.

Now, the second part of their research went the opposite way. What if the investor had been invested in all but the very worst days in those years? The $1,000 would have grown to $987,120.

Merriman Capital Management cites another research study. “If you invested $100 in the stock market in 1926 and simply kept your money there through 1993, your investment would be worth $80,000. If you tried to time the market and “missed” the 30 best months, your $100 would have grown to only about $1,200.”

In the same study, they ran a study where you were invested in the same time period and missed the 30 worst months. That initial $100 would have grown to $8.6 million.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tuesday, February 05, 2008

Should I Stay or Should I Go?

With January investment statements coming out this week, most investors will face the reality of pretty steep investment loss. January’s returns, combined with the preceding two months, have been tough on investment accounts.

This is going to lead many of you to consider pulling out of the market. Should you stay invested or should you preserve capital?

Since no one has a crystal ball, it is impossible to determine what makes the most sense. So for most people, trying to figure out the direction of the stock market is going to be tough at best. Thus that might not be the best strategy unless you are willing to get an education in technical analysis of the stock market.

So the question is not about the direction of the market. The real question is what is most important to you? How much of your investments are you willing to risk in the stock market? You also have to consider your time horizon. How long will it be before you need that money?

Now don’t mistake time as an excuse for taking risk that is not prudent. I have always felt that the idea promoted by the 7 trillion dollar financial services industry that if you are young, you can be aggressive because time is on your side.

Whether you have one year or thirty years, it only makes sense to invest in investments that have a high probability of either rewarding you for the risk that you are taking or preserving your capital.

So if you are wondering what steps to take with your investments, then consider this question: How much risk do you really want to take today?

This is a tough question to answer. Let’s say you are 50/50 on taking risk in the stock market. If that is the case, maybe you stay 50% invested and keep the other 50% safe.

If you want to cut way back on risk, then maybe you are 80% in safe investments and 20% in the stock market.

Before you start that process, it is always good to look back over the past five years and see what type of growth you have had in your accounts. If you have had great growth and you are only down a little bit this year, you might find that it makes sense to just protect everything. This information might help make this decision a little easier.

Most importantly, determine when you are going to need this money. If you are nearing retirement in any type of market, whether good or bad, it is important to be thinking about capital preservation and protecting your future nest egg. If you have a long time ahead of you, then your decision is more of a strategic one that balances risk and reward.

So if you move to safety, when do you know that it is safe to move back into the investments? Join me tomorrow for part II of this series and we will discuss some strategies for getting back into those investments again.

Finally, on Thursday, we will discuss what type of investments that you should consider if you are staying invested.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Monday, February 04, 2008

What You Need To Know If You Are Refinancing A Mortgage

Due to the decrease in mortgage rates, consumers are starting to look at refinancing again. If you are in the market, here are a few things you need to know:

1) Mortgage companies are just as aggressive today as they were years ago

Some of these aggressive mortgage companies are saying anything to get you into the door. Unfortunately, the real details are not as advertized and most of the time consumers don’t catch it. Be careful doing business with the aggressive mortgage lenders.

2) It might not make sense for you to refinance

On the surface, it might look like it makes sense to refinance. If you dig deep, add in all the fees, and run the numbers, refinancing might not be prudent. Unfortunately, if you are with an aggressive salesperson, you will never be told that it is not a good idea.

3) Understand the fees that you are paying

I am seeing cases where mortgage companies are loading up these loans with fees. Be careful and understand the fees that you are paying.

4) There are no good deals

This is a big one. You can shop rates all day long and probably not come up with much of a difference. ALL mortgage companies are working with the same markets. If a mortgage company is giving you a special deal, you are paying for it or will pay for it in the end.

5) The ability to refinance is based on good credit scores and at least 5 to 10% equity

A good credit score and equity in your home is extremely important today. The lending standards have become very restrictive.

6) Companies are still aggressively marketing the low payment through the use of adjustable rate interest only mortgages

Only in certain situations, do these make sense. In most cases, they do not. Don’t let an aggressive mortgage salesperson sell you on the low payment.

Bottom-line – The mortgage industry is hurting. This type of environment is ripe for the unscrupulous, desperate salespeople to do whatever it takes to close a deal. It is more important than ever before to know all of the details and information before signing on the dotted line. Don’t get me wrong. There are some excellent mortgage people that are ethical and take care of their clients. Unfortunately, they represent a small percentage. This is why you have to be careful.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Friday, February 01, 2008

Tell the Senate that the Economic Stimulus Package Must Contain Relief for Homeowners

I wanted to share this information from our mortgage consultant Alice White. We have been very blessed to have her as a resource for Prudent Money. She sent this and we need to take some action. This would be a good thing for the mortgage markets.

The much needed and welcome economic stimulus package is now in the hands of the U.S. Senate. But the Senate must include new loan limits on FHA and Fannie Mae and Freddie Mac loans. America's housing market needs this help.

NAR wants a stimulus package that will be good for America’s home-owners now and for future homeowners to come.

Take action and make your position known. Tell Senators Cornyn and Hutchison that these new loan limits must be included in the economic package.

Take Action!

Send this sample letter to Senators Cornyn and Hutchison:

Subject: Support Inclusion of Housing in the Economic Stimulus Package

Dear [decision maker name inserted here],

As a constituent and a REALTOR®, I want to stress how important it is for the Senate to include increases for the FHA and GSE loan limits in the Senate’s economic stimulus package. These provisions will create safe and affordable mortgage options for our state’s homeowners and provide much needed stability for our local economies.

The critical role that Fannie Mae and Freddie Mac (GSEs) play in providing liquidity to the mortgage market has never been more evident than it is today. The national subprime meltdown has had a dramatic impact on both the cost and availability of mortgages in my market. Since August 2007, the interest rates for jumbo borrowers have been more than 1 percentage point higher than conforming loans, which can cost homeowners up to $400 month in higher interest payments.

Raising the GSEs’ conforming loan limit will provide immediate relief to borrowers and alleviate downward pressure on our already fragile housing markets. According to the National Association of REALTORS®, increasing the GSE loan limit will result in more than 300,000 additional home sales and strengthen current home prices by 2 to 3 percent.

I also believe that increasing the FHA loan limits is critical to helping bolster our fragile housing market. Current law restricts FHA loans to levels well below the median home price in many areas of the country and caps loans in high costs states at $363,790. These limits are preventing many homebuyers from using FHA to purchase or refinance their loan. The proposed provision will increase FHA loan limits nationwide by raising the floor to $271,050 and the limit to 125% of local median home prices. These increases will help an additional 138,000 Americans purchase and 200,000 families refinance their homes safely and affordably.

I hope I can count on you to support including increases for the FHA and GSE loan limits in the Senate’s economic stimulus package. Our national housing and mortgage finance markets need stability and an immediate infusion of liquidity. Both of these provisions are necessary if our nation’s families, housing markets and economy are to move beyond the crisis they now face.

Sincerely,

Alice Hinckley

Take Action!