Monday, March 31, 2008

Time, Not Interference, Corrects the Problems

For the third or fourth time (I’ve lost count), the Bush Administration is announcing another “solution” to the current credit crisis. This is another prime example of why politicians remain virtually useless. They are reactionary versus proactive. This morning, Treasury Secretary Hank Paulson is set to announce the biggest set of reforms and regulation since the Great Depression.

Paulson stated in his remarks, “"I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

What a priceless statement. A regulatory structure is put in place for the sole purpose of preventing abuse in the system. If the politicians were paying attention instead of conveniently ignoring advertized teaser rates, no documentation loans, adjustable rate mortgages, and the mortgage industry giving consumers loans without money down, we wouldn’t have this problem.

However, this is the problem. The politicians don’t make the tough decisions when we need them. They make the popular decisions that serve the masses (and their own political agendas) on a short-term basis.

In 2001, in order to prop up the economy following 9/11, Bush aggressively cut taxes during a time we couldn’t afford to do so. The Federal Reserve Board aggressively reduced interest rates that fueled a housing bubble. As a result, we had six years of debt-induced economic growth.

Instead in 2001, the Bush administration should have allowed the excesses from the 90’s to work themselves out through the system. Yes, it would have been tough. However, not as tough as a situation we are about to face.

Now, once again, you have the Bush Administration stepping in and trying to bail out every individual who has made an irresponsible decision. People should pay their dues, markets should be allowed to function on their own, and time should be the solution to the problem.

The time to act was years ago. Politicians should have put a stop to predatory lending and stopped the abuse in the mortgage industry. The politicians should have worked to put laws together that would protect consumers from themselves. Unfortunately for all of us, that solution wasn’t politically convenient. For the politicians, it is much more convenient for consumers to spend at all costs. If that means getting into debt over their heads, then that is what needs to happen.

Have you ever really heard a politician encourage people to save? Of course not! That would be the best thing for the average American.

I doubt that anything the politicians put on the table is going to matter anyway. First, it will go through endless months of political debate. Second, there is really very little that they can do. Bailing out America (even though they would like you to think differently) is not viable option. Finally, this is a deflationary debt contraction we are experiencing. Time is our only option.

If the politicians figure out some type of bail-out and successfully interfere, the problem will just be pushed out further into the future. I don’t think anyone wants to make this problem any bigger.

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

Friday, March 28, 2008

Paying your Taxes with your Credit Card for Membership Rewards – A $ 1,045 IPOD

American Express wants you to use your American Express credit card to pay any remaining tax balance owed to the IRS. Why does AMEX say it is beneficial? Use your card and you get membership rewards. You have to pay those taxes anyway. You might as well get a side benefit in the way of membership rewards.

For every dollar you charge in taxes, you will receive 1 membership reward point. With membership rewards points, you can travel, eat out, go to shows, buy that gadget you always wanted, etc…..

That is a pretty tempting offer. I don’t know anyone who doesn’t like membership rewards. I use them all the time as a means of buying airline tickets. It makes a lot of sense.

Oops, I forgot to tell you about the little catch. There is this small 2.49% convenience charge (a convenient way for them to make excessive money) that goes along with the credit card transaction. For example, for every $10,000 you place on the AMEX card, you will pay $249.

So, let’s say you wanted to buy a brand new classic 80 GB IPOD. In the AMEX membership rewards program, you would need 42,000 points. So, in order to get that IPOD, I just pay my $ 42,000 tax bill using my AMEX card. By doing so, that would give me the 42,000 points that I need. This way I can pay my taxes and get my IPOD at the same time.

The convenience fee is 2.49% or $ 1,045.80. Basically, you paid $1,045.80 for an IPOD that you can get at Circuit City on sale for $237.49. It must be great to be in the credit card business. Doesn’t it bother you that a credit card company would market an idea as a benefit when in reality it is a huge waste of money?

Further, I can understand that some people might have to pay their taxes on a credit card because they don’t have the money at the time. In a tight situation, you can justify the fee. However, AMEX is suggesting that you use a card that you are forced to pay off at the end of the month just for the convenience of paying your taxes online and a bunch of membership reward points!

If you need to put taxes on a credit card, then that is one thing. If you want the convenience of using a credit card, you can use your debit card to pay your taxes. You go to www.officialpayment.com and pay $2.95.

Irresponsible marketing at its best – In the past, AMEX was above that type of marketing. I guess things change.

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

Thursday, March 27, 2008

A 42 Million Dollar Announcement - Your Tax Dollars Hard at Work

So what is a few million between friends? Well a few million must not mean much to the Federal Government because our politicians instructed the IRS to send out notices to tell you, the taxpayer, that you are about to receive a rebate check. Yes, the check from the Federal Government is nearly in the mail. I would suspect that most people know about the rebate check that the Federal Government is sending out.

So why is necessary to send out notices to everyone in the free world and spend 42 million dollars? Yes, we have over 9.4 trillion dollars of debt in this country and the government wants to spend 42 million to just let you know the check is going to be in the mail. I guess we don’t have to wonder how the country got into this mess in the first place.

Well the story even gets better. This is going to cost the government $117 billion to fund these rebate checks. Where do you think that the government gets that money? They do it the good old American way. They borrow the amount and add to our national debt.

Now think about this for a minute. First, the Bush Administration wants to make sure that you know they are thinking of you by making sure that you know you are getting a check. Second, the Bush Administration is so desperate to pump up the economy that they would borrow and spend over 117 billion to do it. Finally, the Bush administration is in hopes that you take that rebate check and spend it. The better option is that you will buy something that costs much more than the rebate check and put the balance of the purchase on plastic. You have to know the retail marketing machine will be in overdrive trying to get you to spend that money and more.

Well this is no surprise that Washington is financially irresponsible with our tax payer dollars. Incidentally, it will be your kids and my kids that end up getting stuck with this tab. It is the next generation that will be picking up the bill.

You do have a chance here to do something prudent with that rebate check. So, what are some of your options?

1) Tithe on that money – that is a given
2) Pay off debt – that should definitely be on the agenda
3) Fund your emergency account – this is so important.
4) If you are out of debt and have an emergency account, why not give it away to a ministry that really needs it?

This is your chance to be prudent over an IOU from the Government. Just because they want you to be irresponsible with the money doesn’t mean that you should be irresponsible. Make your decision count with this rebate check.

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

Wednesday, March 26, 2008

Are Leasing and Smart Buy Programs a Good Deal?

Car dealers thrive on advertising the low payment. They focus on two different types of programs. First, there is the smart buy. Second is the lease arrangement. This is how a dealer can get you to the lowest monthly payment on a vehicle. They will tell you if you buy and sell cars a lot this is a much better deal.

Smart Buys

The whole idea is to get the payment down low for a period of time. Then at the end of that period there is either a trade in value for the car or there is a value at which you could purchase the vehicle. You can also walk away if you chose.

So let’s take a look at a smart buy example.

$ 21,795 sales price
$ 5,500 down
$ 279 a month for 48 months
12,000 miles a year limit

So, what if you took my advice and got pre-approved through Pentagon Credit Union? Let’s look at this deal in two ways, focusing on keeping the payment low. I am not advocating the low payment. I am just showing you what you can do on your own.

(1) $ 21,795 sales price
Nothing down
$ 350 a month for 72 months
$ 7,098 owed at the end of 48 months – should have equity in the car
No excessive wear penalties, etc.

(2) $ 21,795 sales price
$ 5,500 down
$ 262.35 a month for 72 months - should have equity in the car

Now let’s say that you chose option 2 and financed it on your own. If you were to pay $279 instead of $262.35 a month, you would have had the same low lease payment. However, the balance at the end of the 48th month would be $5,079. Do you think that you could sell the car for some equity at that point?

Now they also add to the equation that you would get a guaranteed trade-in value. However, that has a higher probability to not be a good deal because you lose all bargaining power. The reply to any attempts to negotiate could be – “We cannot give you that trade-in amount unless you buy this car at full MSRP.” That would not be a good deal.

In addition, you are limited to 12,000 miles a year. Beyond that limit, you will pay more. You also have the possibility of being docked additional money for excessive wear and tear.

Leasing

It is tough to find a lease that I can analyze. In looking through the Dallas Morning News, all I could find were the monthly payments. They never tell the value of the car. For the prudent buyer, that would be important information to know. So, that is left out of the marketing material.

I did find all of the information on a Porsche Cayman online. Here is the deal:

$51,390
$4,170 down
$650 a month for 36 months
10,000 miles a year limit
Penalties for excessive wear and tear

You could take out a Pentagon Federal Credit Union note at 4.99% for 72 months (remember this is about longer term notes to keep the note down). You would put down the same amount of money and finance the rest.

The payment would be $110 more a month with a balance at the end of year 3 of $25,370.27. A 3 year old Porsche with less than 30,000 miles should have a value much more than $25,370.27.

By not leasing and going with conventional financing, you paid an additional $3,960 over three years. If you were able to sell that car for at least $ 25,370.27 plus the $3,960 at the end of the three years, the lease deal made no sense. A three year old low mileage Porsche would probably command at least in the middle $30,000 area. You would definitely come out ahead.

CONCLUSION:

A marketing strategy that focuses you on the low payment is hardly a good deal. Auto dealerships are not out there to do you any favors. They are out there to sell cars. Their job is made easier by the fact that most people don’t research ahead of time.

Their smart buys and leases are determined by an end value and an interest rate. The key is to get the lowest rate of interest. You will need to do that on your own before you go shopping.

Let me also say that I am not advocating you take out 72 month loans. I am simply showing you how the deal works.

Finally, I am not trying to imply that auto dealerships are evil. They are in business to sell cars and help you fulfill that desire. If is up to you to know whether something is a good deal or not.

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

Tuesday, March 25, 2008

Buying a Car the Right Way

The low monthly payments and the big rebates are out in force again. Dealerships are financing at low rates and/or giving out 2,000 to 5,000 rebates to entice you to come in and buy a new car. Remember, their intention is to not actually give you something for free without getting something on the back-end.

Let’s review my top car buying tips:

(1) Compare the benefits of the rebate versus the low interest rate

Dealerships will entice you with either a rock bottom low interest rate or a big fat rebate on the front-end. It is never their intention to give you both (unless they can figure out another way to make up their “gift” to you.) Evaluating the two is real easy. If you didn’t follow my most important advice (see tip 2) and get pre-qualified before going into the dealership, you will depend on the finance department to arrange for a loan.

Compare the total cost of the car after paying it off with the normal interest rate plus the rebate versus the low interest rate and no rebate. That will tell you which one is the better deal.

(2) Get pre-qualified for financing before going to the dealership

To me, this is the most important car buying tip. It has been my experience that you don’t get the best interest rate at the dealership. There are too many people making money off of your interest rate. Therefore the rate is higher.

My greatest loan source is the Pentagon Federal Credit Union (http://www.penfed.org/). You can get 4.99% up to 72 months on a new and used car loan (up to 60 months on used car). Now take that rate into the dealership and the rebate. That could be an awesome deal.

(3) Look for a new car that is the prior year

This is one of the greatest ways to get a good deal. If you were looking today for a car, look for an ‘07 instead of an ‘08. If a car dealer still has an ‘07 on their lot, they are probably very motivated to get that car sold. Better yet, if the model changed in any way in ‘08, that ‘07 becomes an even better deal.

(4) Look for a demo

Demos are one of the best buys you can get. The dealership takes the depreciation hit because of the miles. Yes, you are buying a new car with some miles. However, it is that initial depreciation hit that costs you so much money. Plus, dealerships can get pretty motivated if they have a demo sitting on the lot that is not selling.

(5) Research ahead of time

If you are taking my advice in #4, then go to http://www.autotrader.com/ and find comparable cars that you want with low miles. This will tell you how the market is valuing the car and give you a baseline as to what is an acceptable deal.

Buying a car the wrong way can be a huge mistake. Make sure you prepare well before you start the process.

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

Monday, March 24, 2008

Advice Needs to be Responsible

I have a lot of respect for CNBC anchor woman Maria Bartiromo. I started watching her when she first started with CNBC well over 10 years ago. She has been a huge success in a business, especially back then was considered a “man’s world.” I have enjoyed seeing her succeed.

Right now there is a lot of advice given to the average investor when it comes to investing money in difficult times. What concerns me is that most advice is given by the industry and is really not accurate advice.

Maria was being interviewed by Tim Russert on Meet the Press. While getting ready for church, I happened to have the sound turned up on the television.

They were talking about the credit crunch and everything this country faces. Tim Russert looked at her and asked, “An investor with their portfolio today, what should they be doing?”

I was a little surprised at the response. I feel like a journalist in her position should have a better answer. First, she said that anyone who has money in a bank will be fine. Your money is fine because it is insured by the FDIC. Well, that isn’t entirely accurate. Accounts are only FDIC insured up to $100,000.

Second, she talked about that investors should always assess the risk that they are taking. Then she started discussing the importance of diversification. My initial thoughts were that she was really going to deliver some sound information for listeners to consider. Then the wheels fell off the bus.

She stated that she thinks that investors should invest in “three buckets.” Keep in mind that this example was further explaining diversification.

The first bucket is a simple savings account. You should have money set back for a rainy day. Second, you should have money invested in a 401(k) plan. Third, you should have money invested in stocks because stocks will outperform all asset classes in the long-term.

Here is the problem – the industry keeps distorting the important definition of diversification. Diversification is THE KEY to managing risk. Her definition of diversification is investing in a 401(k) plan and then investing in stocks. So the average investor would listen to that and think…..Well, I have a savings account. I have stocks. I have a 401(k) plan. I must be OK. Those three have nothing to do with diversification.

The most important concept that I can relay to you is diversification. Most investment strategies are far from diversification and invested way too much in stocks. If you have not done so, please read my report on diversification.

Oh and incidentally, stocks have not outperformed ALL asset classes over the long-term. Of course she was suggesting that long-term was 10 years or more.

The Citigroup Corporate Bond Index over the last 10 years has earned 7% while the Dow Jones has earned a 4.81% average. Over the last 79 years, the Dow Jones Industrial Average earned 4.94% and the Citigroup Corporate Bond Index earned an annual average of 5.88%.

Remember, ALWAYS is not a good word to count on in the wonderful world of investments.

Copyright © 2008 Prudent Money and Bob Brooks.

Thursday, March 20, 2008

Happy Easter

Due to the holiday, the next blog will be posted on Monday, March 24th. Have a great Easter weekend!

Tuesday, March 18, 2008

Stewardship: God’s Economic Plan

From guest blogger Ashley Hodge. Please visit his website at http://www.stewardshipmandate.com/


These are difficult economic times. The economy is either in recession or likely to be in recession. There are some significant strains on the economy to work out - housing; credit; weak dollar; high commodity prices. But some things never change. God has His ways. His wisdom works in any economic environment.

What are some keys from God’s Word that help us focus our attention on Him and the plans that He has for us during economic uncertainty?

I have 3 keys from the Bible that never change. They work in times of recession and economic calamity. They work in times of great prosperity. If you practice them, you will have peace. If you neglect them, you will invite stress.

1. Simplify

Ecclesiastes 7:29 tells us that God has made us simple, yet we seek out our own complexities. The Scriptures encourage us to store our treasures in Heaven not earth- where moths, thieves and rust cannot destroy them (Matthew 6:20). We are told to pursue godly character and not riches - I Timothy 6:6-20. If money comes as a byproduct of pursuing godliness, so be it. But our focus should never be possessions.

He who dies with the most toys is not a winner in God’s economy. We are encouraged to travel light and to use things for our enjoyment and God’s purposes. But we are never to worship things by spending our time, money and energy on accumulating unneeded stuff. This is why it is easy for the Christian who shares a biblical worldview to scale down quickly in times of economic downturn.

2. Work Hard

Jesus declares in John 9:4, “We must work the works of Him who sent Me while it is day; night is coming, when no one can work.” Retirement is not a biblical concept. God gives each of us a unique gift set. Our job is to use, hone and refine our unique gifts towards work that is beneficial to mankind. If we are blessed enough to be in a position where working for pay is optional, we should still seek productivity.

I was watching an old Super Friends episode with my 3-year old son. These episodes required the combined talents of Superman, Aquaman, Batman, Robin, Wonder Woman and the Wonder Twins to thwart some evil force’s attempt to destroy the world. When faced with one dilemma Superman said, “Our motto is to always choose the course of action that produces the greatest good to the greatest amount of people.”

This is a good motto to live our lives by. Our time of permanent rest is not here. We have work to do. We want to burn out bright. As long as our minds and bodies are active, we should be engaged in useful, productive activities. This is a recession proof philosophy. Proverbs 10:3, “The Lord will not let the righteous go hungry.”

3. Be Hopeful

We should seek to be biblical progressives. What do I mean by that? Some Christians want to be thrown back to the good ol’ days before all the modern problems complicated our lives. The Amish are an example. They shun electricity, computers, washing machines, etc… because they believe in a return to the Garden of Eden before mankind ruined the earth.

But the problem is not modernization. The problem is sin. Computers are an invention that can be used to destroy lives by leading to pornography or enhance lives by allowing us to work more effectively any place, any time. When we waste our time or resources because of modernization, it is a problem. But the biblical story moves from an undeveloped pristine garden - Genesis - to a developed, complex city of God - Revelation.

God has called us into a stewardship relationship with the earth and all of its resources. We are given a mandate to be fruitful and multiply the resources that God brings our way - Genesis 1:28. This should give us great hope. Heaven will be a period of great mental and physical activity and unlimited prosperity.

But we won’t get tired like we do now. In the meantime, the story of humankind is one of progress and ingenuity as people fulfill God’s stewardship mandate. God will sort out the wasteful from the useful at the end of time. We should do this in our lives as well and spend our time on useful pursuits.

Economic cycles come and go. There are times of scarcity and times of plenty. But we can have peace if we follow God’s ways: live simple; work hard and be hopeful. We know how it all ends. Let’s make sure others can see Christ - our hope of glory - in the way we live.

Ashley Hodge, CFP®

Monday, March 17, 2008

Dissecting Hillary Clinton’s Press Release (Political Spin)

I get these at least every day. They actually provide some humor in the middle of the day. It is just amazing what a politician will say. Let’s take a look:

FROM THE PRESS RELEASE:

For a year now, I have been speaking out on the need to address our nation’s housing crisis. (What took you so long? This problem has been going on a lot longer. Oh and what were you doing to help prevent this problem in the first place?)

In March 2007, I first called for a “foreclosure timeout” that would bring together servicers, lenders and government actors to help keep families in their homes. In August 2007, I called for increased regulations to protect borrowers and rein in rampant mortgage industry abuses. (Nice thought - a little late. Americans needed protection from the mortgage industry about 6 years ago - I do hope that you and your colleagues enjoyed the nice artificial growth created by the real estate boom and easy credit.)

In December 2007, I proposed a framework to keep families in their homes with a moratorium on foreclosures for 90 days and a voluntary freeze of at least 5 years on adjustable rate subprime mortgage rates. (With all due respect Senator, it just doesn’t work like that. If it were that easy, President Bush would have done that a long time ago and we wouldn’t have that problem. Being an attorney, you should know the huge ramifications that would be had if interest rates were frozen for 5 years – I will give you Kudos for the great political sound bite.)

And in early January of this year, I called for $30 billion in immediate assistance to help states and cities mitigate the foreclosure crisis. (Senator Clinton, if you had $10,000 in debt, would a gift of $1 from the federal government really help? Although $30 billion is a big number, it wouldn’t put a dent in the problem.)

While I was heartened today to see the Administration acknowledge the need for greater federal oversight of the mortgage industry, this news comes seven months and 1.6 million foreclosure filings after I first called for similar steps. (see above comments – what took you so long?)

And while the Bush Administration has belatedly acknowledged that both a foreclosure moratorium and an extended rate freeze are important components of an eventual solution, their approach to-date has been far too narrow to address the scope of the crisis. (That is because President Bush has to play politics as well. He knows that it is important to say they are important components. He also knows that he can’t use them.)

That’s why today, in addition to my proposals for a voluntary moratorium and rate freeze, I am supporting a plan to help millions of families restructure their mortgages on affordable, sustainable terms. I am co-sponsoring legislation with Senator Dodd to expand the Federal Housing Administration’s (FHA) capacity to guarantee responsible, restructured mortgages. This legislation will give lenders new incentives to work with homeowners who have seen the value of their homes fall below the principal on their loans, and put them into more affordable, secure long-term mortgages.

This approach is not a bailout. (Of course not, nor is that program that freezes interest rates - did I just type that out loud?) It is a sensible way for all actors (hey another word for politicians) – lenders, investors, servicers and borrowers – to share responsibility, keep families in their homes and stabilize our communities and our economy.

I first championed FHA reform over a year ago, and offered legislation to help modernize the FHA infrastructure to make the investments in personnel and information technology to help meet market demand and offer safe and secure alternatives to subprime mortgages. (Alternatives to sub-prime mortgages? I wonder if she is referring to 30 year fixed rate loans?) Today, I am expanding that approach so that the FHA can help stabilize the current housing crisis. (I didn’t catch the solution. What can they do besides restructure loans to 30 year fixed loans where people still cannot make the payments?)

Finally, I am calling on Congress to immediately establish a $30 billion Emergency Housing Fund for states and localities struggling with mounting foreclosures. While the recently passed stimulus bill provides much-needed support for struggling workers and seniors (Yep, that $ 600 check is going to go a long way. Maybe a family of four can put enough gas in their car to take a trip and stay at a Motel 6.), it fails to address the housing crisis (You think?), which is at the heart of our economy’s problems. This Emergency Fund would give governors, mayors, and community organizations the resources they need to stem the downward economic spiral that accompanies concentrated foreclosures. (What a relief – I didn’t realize throwing 30 billion dollars is all that you needed to fix the problem.) These resources could be used to buy, rehabilitate and put foreclosed properties back into constructive use (Wow – too bad no one can afford to buy these refurbished homes due to lack of money and the inability to get credit), expand foreclosure prevention and counseling programs (Read: Consumer Credit Counseling-throwing consumers to the wolves), and support community-level efforts to combat blight.

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

Friday, March 14, 2008

Irresponsible (Self-Serving) Advice Given by Advisor

I met with a very dear lady the other day who had just recently retired. Prior to retirement, she sat and down and talked with an Edward D. Jones broker to get advice regarding whether or not she could retire.

She had roughly $348,000 at the time. After looking at the situation and maybe even the commissions that would be made off of the rollover, he tells her that she definitely should retire.

The problem is that she would need an annual withdrawal from that IRA of $27,000. That would require her money to earn at least 7.7% a year just to meet the withdrawal. With inflation hovering between 2 and 3%, she would actually need between 10 and 11% a year just to keep up.

So, based on the horrible (irresponsible) advice, she leaves a company that she has worked for for 41 years. She didn’t necessarily need to retire. She was happy working. It would just be nice if she could retire. So, the broker gives her bad advice, she retires, and he makes a fat commission.

If that is not bad enough, this is how he invested the money:

28% One Stock – Categorized as Aggressive
10% Fixed Income – Through Mutual Funds
62% Stocks – Through Mutual Funds

That is 90% stocks and 10% bonds. From my standpoint, that is very aggressive. Thus far, she has lost roughly $40,000 or 14% in just a few short months.

Now she will have to go get a job to help support her monthly expenses.

There are three things to know about the financial advisor community.

1) Just because a person calls themselves a financial advisor, planner, consultant, doesn’t mean that they are qualified to give advice.
2) Always get more than one opinion.
3) The financial advisor community is working for commissions. After the sale, there really is no incentive to do anything for you unless you have more money to invest. It is a SALES BUSINESS.

Of course, there are exceptions to the rule. You just need to be careful of the ones who just sell product.

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

Wednesday, March 12, 2008

What to Start Your Own Business?

Do you have an idea that you think would be the next great business? Are you already a business owner and you just need some help and assistance getting to the next level? Do you have an invention you would love to get off the ground?

I want to make sure that you know about a resource here in the DFW area. On yesterday’s program, I interviewed Mark Langford, the Director of the North Texas Small Business Development Center – here are a few facts I want to start off with today.

A new business is opened by an SBDC in-depth client every 27 minutes.
A new job is created in the US by a DBDC in-depth client every 6.5 minutes.
$ 100,000 in new sales is generated by SBDC in-depth clients every 5.5 minutes.
$ 100,000 in financing is obtained by SBDC in-depth clients every 14.5 minutes.

Now you know how I feel about “free.” What is the catch? This is a non-profit entity that is funded by the Small Business Association, local community colleges, etc. It is here as a resource.

They will take you through the entire process of going into business for yourself. They even cover the financing end of things.

I did ask Mark about obtaining government grants. Unfortunately, there are websites like this telling you that the Federal Government routinely gives out grants for small business owners. Mark stated that in 15 years of working with clients through the center, he has never seen such a thing. The Federal Government doesn’t just give out money to go start up a restaurant.

The Small Business Development Center also helps people with invention ideas. There are also a lot of companies that will claim to do this for a fee. The center does this for you for free. In addition, they will take an unbiased approach since they do not have any financial interest.

I would encourage you to go check out their website at http://www.ntsbdc.org/.

You can also listen to the entire Prudent Money Interview with Mark by clicking here.

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

Tuesday, March 11, 2008

The Other Side of the Story of Market Timing

Market timing is a misunderstood concept when it comes to investing. The mutual fund industry defines market timing as a process of attempting to perfectly time the tops of markets (before a market declines) and perfectly time the bottom of stock market declines (before the stock market goes up).

In other words, an investor is trying to sell at the perfect time and buy at the perfect time. The mutual fund industry doesn’t want you to time the market. Thus, they came up with a perfect example of why market timing is a disastrous strategy.

The basis of their argument is that if you try to time the market you might miss the best days of the month or year. If you miss those days when the market has big gains, then your overall investment return will really suffer. So they publish these studies.

Barron’s Magazine 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 complement study to the one in Barron’s. They stated that if an investor missed the five best days every calendar year, the $1,000 would have shrunk to $150.

That is pretty convincing. An average investor would look at that statistic and conclude that market timing is a horrible strategy. Why would you want to try and pick when to be in the stock market and when to be out of the stock market? If you just missed a few good days, you might miss the entire opportunity.

I ran my own study. I wanted to know what would happen if you missed the worst months to be in the stock market. So, I took a look at the S&P 500 between January 1950 and December 2007.

If you invested $1,000 January 1950, it would have grown to $613,013 by December 2007.

If you missed the 30 best months, that $1,000 would have turned into $35,404. If you would have just stayed invested and not tried market timing, your $1,000 would have turned into $613,013. Instead, you tried to market time and ended up with only $35,404.

What if you would have missed the 30 worst months between January 1950 and December 2007?

If you missed the 30 worst months, your $1,000 would have turned into $9,509,094.

Which do you think is more important? Being in there for the gains or protecting yourself in the bad markets?

This isn’t about market timing and trying to pick tops and bottoms of the market. This is about protecting your investments when stock market risk gets high. Remember you reduce risk as you reduce the amount of money invested in stocks.

When you experience excessive losses, it just takes so much time to gain back the loss.

Loss..........% Required to Break Even
-10%........ +11%
-20%........ +25%
-30%........ +43%
-40%........ +67%
-50%........ +100%
-60%........ +150%
-70%........ +233%

If you were to lose -40%, it would require a return of 67% just to get back to even again. It would take a long time to achieve that return. This is why risk matters and having a risk strategy is extremely important.

Now obviously neither you nor I are going to be able to look into the future and pick good and bad days in the market. This is just to illustrate the impact of loss on a portfolio. This is primarily directed towards investors who stay heavily invested in stocks. At some point you have to start taking profits and get your portfolio balanced and properly diversified. The problem is that most people are not properly diversified.

If you’re concerned about your investments, you can email me through AskBob.

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

Friday, March 07, 2008

Problems on Wall Street Are Mounting

Credit worries were upfront and center yesterday as stocks took foreclosure news very hard. Today’s problem is the loss of 63,000 jobs. This is what happens in bear markets and I firmly believe that we are in a bear market.

My greatest concern, which I have voiced for a long time now, is how the consumer is going to fare in this mortgage meltdown. The problems this time around go deeper than normal type recessions. In normal type recessions, consumer spending slows down to unemployment. In addition to unemployment problems this time around, we have huge consumer debt problems.

In previous programs, I have pointed out that I believe that we are in the early innings of this foreclosure problem and that maybe the roughest patch is still in front of us.

Yesterday the stock market was greeted with some very sobering news about what is happening to consumers and their mortgages. The Mortgage Bankers Association announced today that foreclosures hit a record high in the fourth quarter.

Now you have to love the chief spokespeople for these associations. Years ago the lead economist for the National Realtors Association was assuring consumers that there was no way we were in a real estate bubble. No one wants to admit that there might be some irresponsibility occurring within their industry.

Well the chief economist for the Mortgage Bankers Association says that these foreclosure problems aren’t a result of adjustable rate mortgages (read: not resulting from the irresponsible loans that the mortgage industry sold to consumers). It was a result of the poor credit condition of the borrower. Yeah right……

The reason people are going into foreclosure is primarily a direct result of these adjustable rate mortgages that should have never been written in the first place.

So, let me go through this with you. I want to keep this very simple. Adjustable rate mortgages (ARMs) are the source of the problem. These ARMs were originally written for the consumer as a low introductory interest rate and payment. At some time in the future, the interest rate and payment “reset.” The payment skyrockets and the consumer can no longer afford to make it, oftentimes resulting in foreclosures.

My concern is that we are now seeing the real damage from these foreclosure problems and we are potentially still in the early innings. The problem is the delayed effect. The original problems with these adjustable rate mortgages started in April of last year. We still have well over a trillion dollars of these adjustable rate mortgages ahead of us set to reset over the next two years. March is the largest month for resets with over 120 billion dollars.

This is why the risk level for this particular recession remains high.

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

Thursday, March 06, 2008

Credit Card Companies Changing Due Dates – What You Need to Know

“A heads up if you haven't seen this yet. Our VISA card moved our bill due date up by a day per month over the last 5 months. It looks like an attempt to make us late. We had to call and get it set back to where it belongs. I think listeners will need to constantly check that. Bet we aren't the only ones that had it happen. They told us something like it "increases our buying power" - an outright lie in my book.” – Prudent Money Listener

Another almost identical situation occurred with a national retailer and the due date on a deferred payment plan. Retailers have been offering all types of no deferred interest payment plans. They set you up to make a minimum payment each month. If you pay off the card during the interest deferment period, then you don’t owe the accumulated interest.

Well, this one retailer changed the due date from the original agreed upon date. In this particular case, the consumer had a 2 year deferral charge. This consumer took the total cost of the item and made the appropriate payment each month so that the total amount due would be paid before the deferral period ends. This past month which was the 16th month of the 24 month deferral period, a bill was received showing all of that deferred interest due. Somehow, the deferral period magically changed from 24 months to 16 months.

The consumer went to the retailer and disputed it. The retailer said it would investigate it and that corporate had to approve having the deferral period extended giving the consumer the ability to pay off the balance without the deferred interest.

So why would the retailer do such a thing when it is the consumer’s word against theirs? The manager replied, “It would be considered store error and that they typically correct it.” That consumer incidentally was my wife. It left me wondering….are they changing those deferral periods hoping that the customer will just pay the money?

Ironically, my wife almost had the whole thing paid off. Her balance was $200 after the payment. However, when the interest was added back, the balance turned into over $500. All I know is that they were real quick to take my word and get the problem resolved.

Due dates – you really have to be careful with your due dates on any type of loan and or credit card. I am convinced that credit card companies count on consumers having problems with due dates. They make billions of dollars on penalties as well as from charging high penalty rates.

So here are a few tips – First, always check the due date each month when you get the bill and make note of it. Send the check to the company at least 10 to 15 days prior to the due date. Most importantly, follow up a day before and make sure that the bill was actually paid. Automatic bill pay from your bank account to the company is the best way to go.

If possible, pay the bill the day you receive it. You can’t go wrong with that system.

If you buy an item on an interest deferred program, have documentation of the deferral date and put it in a file. Watch your statements closely and make sure that due date is not changing.

The credit industry is not looking out for you nor does the phrase “how can I provide you with excellent satisfaction today” mean they are going to take care of you. If you are late, you will pay.

One of the keys to avoiding problems with your finances is staying very organized. If you do not have a system set up, take care of it today.

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

Wednesday, March 05, 2008

What You Need to Know About Credit Inquiries and Renting a Car

Credit scores are extremely important in our society. A good credit score saves you money in the long-run. One of the items that can lower the credit score is an inquiry. Of course, this occurs when a creditor or employer runs a credit check.

There are two types of credit inquiries. There is the soft inquiry. This occurs when you check your own credit file and score. Soft inquiries do not affect your credit score. There are no deductions for points.

What about a hard inquiry? When a company runs a credit check, points will be deducted from the credit score. The amount really depends on how many inquiries have been made and in what time-frame. For instance, consumers can run many inquiries within a 14-day time period and it only counts as 1 inquiry. The credit reporting agencies understand that a person might need to shop rates when buying a house or car. So, the credit reporting agencies allow for that over that 14 day period.

Who can arbitrarily check your credit scores and for what reason? Well the law reads that a company or individual must have a permissible purpose. They have to have a valid business reason for checking your scores. Unfortunately, if you don’t agree with a credit check and want to dispute it to have it removed, the credit reporting agencies typically side with the creditor. Most inquiries have legitimate permissible purposes when it comes to checking credit.

Only in cases of fraud could you have it removed.

Some examples of permissible purpose would be:

- To obtain credit
- Employment purposes – must have consumer permission
- To assess credit risk by a creditor
- Underwriting of insurance
- In connection with a business transaction
- Eligibility for a state license

Here is one that you probably would never think of. If you are renting an automobile with a debit card, the rental car company most often will check your credit to make sure that you are not a credit risk. With a credit card, they know that their risk is covered if you damage the car or keep it an extra day. With a debit card, there is a risk that they will not get their money.

This offers them a way to collect. So, if renting a car, always use a credit card. If you are going to use a debit card, present a credit card in order to prevent them from checking your credit report.

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

Tuesday, March 04, 2008

Does Your Advisor Protect You Against Loss or Just Invest for the Long-Term?

What is your investment advisor’s investment strategy? Unfortunately, for most advisors, the strategy is all the same – just buy and hold for the long-term ….no matter what.

If you called your investment advisor over the last few months, I bet I can guess what type of advice you were given.

“Don’t worry we are long-term investors. Markets will go up and markets will go down – however, they always go back up.”

So, why is that the standard line when the market is going down? Why does it seem that most advisors don’t take an active approach when it comes to guarding against investment loss?

The biggest problem with the financial services industry is that the industry is a one-trick pony. The financial services industry can show you all day how to make money. The industry can talk about performance numbers and average annual returns. However, they don’t have a strategy for protecting your money.

They use the misguided concept of “time” as a strategy. As long as you have time on your side, you can weather the storm. A prudent investment approach consists of strategies that will help you grow money and protect money. What I want to suggest to you today is that protecting money is as important to your overall growth as are the strategies for growing it.

If your investment advisor is willing to allow you to continue to take losses and not offer up a strategy for protecting against loss, then consider if those fees you are paying are really worth it. After all, you can invest your money with a no-load mutual fund company for free and just buy and hold with no strategy for the bad times. Investing for growth can be done by most. The value in a financial advisor comes when they are working to protect your money as well.

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