Last week, I wrote about an email that I received from a mutual fund company. When the stock market is experiencing difficulty, the mutual fund industry is working overtime to make sure that financial advisors know what to say to clients.
I call it the hand-holding process. The mutual fund industry holds the advisor’s hand and the advisor holds the hand of the client, assuring the client that everything will be just fine. The last thing either wants is for the client to sell and get out of the market.
You get the clichés of “we are in it for the long-term,” “you always buy and hold,” “the market always comes back,” “stocks are the greatest long-term investment,” etc.
Well, my weekly email came today and now they have a “client approved” piece that advisors can send out to their clients that illustrates the point that stock prices rise more often than they fall. If you will recall, the whole concept is that since 1896 stocks have had 72 positive years and 39 negative years. The conclusion is that the good outweighs the bad. Of course, if you read my blog, you would see the other side of that statistic.
Let’s take a look at this “hand-holding” piece.
“If they (investors) resist the panic sell, investors have historically been rewarded for their patience as stock prices rallied amid rough economic periods.” They appeal to the investors since the long-term and that history is on their side.
Then they use examples of economic downturns in the summer of 1981 and the downturn between July 1990 and March 1991. In both examples, the market came roaring back.
Of course, the downturn in 1981 was at the tail-end of a 17-year long-term bear market. Stocks were ready to take off. In July 1990, we saw a very mild contraction in the economy with the stock market right in the middle of one of the greatest bull markets on record. So, these are some pretty good cherry-picked examples showing that it didn’t make sense to sell.
Today, we are in the midst of a serious credit crunch that is starting to affect all aspects of our economy. We are also facing a major real estate crisis that is seeing foreclosures skyrocket. We are in what looks like a consumer led recession. These types of recessions can last a lot longer than one can imagine. In other words, risk is very high for stocks. The mutual fund company wants to lull you to sleep with these historical facts, making you think that it makes sense to take risk. Remember, it is best for the industry if you stay put.
It only makes sense to take a lot of risk when there is the probability of a lot of reward.
They end the piece with an illustration showing all of the positive years and the smaller number of negative years. What they don’t tell you in that hand-holding piece is that it takes all of that green to make up for the little bit of red. Don’t let the hand-holding put you to sleep. Know your risk!
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, April 30, 2008
Tuesday, April 29, 2008
What Makes Up a Credit Score?
The credit score was developed in the 1960’s by a company called the Fair Isaac Corporation. The FICO score, as it is commonly referred to, was adopted as the standard for scoring credit. FICO stands for Fair Isaac Corporation. There are other credit scores developed by other companies, but this is the one that most people reference.
Fair Isaac has kept the mathematical formula for the credit score a secret. However, we do have an idea concerning the make-up of the score.
Payment History - Roughly 35% of the score
This is a very important part of your score. This shows your track record for making payments on time, how long you have had credit, and if you have completed your obligations.
Total Debt - Roughly 30% of the score
This looks at your total debt versus the total available debt. This is referred to as credit utilization and is viewed in terms of a ratio. For example, your credit score is going to be significantly lower in the event that all of your credit accounts are borrowed to their maximum limit. For a lender, that represents a higher risk. Preferably you want the ratio of debt to your total credit limit less than 50%.
Credit History - Roughly 15% of the score
This factors into your score the length of time that you have held credit. It is important to keep the oldest accounts open. This shows your “credit experience.” An older, positive credit history is favorable to your credit score.
Recently Added Credit - Roughly 10% of the score
This part of your score represents the number of new accounts opened as well as inquiries for your credit score. A great deal of activity showing multiple accounts opened as well as inquiries will lower your credit score. It is referred to as a “hard” inquiry when a creditor makes an inquiry. When you make an inquiry, it is referred to as a “soft” inquiry. Hard inquiries affect your credit score, whereas soft inquiries do not.
Types of Credit - Roughly 10% of the score
The credit score is calculated based upon the various types of accounts that you have opened. This gets into the area of secured accounts versus unsecured accounts. A car loan is secured by a car. A home loan is secured by the house. If you default on the car, they will repossess the car. If you default on a home note, they will foreclose. As a result, the lender reduces their risk by having access to the car or the house in the event of a default.
An unsecured note would be any debt where the creditor cannot seize an asset upon default of the loan. A credit card account is a good example. Credit cards are issued on the basis of a credit score and good faith. For lenders, this is higher risk. So a higher number of unsecured accounts on your credit report has more of a negative impact. It demonstrates higher risk.
Tomorrow we will take a look at the three different credit scores and how those are handled.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Fair Isaac has kept the mathematical formula for the credit score a secret. However, we do have an idea concerning the make-up of the score.
Payment History - Roughly 35% of the score
This is a very important part of your score. This shows your track record for making payments on time, how long you have had credit, and if you have completed your obligations.
Total Debt - Roughly 30% of the score
This looks at your total debt versus the total available debt. This is referred to as credit utilization and is viewed in terms of a ratio. For example, your credit score is going to be significantly lower in the event that all of your credit accounts are borrowed to their maximum limit. For a lender, that represents a higher risk. Preferably you want the ratio of debt to your total credit limit less than 50%.
Credit History - Roughly 15% of the score
This factors into your score the length of time that you have held credit. It is important to keep the oldest accounts open. This shows your “credit experience.” An older, positive credit history is favorable to your credit score.
Recently Added Credit - Roughly 10% of the score
This part of your score represents the number of new accounts opened as well as inquiries for your credit score. A great deal of activity showing multiple accounts opened as well as inquiries will lower your credit score. It is referred to as a “hard” inquiry when a creditor makes an inquiry. When you make an inquiry, it is referred to as a “soft” inquiry. Hard inquiries affect your credit score, whereas soft inquiries do not.
Types of Credit - Roughly 10% of the score
The credit score is calculated based upon the various types of accounts that you have opened. This gets into the area of secured accounts versus unsecured accounts. A car loan is secured by a car. A home loan is secured by the house. If you default on the car, they will repossess the car. If you default on a home note, they will foreclose. As a result, the lender reduces their risk by having access to the car or the house in the event of a default.
An unsecured note would be any debt where the creditor cannot seize an asset upon default of the loan. A credit card account is a good example. Credit cards are issued on the basis of a credit score and good faith. For lenders, this is higher risk. So a higher number of unsecured accounts on your credit report has more of a negative impact. It demonstrates higher risk.
Tomorrow we will take a look at the three different credit scores and how those are handled.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, April 28, 2008
Candidates’ Proposals to Rescue Homeowners Ridiculous in their Own Ways
“If you elect me as your President, I will just make all of this foreclosure mess go away. I will outlaw foreclosure and let everyone live in their homes for free. Better yet, we will just forgive all of that mortgage debt.”
What is the difference between the campaign promise above (admittedly ridiculous) and the ones that the candidates are promising?
This is a hot campaign topic. High gas prices, recession, etc. are not even a worthy component to this problem. Foreclosures are on the rise and every candidate is hoping to convince you that they are going to fix the problem.
The most ridiculous (besides my own campaign promise mentioned above) is from Senator Clinton.
Here is a look at her proposal (provided by the Dallas Morning News):
· Provide $30 billion for state and local governments to stem foreclosures with counseling, refinancing assistance and purchase of foreclosed properties.
It is estimated that 730,000 homes are already in a short sale or foreclosure situation. With almost 1 trillion estimated loans set to reset in the next year or so, $30 billion is nothing. You can counsel someone all day in a foreclosure. If the credit is bad and there is no equity in the home, the train has left the station and there is nothing anyone can do.
· Ask lenders to freeze interest rates on resetting mortgages for five years and halt foreclosures for 90 days.
Excuse me for a second as I gain my composure from laughing. Clinton needs to fire whoever said that was a good campaign promise. As an attorney, she should know better that you cannot just arbitrarily change a binding contract without enormous repercussions.
· Allow the FHA or another government agency to purchase mortgages and restructure them if the crisis worsens.
You cannot just let the Government pick up the bill for everything.
Barack Obama:
• Provide $10 billion to support victims of mortgage fraud and help homeowners modify loans.
At least Obama knows that this is a ridiculous campaign promise by just throwing a dog the bone with $10 billion.
• Offer a 10 percent universal mortgage credit to homeowners who don't itemize on taxes.
What???
Then there is Senator McCain:
· Expand the Federal Housing Administration to help 200,000 to 400,000 homeowners refinance into viable mortgages.
This is all we need – four more years of Bush politics. Don’t worry, the Government will just pick up the tab. We can just “print” our way out of this problem.
I realize that politics are politics and none of this is too surprising. I just wish that we had politicians that could offer a dose of reality, real solutions, and the appearance that they really do understand the problem.
Is there a fourth choice?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
What is the difference between the campaign promise above (admittedly ridiculous) and the ones that the candidates are promising?
This is a hot campaign topic. High gas prices, recession, etc. are not even a worthy component to this problem. Foreclosures are on the rise and every candidate is hoping to convince you that they are going to fix the problem.
The most ridiculous (besides my own campaign promise mentioned above) is from Senator Clinton.
Here is a look at her proposal (provided by the Dallas Morning News):
· Provide $30 billion for state and local governments to stem foreclosures with counseling, refinancing assistance and purchase of foreclosed properties.
It is estimated that 730,000 homes are already in a short sale or foreclosure situation. With almost 1 trillion estimated loans set to reset in the next year or so, $30 billion is nothing. You can counsel someone all day in a foreclosure. If the credit is bad and there is no equity in the home, the train has left the station and there is nothing anyone can do.
· Ask lenders to freeze interest rates on resetting mortgages for five years and halt foreclosures for 90 days.
Excuse me for a second as I gain my composure from laughing. Clinton needs to fire whoever said that was a good campaign promise. As an attorney, she should know better that you cannot just arbitrarily change a binding contract without enormous repercussions.
· Allow the FHA or another government agency to purchase mortgages and restructure them if the crisis worsens.
You cannot just let the Government pick up the bill for everything.
Barack Obama:
• Provide $10 billion to support victims of mortgage fraud and help homeowners modify loans.
At least Obama knows that this is a ridiculous campaign promise by just throwing a dog the bone with $10 billion.
• Offer a 10 percent universal mortgage credit to homeowners who don't itemize on taxes.
What???
Then there is Senator McCain:
· Expand the Federal Housing Administration to help 200,000 to 400,000 homeowners refinance into viable mortgages.
This is all we need – four more years of Bush politics. Don’t worry, the Government will just pick up the tab. We can just “print” our way out of this problem.
I realize that politics are politics and none of this is too surprising. I just wish that we had politicians that could offer a dose of reality, real solutions, and the appearance that they really do understand the problem.
Is there a fourth choice?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, April 24, 2008
Do Stock Prices Rise More Often Than They Fall?
This was the question posed by a mutual fund company in a recent email to financial advisors. Yes, it is that time where the mutual fund industry bombards advisors with information that they in turn can share with their clients. They send out tons of information to help advisors justify to their clients that buying and holding through a bear market makes sense.
This recent hand-holding email arrived in my inbox yesterday. After reading it, I decided that I wanted to share it with you so that you can understand the difference in what you are being told versus the reality of the situation. So let’s talk about risk today.
First let me set the stage – The mutual fund and financial services industry has one strategy when it comes to investing – you buy and hold for the long-term. The industry feels that this strategy, along with diversification, helps you weather any storms. This is an easy concept to sell and requires no effort amongst advisors in regards to management. It also protects the mutual fund industry from clients removing money from investments in down markets. So, during the difficult times, the industry does everything possible to equip advisors with what they should say.
EMAIL:
Situation: Your clients are jittery about a weak economy and turbulent financial markets.
Solution: Inform investors that we’ve been here before and stocks have a track record of bouncing back.
Discussion: On a calendar basis, the Dow has risen almost twice as often as it has declined. History shows us that stock prices have rallied amid rough economic periods.
There is more than a century of proof that despite periodic downturns in stock prices, equities have been an outstanding long-term investment. Since the Dow Jones Industrial Average’s inception in 1896, it has posted positive returns 72 years vs. 39 years of negative returns. It has produced an average annual return of 7.6%.
So this is the conversation that advisors are to have with their clients:
“Mr. and Mrs. Client, although you have lost a lot of money, everything will be OK. The Dow has had many more positive return years than negative. The good outweighs the bad by almost 2 to 1.”
The problem with that logic is two-fold. First, most people don’t have 100 plus years to stay invested. Thus, I have always thought that was somewhat of a weak argument. Second, they measure risk from the basis of gain and loss only. In reality, risk (which is the focus of the worry) is measured not only as gain or loss but also in terms of time.
Sure, there are more positive years than negative years of performance. There has to be more positive years for a good reason. It takes so many more positive years to make up for the damage done by the negative years.
The bear market of 2000 to 2002 wiped out five years and nine months of investment gain. It then took another seven years just for investors to get back to the amount of money that they had before the bear market even began.
It took four years of losses between 1929 and 1932 to deplete twenty-eight years of gains.
The financial services industry doesn’t address risk in the proper way. They just show you pictures and graphs of a stock market that goes up. That doesn’t ell the entire story.
Risk does matter. It is important to have a strategy other than just buy and hold when things get so risky in the stock market. It isn’t just about loss of value. It is also about loss of time. I would suggest that time is the bigger risk of the two.
You always have to look at risk from the standpoint of the effects of gain and loss and time. If you are in a situation where your current investment strategy could lose the type of money that would wipe away years of progress, then you are taking too much risk.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
This recent hand-holding email arrived in my inbox yesterday. After reading it, I decided that I wanted to share it with you so that you can understand the difference in what you are being told versus the reality of the situation. So let’s talk about risk today.
First let me set the stage – The mutual fund and financial services industry has one strategy when it comes to investing – you buy and hold for the long-term. The industry feels that this strategy, along with diversification, helps you weather any storms. This is an easy concept to sell and requires no effort amongst advisors in regards to management. It also protects the mutual fund industry from clients removing money from investments in down markets. So, during the difficult times, the industry does everything possible to equip advisors with what they should say.
EMAIL:
Situation: Your clients are jittery about a weak economy and turbulent financial markets.
Solution: Inform investors that we’ve been here before and stocks have a track record of bouncing back.
Discussion: On a calendar basis, the Dow has risen almost twice as often as it has declined. History shows us that stock prices have rallied amid rough economic periods.
There is more than a century of proof that despite periodic downturns in stock prices, equities have been an outstanding long-term investment. Since the Dow Jones Industrial Average’s inception in 1896, it has posted positive returns 72 years vs. 39 years of negative returns. It has produced an average annual return of 7.6%.
So this is the conversation that advisors are to have with their clients:
“Mr. and Mrs. Client, although you have lost a lot of money, everything will be OK. The Dow has had many more positive return years than negative. The good outweighs the bad by almost 2 to 1.”
The problem with that logic is two-fold. First, most people don’t have 100 plus years to stay invested. Thus, I have always thought that was somewhat of a weak argument. Second, they measure risk from the basis of gain and loss only. In reality, risk (which is the focus of the worry) is measured not only as gain or loss but also in terms of time.
Sure, there are more positive years than negative years of performance. There has to be more positive years for a good reason. It takes so many more positive years to make up for the damage done by the negative years.
The bear market of 2000 to 2002 wiped out five years and nine months of investment gain. It then took another seven years just for investors to get back to the amount of money that they had before the bear market even began.
It took four years of losses between 1929 and 1932 to deplete twenty-eight years of gains.
The financial services industry doesn’t address risk in the proper way. They just show you pictures and graphs of a stock market that goes up. That doesn’t ell the entire story.
Risk does matter. It is important to have a strategy other than just buy and hold when things get so risky in the stock market. It isn’t just about loss of value. It is also about loss of time. I would suggest that time is the bigger risk of the two.
You always have to look at risk from the standpoint of the effects of gain and loss and time. If you are in a situation where your current investment strategy could lose the type of money that would wipe away years of progress, then you are taking too much risk.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, April 23, 2008
More Bank of America Games
I received these two emails just within the last two days. These emails highlight in several ways how Bank of America is not consumer friendly. In past blogs, I have illustrated numerous times how this bank creates horrible consumer products and then markets them as the next great thing. Now what are they up to?
Email #1:
My husband and I got behind on a Bank of America credit card several years ago. We then set up a payment plan (auto withdraw from our checking account) every month for two years and we made the payments every month on time. However, they said we were late every month and had dinged our credit each and every month for two years. We recently checked my husband’s credit score (not so good) which is how we found out about the mistake, and realized they had put late payments on his credit. We have proof that the payments were made via bank statements. What we need now is a credit dispute letter. Please let us know if you can help us.
Email #2:
From June 2006 to October 2007, I had payments taken electronically taken out of my account to pay off a Bank of America credit card. I paid them $226.50 every two weeks for about a year or more. I received a statement in the mail from a debt collector saying I still owe Bank of America credit card $310.36. I paid off this debt with the other creditor last October. How can I prove that I paid off this debt? I have tried to call the debt collector who represents Bank of America credit card, but they could not find me in their system. How is that even possible? Help me!
Does this really surprise you? If you are doing business with Bank of America, be careful! Nothing surprises me when it comes to these banks. Don’t forget that it is desperate times for these big banks.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, April 22, 2008
The Democrats Attempt to Save Homeowners – Another “Solution”
Yesterday I talked about one aspect of a weak plan from our politicians in Washington to save the homeowner from foreclosure. It was a big benefit for big business and little for the distressed homeowner. Now Representative Barney Frank has his ideas on the table to help the homeowner.
I can sum up this latest attempt to help homeowners. The bottom line is that Congress has to APPEAR that they are solving the problem. Politics are all about appearances. Are they really helping anyone? Well this latest idea (read: political spin) has the three qualities that stand out in most political solutions.
First, it is too little too late. By the time this or any other piece of legislation actually gets passed, the bulk of people in trouble will have already been failed by the current system. Second, the plan has headline grabbing details. Reading the details of this plan leads a person to think that Washington is really helping people. Third, it is a plan that helps a very small percentage of people.
The plan is set up for the FHA to, in a sense, buy mortgages from banks from struggling homeowners, readjust their payment, and then the government would share in any gain that the homeowner receives after the sale of the home.
Of course, the bank has to agree to take a loss on the mortgage and forgive some of the debt. It is not clear as of yet whether the homeowner would take a tax hit on the portion of the loan that was forgiven. As of today, the homeowner would pay federal income taxes on any portion of a loan that is forgiven.
We could walk through the details of the plan. However, it is not necessary. I will just tell you the political headline and then the few pieces of this legislation that assures only a very small percentage might be helped.
In an article written about the newest round of legislation it says,
“Frank's bill would allow a whole new swath of homeowners who are currently too financially strapped to qualify for a government-insured loan to do so. That includes people who are badly behind on their mortgage payments, have poor credit and hefty debt, and those who owe more than their homes are worth.”
This is the best part of the “solution.” They will only re-finance up to 90% of the home value. Let’s see, most of these people who are in trouble borrowed close to 105% of their original home value. You factor in a 20 to 25% decrease in value. You can do the math.
This plan will only help those who actually have equity in their homes. This is the problem. With declining home values and homeowners mortgaged to the capacity, they will not be able to qualify for enough loan to actually cover the mortgage. Thus, this plan will not help those who need it.
Then there is my second favorite part of the article.
“One major task of the board will be to figure out how to compensate those who hold secondary claims on a home, who would walk away with no more than 1 percent of the home's value.”
You think that might be a problem? It is a huge understatement. There are thousands of investors who have invested in these horrible loans. Now they have to take a hit as Congress attempts to bail out a problem they could have prevented in the first place if they were actually doing their jobs as the governing body that is elected to protect Americans from these types of practices.
Just think of the political sound bites and photo opportunity for politicians when Congress finally comes up with their “homeowner rescue” plan.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
I can sum up this latest attempt to help homeowners. The bottom line is that Congress has to APPEAR that they are solving the problem. Politics are all about appearances. Are they really helping anyone? Well this latest idea (read: political spin) has the three qualities that stand out in most political solutions.
First, it is too little too late. By the time this or any other piece of legislation actually gets passed, the bulk of people in trouble will have already been failed by the current system. Second, the plan has headline grabbing details. Reading the details of this plan leads a person to think that Washington is really helping people. Third, it is a plan that helps a very small percentage of people.
The plan is set up for the FHA to, in a sense, buy mortgages from banks from struggling homeowners, readjust their payment, and then the government would share in any gain that the homeowner receives after the sale of the home.
Of course, the bank has to agree to take a loss on the mortgage and forgive some of the debt. It is not clear as of yet whether the homeowner would take a tax hit on the portion of the loan that was forgiven. As of today, the homeowner would pay federal income taxes on any portion of a loan that is forgiven.
We could walk through the details of the plan. However, it is not necessary. I will just tell you the political headline and then the few pieces of this legislation that assures only a very small percentage might be helped.
In an article written about the newest round of legislation it says,
“Frank's bill would allow a whole new swath of homeowners who are currently too financially strapped to qualify for a government-insured loan to do so. That includes people who are badly behind on their mortgage payments, have poor credit and hefty debt, and those who owe more than their homes are worth.”
This is the best part of the “solution.” They will only re-finance up to 90% of the home value. Let’s see, most of these people who are in trouble borrowed close to 105% of their original home value. You factor in a 20 to 25% decrease in value. You can do the math.
This plan will only help those who actually have equity in their homes. This is the problem. With declining home values and homeowners mortgaged to the capacity, they will not be able to qualify for enough loan to actually cover the mortgage. Thus, this plan will not help those who need it.
Then there is my second favorite part of the article.
“One major task of the board will be to figure out how to compensate those who hold secondary claims on a home, who would walk away with no more than 1 percent of the home's value.”
You think that might be a problem? It is a huge understatement. There are thousands of investors who have invested in these horrible loans. Now they have to take a hit as Congress attempts to bail out a problem they could have prevented in the first place if they were actually doing their jobs as the governing body that is elected to protect Americans from these types of practices.
Just think of the political sound bites and photo opportunity for politicians when Congress finally comes up with their “homeowner rescue” plan.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, April 21, 2008
Foreclosure Prevention Act is Helping Everyone but the Homeowners
As I have written plenty of times in this blog, the politicians, still self-serving, are not actually going to do much for the homeowner in this foreclosure crisis as promised.
First of all, they can’t do anything. They cannot essentially bail-out America. However, they can look like they are doing something and at the same time help big business (read: campaign supporters). Politicians never cease to amaze me.
Let’s look at this latest bill entitled the Foreclosure Prevention Act (that you and I will help pay for).
Homebuilders, Ford and General Motors, airlines and manufacturers, and alternative energy producers will get billions of dollars in tax breaks if this bill becomes law.
They are basically asking tax payers to pay for the bad decisions made by corporate America all in the name of foreclosure relief. As a small business owner, I wish that I had the luxury of dialing up my friends in Washington every time I made a decision that caused me to lose money. Let these industries suffer the consequences of bad decisions like the rest of us are forced to do.
Here is my favorite part of it – the tax breaks are expected to cost 25 billion dollars through 2010. Don’t you worry one bit – economic growth (which any economic growth that we do get in the next few years will for the most part be manufactured by the Government) will cut that bill down to 6 billion. I guess that is intended to make taxpayers feel better. This is from the same set of politicians who spend 42 million to let you know that your tax rebate is coming so you can go out and buy that plasma TV in order to help produce economic growth.
Ok, so they have to be doing something for homeowners. Right? Don’t you worry – they are doing something about the foreclosure problem. They are giving $7,000 as a tax credit to anyone who buys a foreclosed home. They are also allocating $4 billion to communities to buy and fix up foreclosed homes.
I think that the foreclosure problem, past and present, is a little bigger than $4 billion. It is also great that they are giving the people who do have good credit some money in tax breaks to buy foreclosed homes. It seems to me that all this is doing is helping the banks who hold all of these foreclosed homes get this mess off of their books. They originated the bad loans and they should live with it.
What about Joe and Sue Smith who are about to lose their home? Oh I forgot – your check is in the mail so that you can buy that big screen plasma TV….oops – I forgot, you are about to lose your home.
Way to go Washington – I hope that the elections turn out OK for you. By the way, you might change the title from the Foreclosure Prevention Act to the Further Bank Bailout Bill and a little help for our friend in the name of Foreclosures Act.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
First of all, they can’t do anything. They cannot essentially bail-out America. However, they can look like they are doing something and at the same time help big business (read: campaign supporters). Politicians never cease to amaze me.
Let’s look at this latest bill entitled the Foreclosure Prevention Act (that you and I will help pay for).
Homebuilders, Ford and General Motors, airlines and manufacturers, and alternative energy producers will get billions of dollars in tax breaks if this bill becomes law.
They are basically asking tax payers to pay for the bad decisions made by corporate America all in the name of foreclosure relief. As a small business owner, I wish that I had the luxury of dialing up my friends in Washington every time I made a decision that caused me to lose money. Let these industries suffer the consequences of bad decisions like the rest of us are forced to do.
Here is my favorite part of it – the tax breaks are expected to cost 25 billion dollars through 2010. Don’t you worry one bit – economic growth (which any economic growth that we do get in the next few years will for the most part be manufactured by the Government) will cut that bill down to 6 billion. I guess that is intended to make taxpayers feel better. This is from the same set of politicians who spend 42 million to let you know that your tax rebate is coming so you can go out and buy that plasma TV in order to help produce economic growth.
Ok, so they have to be doing something for homeowners. Right? Don’t you worry – they are doing something about the foreclosure problem. They are giving $7,000 as a tax credit to anyone who buys a foreclosed home. They are also allocating $4 billion to communities to buy and fix up foreclosed homes.
I think that the foreclosure problem, past and present, is a little bigger than $4 billion. It is also great that they are giving the people who do have good credit some money in tax breaks to buy foreclosed homes. It seems to me that all this is doing is helping the banks who hold all of these foreclosed homes get this mess off of their books. They originated the bad loans and they should live with it.
What about Joe and Sue Smith who are about to lose their home? Oh I forgot – your check is in the mail so that you can buy that big screen plasma TV….oops – I forgot, you are about to lose your home.
Way to go Washington – I hope that the elections turn out OK for you. By the way, you might change the title from the Foreclosure Prevention Act to the Further Bank Bailout Bill and a little help for our friend in the name of Foreclosures Act.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, April 18, 2008
Financial Armageddon - Revised and Updated Edition
I interviewed Michael Panzner last year on his book “Financial Armageddon.” He basically spelled out everything that was about to happen to our credit markets, stock market, real estate markets, and economy. He made some bold predictions that are unfortunately coming true today.
Fast forward to today. Michael recently released his updated and revised edition. It is not for the faint of heart. At the same time, it is not a gloom and doom message. It is the message that you are not hearing in the media. It is the opposite side of the story that you hear from the cheerleaders on Wall Street. I interviewed Michael yesterday on Prudent Money. I typically interview guests during the first 15 minutes of the program leaving the time after the break available for questions. The information that he was presenting was compelling so I let him have the entire show.
I am not asking you to agree with what he has to say. I am asking you to listen. This is an extremely important message. Most investors don’t know the other side of the story. Although I have been writing some of the same message for a long time now, I come nowhere close to the amount of clarity and detail he brings to the current credit crisis we face in this country.
I want to encourage you to go to the website www.financialarmageddon.com and check out all of this information and buy this book. It is worth buying. If Michael is correct in his assessment, what would take place will blindside the investor who has not prepared for a potential crisis. Of course, who knows if everything he writes about will happen. I do believe that a good percentage of what he is writing about will occur. Even then, you don’t want that to be a surprise.
To listen to the interview, click here.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Fast forward to today. Michael recently released his updated and revised edition. It is not for the faint of heart. At the same time, it is not a gloom and doom message. It is the message that you are not hearing in the media. It is the opposite side of the story that you hear from the cheerleaders on Wall Street. I interviewed Michael yesterday on Prudent Money. I typically interview guests during the first 15 minutes of the program leaving the time after the break available for questions. The information that he was presenting was compelling so I let him have the entire show.
I am not asking you to agree with what he has to say. I am asking you to listen. This is an extremely important message. Most investors don’t know the other side of the story. Although I have been writing some of the same message for a long time now, I come nowhere close to the amount of clarity and detail he brings to the current credit crisis we face in this country.
I want to encourage you to go to the website www.financialarmageddon.com and check out all of this information and buy this book. It is worth buying. If Michael is correct in his assessment, what would take place will blindside the investor who has not prepared for a potential crisis. Of course, who knows if everything he writes about will happen. I do believe that a good percentage of what he is writing about will occur. Even then, you don’t want that to be a surprise.
To listen to the interview, click here.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, April 17, 2008
Bill Dispute - Persistence Pays Off!!
When there is a problem with a payment, companies are often times reluctant to help. One of the pieces of advice that I always give is to be persistent. It cannot hurt anything and might just get a problem resolved.
I wanted to share this Ask Bob Q&A from a listener. This is a perfect example of being persistent.
The Problem - A letter sent to TXU from a listener
I would like to appeal to TXU to delete the charge-off information reported on my credit report. I do not dispute that the balance owed was my responsibility. However, I am appealing to your graces. I have had excellent credit with TXU in the past. I always pay my debts. When I found out there was a balance due on February 25th, I immediately paid the balance due. I only found out about the debt when my credit union denied me for a signature loan.I am asking again; please delete the derogatory information (charge-off) from my credit report. It is very damaging. I do not deserve to have my credit reports damaged as such for the next seven years. I am aware of the credit reporting laws. Only the creditor who places the derogatory information on the credit reports can write a letter requesting the derogatory information to be deleted. The credit bureaus are not responsible as TXU keeping stating. Per the credit bureaus, they just need you to delete the information.
She goes on to give very detailed facts in her letter to TXU.
The Solution – A telephone call to the Executive Offices of TXU
I called today and spoke with a young lady by the name of Sally (different name). She was very nice and compassionate. She stated she would see what see can do and would call me back. She called me back, but said that her co-workers stated that since TXU was not at fault, then there is nothing TXU can/will do to remedy the situation. I was very nice and asked Sally if I can humbly appeal to her supervisor. She stated that I could and that since she agreed with me, she would plea my case to him. She said she would call me back. Well, she called be back after talking with him. She stated, "We got our money, and she paid it as soon as she found out about the debt, so why can't we help her?" Her boss stated, "Well, if you feel comfortable doing it, do it." Well, Christina called me back with good news and asked me for my fax number. Sally contacted the Credit/Collection Dept. of TXU. TXU faxed a letter to me stating that they are deleting the charge off. Praise God! God is awesome.
Thanks for all you do, Bob. You have been such a blessing. Please share with others whenever they have problems with utility companies to contact the Public Service Commission.
Way to Go TXU for doing the right thing!! Persistence does pay off.
Tuesday, April 15, 2008
A Biblical Look at Debt
There are many people who are faced with the daunting situation of being overloaded with credit card payments, mortgage payments, and car payments. Well, we know the financial downside from walking away from a mortgage. You lose your house. We also know the downside for not making a car payment. You lose your way around. What about the downside to walking away from credit card debt? Since there is nothing held in collateral, is there really a downside?
We can talk in terms of money, obligations, contracts and everything else that could go into that answer. I want to look at the answer to that question from a Biblical perspective.
Let’s first take a look at what the Bible says about debt. There is one verse in particular that I like to turn to that I feel sums it all up.
Proverbs 22:7 says:
Just as the rich rule the poor, so the borrower is servant to the lender.
This verse really illustrates the point that the Bible makes about debt. God wants 100% of us. To put it in context of the verse, it is tough to be a servant to God and be a servant to a lender at the same time. When you are able to handle your debt comfortably without problems, there is no servant relationship. When you have a debt problem, you are a slave to your debt.
God wants us to have the freedom to answer His call and follow His direction. Debt can limit your freedom. Debt can preoccupy your life. Managing debt can create worry. It can force a person to work long hours just to make the payments. Debt can occupy a great deal of our minds.
A great deal of debt limits your ability to freely give of your time and money to those who are in need. Remember, one of our primary responsibilities as a Christian is to serve. Living a debt-filled life will interfere with the freedom to go and do whatever God wants of you. To be the type of servant that God wants requires a lot of freedom that debt ultimately takes away.
So, let’s say you are in a spot where you finally got that message. What do you do now?
1) Ask God to change your life so that you never get in this situation again
2) Commit that you will do everything possible to get out of debt
3) Pray and ask for those answers – It might be that you are forced to work extra hours for a period of a few years. It might be that you need to downsize. Maybe your possessions have become bigger than God in your life.
So, back to the original question, should you just walk away from your credit cards if the obligation has become too big? You have one of two options in that case. First, you could walk away. The problem is that energy and freedom zapping debt problem just became a bigger monster as you deal with debt collectors, bad credit scores, potential lawsuits, etc. Incidentally, walking away will always haunt you. You always owe the debt.
Second, you can do everything possible from getting an extra job to downsizing to cutting back and get out of debt once and for all. Yes, in the short-run, you limit your freedom. If the motivation from doing all of that is to get into a relationship with God where you can give 100%, God will honor those decisions. Plus you are doing the right thing by getting out of debt.
Getting into debt was fun and easy. It is the process of getting out of debt where you grow as an individual and most importantly grow in your relationship with God to levels you never thought possible.
In short, the Bible talks about the dangers of debt and highly discourages its use. At the same time, it does not call debt a sin. Anything to where we put our time, commitment, and attention on that interferes and or limits our relationship with God can become a sin. That is when debt becomes the problem.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
We can talk in terms of money, obligations, contracts and everything else that could go into that answer. I want to look at the answer to that question from a Biblical perspective.
Let’s first take a look at what the Bible says about debt. There is one verse in particular that I like to turn to that I feel sums it all up.
Proverbs 22:7 says:
Just as the rich rule the poor, so the borrower is servant to the lender.
This verse really illustrates the point that the Bible makes about debt. God wants 100% of us. To put it in context of the verse, it is tough to be a servant to God and be a servant to a lender at the same time. When you are able to handle your debt comfortably without problems, there is no servant relationship. When you have a debt problem, you are a slave to your debt.
God wants us to have the freedom to answer His call and follow His direction. Debt can limit your freedom. Debt can preoccupy your life. Managing debt can create worry. It can force a person to work long hours just to make the payments. Debt can occupy a great deal of our minds.
A great deal of debt limits your ability to freely give of your time and money to those who are in need. Remember, one of our primary responsibilities as a Christian is to serve. Living a debt-filled life will interfere with the freedom to go and do whatever God wants of you. To be the type of servant that God wants requires a lot of freedom that debt ultimately takes away.
So, let’s say you are in a spot where you finally got that message. What do you do now?
1) Ask God to change your life so that you never get in this situation again
2) Commit that you will do everything possible to get out of debt
3) Pray and ask for those answers – It might be that you are forced to work extra hours for a period of a few years. It might be that you need to downsize. Maybe your possessions have become bigger than God in your life.
So, back to the original question, should you just walk away from your credit cards if the obligation has become too big? You have one of two options in that case. First, you could walk away. The problem is that energy and freedom zapping debt problem just became a bigger monster as you deal with debt collectors, bad credit scores, potential lawsuits, etc. Incidentally, walking away will always haunt you. You always owe the debt.
Second, you can do everything possible from getting an extra job to downsizing to cutting back and get out of debt once and for all. Yes, in the short-run, you limit your freedom. If the motivation from doing all of that is to get into a relationship with God where you can give 100%, God will honor those decisions. Plus you are doing the right thing by getting out of debt.
Getting into debt was fun and easy. It is the process of getting out of debt where you grow as an individual and most importantly grow in your relationship with God to levels you never thought possible.
In short, the Bible talks about the dangers of debt and highly discourages its use. At the same time, it does not call debt a sin. Anything to where we put our time, commitment, and attention on that interferes and or limits our relationship with God can become a sin. That is when debt becomes the problem.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, April 14, 2008
Come On, Realtors, Show Some Class
Thankfully none of this is going on in the DFW area where realtors have class. However, in other parts of the country, there are real estate firms that love the fact that people are losing their homes.
Foreclosed homes are "the only game in town," says Larry Salas of All-Star Realty Sales in Miami (from Yahoo article). With all due respect Mr. Salas, this isn’t a game. Good people have lost their homes. The Yahoo article goes on to say that Mr. Salas has never seen such a weak market in more than 30 years as a real-estate agent, and that suits his firm perfectly.
This is great! Maybe more and more people will lose their homes, Mr. Salas. It is such a great game to play (not in the article).
I have no problem with the real estate community taking advantage of this opportunity. Although the downside is that it does help the lenders who helped create the problem (I personally think that they should take the majority of the brunt of this problem – of course, along with the politicians that allowed it to happen), we do need help in getting this problem of inventory cleared up.
I have a problem with realtors who show no class in the face of those who have lost their homes.
Take Joseph Luliucci as a good example. He is a Las Vegas realtor who takes potential prospective buyers on his “Foreclosure Bus Tour” complete with signage on the bus. He drives these buyers through the neighborhoods of homes that went into foreclosure.
The potential buyers show up and are given a “repo” express name tag.
Well Mr. Luliucci that is pretty clever. You are profiting from the despair of America. I appreciate that you are providing a service and have no problem with the process or that you are getting paid to do so. I just have a problem with how you are going about it.
That Foreclosure Bus Tour idea is great idea, Mr. Luliucci. As you put that marketing message together, just think of the humiliation of the people who went through the process. Just think of the people who were legitimately lied to in the mortgage process and lost their homes. You are driving people through the real estate graveyards of America. I love to look at homes. At the same time, I am saddened when I see a home that the bank now owns.
Just think, with the large percentages of people who have lost their homes in America, you offer the opportunity for them to re-live their experience every time they see your bus.
Maybe that is one of the problems in America. We have lost our sense of integrity. Integrity should have started in Washington.
Look at former Housing Secretary Alphonso Jackson. He should be the poster boy for this problem. He was one that encouraged the type of activity that has driven and is going to drive many into foreclosure. I bring this up only because it is a preview to my next blog. It just baffles me that no one in a leadership position could see this coming. If it is my job to monitor and regulate the housing industry, I would know the situation inside and out. If anyone did, they would see this train wreck coming.
Apparently, Mr. Jackson did not have a clue. He is one of many nightmares that President Bush selected to run lead positions in this country.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Foreclosed homes are "the only game in town," says Larry Salas of All-Star Realty Sales in Miami (from Yahoo article). With all due respect Mr. Salas, this isn’t a game. Good people have lost their homes. The Yahoo article goes on to say that Mr. Salas has never seen such a weak market in more than 30 years as a real-estate agent, and that suits his firm perfectly.
This is great! Maybe more and more people will lose their homes, Mr. Salas. It is such a great game to play (not in the article).
I have no problem with the real estate community taking advantage of this opportunity. Although the downside is that it does help the lenders who helped create the problem (I personally think that they should take the majority of the brunt of this problem – of course, along with the politicians that allowed it to happen), we do need help in getting this problem of inventory cleared up.
I have a problem with realtors who show no class in the face of those who have lost their homes.
Take Joseph Luliucci as a good example. He is a Las Vegas realtor who takes potential prospective buyers on his “Foreclosure Bus Tour” complete with signage on the bus. He drives these buyers through the neighborhoods of homes that went into foreclosure.
The potential buyers show up and are given a “repo” express name tag.
Well Mr. Luliucci that is pretty clever. You are profiting from the despair of America. I appreciate that you are providing a service and have no problem with the process or that you are getting paid to do so. I just have a problem with how you are going about it.
That Foreclosure Bus Tour idea is great idea, Mr. Luliucci. As you put that marketing message together, just think of the humiliation of the people who went through the process. Just think of the people who were legitimately lied to in the mortgage process and lost their homes. You are driving people through the real estate graveyards of America. I love to look at homes. At the same time, I am saddened when I see a home that the bank now owns.
Just think, with the large percentages of people who have lost their homes in America, you offer the opportunity for them to re-live their experience every time they see your bus.
Maybe that is one of the problems in America. We have lost our sense of integrity. Integrity should have started in Washington.
Look at former Housing Secretary Alphonso Jackson. He should be the poster boy for this problem. He was one that encouraged the type of activity that has driven and is going to drive many into foreclosure. I bring this up only because it is a preview to my next blog. It just baffles me that no one in a leadership position could see this coming. If it is my job to monitor and regulate the housing industry, I would know the situation inside and out. If anyone did, they would see this train wreck coming.
Apparently, Mr. Jackson did not have a clue. He is one of many nightmares that President Bush selected to run lead positions in this country.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, April 11, 2008
More Credit Fact or Fiction
(1) If a spouse is responsible for a debt due to a divorce decree, the other spouse is completely released of all liability - True or False.
False – If at the time of divorce both spouses are signed on the credit account, they are both liable for the debt after the divorce regardless of the divorce decree. The credit card companies only release liability when the debt is refinanced into the responsible spouse’s name.
(2) If you co-sign for another individual, your credit could be affected – True or False.
True – If you co-sign on a credit application, you are as responsible for the loan as the individual you co-signed for. If that individual misses a payment, that negative mark goes on your credit report. If that individual defaults on the debt, the co-signer is now responsible.
(3) If a creditor settles a debt, the consumer has no other further obligations - True or False.
False – If the creditor forgives debt, the creditor reports that to the IRS and the consumer has to pay taxes on the amount that has been forgiven.
(4) If a debt collector harasses a consumer, the consumer has no means of protecting their rights - True or False.
False – Consumers are protected under the Fair Debt Practices Act. If a consumer’s rights have been violated, a consumer can hire an attorney and file suit against the debt collector for the means of protecting their rights. The law also allows for attorneys that practice this special type of law to take cases for free. The attorney can force the debt collector to pay fees in the event the case wins.
(5) If your debt has been charged off and is with a debt collector, the consumer can always go back to the original creditor and negotiate the terms of the debt - True of False.
False – Once the debt has been charged off and is in the hands of the debt collector, the original creditor has no interest in talking to you about the debt. You talk with the creditor as long as they are holding the debt and collecting the debt through their in-house debt collection department.
(6) It is a good idea to try and negotiate a current debt - True or False
False – If you are on time with your payments and everything is current, you never want to call a creditor and ask for the balance to be reduced. It is like asking your credit card company to close your account and place you in collections. They will automatically deem you as a risk and probabilities are high that they will close your account and raise your interest rates to penalty rates. It happens all the time. You can attempt to get your interest rate lowered. However, it stops there.
(7) There is a way to legally remove bankruptcies before the credit reporting period has ended - True or False
False – Every negative item on your credit report has to serve its allotted reporting time on your credit report. For most, that is 7 ½ years past the first missed payment.
(8) A credit reporting agency has to inform me of the results of my dispute - True or False.
True – They do have to inform you by letter of their findings.
(9) After 7 ½ years and the debt has been removed from your credit report you no longer owe it - True or False.
False – You always owe the debt.
(10) Debt Collectors can always take legal action against you to collect a debt - True of False.
True and False – They can only successfully file suit against you during the statute of limitations period which is determined individually by each state. In Texas, it is 4 (some attorneys argue 4 ½) years past the first missed payment. They can still file suit after that period. However, it is up to the consumer to use the statute of limitation defense and get the lawsuit thrown out. If the consumer does not take action, the debt collector will probably successfully win that suit.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
False – If at the time of divorce both spouses are signed on the credit account, they are both liable for the debt after the divorce regardless of the divorce decree. The credit card companies only release liability when the debt is refinanced into the responsible spouse’s name.
(2) If you co-sign for another individual, your credit could be affected – True or False.
True – If you co-sign on a credit application, you are as responsible for the loan as the individual you co-signed for. If that individual misses a payment, that negative mark goes on your credit report. If that individual defaults on the debt, the co-signer is now responsible.
(3) If a creditor settles a debt, the consumer has no other further obligations - True or False.
False – If the creditor forgives debt, the creditor reports that to the IRS and the consumer has to pay taxes on the amount that has been forgiven.
(4) If a debt collector harasses a consumer, the consumer has no means of protecting their rights - True or False.
False – Consumers are protected under the Fair Debt Practices Act. If a consumer’s rights have been violated, a consumer can hire an attorney and file suit against the debt collector for the means of protecting their rights. The law also allows for attorneys that practice this special type of law to take cases for free. The attorney can force the debt collector to pay fees in the event the case wins.
(5) If your debt has been charged off and is with a debt collector, the consumer can always go back to the original creditor and negotiate the terms of the debt - True of False.
False – Once the debt has been charged off and is in the hands of the debt collector, the original creditor has no interest in talking to you about the debt. You talk with the creditor as long as they are holding the debt and collecting the debt through their in-house debt collection department.
(6) It is a good idea to try and negotiate a current debt - True or False
False – If you are on time with your payments and everything is current, you never want to call a creditor and ask for the balance to be reduced. It is like asking your credit card company to close your account and place you in collections. They will automatically deem you as a risk and probabilities are high that they will close your account and raise your interest rates to penalty rates. It happens all the time. You can attempt to get your interest rate lowered. However, it stops there.
(7) There is a way to legally remove bankruptcies before the credit reporting period has ended - True or False
False – Every negative item on your credit report has to serve its allotted reporting time on your credit report. For most, that is 7 ½ years past the first missed payment.
(8) A credit reporting agency has to inform me of the results of my dispute - True or False.
True – They do have to inform you by letter of their findings.
(9) After 7 ½ years and the debt has been removed from your credit report you no longer owe it - True or False.
False – You always owe the debt.
(10) Debt Collectors can always take legal action against you to collect a debt - True of False.
True and False – They can only successfully file suit against you during the statute of limitations period which is determined individually by each state. In Texas, it is 4 (some attorneys argue 4 ½) years past the first missed payment. They can still file suit after that period. However, it is up to the consumer to use the statute of limitation defense and get the lawsuit thrown out. If the consumer does not take action, the debt collector will probably successfully win that suit.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, April 10, 2008
Credit: Fact or Fiction?
There is a lot of information floating around out there about debt. Today, we are going to take a look at some of this information and determine if it is fact or fiction.
(1) If I close my credit cards, I will remove all of my credit history - True or False.
False – your credit history stays on your credit report if you close a credit card.
(2) Your credit score is your FICO score - True or False.
True and False – Fair Issac Corporation developed the original credit scoring formula. However, each credit reporting agency has its own version of the scoring model. Trans Union’s score is called the Empirica score. Equifax calls their score the Beacon score. Experian does call its credit score the FICO score.
(3) Every time you check your credit report, you get an inquiry posted and could lose points on your credit score - True or False.
False – When an individual checks their credit score, it is called a soft inquiry and there are no deductions or records of the inquiry. When a company checks a consumer’s credit score for the purpose of credit information, this is a hard inquiry and there is a deduction of points.
(4) Every time you close a credit account your score lowers - True of False.
More True than False – Approximately 30% of your credit score is determined by how much overall credit that you have available to you versus how much of that credit you are using. This creates your utilization ratio. It is the ratio of total available credit to debt. If you have a lot of available credit and low amount of debt your ratio is low. That is a good thing. If it is the other way around, your utilization ratio is high. If you close accounts that have free credit limit, you remove the available credit limit from your ratio, which in turn could increase your utilization ratio and lower your score.
(5) If someone illegally uses your credit card without your authorization, you are on the hook for the full amount charged on the credit card – True or False
False – The law states that you are only on the hook for no more than $50. The credit card company is on the hook for the unauthorized charge. Credit card companies market that you have zero liability for unauthorized charges. They are just marketing something that you have anyway due to the law. In fact, most companies waive the $50.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, April 09, 2008
Mutual Fund Red Flags
With the stock market losing ground, it is important to evaluate your investments and make sure that you are in good solid investments. What if you find a fund with big losses? When do you dump that loser mutual fund? There are some red flags that you need to monitor that will help you know if your fund is in trouble or if the losses are just market related.
Mutual Fund Red Flags
(1) Did the fund change money managers? I think that this is one aspect of your mutual funds that needs to be monitored very closely. Chances are that if you do get a new money manager, the fund might be managed differently. If the management of your fund changes, keep a close eye on the performance.
(2) Did the fund close to new money? Mutual funds that get too large and potentially unmanageable will close their doors to new investors. This can end up being problem for investment performance going forward. Morningstar performed a study back in 2003 where they looked at mutual funds that had closed and prior to closing were in the top 20% of their category. Over the next three years, 75% of those closed funds went from tier performance to average performance. Why does that happen? There could be a number of reasons. The bottom line is that it is a red flag that you want to watch.
(3) The fund manager is in a slump – Bill Miller, the acclaimed mutual fund manager who outperformed the S&P 500 for 15 straight years, can tell you about how a slump feels. Well his streak ended in 2005 and the last positive year he had was 2006 with an underperformance of 5.9%. In 2007, he lost -6.7% and through the first quarter of this year, he was down a horrible -19.7%. Money managers do go through slumps. When in a slump, people take big risks. If you think that your money manager is in a slump, keep up on the performance.
(4) The fund changed their investment style – There are two main types of investment styles. For the most part you are either a growth or value manager. There is even an investment style that is a blend both of both growth and value. In some cases, you will see the fund manager change their style from one growth to value or vice versa. This can end up hurting performance.
(5) The fund is performing in the lower percentile of the peer group - You always want to know how your mutual fund is performing in comparison to other mutual funds that invest the same way. This is measured on a daily, weekly, monthly, quarterly, annual, etc. basis. Ideally, you want your money manager in the top 50% of their peer group. However, when you start to see the performance slip to the 75%, 80%, or 90% and greater of their peer group, there are problems. This is the biggest red flag of them all.
The best way to monitor any of these red flags is through http://www.morningstar.com/. You can look up everything from category rankings to investment style change. You can also sign up for alerts to notify you if news comes out on the mutual fund.
You don’t want to just hold and hope that the investment comes back. Have good reasons for holding onto an investment and remember, hoping and crossing your fingers that all be well is not an investment strategy.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, April 08, 2008
Is it Always a Good Time to Invest? Yes, No, It Depends on the Strategy
Is it always a good time to invest? Well if you ask most investment advisors and professionals on Wall Street, the answer is “Yes, it is always a good time to invest in the stock market.” What do you think? With the U.S. economy unarguably in a recession, the real estate markets in a mess, and the credit crisis, are we now facing a time where the worst is behind us?
“It is always a good time to invest in the stock market” is your only option when investing in the stock market. This is the challenge with those on Wall Street. The majority of professionals who either manage money or are financial advisors only have one strategy. Their strategy just consists of growing money.
They show you performance numbers and how great their investment strategy has performed…during the good times. What about during the bad times? They will just show you how it paid to stay invested because the stock market ALWAYS comes back.
So since the market always comes back, these times in the stock market when stocks have lost money provide great opportunities to buy stocks ON SALE. Thus, it is always a good time to invest in the market. The best part of this strategy is that it is easy to explain, easy to understand, and even easier to sell.
Well, unfortunately, investing just doesn’t work that easily. Yes, it is always a good time to invest. It just depends on your strategy. If you operate under the buy-and-hold, always stay invested for the long-term, it isn’t always a good time to be invested. If you have a strategy that invests for both good and bad times in the market, then yes there is always opportunity.
This is the challenge with most investment strategies as practiced by the financial advisor community. It is tough to have long-term success with only a strategy for growing money. Investment success is about a strategy for growth AND a strategy for investing during bad markets. Yes, we can and will go through long periods of time where it doesn’t make sense to fully invest in the stock market.
For instance, the S&P 500 composite return over the past 10 years has an average return of 2.4% per year. You would have made more being invested in a money market account.
The Dow Jones Industrial Average returned 1.61% a year between 1966 and 1982. The bottom line is that during those long time periods it didn’t pay to just invest for investment growth. However, if you had an investment strategy that invested for both good and bad markets, then there were a ton of opportunities.
The proof is in the returns. A growth strategy doesn’t always work because we aren’t always in that type of stock market environment.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, April 07, 2008
More Irresponsible Marketing
Hi, I am the Video Professor and I am known for giving away my training software (read: Yes, I am just giving this stuff away and paying all of these advertizing costs because I like charity work).
I want to give you the opportunity to try my new software that teaches you how to make money buying and selling on eBay. Now this DVD will not teach you how to make millions (read: however, if millions of you will just answer this “free” offer I will make millions of dollars).
Just call this number and I will send you for free this title and any of the 48 titles that I have produced, once again for free. You just pay a small shipping and handling cost (read: of $9.95, where I have a profit margin of around $ 6 per product).
It is amazing that these guys get on cable TV and make it seem like they are doing consumers a favor. They are doing nothing more than selling product. It is about selling hundreds of thousands of units for a nice little profit margin.
They use the word free and small shipping and handling cost to disguise the fact that you are actually buying a product that has been produced for a low cost.
I would really have much more respect for these companies if they wouldn’t resort to smoke and mirror marketing.
There are tons of these ads. Some of my favorites – The Real Estate Selling System, the Ross Gardine Stock System, the Make Millions From Home System, etc.
Do yourself a favor. These systems could actually provide great information. There is no question. However, buy the same information from authors who market and sell their information the correct way.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, April 04, 2008
The Secrets to a Great Financial Marriage
Like it or not, money is cited as the number one reason for divorce in this country. The good news is that this does not have to be the case. The real problem with money amd marriage is that couples do an ineffective job of communicating when it comes to finances. Let’s face it – money is a tough and sometimes emotional subject to discuss when you are married. It also doesn’t help that a husband and a wife bring in their own set of baggage about money that was learned prior to marriage.
The key is taking two sets of financial value systems and making them work. Here are a few tips to financial success in your marriage.
1) Release the need to be right – Arguing is nothing more than an attempt to declare someone right and someone wrong. Couples spend a lot of time unnecessarily fighting over who is right and wrong when it comes to money. The truth of the matter is that arguing makes both the husband and the wife wrong. Release the need to be right and focus on working through the issues until you figure out what works for both of you.
2) Give respect by seeking to understand – We all have our own views when it comes to money. Many times we work so hard at having our views understood that we don’t stop and take the time to show respect to our spouse and understand their views. The key to being heard is listening and understanding the other person’s viewpoint. We cannot begin to help our spouse understand our views until we first understand how they feel. As Stephen Covey writes, “Seek first to understand, then be understood.” You can never go wrong giving your spouse the respect of their views.
3) Leave your ego at the door and let God in - This is the key element to making all of this work. This isn’t about you and your needs. This is about your family as a whole. Make that your objective. Before discussing finances with your spouse, pray about it together first. It is tough to argue when God has been invited to the meeting.
4) Respect your parents’ advice and remember that you have your own family – I do believe that parents have good intentions when they give advice. Oftentimes parents will get a little to involved in the affairs of their grown children. You always want to listen and respect your parents. That is biblical. You also have to remember that your responsibility is to your family. You no longer live under your parents’ roof. Pray about the advice you are being given and let God be the deciding factor as to the decisions that you make.
5) In marriage it is not yours or mine, it is ours - In order to have a good financial system in a marriage, it comes down to teamwork and communication. Someone needs to be in charge of the bills and keeping the bank accounts. Both spouses need to manage the outcome of that process together. Many times it is one spouse that is in charge and the other spouse is in the dark. Communication and being on the same page is key.
6) Two separate sets of values mold new family values – Two sets of values concerning money have a hard time coexisting in a relationship. Each of us has our own set of financial values. That is what makes us unique. Work to find out how two sets of values can compliment each other and form a new set of family values. It isn’t about what is important for you individually. It is about what is important for the family. Compromising for a bigger objective is the key.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
The key is taking two sets of financial value systems and making them work. Here are a few tips to financial success in your marriage.
1) Release the need to be right – Arguing is nothing more than an attempt to declare someone right and someone wrong. Couples spend a lot of time unnecessarily fighting over who is right and wrong when it comes to money. The truth of the matter is that arguing makes both the husband and the wife wrong. Release the need to be right and focus on working through the issues until you figure out what works for both of you.
2) Give respect by seeking to understand – We all have our own views when it comes to money. Many times we work so hard at having our views understood that we don’t stop and take the time to show respect to our spouse and understand their views. The key to being heard is listening and understanding the other person’s viewpoint. We cannot begin to help our spouse understand our views until we first understand how they feel. As Stephen Covey writes, “Seek first to understand, then be understood.” You can never go wrong giving your spouse the respect of their views.
3) Leave your ego at the door and let God in - This is the key element to making all of this work. This isn’t about you and your needs. This is about your family as a whole. Make that your objective. Before discussing finances with your spouse, pray about it together first. It is tough to argue when God has been invited to the meeting.
4) Respect your parents’ advice and remember that you have your own family – I do believe that parents have good intentions when they give advice. Oftentimes parents will get a little to involved in the affairs of their grown children. You always want to listen and respect your parents. That is biblical. You also have to remember that your responsibility is to your family. You no longer live under your parents’ roof. Pray about the advice you are being given and let God be the deciding factor as to the decisions that you make.
5) In marriage it is not yours or mine, it is ours - In order to have a good financial system in a marriage, it comes down to teamwork and communication. Someone needs to be in charge of the bills and keeping the bank accounts. Both spouses need to manage the outcome of that process together. Many times it is one spouse that is in charge and the other spouse is in the dark. Communication and being on the same page is key.
6) Two separate sets of values mold new family values – Two sets of values concerning money have a hard time coexisting in a relationship. Each of us has our own set of financial values. That is what makes us unique. Work to find out how two sets of values can compliment each other and form a new set of family values. It isn’t about what is important for you individually. It is about what is important for the family. Compromising for a bigger objective is the key.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, April 03, 2008
Deducting Taxes is not a Good Reason to Invest in an IRA
There is a process that is important to go through when considering an IRA. First, let’s just look at a regular IRA. With a regular IRA, anyone that has income can invest into an IRA. However, there is a key question that you have to ask. Can I invest this money in an IRA and get a tax deduction?
For most people, it is the tax deduction of the contribution that is appealing about putting money into an IRA. The ability to deduct an IRA contribution comes down to two factors. First, are you an active participant in a 401(k) plan? If the answer is no, then you would get a tax deduction on the contribution. Second, what is your adjusted gross income?
If you are an active participant in a 401(k) plan, then the ability to deduct an IRA contribution comes down to the amount of money that you make. If you are married and filing jointly, you can deduct 100% of your IRA contribution as long as your adjusted gross income is below $83,000. Between $83,000 and $103,000, your ability to deduct is phased out. Over $103,000 AGI, you cannot deduct anything.
If you are single, the AGI limits are $52,000 to $62,000.
For the Roth IRA, it isn’t about the ability to deduct the contribution. It is about the ability to just contribute. If you are married and filing jointly, the income limits are $150,000 to $160,000. If you make less than $150,000, you can contribute the full amount. However, between $150,000 and $160,000, your ability to contribute starts to phase out. Over $160,000, you cannot contribute at all.
For the single filer, the income limits are $95,000 to $110,000.
Let’s say that you find yourself in that “unfortunate” position where you make too much money to contribute to a Roth. If that is the case, invest an after-tax contribution into your IRA. In 2010, they are lifting the income restrictions and allowing everyone, no matter your income, to convert traditional IRA’s into Roth IRA’s.
So for the next three years, you can put the maximum after-tax nondeductible contribution into the IRA and then convert it to a Roth in 2010.
So which makes the most sense? I believe that the Roth makes the most sense and it comes down to which gives you the biggest tax benefit. With a regular IRA you get the small tax deduction up-front. Then you pay taxes on the money once you take it out at retirement. With the Roth, you don’t get that tax deduction. However, when you take money out of the Roth it is all tax-free. You could have a tax-free income off of decades of investment growth. There is a huge difference in tax benefits.
The Roth also has one other big benefit. All contribution that you make to a Roth can be taken out of the account without penalty. If you get into a bind, you can take out your contributions.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, April 02, 2008
Banks Scaring People into Refinancing
It is vitally important today that you as a consumer check your facts and verify information that is being told to you. Unfortunately, the reason is not because mistakes can be made. I am seeing more and more examples of companies in the financial arena that are deliberately misleading consumers into thinking one thing when another actually exists.
Consumers have been running into trouble with these adjustable rate mortgages. Adjustable rate mortgages start out with low “teaser” rates for a period of time. Then the time comes when the payment and the interest rate changes or “resets.”
When these mortgages reset, the payment usually takes off. As a result, many consumers can’t make the payment and many have or are facing foreclosure.
We only hear about the mortgages that change for the worse. What about the ones were the payment changes for the better or the payment changes but is still bearable? If that happens, then the consumer could be set for at least another year.
In an article written by “Mike Mish” Shedlock, he writes that Citigroup is scaring people into refinancing their mortgages without giving them all of the information.
He sites an example where a recent letter sent out by Citigroup is encouraging this one consumer to refinance his mortgage because the mortgage is resetting. Of course, the letter is written as if the payment will go up.
The letter gives an example and shows the ARM adjusting on the date, the new interest rate, the new higher payment, and then compares that to a refinance. If you look at the data, of course it makes sense to just go ahead and refinance.
The problem is that the data was based on old rates. Given the old data, the mortgage payment would reset higher. Given current data, there would be no need to refinance because rates have fallen making refinance a bad idea. It wouldn’t make sense.
Nowhere in that letter is pointed out that his adjustable rate mortgage could be lower. There is obscure language that hints at it.
So, this individual calls Citigroup and asks the question:
Consumer: What happens to our loan on the anniversary? Will it go down?
Citigroup Rep: It is very unlikely that it will go down. Would you like to refinance?
Although no one is outright lying in this situation, there is a question of ethics. Remember, that you have to verify information and not just trust what you are being told.
Tuesday, April 01, 2008
Fees, Simplicity, or Strategy?
So what is going to make or break you when it comes to your investments? Is it going to fees, simplicity, or strategy?
Well, Columnist Scott Burns builds his whole philosophy on simplicity and low fees. These are the two keys to his approach. His stance is that a low cost, passive approach is the only way to go when it comes to investing. The big point that he attempts to make is that professional money management is an expensive way to lose money. You should just do it yourself.
In a recent article, he is basically defending his investment portfolios that he has touted over the years. His low cost approach is apparently not immune to losses. The following were some of his remarks:
Since his approach is based on low cost index funds, “each fund has a high probability of doing better than 70 to 80% of its more expensive professionally managed competitors.”
Well, a big loss is a big loss. If a professionally managed fund goes down 30% and the low cost index fund goes down 24%, it really doesn’t matter. Investment strategies should be designed to avoid the big hits. In addition, it has been proven that index funds beat out the majority of managed mutual funds a portion of the time and not all of the time as this writer would have you believe.
“The greater the number of asset classes in your portfolio, the better the odds that one asset class will perform well enough to compensate for the asset class that is performing poorly.”
Well I do agree with that statement. However, I disagree with calling a REIT, a large company stock, and a small company stock three different investment classes. Depending on the market, they could all be considered one investment class because they are all three stocks. We are in that type of market.
The biggest concern that I have about this type of advice being given is that he is answering back to a retiree question about his portfolio method for investing.
Low fees are the way to go.
There is nothing wrong with fees. It comes down to what you get for those fees. If you are paying someone to manage your money and that investment manager is making you money this year, there is nothing wrong with fees. The question is not the amount of the fee. The question is if the fee is producing value? Sometimes you do get what you pay for!
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
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