8 Things You Need to Know About Investing in Tough Markets

1) Understand Diversification – Don’t confuse quantity of investments with diversification. Proper diversification in its simplest form comes down to how much you have invested in anything classified as a stock and anything classified as bonds, fixed investments, or cash.
2) Your financial advisor, most financial media, Wall Street, your Mutual Fund company, etc. will always tell you to just hold on for the long-term. Sometimes that makes sense. However, there are times when it doesn’t make sense. Your response should be that long-term is fine. What can you do for me today to reduce risk and be more balanced?
3) Your financial advisor is probably not managing your money. They have invested it and are watching it decline. Make sure you understand the difference between investing money and investing then managing money. The latter helps you avoid risk.
4) If you have 100% in 10 stock funds, you have 100% in stocks with no diversification. Remember there are markets where it doesn’t matter how your stock is classified. There are environments where ALL stocks go down at the same time.
5) The salespeople marketing “guaranteed not to lose” investment annuity programs come out of the woodwork. Remember that you don’t get anything for free. If these programs were really as advertised, we would all be using them. The best advice I can give is to stay away unless an average of 4 to 5% a year for the rest of your life makes sense.
6) If you are going to reduce your stock positions, do so gradually and do so when the market goes through periods of strength.
7) If this is a bear market, they last on average 406 days with an average loss of a negative -30%.
8) Bear markets don’t fall in a straight line. They fall over time with a combination of stock market rallies and declines.

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

What To Do If We Really Are In A Bear Market

The stock market has taken a dramatic plunge over the almost past 3 months. However, today it looks like it might have found a temporary resting spot. At one point today, the NASDAQ looked like it was in the biggest amount of trouble with the technology index going as low as 21% from its high in 2007. If the stock market would have closed at those levels, the tech sector would officially be in a bear market.

Fortunately, the markets put in a strong rebound and put investors’ nerves at rest, at least for the time being. Are we out of the woods? Well we have to look at how bear markets work. On the front page of the Prudent Money website I illustrated how the stock market tends to respond in bear market environments.

Between September 2000 and March 2001, investors LOST -26%. YIKES!!
Between March 2001 and May 2001, investors GAINED 17%. YEA!!
Between May 2001 and September 2001, investors LOST -26%. YIKES!!
Between September 2001 and March 2002, investors GAINED 21%. YEA!!
Between March 2002 and July 2002, investors LOST -31%. DOUBLE YIKES!!!
Between July 2002 and August 2002, investors GAINED 27%. YEA!!!!
Between August 2002 and October 2002, investors LOST -19%. YIKES but YEA it is over with.

It is exceptionally volatile. This is the problem with bear markets. The market will plunge in value. Then it will make huge gains. Investors will feel as if things have turned around. Then the market plunges again. It is hope to despair to hope and vice versa.

Do I feel like this is over? My stance has been all along that we could experience a bear market in stocks. I do think that we are in one. The problem causing the drop in stocks is far from solved. So, what steps should you take now?

1) Don’t Panic – You cannot make rationale decisions when your emotions are running wild.
2) IF you feel like we are in a bear market, then reduce your stock holdings as the market takes a break from the selling and increases in value. Also keep in mind that you might be wrong. If the market just turns back into a bull market, also know that there is a good chance that we will see THE bear market sometime in the next year or so. Either we see THE bear today, or THE bear tomorrow. Ultimately, I don’t think that we escape the bear.
3) If you are just on the fence, evaluate how much money you have made in the last 5 years being invested in a bull market. Determine how much of that you are willing to risk. Draw a line in the sand that you are not willing to cross.
4) If you are going to reduce your stock holdings, reduce them into strength. Look at the chart above and how the market does go through periods of big returns in the midst of bear markets. Make sure and use that to your advantage. If you are unsure as to the percentage in stocks, read this study to see how much risk you might be taking.

The bottom line is to prevent panic and emotion by having a game plan and knowing what you are going to do in the event that your game plan is wrong. Most importantly, don’t make any of those decisions without God’s peace.

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

Turning Your 401(k) Plan Into An ATM Machine

I thought that I had seen just about everything when it comes to borrowing money. There are so many crazy programs on the market that end up putting the consumer in a trap. You can watch what is happening in the mortgage markets to get a good example.

Those loan programs were the worst of consumer traps.

Well a company had the bright idea of marketing a program to companies that allows their employees to have a debit card on their 401(k) plan. Now that you can no longer treat your home like an ATM machine, in steps your 401(k) plan.

Here is how it works – An employee gets approved for a loan line. They basically have that amount of money, approved to borrow, waiting to be borrowed for any reason. Interest isn’t charged until the employee takes money out of the account through the use of the debit card. They can take as much or as little as they want.

Then the company who set up the program bills them directly like a credit card. The employee pays a pretty stout interest rate on that money and a nice up-front fee.

There should be watch groups that prevent these types of products from being introduced into the market place. These 401(k) plans should be considered sacred. They are there for an individual’s future. From the standpoint of a loan, borrowing from a 401(k) plan should be in extreme emergency situation where there is just not any other choice.

Retirement saving in America is dangerously low. I am hoping that a program like this does not catch on. The last thing in the world consumers need is the temptation to just take money out as they wish from their 401(k) plan.

Incidentally, when you pay back interest on a loan from your 401(k) plan, you are paying it back with money that has already been taxed. Down the road when you take out that money that was used to pay the interest on your loan, you pay taxes on it a second time.

At least with a 401(k) loan and not this debit card program, you pay yourself back the interest and not out to some company.

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

Another Rough Week for the Bull

Are we in a bear market? A few weeks ago I posed that question. This past week confirmed at least in my mind that we are in a bear market. We are very close to the official 20% decline line that is used by many to classify a drop as a bear market. Of course, today the market is closed. However, the futures markets are trading in other countries. The trading is absolutely horrible. IF the Dow Jones were to open right now, it would be down 400 to 500 points. That would put us in official bear market territory.

So, if you are invested in stocks and you want to reduce your risk, how should you go about doing that?

Please know that I am not suggesting that anyone sell their investments. I cannot give advice in these pages. I just hope that you found agreement with me months ago when I was writing about the risk in the markets and made the appropriate moves at that point.

I think that we are pretty close to a “temporary” bottom. Remember, bear markets don’t fall in a straight line. They go through periods of declines. They rebound for a period of time, then the selling and the declines resume. This happens over a period of time until one day the market has found a real bottom.

So, if you are looking to sell some of your holdings and reduce the risk in your portfolio, one method would be to use bear market rallies as an opportunity to make sells. As the market rallies, you might slowly sell some of your equity positions.

Remember, we still have not heard anything from the Fed in regards to a rate cut. I feel strongly that we will see the Fed move aggressively. To get the most bang for the buck, they could do a surprise rate cut. That should motivate the markets to rally and temporarily halt the selling.

Don’t forget, the problems that are causing this slide in the stock market are not gone. Unfortunately, they will probably worsen before they start to get better. So, know your risk and make sure that you have a game plan. Bear markets can be very brutal.

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

Strange As It Sounds...

Strange as it sounds, I miss Alan Greenspan.

This certainly isn’t your Greenspan-run Federal Reserve Board. It is the Ben Bernanke era and a strange one it is for the markets. First, let’s be fair to Chairman Bernanke. He didn’t create the mess we are in right now. He just inherited it.

Greenspan is part owner and architect of this credit mess we are facing today in our country. Greenspan was the one a few years back that actually encouraged the use of adjustable rate mortgages. Keep in mind that it is adjustable rate mortgages that really put the sub-prime in sub-prime loans. I would argue that they are the main reason that most homes are going into foreclosure. When the adjustable rate changes and the homeowner cannot afford the payment, foreclosure is typically the undesirable ending.

Let me tell you something that I did like about Greenspan. He kept things a game. He spoke a language that some called “Greenspeak” or “Greenspanology.”

He spoke in code. Analysts would attempt to determine what he really said by interpreting his eloquent and sometimes vague language. He came across very confident.

Thinking back, that is what I liked about Alan Greenspan. Ben Bernanke is a totally different Fed Chairman. His words seem to send the markets into the tank. His speech to Congress today continued to strengthen this crisis of confidence that we have in the markets.

Now, I am the last person that wants the Federal Reserve Board to manipulate and play with markets. However, we need the Federal Reserve Board to act now. We need Chairman Bernanke to aggressively lower those interest rates. If not, we could have an even bigger mess on our hands as this continues.

So for those of you who are invested in the stock market and taking a bath in your 401(k) plans, this is what you look for. If the Fed acts fast and cuts rates, then there is a glimmer of hope that things might be OK for the economy. If the Fed continues to sit on their hands and just monitor the situation, then things could get very ugly for our markets.

Right now, capital preservation is the name of the game!

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

Falling for the Holy Grail

After last week’s show where a caller inquired about an investment program that would guarantee good returns with no risk, I had many emails come in asking about other types of similar programs.

- Human nature is to gravitate towards the easy buck. There is a real tendency to gravitate towards a program that shows a secret easy way to make money without risk.
- The irresponsible marketers prey on these human emotions.
- Are these programs illegal in any way? While some are a part of scams that go undetected for a while, most of these are software programs that promise just a few minutes a day will make you a millionaire. The problem is that the stars would have to align for them to work as advertised. Unfortunately, the consumer is out big bucks before they realize it.

Here is a rule of thumb with any “money making program”:
- There is no slam dunk easy solution to making money in the stock market that doesn’t require risk.
- Risk and reward is a timeless principle that doesn’t go away.
- There is no investment model or program that works 100% of the time.
- If a program is offering a way to make an enormous amount of money with apparently little or no risk, then there is a catch.

Michael Covell in his book, Trend Following, interviewed the traders who are considered the best in the business. These were his conclusions:
- Even the best have bad years
- No one has it all figured out
- There is no holy grail

Here is the bottom line – If I had the secret to making money in the stock market that would guarantee I would make millions, I would keep it a secret. If everyone knew, it would cease to work. Don’t forget the laws of irresponsible marketing!

PLEASE BE CAREFUL ABOUT THESE PROGRAMS

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

Bank of America Deserves Countrywide

The big news on Friday was that Bank of America was buying Countrywide. Quite frankly, I think that they deserve each other. Of course, Countrywide is a train wreck. Due to all of their irresponsibilities in writing loans to consumers through the years, they find themselves in quite a financial mess.

Countrywide could be the poster child for sub-prime loans. They were a big part of an industry that put together these horrible loan packages for consumers. Now, consumers are paying the price of foreclosure.

You cannot tell me that the leaders of mortgage companies like Countrywide couldn’t look ahead and say:

“If we write loans for more than the house is worth, take no down payments, don’t verify incomes, give loans to people who were recently bankrupt, and use teaser rates to suck people in, do you think that might be a problem one day? Well maybe it will be a problem of some sort. For now, look at all of the money we are making!”

Then you have Bank of America. The “people’s” bank that wrote the same types of irresponsible mortgages and provided savings programs (Keep the Change) for consumers that pay a whopping 0.25% in interest. You have a bank that creates programs that encourage the use of debit cards. In this, consumers paid over $18 billion in late fees last year because of mistakes with these cards.

Then, of course, Bank of America is one of the biggest players in the credit card game where consumers are being victimized by the fine print.

So, these two definitely deserve each other.

The best part of it is the package that Angelo Mozila stands to get from Bank of America. It is estimated that he might receive as much as $ 115,000,000. I have a lot of respect for how Mr. Mozila built this company from scratch. At the same time, it is like rewarding someone for a business practice that has created billions of dollars of losses and caused hundreds of thousands of people to lose their homes.

I realize that no one held a gun to the consumer’s head and forced them to sign up for a sub-prime loan. Just like a drug addict, everyone has responsibility for their decisions. However, that doesn’t make the drug dealer innocent.

If Mr. Mozila were to do the right thing, we would take a good portion of that
$ 115,000,000 and give it to a fund to help people who have lost their homes. After all, I am sure that he doesn’t need it.

What are your thoughts?

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

Successfully Selling Your Home in a Tough Environment

This is a tough real estate market and sellers are running into all types of difficulties. So, how do you sell a house in this market? It really comes down to your mindset. I find that many people are trying to sell their homes with the mindset that we are still in a booming real estate market. Unfortunately, that is far from the case.

So, let’s talk about some tips that you consider if you are contemplating selling your home.

1) Unless you have an unlimited amount of patience during the sales process, accept the possibility that you are going to have to sell your home for much less than you would like.

It is a buyers’ market. There are two types of buyers. First, you have the buyer who is looking for the good deal. They are watching the prices of homes and looking for panicky sellers. Second, you have the buyers who are waiting. They feel pretty certain that prices will be much lower; thus, they wait. To motivate interest in your home, the price has got to be competitive. Unfortunately, a competitive price comes out a discount. However, that is not so bad news. You can make up that price discount with the next tip.

2) You are not only a home seller, but you are also a home buyer.

So, you unfortunately took a lot less than you wanted when you sold your home. The key is to make up for it on the back-end. This is where you really have to do your homework and look for the good deal. Find areas of the city that interest you. Then look at the homes that have been on the market. Make notes of how long they have been on the market. If the house is vacant and it has been on the market for a long time, you might just find a motivated seller.

The key is to determine the amount you want to finance following the sale of your house and the purchase of another one. Obviously, you will have a lower down payment if you sell your house at a discount. Thus, you have to be a great buyer.

3) Resist putting a great deal of money into the house.

You might think that the carpet looks bad. You might not like the paint. Well, guess what? A prospective buyer might not care for the new paint or carpet that you choose to put in the house. You spend all of that money and the new buyer just paints and carpets over it.

Yes do some small things that create nice curb appeal and create value in the selling price. However, be smart about it and keep your costs at a minimum. Remember, you are trying to get everything possible out of this house. Keep those expenses down.

4) Cut your costs but don’t cut your realtor.

Realtors are worth any money that you pay in the home selling area and they earn every penny of it. Not only do you get on the listing service, you also get internet exposure. Buyers go to the net first now. Realtors know which sellers might be motivated. They can cut down on your legwork. Plus, the realtor can negotiate for you. You are always better off having someone handle those negotiations.

5) Consider renting until you find that perfect deal.

Maybe you are lucky enough to sell your home quickly. If you haven’t found something, I think that it makes sense to consider renting for a while. The buying process is crucial and you need plenty of time to go through the process.

Yes, the real estate markets are in a tough spot. However, that doesn’t mean you cannot successfully put a good deal together. Today’s real estate market requires you to look at the whole deal, including both the sale and the buy, and that you work hard to obtain the right overall deal that makes sense for you and your family.

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

Identity Theft – The Guilty Victim

So, what are the steps to take if you are an identity theft victim? First of all, you have to take this seriously. Although you might consider yourself a victim of a crime, you are also considered a guilty victim until you prove that you had nothing to do with the theft. Remember, in an identity theft, someone is going to lose money. It wouldn’t be too difficult for an individual to stage an identity theft. In the eyes of a merchant, you could be the one directly benefiting from those fraudulent charges or withdrawals while claiming to be a victim of identity theft.

As the victim, you have three main objectives:

1) Prove that you are an identity theft victim
2) Get released from any liability
3) Make sure that all information regarding the theft is permanently removed from your credit file

You really have to focus on these three items. It is crucial that all three objectives are achieved. Most identity theft victims don’t achieve the first objective because they don’t go through all of the necessary steps. Most identity theft victims feel that they are protected by the law and are entitled certain protection. It is assumed that once the crime is reported they are covered.

So here is the order of the important steps for you to take.

1) Place an initial fraud alert on your credit file. This is easy to do and can be handled with a quick phone call. You are basically saying that fraud has been committed and you are in the process of gathering facts and filing a police report. In the meantime, you want to be alerted if your credit file is being accessed without your authorization. Remember that a fraud alert is temporary and not failsafe. You want either the extended alert or preferably (if available) the security freeze implemented as soon as possible.

2) If an account has been opened or the theft involves your credit card or bank, notify the appropriate company immediately to close accounts. Every company has a specific department that handles fraud. Make sure that you are contacting the right one.

3) File a report with your local police department. This is extremely important and gives evidence that you are serious about getting your name cleared from this situation. It is also required for almost every step that follows.

4) Create your Identity Theft Report. This is your “case” that proves your innocence. Remember the victim/guilty irony.

5) Turn your initial alert into a credit freeze with the three credit reporting agencies. This is the highest protection that you can have on your credit files.

6) Send the Identity Theft Report to the three credit reporting agencies and request that the information be blocked from your credit file.

7) Send the Identity Theft Report to the merchant that holds the fraudulent account as a follow up to your initial call. This will allow for them to confirm that you were indeed a victim. This should provide all of the information that is needed to conduct the identity theft claim. You can also request the application and any transaction records used in setting up the fraudulent account.

8) Get a closure letter from the merchant that releases you from liability. This is extremely important and something most people neglect to do. Remember the closure principle.

9) Make sure that all information about the fraudulent account is removed from your credit files at all three credit reporting agencies.

10) Keep a close eye on your credit files and make sure that nothing reappears concerning the identity theft on your account.

Keep a paper trail and, always send all correspondence certified mail return receipt requested.

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

Are Fraud Alerts by Themselves a Good Identity Theft Prevention Tool?

One strategy for protecting your identity is issuing fraud alerts on your credit reports. Is this a good strategy? Well let’s first talk about how fraud alerts work. In 2003, the Fair Credit Reporting Act was updated with the signing of the Fair and Accurate Credit Transaction Act into law.

The FACT Act established three methods of protection for a consumer to immediately protect themselves from identity theft. The law reads that if you know or suspect that you are a victim of identity theft, then you can place a fraud alert on your credit file. A fraud alert is a red flag for a creditor when they check your credit file for information.

If someone is attempting to open up a credit account in your name, the fraud alert would tell the creditor that there is a high risk of identity theft. As a result, the creditor is instructed to call the consumer and verify identity before issuing credit. A consumer would have to reissue the fraud alert every 90 days.

If you can provide proof that you are a victim of identity theft, you can extend that fraud alert up to seven years.

So, is this an effective way to protect your identity? Reports would suggest that there are times that fraud alerts do not work. I have seen reports that place the percentage of failure between 10 and 25% of the time. It appears that creditors don’t always check and verify the identity of the person opening the account.

So what about the companies that issue fraud alerts on your behalf? Is this effective? Well, it has been documented that these fraud alerts don’t always work. So, that is a concern. If a fraud alert were to fail, you could be a victim of an identity theft for years and not even know it.

This is why credit monitoring makes the most sense. You still need to know that identity theft is taking place. There isn’t a failure rate with credit monitoring as long as the company you are using is accurately reporting to you changes on your credit report.

Fraud alerts by themselves are not the perfect identity theft tool. I wouldn’t want to use any strategy that had that high of a failure rate. If you are committed to preventing identity theft, just know that you will have to partner up with someone monthly to help you. Your money is best spent issuing fraud alerts on your own and having a subsequent company monitor your credit reports.

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

Five Reasons Why You Should Not Use a Debit Card

Are debit cards a good financial tool for your money? Below are five reasons why you might consider using a credit card versus a debit card for your everyday purchases.

1) Unlimited Liability – If someone steals money out of your bank account by the use of your debit card information, it can cause a host of problems. It can create overdraft fees, unlimited loss if you don’t catch it in time, and financial hardship while the theft is being investigated. With a credit card, fraud carries an out-of-pocket limit of $50 per occurrence. Many credit card companies even waive the $50 limit. In addition, an unauthorized charge on your credit card is easily disputed and should not cause potential hardship.

2) Debit cards are becoming larger identity theft targets – According to a recent report, 33% prefer to use debit cards for in-store transactions versus 19% who prefer credit cards. As a result, identity thieves are becoming smarter when it comes to creating ways to steal you money. Thieves will use skimmers to steal your debit card information and then create another card for their own use. This first started happening at gasoline stations. Now, there are cases where it is happening in restaurants.

3) Online Fraud – Buying items online has become a fast and convenient way to shop. However, it can be a big problem when the store on the other end is really a scam designed to steal your money. If that happens with a debit card, you are out that money. According to Reader’s Digest, under the Electronic Fund Transfer Act, your debit card company isn’t required to step in if you make a deal with an unscrupulous merchant. With a credit card, your maximum liability is $50.

4) Potential to make mistakes – Your mistakes with debit cards are a big profit center for banks. It is estimated that Americans pay 18 billion dollars each year in overdraft fees.

5) With a debit card, you do not build credit – A debit card transaction is just a transaction between you and a bank and has no affect on your credit score. A credit card transaction that is paid off on time positively affects your credit score.

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

Watch out for Free Offers – Most of the Time, They are a Scam

I really need to stop listening to Sirius. Sirius, as well as XM radio, will allow anyone to buy marketing time and say anything. I have found that most of the time these commercials that air on satellite radio fall into the “irresponsible marketing” category.

My favorite one is by “self titled stock market genius” Ross Jardine. Here are his claims:

"I've taught thousands to make money in the stock market and I want to teach you for free!"
~ Ross Jardine

• Fast and Easy (15 minutes a day)
• Consistent Income Every Month
• Profit in both Up and Down Markets
• Take Control of your Financial Future

So, he wants to send you his free investor’s stock market kit and make you rich. Well, let’s talk about this “free” offer. It will cost you a “processing and handling fee” of $ 9.95. He sends you a CD that probably costs roughly $ 1.50 to $ 2 to produce (that is probably on the high side). He pays another $ 0.75 or so for postage and pays for advertizing. I would suspect he is making a pretty good penny per free offer. Plus you have to sign up for his service (he will not tell you the cost on his site – you have to pay him $ 9.95 to find out the cost) to get the subscription cost.

That doesn’t sound free to me. Then in order to learn and discover the “holy grail,” you have to buy and subscribe and spend lots of money.

First of all, repeat after me. There is no holy grail in investing. There is no quick way to get rich. If there were, no one would tell anyone. Secondly, this is nothing more than a marketing scam to sell product.

Mr. Jardine, with all due respect, don’t talk about teaching people to invest for free when it is not true. If you want to sell a book for $ 9.95, then sell one.

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

Mr. President, You Just Can’t Spin These Numbers

President Bush addressed the media Friday morning and had these comments regarding everything that is happening in the economy and the stock market.

Here are a few excerpts (note: not exact wording):

I understand that people are worried about losing their homes. That is why we set up programs to help “credit worthy” people.

Mr. President, although we Americans greatly appreciate the efforts behind your programs to fix what was allowed to occur under your watch, most of these worried homeowners have no credit and not credit worthy. Thus, this really isn’t a solution. However, it does make for a good sound bite.

Home prices are beginning to fall.

Mr. President, that actually started in July of 2005 when the real estate market topped. We will call that a little slip on the dates.

…..Job growth slowed a bit in December.

Mr. President, it appears that 18,000 jobs created was more than “slowing a bit.” If you removed all of the jobs that the Government created out of thin air, we would be in an employment contraction.

We have had 52 months of job growth.

Mr. President, congratulations on that record. However, that doesn’t pay the bills for those who are in trouble today.

And my favorite…
We are going to see what Washington can do to fix this problem.

Mr. President, the idea of you cutting taxes to fix the problem was as crazy as the band-aid that you put on this country in 2001 with your tax cut programs. We couldn’t afford it then and we cannot afford it today.

Someone please tell me that he really does understand and this is nothing more than the SPIN machine. Politicians must think that Americans are dumb. I know my intelligence has been insulted.

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

The Importance Of Being Proactive When It Comes To Identity Theft

With identity theft stats getting worse, it is more important than ever to be proactive and partner up with a service that will help you protect your good name.

You can take companies in the identity theft business and break them down into two categories. There are the monitoring companies and the protection companies.

Let’s start with the monitoring companies. This is what you are looking for:

1) Monitors all three credit reporting agencies – Using a system that monitors one is better than nothing. However, it doesn’t allow for the best protection. Creditors don’t always report to all three. You want all three agencies monitored for complete safety.
2) Has alerts – Most companies will alert you when something changes on your credit report.
3) Gives you unlimited access to your credit reports and scores – I think that this is critical. It is important to be able to access your credit reports once a month to check over them and make sure everything remains accurate.
4) Identity theft insurance – Most companies have some form of insurance coverage in the event that you are a victim. This could cover lost wages, loss due to identity theft, etc. You want to look at total coverage, deductible, and amount that they cover for lost wages and for how long. This is the one component that can really affect the price.

Then there is the new breed of identity theft protection companies. Take the guy who gives out his social security number in commercials and dares someone to steal his ID. This company is doing nothing more than activating fraud alerts on your credit reports every 90 days. You are paying them to make this phone call for you. In my opinion, they are doing something you can do for yourself. It is not a good use of money.

A fraud alert prompts a creditor to call you first in order to alert you that someone is trying to take out credit in your name. The problem is that this doesn’t always work. Also, according to the law, it is intended to be used if a consumer THINKS they could be or they already are a victim of identity theft.

If you are living in the state of Texas, you could take one step further and place a credit freeze on your credit reports. There is a cost associated with freezing and “un-freezing” your credit. However, this is the most effective way to protect your credit reports.

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

The Fastest Growing Crime in America is Growing Faster

The Federal Trade Commission declared identity theft the fastest growing crime in America….and for good reason. It is a crime without violence or much risk of getting caught and is extremely lucrative.

The loss or theft of personal data such as credit card and Social Security numbers soared to unprecedented levels in 2007. The Identity Theft Resource Center’s report lists more than 79 million records reported compromised in the United States in 2007. In 2006, only 20 million records were reported. This is personal information such as credit cards or Social Security numbers that were either lost or stolen. This could have happened through hackers getting into company databases, as well as all other types of identity theft scams. It is an alarming number.
Another group looked at the same statistic on a world-wide basis. The number soared to 162 million. That same statistic in 2006 was merely 49 million.

This is a major problem that is just getting worse. Thieves are finding new ways to get your information. Companies are not working hard enough to secure and protect information. It is also a crime that, for the most part, goes undetected. If someone shoots another individual, there is a good chance it will make the newspaper. Identity theft claims don’t make it in the newspaper. It is a crime that can go on for a long time without even getting detected.

There is also a mindset that “it will never happen to me.” Thus, people are not proactive enough. I want to change that mindset and make sure that you don’t become a victim. The good news is that it is easy to protect yourself against identity theft. Just like anything else, it takes time and a little investment of money to do so.

Over the next week, we will be discussing why debit cards are so dangerous when it comes to identity theft. My report on debit cards might make you rethink using them at all.

I will also be reviewing the various identity theft solutions that are aggressively marketed and tell you which ones are a waste of money and which ones make the most sense. When I tell you the truth behind some of these marketing campaigns, you will start to see that most of them are an insult to intelligence.

I will be writing about why fraud alerts don’t always work, as well as the new laws in the state of Texas that will put an iron clad lock on your credit reports.

Most importantly, I will write about what to do in the event that you are an identity theft victim. I will cover your first steps to dealing with the debt collectors. The bottom line is that consumers have to stay on alert, stop being so trusting, and start using some common sense. Identity theft thieves are counting on consumers to stay complacent.

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

Merry Christmas

Yesterday's blog was the last blog of the year. We will be out for the Christmas break. Hope everyone has a Merry Christmas!

The One Action That Will Change Your Financial Life

When I counsel with people who are in financial difficulty, I find one consistent theme. People who are in financial trouble and have no idea as to where their money is going each month or if it is a debt problem usually understand very little about the details of that debt.

I want that to change for everyone. Financial organization is the one step anyone can take that will start the process of getting finances back on the road towards prudent stewardship.

So what does financial organization mean? It simply means knowing the current state of your finances as well as where the money goes each month. Most people don’t know how much they’re spending. What’s worst, there is a lot of spending that goes on behind the other spouse’s back.

There are two keys to successful financial organization. First, you have to be willing to put everything on the table about money and communicate. When you have two people working under the same finances, both individuals need to be on the same page. Tracking your spending is the second key. Your finances would drastically change if you were to take thirty minutes each week to write down your expenses and put them into an expense category and then an additional thirty minutes each month to analyze and discuss.

Now, here is where the problem occurs. First, money is probably one of the hardest things to talk about in a marriage. Second, it is all about finding the time.

Well, I would agree with you about the first challenge. Communication about money is a tough one. However, there are ways to work through these issues. We are going to spend a great deal of time next year talking about this very issue. Second, I can’t buy into the time challenge. When you commit to something, you find the time.

When the clock strikes 12 on December 31st, you will have 525,600 minutes to get things done in 2008. I am talking about committing to 1,920 minutes next year to make a huge difference in your life. That amounts to 0.36% of your time. Now, it almost seems sort of ridiculous that one could not take 0.36% of his or her time to take the steps to make huge differences with their financial life.

This is a process of baby steps. What I am talking about today is the first step, which is to just commit to taking that time. The rest we will talk about next year.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are Extended Warranties Worth It?

Do extended warranties make sense? You probably have been in that situation before. You have researched and researched a certain item that you want to buy. You finally figure out the make and the model number and you are ready for purchase. You talk to the salesperson, check availability, and get ready to pay.

The whole time you know the dreaded question is coming. “Are you interested in an extended warranty today?” Let me show you how it works. If you have a real aggressive salesperson, then the benefits might be a little exaggerated. Maybe there is a claim of replacement no matter what. In any situation, no questions will be asked and your product will be replaced. Of course, if you read the fine print, you would get a different story.

The problem is one of emotion. Emotions get in the way. You start picturing your brand new item having a problem or getting damaged. You think about the cost. Then you rationalize that it is probably better to not risk it. You see it is human nature to do anything to avoid loss and the salespeople know that to be true.

Retailers bank on that emotional response. The last numbers that I saw suggested that extended warranties are a 15 billion dollar industry where maybe 20% is paid out in claims.

What do the experts say? In the majority of cases, the consumer advocates advise to say “no” to extended warranties. It is just not worth the money. Here are a few points to consider before you say “YES” to an extended warranty.

- How good is the original warranty on the product? How is the extended warranty in conjunction with the original warranty?
- How does the fine print compare to what the salesperson is telling you? Some retailers still pay out commissions for an extended warranty sale. Have them back up their claims with a look at the fine print.
- What is the hassle factor associated with getting something fixed? How long will you be without that product?
- What do reliability ratings say about the product that you are purchasing? If the reliability ratings are high, why even insure a low probability event?

If you really feel strongly about having that added protection, make sure that you do the following:

- Take some time to really study the fine print and understand the terms and conditions
- Create a file to store the receipt and a copy of the extended warranty
- Really evaluate if it is worth the cost and if this is an emotional decision being influenced by an aggressive salesperson
- In most cases, you can always go home and think about it then add it on the next day

I have to admit that I have wasted more money on these warranties in my life and rarely have had to use them. Most of the time, failures in electronics will show up early on during the original warranty. I have also found that the hassle factor is just not worth it.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are the Proposed Government Solutions Helping the Credit Markets?

Are the solutions presented by the Government and the Federal Reserve Board actually working? Well, if the market were voting, the answer would be no. None of these solutions presented by the Government have given the markets any confidence.

Yesterday was just another example of that as credit fears and potential inflation fears continue to grip the market with the S&P 500 dropping another 1.5%, leaving the stock market up by around 2% for the year.

The Federal Reserve Board has cut rates three times now. Treasury Secretary Hank Paulson unveiled some Super Fund coordinated by banks to stabilize the credit markets. Then the President unveiled a plan that is intended to save homeowners from rising interest rates on adjustable rate mortgages and in turn reduce the number of homeowners who are losing their homes.

There has been a consistency with all three actions. First, they arrive with a big fan fair. Second, the stock market reacts positively to the announcement. Third, the market quickly gets over the fanfare and continues to drop. Fourth, we hear very little about these programs going forward and have very few details to go on.

Unfortunately, there is not much that the Government can do to fix the mess that they sat by and allowed to develop.

For instance, the President’s new plan makes for a great political sound bite. However, in reality, there are too many moving parts and too many parties involved to just announce that all homeowners who fit a certain criteria will have their interest rates frozen. It is just not that easy.

So are there really any good answers? Yes, the best action is to allow the market to work through this on its own. That is the only viable solution so that we can get past this and go forward.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Federal Reserve Board Losing Control

There is the behind scenes manipulation, deciphering what the Federal Reserve Board Chairman says and trying to read between the lines. Wall Street has been trying to figure out the Federal Reserve Board for decades. The actions and words of the Federal Reserve Board yield a great deal of power over the markets.

Last week’s Federal Reserve Board meeting was highly anticipated. Wall Street felt strongly that the Federal Reserve Board would come to the rescue and greatly reduce both the discount rate and the federal funds rate. It would be a signal to the Street that the Federal Reserve Board acknowledges the risk in the credit markets and will do whatever necessary to help stabilize the markets.

Unfortunately, it didn’t quite turn out that way. The Fed lowered interest rates minimally and the stock market sold off. There was nothing stated that gave the markets any confidence that the Federal Reserve Board was on the job.

Then the next day, the Federal Reserve Board made a surprise move. Of course, they do so before the opening bell. They take a step back and put together this enormous coordinated global effort to provide liquidity for the banking system. The markets soared on that news.

Why didn’t the Fed just mention it following the Fed meeting? It was almost like they were back-pedaling after witnessing the markets’ reaction to their interest rate decision. It looks like they are losing control of the markets. It also looks like the markets are losing confidence in the Fed. If you look at all of these Federal Reserve Actions of pumping money into the markets and lowering discount and federal funds rates, the market has done nothing but go down.

Confidence is the last hope for this market. Confidence will prevent recession and a bear market. Unfortunately, it appears that confidence is slowly diminishing.

As you evaluate your investments for the new year, consider some of these risks. These are looking like very big risks.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Be Careful Who You Use to Refinance Your Mortgage

The mortgage markets are a mess. Getting a mortgage is a different ballgame today. We are beyond the days when you could just fog a mirror and get the keys to a house.

Credit is tight. Lending standards? Well, there are actual lending standards now. I have always said it is important to make sure that you go to someone who is more of a consultant than a salesperson.

Today, this is even more important. Through their marketing efforts, mortgage companies invite you to just pick up a phone and qualify for a loan. It is important to sit down with someone who is going to look at your situation and consult you. A consultant will look at your credit score, analyze your current mortgage, and help you get into the right type of financing.

I have known Alice White Hinckley for over 25 years and think that she is the best out there. If you are in need of mortgage help, I recommend her with confidence. If you didn’t get a chance to hear the show from yesterday, make sure you listen to the podcast.

Her email address is alwhite@firsthorizon.com.

Copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Be Careful Believing the Overly Bullish Stock Market Commentators

Earlier in the day, a stock market commentator had this to say about the Dow. He said if the Fed did nothing, the Dow would finish up around 16000. If they cut just 0.25%, it would finish at 18000. If the Fed cut 0.50%, it would finish up at 20,000.

With everything that is happening, how can these guys be so bullish? I think that Tuesday’s stock market told us a lot about this environment and what might be in front of us.

In just a matter of moments, the Dow Jones Industrial Average dropped 240 points as the Federal Reserve Board decided to decrease the federal funds rate 0.25%. A disappointed stock market reacted extremely negatively to that news. The stock market felt like the
Federal Reserve Board should do much more in its effort to fight what looks like an inevitable recession.

Should the stock market be so surprised? The answer is both yes and no. Yes, because the Federal Reserve Board has been very market friendly. It has made many decisions and taken actions to continue to prop up this stock market. This is why we have witnessed all of the bad news in the credit markets and yet it hasn’t dramatically affected the stock market.

At the same time, the stock market shouldn’t be surprised because the regulators need to allow these markets to work themselves out without a lot of government intervention. It is the healthiest way for us to get through this credit crunch.

So, after a rough November, what does this say about December? December is typically a strong month for the stock market. This type of weak market activity is a little unusual. However, it also goes along with my outlook for the stock market. I still feel that there is a good chance that we have started into a bear market.

It is important to make sure that you are not taking a tremendous amount of risk. My indicators are still showing that a bear market definitely cannot be ruled out.

If that is the case, go back to the three things that you can do in this type of situation and make a choice. First, do nothing. That is not a good choice. Second, reduce your exposure to stock by investing defensively. Third, invest offensively. There are ways to make money in a declining market.

Now some may think that I am completely off base and overreacting to one day of a sell-off. I am just putting the pieces together and the picture doesn’t look promising.

· Weakening economy
· Consumers facing massive amounts of debt
· One of the most severe credit problems we have seen in decades
· A severe real estate bust
· A market that is losing confidence in the Federal Reserve Board

Bear markets and recession are never announced ahead of time. You just have to look at the clues.

Copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Too Little Return versus Too Much Risk – Choosing the Right Money Market Account

So where is the best place for your money to stay safe? The whole idea with managing money that you might need is to keep it liquid. You always want the ability to get to the money. There is a going rate for that type of risk-free account, which is why it is good to know your options.

Let’s start with the lowest risk and lowest-paying account – the savings account.

We have always been taught to just open a savings account. Unfortunately, savings accounts pay virtually nothing in interest. I checked the going rate at one of the major U.S. banks. They are currently paying 0.20%. They are also using this low-paying account as the main savings account for one of their heavily marketed savings programs.

The second type of account would be a money market account.

Theoretically with a money market account, you position yourself to get a little higher return. Most money market accounts are FDIC-insured. They are considered deposit accounts in banks.

What is the big difference between a money market account and a savings account? The main difference is that a money market account will typically limit the number of withdrawals you can make, while a savings account has unlimited withdrawals.

The rate goes up a little in a money market account. At Bank of America, they will pay 1.75% up to $25,000 and then increases to 2.8% up to $50,000.

The third type of account would be a money market fund.

This is actually a mutual fund that invests in money market type instruments. It is considered a safe investment although you could lose money. Every dollar you place in the money market mutual fund represents one share that is worth $1. The accounts are arranged so that the $1 per share value never goes down.

So, what is a good rate for a money market mutual fund? At this time, Fidelity is paying 4.75%.

Could you lose money in a money market mutual fund? Well in a traditional money market mutual fund, the probability is much lower. It would have to be some type of dramatic situation. I have never heard of a traditional money market mutual fund losing money. However, I am not implying that it cannot happen.

If you are in the fourth category, you could lose money. The fourth category consists of enhanced or strategic money market mutual funds.

These take a little more risk to get a higher return. Unfortunately, it has been discovered that these funds have invested in these mortgage-backed securities and many are in trouble.

Just this morning, Bank of America announced they were closing their 12 billion dollar enhanced money market fund because of problems.

Where is the best place to look? This is not intended as advice. I think that the risk taken with a money market mutual fund makes the most sense. There is a big enough difference in return. However, there is one word of caution.

Make sure you are only using a traditional money market mutual fund and not one of the enhanced funds that are in that fourth category. It just isn’t worth the risk.

Copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Mortgage Industry Doesn't Even Understand the Problems

I overheard an interesting conversation one morning as I was sitting at Starbucks. It was between a mortgage broker and a guy who represents a company that sells leads to people in the mortgage industry. The list he gave consisted of people who have adjustable rate mortgages coming due and need to refinance.

It is amazing to me how people in the industry actually understand very little about what is happening in their own industry. We will call the guy from the lead company “lead guy”. We will call the guy from the mortgage company “mortgage guy”.

Lead guy is explaining to the mortgage guy that he can give him all types of leads based on any type of criteria. Mortgage guy states that he read that the Dallas Fort Worth area might be in the top five areas in the country for foreclosures when it is all said and done.

He said that he didn’t want any mortgages below $100,000 or any sub-prime debt. He is going to be paying up to $1 a lead. Unfortunately, he doesn’t realize that this is not just a sub-prime problem. People with good credit as well as bad credit are going into foreclosure. People with all types of balances (both big and small) are going into foreclosures.

The lead guy is selling him a list of the problem. The problem is adjustable rate mortgages. Unfortunately, the mortgage guy has no idea that this goes way beyond sub-prime issues. Even more unfortunate is the $1 he is going to pay per lead.

Speaking of mailers, I received a mailer from Countrywide today showing me how I could refinance my mortgage to a 40 YEAR MORTGAGE and save money each month.

The irresponsibility just never stops.

Copyright© 2007 Prudent Money and Bob Brooks. All rights reserved.

A Sobering View from a Mortgage Insider

“Even before this mortgage mess started, one person kept emailing me over and over saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A and beyond the imagination of most pundits, politicians and the press. When I asked him why somebody from inside the industry would be so emphatically sounding the siren, he said, “Somebody’s got to warn people.”

This was the beginning of Herb Greenberg’s blog and is one of the more sobering looks at the industry. Although a little long, it is a must read. It has a detailed description from twenty year mortgage veteran Mark Hanson. He ends the blog with this:

What I am telling you is not speculation. I sold BILLIONS of these very loans over the past five years.

Read More……

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Don’t Fall For This Scam

This is a new scam floating around. The other day, I received this email found below. I did a google search and found that they have actually scammed people out of their money.

First of all, let’s say that I did have an outstanding payday loan. These debt collectors use the telephone as a means of collections and not email. Secondly, they cannot just arbitrarily find an account and lawfully take money out of your banking account.

This is a scam designed to scare the recipient. They are hopeful that the person will call. My guess is that they have a pretty good success rate if the consumer actually calls. If you don’t know better, these collection inquiries can be very scary. Many times people will pay something that was never owed.

My reply back to them was:
“You and your company should be prosecuted for running this scam.”
I didn’t get a reply.

Email received reads as follows:

Subject: Check Recovery Notice for Case #2207-26wwd

I am contacting you because you have one or more payday loans that have
been referred to our collection department as a result of return payments by
your bank.

We have made numerous attempts to get in touch with you regarding repayment
of your account. Since you have demonstrated an unwillingness to voluntarily
settle the debt, you have been referred to Check Recovery. This automated system
is actively looking to locate any valid bank account associated with your name
and social security number. If such an account is found, Check Recovery will
move to recover the entire balance due at once.

If you would like to have control over how and when your obligation is
repaid, you need to contact me to put a firm payment plan in place. If I do not
hear from you by close of business November 28, 2007, I will assume you would
rather have my company take back what you owe, rather than paying it back on
your own terms. You may contact me by phone or
email.


Westbury Ventures
Phone: 1-800-859-6439 ext. 3487
Fax: 1-800-859-6450
adaugherty@ltsmanagement.com
adaugherty@dmsmktg.com

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Q and A on Market Timing versus Buy and Hold Investing

I've listened to some of your author interviews via podcast, and have really appreciated the great info, and picked up some of the books. Two questions:

QUESTION: I'm reading John Bogle’s book, "Common Sense Investing,” based on your interview, which really advocates a buy-and-hold index philosophy. His approach makes sense, but I can see from the graphs that if you sold at peaks (before the ten year lows), you would end up even better (some periods take ten years before they return to their previous peak value!). How do you reconcile this "market timing" vs. "buy and hold"? How do you feel about indexing vs. managed mutual funds?

ANSWER: Most financial writers will make blanket statements such as using index funds is a better strategy than using managed mutual funds. The truth of the matter is there are times when indexing works and there are times when managed funds are best. I would suggest that over the past three years, managed mutual funds were the better choice. However, in the late 90's, index funds were tough to beat. In fact, indexing with the S&P could be very tough as we go through this credit crisis (which still has a long way to play out). The S&P 500 is greatly influenced by financial stocks. One other thing you have to be careful of is the financial writer or talk show host who has the answer and claims that it is the only way to go about doing something. Remember, there is no holy grail when it comes to investing. Those are good questions - I wish everyone would think through what they hear and challenge it.

For more information on market timing versus buy and hold investing, listen here.

For more information on an investment program that is more than just buy and hold investments, go here.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Band-Aid Approach Continues

Who am I to criticize? I have no idea as to how I would handle this mortgage/credit/real estate mess. Being in a leadership position is a tough one today.

Let’s look at who is really responsible for this mess. Well, you could blame Greenspan. You could even start to fault Bernanke and Paulson to a degree with their extremely risky solutions to handling the current problem. You could blame the mortgage industry.

Ironically, the one person who should be taking responsibility is never mentioned in the blame game. Let me say that I respect President Bush and think that he not only inherited a tough situation, but has also had one of the toughest situations to preside over in decades. At the same time, he is the leader of this country and he sat back just like Congress and ignored it. He also allowed Greenspan to irresponsibly ignite the process through his policy decisions.

Now the Bush administration is practicing moral hazard by setting up a program that will freeze adjustable rate mortgages. Apparently, neither he nor his advisors have a clue as to the domino effect that this type of program will create.

I realize that they have to do something. However, this is not the answer. The answer is to let the irresponsibility work its way through the system. The answer to every problem that the Bush administration has faced has been to put a band-aid on the problem. Band-aid solutions just allow the problem to fester and become an even larger problem later.

I wish that President Bush would look at the reality of the situation. We need to stop tampering with the markets and let them adjust accordingly. We need to set up strict regulation so that the credit industry cannot continue to rip-off the consumer base. Most importantly, someone needs to put politics aside and lead this country.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Be Careful Believing the Numbers from Credit Counselors

Before I get started, there might credit counselors out there that are legitimate. I have seen many of these proposals and pored over the numbers.

I have found 100% of the time that the numbers on these proposals are completely wrong. Thus, they are misleading.

I looked at one this morning and they promised this listener that he would be out of debt in 41 months. He has roughly 10 debts. There are so many errors and misrepresentations on this page that I don’t have enough space to detail it all.

Let’s just start out with one. He has a Bank of America debt of $4,742 that he is paying $208 a month and the interest rate is 32%. The company said that they would lower that interest rate to 18% and he would pay $111 a month. Now they say he would be debt free in 41 months.

It would take him 69 months to pay $111 a month at 18%. That is 28 months more than the proposal states. In addition, he would be out of that debt in 35 months if he just kept on the regular schedule.

It is amazing that the Federal Trade Commission allows these companies to operate. The problem is that anyone can get into this business. People often ask me if this is a good solution. As you can see, it is not!

In addition, you run the risk of getting put in collections while in one of these programs. You also run the risk of penalties. You basically face all types of risks by participating.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Politicians and the Credit Industry

Yesterday, I wrote about how the credit industry is desperately trying to clean up their image because of pressure from Congress. Congress has really been putting the pressure on the credit industry to change their anti-consumer practices of charging outrageous fees and higher interest rates.

Since this makes perfect sense, why does it take an act of Congress (no pun intended) to get this accomplished? Why wouldn’t any self-proclaimed Congressional leader see the unethical nature of these credit practices and just pass legislation to fix them?

Well, it is because they are politicians. Through the years, the big hitters in the credit industry have lined the coffers of many a politician’s re-election campaign. Thus, you scratch my back and I will scratch yours.

They have heavily contributed to the Republican side of the aisle while not really showing much love to the Democrats. As a result, the Republicans allowed this to get completely out of control. Now, the credit industry probably wishes they would have shown a little more love to the Democrats now that they are in power.

So, the Democrats really don’t have a back to scratch so they are going after the credit industry…..or are they? The current legislation by Democratic Senators Levin and McCaskill is excellent legislation that would prohibit these anti-consumer practices.

It is so good that it brings up a red flag for me and begs the question, “Is this piece of legislation a campaign contribution negotiation technique?” In other words, if the credit industry will start scratching my back, we will make sure that this legislation is a little more credit industry friendly.

Sorry to be so critical of our leaders in Congress. However, they are politicians and politics is politics. This will be interesting to track.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The New Friendly Face of Credit – The Wolf behind Sheep’s Clothing

Congress has been coming down hard on the credit card industry for their use of the universal default clause. This is a clause in your credit card terms and conditions that you sign off on that gives credit card companies to ability to raise the default credit card rates as high as 32% if they determine that you have become a risk.

Chase has just recently announced their clear and simple plan. They are eliminating this practice as of March 2008. In a Dallas Morning News article, Capital One states that they raise a consumer’s rate only "if they pay us more than three days late twice in a 12-month period."

A spokeswoman for Bank of America said, "We do not engage, and never have engaged, in the practice of universal default for our consumer credit cards based on the customer's failure to repay obligations to other creditors."

So are credit companies really becoming more consumer-friendly? Not really.

Bank of America says that they never have engaged in the practice of universal default. However, if you look at their terms and conditions, it says:

We reserve the right to change the APRs in our discretion.

Another company that claims that they don’t engage in the practice has this on their terms and conditions:

In the future, we may increase your non-introductory APRs if market conditions
change.

I would define universal default agreement as the ability to change credit card rates for any reason. If you read the terms and conditions, they still reserve that right. They just don’t call it the universal default clause.

Remember, credit card companies just want the money that they make off of high interest rates, as well as the money that they make off of your mistakes. Be careful when a credit card company wants to be your friend.

My favorite is “a change in market conditions” – what about current credit conditions?

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are We Already in a Recession and Just Don’t Know It?

Another brutal day on Wall Street. After Friday’s rebound, stocks returned to the intense selling that has been the norm for November. Further fears in the credit markets sent the S&P 500 down 32 points, or 2.32%, and the Dow Jones Industrial Average down 237 points, or 1.83%. It was yet another tough day on Wall Street. This bad period for stocks started just twenty-five days ago on November 1st and it is already down 9% since that time period.

A look at stock prices can give us a real good perspective at how things are in economy. Stock prices are typically a good predictor of things to come.

Financial stocks are reflective of the big problems that we are facing in the credit markets. Citigroup, Merrill Lynch, and Bear Sterns are all close to a 50% decline from their 2007 stock market highs.

If you take a look at retail, it doesn’t get much better. Wal-Mart, a good overall barometer for consumer spending, is down levels not seen since October of 1999. If you were invested in that stock, you would be at the same stock price now that you were eight years ago.

I wrote about retail sales yesterday in my blog and on my stock market outlook because this will give us a very good indication of the health of the consumer. For the most part, retail sales were stronger this year than last year on Black Friday. However, much of this was due to the aggressive marketing of midnight sales and the fact that retailers were practically giving merchandize away.

Retailers have figured out that to get the consumer in the door you have to slash prices. The problem is that retailers cannot afford to continue to sell merchandise at these levels for the next thirty days. Wall Street is dependent upon consumer spending to keep this economy going.

So, taking a look at the housing market, consumer debt, high energy prices, lay-offs, and slowing wage growth, it begs one to ask the question: “Are we already in a recession?” If not, I think that we are getting ever so close to one. If we are, market investors need to take a look at their portfolios and consider battening down the hatches. The stock market does not do well in recessions. The average loss in a recession is over 30%.

So how do you respond? Make sure you review my article on the 3 ways of investing. The bottom line is to have a game plan and know your risk.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Happy Cyber Monday

I cannot stress the importance of this Christmas retail season. This is a big test for the consumer. Wall Street is bracing for the worst, expecting retail sales to be the lowest in five years.

Why is there such an importance placed on this year? I would argue that one of the main factors to keeping us out of a recession is consumer spending. The consumer has not slowed down in a very long time. Through the use of debt, consumer spending has remained vigilant even through the tough years at the beginning of this decade.

Last Friday (Black Friday) was the start of the Christmas retail season. This year, Black Friday was stronger than last year. So, are we in the clear? You have to look behind the headline numbers. I would argue that these numbers don’t even remotely tell the whole story.

1) In order to get customers in the stores, retailers had to give the items away. The discounts were extremely deep. For the debt trapped consumer, these deals were necessary. Thus, they are going to show up in droves.
2) The average amount of money spent per consumer was lower than last year. You could look at that stat in one of two ways. The average could be down because of the low prices or it could be down because consumers are spending less. I would suggest it is a little of both.
3) The marketing of the 3 a.m. and 4 a.m. sales was a huge hit. That, in combination with the low prices, packed the consumers into the stores.

The big question is what happens in the next few weeks before Christmas? What happens after the deep discounts end? This will tell volumes about the state of the consumer. As long as retailers are willing to lend money and defer payments, the sales should be propped up to a certain degree. However, I doubt we are going to see strong retail sales for this Christmas season.

Today is cyber Monday and is the online shopping version of Black Friday.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

More and More Scams

These are two examples that came in today of scams that listeners have received:

Example 1
I seem to be getting a lot of emails stating that I have won various lotteries from different countries from the U.K. to South Africa to Nigeria. These emails do not have my name in them, and I believe they are scams. Also, I keep getting emails about jobs in which I would cash checks and keep a percentage of the money and send the money back (usually to someone in another country) by wire transfer. I know these have to be scams, but I am afraid some people may be fooled by them. I almost got fooled by a check-cashing scheme by someone buying some Avon products from me (from my Avon website). Some of the emails sound very legitimate with official-looking information, but I always remember the saying "if it sounds too good to be true, it probably is." I just wanted to let you know about these check-cashing and lottery scams. I seem to be getting these emails everyday.

Example 2
Bob,
Caught part of your program on Monday and heard about the check scam. We have heard from a company in London called Long-well Textiles, LTD, and he is describing the same set up. Checks mailed to you, you cash, keep 10% and wire the rest to his account in London. The first envelope arrived today and we declined accepting it and he is most upset and saying it is not a scam. We had found some info on this on the internet, however, we have not located it again.

Please be careful – these scammers are working hard to steal your money!!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Government Grant Scam

A few weeks ago, I wrote about financial scams (read blog here) where people would give you a check to cash and tell you that you could keep some of that money just for cashing the check. You then cash the check, send them a part of the proceeds, and then the check bounces and you are out the money that you sent.

Well, there is another scam going right now and these scammers are bold in using advertisements and websites. It is the free grant money scam.

One listener writes in:

I know that this is too good to be true, but I wanted to run this by you....
Have you heard of www.Contactgrantpeople.com?
I just received a letter in the mail from this company stating that they
are a broker at Grant Organization and that I have been selected to receive a
$9960.00 cash grant. This money comes from large corporations and wealthy
individuals that give away money in a form of financial assistance. The
check is for $4980 and if I cash or deposit the check, I must send him his 10%
commission ($498.00) and then they will send the remaining $4980 airmail
express.

Now I cannot speak to whether or not these people are scammers. This is a real website. Everything that they advertise does fit. This is what the Federal Trade Commission had to say about this scam:

"The defendants advertised guaranteed 'free grants.' But the only grant was to
them. They took consumers' money, they did not honor their guarantees, and they
gave consumers nothing more than empty promises of free money," said Howard
Beales, Director of the FTC's Bureau of Consumer Protection. "Consumers should
keep in mind that most sources of grant money have strict criteria; they do not
give individuals money for nothing." (to read article, click here)

Here is a simple rule of thumb when it comes to this sort of thing:
Never take any offer where someone is just going to give you something for doing virtually nothing. There is no free lunch.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Is Your Money Market in Danger of Losing Money?

Are money market funds in danger of losing money due to short-term investments in bonds that hold sub-prime mortgages? The problems with sub-prime mortgages are apparently affecting money market accounts. Depending on what type of money market you have, there could be trouble brewing.

One money market account just recently offered its shareholders a way out of their account by accepting $0.96 for every $1 deposited.

This account was an enhanced money market account, which is an account designed to give a higher return than a normal money market account. In doing this, they take additional risk. Those funds will end up taking the loss. They can also be categorized as ultra-short bond funds, which are intended to be safer investments. However, one of the ultra-short bond funds year to date has had over an -8% loss.

What about money market accounts that have exposure to the risk from sub-prime loans? Of course, this isn’t something that you want to bank on. However, most major money market funds will step in and replenish their money market accounts with money to make up for any losses. A mutual fund or brokerage company that is a big player in the money market arena cannot afford the negative publicity that results from losses in accounts that are assumed to be relatively safe. People count on money market accounts to be safe. At the same time, you have to realize that they do take risk.

Keep in mind that money market accounts are not FDIC insured. Money on deposit in these accounts is insured by the FDIC for up to $ 100,000.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

How To Approach This Market – The Three Ways To Invest

I had a listener send me an e-mail a while back with this message. “You talk about how much risk is in the market. However, you never tell us what to do.” Well, I am here to give my analysis and teach you how to handle most things as a steward of your God-given assets. Most of the advice that I give is to be taken as general direction. It is a little bit tough to give specific advice when I don’t know your particular situation.

Generally speaking, there are three ways to face this stock market right now. Without question, you could find yourself in one of these three places.

1) Invest defensively – This would simply mean reducing your exposure to stocks and risky bond investments and increasing your cash and fixed investment exposure. I put together an entire analysis on this type of strategy. You can find the paper here.
2) Invest Offensively – There are ways to make money in bear markets or declining markets. They consist of investing in bear market type mutual funds and strategic investment strategy. For more information, you can go here.
3) Buy and Hold – This strategy never really made sense to me. If the risk is increasing in the stock market, it has been a longer-than-average time since we have experienced a bear market, and uncertainty is at a high, then just staying invested because you are invested for the long-term makes no sense to me. Investing is a probability game. If the probability of being invested has a potentially high probability of giving you high returns over the next six to twelve months, then stay invested. If the probabilities don’t seem to be that great, then go to either the first or second strategy.

The bottom line is to commit to strategy and have a sound basis for it. There are plenty of people that would disagree with my assessment of the third way to invest. However, keep in mind that it is extremely tough to just bounce back from a loss of -35%, which is the average loss of a bear market. At some point, we will face that situation again. Cycles still occur. Who knows the timing? At some point, it is important for every investor to acknowledge that timing might be sooner than later. Whether it is now or four months from now, I think that we are at that time.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Does It Make Sense To Pay Someone For A Bi-Weekly Mortgage Program?

I had a listener call in last week with a question about bi-weekly mortgage payments. Does it make sense to pay someone to make your payments for you on a bi-weekly basis?

First, let’s go over the concept of bi-weekly mortgages. A bi-weekly mortgage payment is paid every two weeks instead of being paid once a month. As a result of this strategy, you end up paying one additional payment a year and could pay off your mortgage approximately seven years sooner. In most cases, it is almost impossible for you as a consumer to make these bi-weekly payments without the assistance of a biweekly program.

These programs can cost as much as $ 295 to set-up and $ 5.50 a month for maintenance. Are these programs worth it?

There are two other ways to get an extra payment in each year. First, you could increase your payment each month so that at the end of twelve months, you have paid thirteen months’ payments instead of twelve months’ payments.

You could also just make one extra payment at the beginning of the year. Let’s look at the results of these three strategies using a $100,000 mortgage, 30 year fixed, at 7% interest rate.

Strategy 1 – Divide up the extra payment over twelve months
Total Interest Paid $ 105,381

Strategy 2 – One extra payment a year
Total Interest Paid $ 106,660

Strategy 3 – Bi-Weekly Payment
Total Interest Paid $ 103,958.73

It would look like the best strategy is the third one. Remember that I said you would have to use a service in order to make the bi-weekly payments. Therefore, we need to add that cost into the equation.

Costs for Strategy 3:
Total monthly costs of $ 5.50 a month over lifetime of program $ 1,545.50
Total upfront cost $ 295.00
Total Costs $ 1,840.50

So does it make sense to use a service?

Strategy 1 You do it yourself
Total interest $ 105,381

Strategy 3 You pay someone for a bi-weekly program
Total interest plus program costs $ 105,799.23

Why pay someone an additional $ 418.23 to do something that you can do for yourself for free?

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Don’t Fall For The Fake Check Scam

There is a scam sweeping the nation where people are losing an average of $3000 to $4000 if they fall for it. It is a fake check scam. Here is how it works:

This scam takes on many different forms. So the form is not what is important. The important thing is to be able to identify the basis of the scam. It all starts when someone gives you a realistic-looking check or money order and asks you to send cash somewhere in return.

The person will typically have a very sensational story to back up this request. You deposit the fake check or money order, send the cash, and then, just like that, you are personally out all of that money.

The problem with these scams is that the money order and the check look very real. If you present it to the bank, they are going to honor it and deposit it into your account. The problem comes when the bank discovers that the check or money order is a fake. Then you are out the money.

Some examples of the scam:
- The Scammer will ask you to cash a check or money order as a favor.
- If you are selling something, they will write the check or money order for more than the price requesting cash back.
- It might be a company that hires you to work at home, and as part of your job duties, you deposit checks or money orders in your account.
- It could be a check that you receive as part of an advance for winning a sweepstakes or some type of foreign business deal.

Scammers are also looking for victims on Ebay, Craig’s list, online dating sites, etc.

So how do you protect yourself from being a victim? First, don’t just automatically trust someone in any transaction that you don’t know. That is the number one rule of thumb. If it involves money and favors, don’t trust it. Second, there is a not legitimate reason why anyone would have you cash a check for them and then send the money. Third, there has to be risk involved if you are dealing with someone who can’t get a check cashed.

Finally, don’t do anything that involves money or giving personal information in any situation where you are approached. If someone calls you and asks for verification of information, don’t give it to them. If you approached through an e-mail, don’t respond.

That one piece of advice will work to prevent most scams from being successful.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Can You Ever Save Too Much Money? Saving With a Purpose

I received an interesting e-mail from a listener the other day.

“Is there such a thing as saving too much? My husband and I don't have any credit card debt, car loans, etc. We only have our mortgage in the way of debt. I contribute the max to my 401k and also have $75 auto-drafted into a savings account weekly. I think I am doing all the right things, but it often feels like we are ‘scraping by’. I think saving is the right thing to do, but my husband feels that I am ‘rat holing’ money and wants me to loosen up. Is there such a thing as saving too much?”

The answer in short is yes. There always has to be a balance between saving and spending. Most of the time, it is the other way around. The spending is way out of line in relation to saving.

You only want to save the amount of money necessary to help you achieve your goals. Thus, you need to save with a purpose. A saving plan needs direction. Without direction, you could catch yourself overdoing it and experience the feeling of just “scraping by.”

So, go through this process. Determine what you are saving for. For most of us, that would be retirement. So, let’s use that as the example. Determine what age you are going to retire. Determine the amount of money you need each month. Determine how long you think that you will need that money being paid to you each month.

Then add in social security, any pensions, and current investments. With all of that data, a financial advisor can tell you approximately how much you need to be saving each month. If you are achieving that monthly amount, then you are reaching your savings goals. That is saving with a purpose!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are These Debt Negotiation Companies Worth It?

This might be too long for a blog. However, I thought it was important to expose the reality of these so-called debt solution companies. Most of these companies will market that they can take your current debt and negotiate on your behalf to reduce that amount by up to 80%. I received a proposal that a listener received from a debt settlement company for $ 48,000.00 worth of debt.

This company proposed that they were going to reduce his debt by roughly 60% and he was going to owe only $ 19,014.27. However, he was going to pay this company $ 7,313.18 for that service.

Here is the reality of these services:

Contrary to what they say, most creditors will aggressively negotiate with anyone past a certain point. This is not rocket science and something that you can do for yourself.

In their proposal, they start with a certain amount of debt. They give you a dollar amount that you are going to pay each month for 48 months to complete their “forecasted” program. However, they cannot guarantee that the penalties and interest on those debts will go away. It is very likely that over the next 48 months, that original $ 48,000 debt will have greatly increased due to penalties and interest.

They get paid the entire fee up-front. The first 13 payments will go to fund their fee. After that, you are at their mercy. They have been paid.

Creditors can still choose to sue you. They will not represent you in a lawsuit. If you are sued, you are on your own. This is the big risk. You have 48 months (in Texas) that you are potentially subject to a lawsuit. Whether you are with a company or not, you are at risk of a lawsuit.

If any of your accounts are current prior to accepting the program, they will go into default and ruin your credit. For this system to work, they have to be extremely behind.

These companies state they will stop debt collector calls. You can stop debt collector calls with a simple letter.

The bottom line is that you are going to pay big bucks upfront to a company that will make sure that your credit goes into the tank, offer no protection from being sued, and negotiate on your behalf something that you can do yourself.

It is yet another smoke and mirrors marketing scheme from the credit industry. Unfortunately, only time will tell if a program like this will work. You sign off that there are no guarantees. As in the case presented above, this listener will be out $ 7,000 within the first 13 months, whether it works or not.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Trading Stocks and Waxing Cars is Easy – Just Ask the Guy on the Commercial

I don’t know whether to take it as an insult to intelligence or marketing genius. I love these late night infomercials or the commercials on satellite radio that market the secret formula for making millions in stocks.

“Hey Bill, where did you get that new car, that new house, and that new speed boat?” “Why Jack, I made that money trading stocks in my spare time.”
“How did you ever learn to trade stocks?” asks Jack.
“I simply went to this website and ordered this CD that tells me everything that I need to know. Anyone can do it.”
(I really cannot make this stuff up)

As I listen to those types of commercials, a few thoughts cross my mind. First, could that type of commercial really entice someone to call and order some informational CD, suckering them into spending thousands of dollars on some bogus stock trading system? Second, if these companies are spending all of this money marketing this garbage, it must work. Finally, this type of marketing is intended to appeal to a powerful emotion.

Show me the Holy Grail, something that is easy, and a slam dunk way to make money.

The problem is that it doesn’t quite work that way. As Michael Covel says in his excellent book called “Trend Following,” there is no holy grail. There is no slam dunk way to make money in trading stocks. Even the greatest of stock traders will tell you that no one has it figured out.

Trading stock is tough. If it weren’t, everyone would be doing it and no one would be losing money. Unfortunately, stock trading doesn’t quite work that way. Always remember marketing often creates a fantasy world that has a slim chance of actually turning into reality.

Don’t become a marketing casualty. The bottom line is that there are no slam dunk solutions.

I wish I would have known that the day I bought a bottle of that miracle car wax at the State Fair. If you have been to the car show, you probably saw the presentation. It is the wax that turns your faded dull car instantly into a brand new shiny car. You can set your hood on fire (I didn’t actually try that one) and nothing happens to the car.

Well, years ago I tried it on an older car with faded paint. Imagine that! My paint didn’t turn out to be a shiny new car again. Why? Because there is no slam dunk solution!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Why Is The Federal Reserve Board So Concerned?

The Federal Reserve Board is taking unusual actions in the markets in the face of what seems like a healthy economy and a stock market that is up nicely year to date.

In the last twenty four hours, the Fed has taken some very unusual emergency-like actions, as if we are facing some unspoken crisis.

In the past day, the Federal Reserve Board has taken three steps:

1) Lowered in federal funds rate
2) Lowered the discount rates making it easier for banks to borrow money
3) Pumped 41 billion dollars into the U.S. financial system

Why is this so unusual? Let’s look at the federal funds rate first. Typically they lower those rates when inflation concerns are not present and the economy is strong. Well the economy showed good growth yesterday in the 3rd quarter. There are definitely inflationary pressures with oil at record highs well over $ 90 a barrel.

Thursday’s infusion of 41 billion dollars into the U.S. financial system is the largest cash infusion since September 2001. In 2001, we were facing a stock market that was getting clobbered, a weak economy, and a devastating terrorist attack. Today, we have strong economic growth and what appears to be a strong stock market.

However, is everything so strong? This comes back to my central argument about debt. This is a debt problem. It was reported today that foreclosures have doubled over the past year. Other types of loans besides mortgages are going into default at an alarming clip. The record price of oil will start to make its way to the gas price, creating even more pressures on the consumer. Finally, signs are showing that the consumer is getting into trouble and that consumer spending is at risk.

The problem is that a debt bubble is bursting. It is a slow process and it takes a little while for it to spread through the system. Some will argue that the Fed will be able to save the day. Well there comes a day when their life-saving strategies might not work. If you look at these extraordinary measures taken over the past twenty four hours and you look at Thursday’s stock market decline. It doesn’t appear to be much in the way of confidence.

I know that I have been on this bearish bandwagon for a while now. Just because things have not shown up doesn’t mean that they are not there. Please be aware of the risk that you taking.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.