Don’t Confuse a Marketing Solicitation with an Actual Offer

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

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

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

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

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

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

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

Rules of thumb:

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

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

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

Congress Doing Its Part To Make America Great

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

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

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

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

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

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

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

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

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

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

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

Is Debt A Sin?

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

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

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

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

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

So is debt a sin?

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

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

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

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

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

Uncertain Times is the Theme of 2008

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

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

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

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

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

Another Week, Another Government Bail-Out Plan

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

Here is what all of these plans have in common:

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

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

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

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

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

Marketing that is an Insult to your Intelligence

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

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

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

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

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

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

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

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

Getting out of High Interest Debt the Right Way

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Should I Stay or Should I Go?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What You Need To Know If You Are Refinancing A Mortgage

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

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

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

2) It might not make sense for you to refinance

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

3) Understand the fees that you are paying

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

4) There are no good deals

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

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

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

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

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

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

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

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

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

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

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

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

Take Action!

Send this sample letter to Senators Cornyn and Hutchison:

Subject: Support Inclusion of Housing in the Economic Stimulus Package

Dear [decision maker name inserted here],

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

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

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

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

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

Sincerely,

Alice Hinckley

Take Action!

Hillary Clinton’s Solution to the Credit Problems in America

First, let me state that the problem with the credit industry in America is politicians. Politicians in the name of campaign support have protected this industry and allowed a huge problem to occur. There is very little Federal regulation of credit card companies.

So now that Hillary is running for President, she is concerned about fixing this problem. She never seemed to be concerned while she was serving as a Senator.

Now some of her colleagues have some great legislation on the table that should be passed. This Fair Credit for Families Agenda is a joke. This is what concerns me about the Clintons. They are blatantly political and offer nothing but political sound bites that don’t solve anything.

Here is her latest solution for credit industry reform:

· Cap penalty interest rates at 30% - Well Senator Clinton, that is just about where most penalty rates are right now. Capping them at 30% does nothing for the American consumer and still protects the credit industry.
· Prevent card companies from unfairly increasing interest rates – In order to do this, politicians would be forced to write legislation that at the end of the day, they just will not write. The only way to solve that problem is to forbid a company to raise rates unless the card holder was late two times or more. Even then, there should be some restrictions. If you take away the universal default clause, they find other creative ways to raise rates.
· Credit card companies cannot raise your interest rate without your affirmative written consent – I really cannot make this stuff up.

“Hillary will require lenders to obtain written consent from a borrower before any rate increases or change in terms become effective.” So, if I don’t want a credit card company to raise my rates, I will just write them and tell them “don’t do that!” or just refuse to agree to it. What did she say?

We need a real leader to stand up and stop the abuse. I only write these blogs about her press releases so that you get the real information. These sound bites are nothing more than political banter. Please don’t elect four years of this sort of thing.

Please give us a real leader to vote for!

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

It is a Good Thing that Senator Clinton has this Housing Mess Figured Out!

NEWS FLASH!!!!!! Senator Clinton revealed her plan yesterday to “bring our nation’s financial house in order.” This was from her press release.

“Simply put, in order to bring our nation's financial house in order, we need to begin with housing itself. That is why my economic stimulus plan calls for $30 billion in assistance to states and communities to help them fight foreclosures. I have also called for a 90-day moratorium on sub-prime foreclosures and a five-year freeze in rates on sub-prime adjustable mortgages.”

There are two things that frighten me about politicians. First, they could potentially know very little about the economy and the housing markets. During the political season, politicians tend to turn into economists. Second, politicians actually think that the American people are that stupid. If it were as easy as 1-2-3, the current administration would have already fixed it.

First, there is an estimated 1 trillion dollars of adjustable rate mortgages still to reset over the next few years. Throwing $ 30 billion in aid to the housing problem is like giving an antibiotic to someone who has a fatal disease. In addition, bailing out homeowners by providing assistance creates moral hazard. This is not a good precedence.

Second, by freezing sub-prime rates, you throw out the basis of contract law. President Bush already tried to offer this as a solution. However, he soon found out the disaster he would have created by doing so. This type of thing creates huge problems in our credit and investment markets. The lawsuits could potentially get completely out of control.

Third, please stop calling it a sub-prime problem. It goes way beyond sub-prime mortgages.

When evaluating the candidates, remember political sound bites offering “the” solutions is the method of getting elected. Don’t be fooled that these politicians actually have an answer. If there were a solution, the current administration would have already figured it out.

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

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.