Zombie Debt: Is It Coming for You?
Zombie debt is old and often expired debt that could be revived after being purchased by a collection agency for pennies on the dollar — or less. These “debt scavengers” have plenty of incentive to cast a wide net and take aggressive steps to collect even a small portion of the original debt.
If you are contacted by a debt collector, it could be for a debt you already repaid or don’t owe. For debts written off by creditors long ago, some records might be lost or unreliable. If you don’t remember crossing paths with the creditor, it’s possible that the debt in question belongs to someone else with a similar name or is the result of identity theft.
One example is a recent wave of zombie second mortgages threatening families with the loss of their homes. After the 2008 housing crash, many homeowners had their mortgages modified and presumed (or were told) that their second loans were forgiven. Now that home prices have risen around the nation, more investors who bought defaulted second mortgages are moving to collect those debts, even if it means foreclosing on the homes.1
Unfortunately, this is just one of the ways that zombie debt could come back to haunt you, and depending on the circumstances, you may or may not be responsible for paying it back.
More types of zombie debt
Time-barred debt. You may be contacted about a debt that is beyond the statute of limitations — the length of time during which you can legally be sued by a creditor or debt collector over an unpaid debt. These limits differ based on the type of debt and can vary widely by state, though they generally range from three to 10 years. When a debt is “time-barred,” a debt collector may still try to convince you to repay it voluntarily.
Discharged debt. This refers to debt that has been legitimately wiped out through a bankruptcy case.
Settled debt. A lower payoff on non-secured debt (such as medical or credit-card debt) might have been negotiated with the creditor in exchange for forgiveness of the remaining balance.
Beware of scare tactics
Debt collectors are not allowed to use abusive language, constant harassment, or deception to intimidate you into repaying a debt that is beyond the statute of limitations or is not actually yours — but it’s been known to happen. They might threaten to sue, even if it’s illegal to do so, then offer to leave you alone if you make a partial payment.
Don’t get tricked. In some states, making one small payment on an expired debt can reset the statute of limitations and bring it back to life. The collector could then legally pursue the entire amount. Repaying part of a debt that was never yours could be interpreted as admitting it does belong to you.
Tips for fighting off debt scavengers
How should you respond if you are contacted about a zombie debt? Don’t panic, and don’t immediately make a payment or provide any personal information. On the other hand, it might not be wise to assume it’s a scam and ignore calls or letters from a collection agency.
Start by asking for a debt validation letter, which should include information about the original creditor, the amount of the debt, and when it was incurred. Don’t say anything to a debt collector until you have a chance to research the details, verify the debt is really yours, and determine whether it falls within the statute of limitations.
If you confirm that the debt is a mistake, has already been paid, or is expired, send a letter disputing the debt within 30 days (and keep a copy for your records). If it shows up as delinquency on your credit report, you can also file a dispute with the credit agency. You are entitled to a free copy of your credit report weekly from each of the three nationwide credit agencies: Experian, TransUnion, and Equifax. Visit www.annualcreditreport.com for more information.
Sometimes a zombie debt results from a long-forgotten charge and/or a bill left behind unknowingly when moving from one place to another. If you discover that you do owe the debt and have the money, resolving the unpaid account could help protect your credit. If you can’t pay the entire amount right away, you may be able to negotiate a payment agreement.
Receiving a collection notice for a home mortgage could be a more serious and costly threat. If you are contacted by an unfamiliar lender demanding money for a second mortgage, check the title report for any encumbrances or liens attached to your property. If you find one, consider consulting an attorney to help negotiate with the lienholder or challenge the debt in court, depending on your personal situation.
1) NPR.com, May 18, 2024
Is the Yield Curve Signaling a Recession?
Long-term bonds generally provide higher yields than short-term bonds because investors demand higher returns to compensate for the risk of lending money over a longer period. Occasionally, however, this relationship flips, and investors are willing to accept lower yields in return for the relative safety of longer-term bonds. This is called a yield curve inversion because a graph showing bond yields in relation to maturity is essentially turned upside down (see chart).
A yield curve could apply to any bonds that carry similar risk, but the most studied curve is for U.S. Treasury securities, and the most common focal point is the relationship between the two-year and 10-year Treasury notes. The two-year yield has been higher than the 10-year yield since July 2022, and beginning in late November, the difference has been at levels not seen since 1981. The biggest separation in 2022 came on December 7, when the two-year was 4.26% and the 10-year was 3.42%, a difference of 0.84%. Other short-term Treasuries have also offered higher yields; the highest yields in early 2023 were for the six-month and one-year Treasury bills.1 (Although Treasuries are often referred to as bonds, maturities up to one year are bills, while maturities of two to 10 years are notes. Only 20- and 30-year Treasuries are officially called bonds.)
Predicting Recessions
An inversion of the two-year and 10-year Treasury notes has preceded each recession over the past 50 years, reliably predicting a recession within the next one to two years.2 A 2018 Federal Reserve study suggested that an inversion of the three-month and 10-year Treasuries may be an even more reliable indicator, predicting a recession within about 12 months.3 The three-month and 10-year Treasuries have been inverted since late October, and in December and early January the difference was often greater than the inversion of the two- and 10-year notes.4
Weakness or Inflation Control?
Yield curve inversions do not cause a recession; rather they indicate a shift in investor sentiment that may reflect underlying economic weakness. A normal yield curve suggests that investors believe the economy will continue to grow, and that interest rates are likely to rise with the growth. In this scenario, an investor typically would want a premium to tie up capital in long-term bonds and potentially miss out on other opportunities in the future.
Conversely, an inversion suggests that investors see economic challenges that are likely to push interest rates down and typically would rather invest in longer-term bonds at today’s yields. This increases demand for long-term bonds, driving prices up and yields down. (Bond prices and yields move in opposite directions; the more you pay for a bond that pays a given coupon interest rate, the lower the yield will be.)
The current situation is not so simple. The Federal Reserve has rapidly raised the benchmark federal funds rate to combat inflation, increasing it from near 0% in March 2022 to 4.25%–4.50% in December. As the rate for overnight loans within the Federal Reserve System, the funds rate directly affects other short-term rates, which is why yields on short-term Treasuries have increased so rapidly. The fact that 10-year Treasuries have lagged the increase in the funds rate may indeed mean that investors believe a recession is coming. But it could also reflect confidence that the Fed is winning the battle against inflation and will lower rates over the next few years. This is in line with the Fed’s projections, which see the funds rate peaking at 5.0%–5.25% by the end of 2023, and then dropping to 4.0%–4.25% in 2024 and 3.0%–3.25% in 2025.5
Inflation slowed somewhat in October and November, but there is a long way to go to reach the Fed’s target of 2% inflation for a healthy economy.6 The fundamental question remains the same as it has been since the Fed launched its aggressive rate increases: Will it require a recession to control inflation, or can it be controlled without shifting the economy into reverse?
Other Indicators and Forecasts
The yield curve is one of many indicators that economists consider when making economic projections. Among the most closely watched are the 10 leading economic indicators published by the Conference Board, with data on employment, interest rates, manufacturing, stock prices, housing, and consumer sentiment. The Leading Economic Index, which includes all 10 indicators, fell for nine consecutive months through November 2022, and Conference Board economists predict a recession beginning around the end of 2022 and lasting until mid-2023.7 Recessions are not officially declared by the National Bureau of Economic Research until they are underway, and the Conference Board view would suggest the United States may already be in a recession.
In The Wall Street Journal’s October 2022 Economic Forecasting Survey, most economists believed the United States would enter a recession within the next 12 months, with an average expectation of a relatively mild 8-month downturn.8 More recent surveys of economists for the Securities Industry and Financial Markets Association and Wolters Kluwer Blue Chip Economic Indicators also found a consensus for a mild recession in 2023.9–10
For now, the economy appears fairly strong despite high inflation, with a low November unemployment rate of 3.7% and an estimated 3.8% Q4 growth rate for real gross domestic product.11–12 Unfortunately, the indicators and surveys discussed above suggest an economic downturn in the next year or so. This would probably cause some job losses and other temporary financial hardship, but a brief recession may be the necessary price to tame inflation and put the U.S. economy on a more stable track for future growth.
U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Forecasts are based on current conditions, are subject to change, and may not happen.
1, 4) U.S. Treasury, 2023
2) Financial Times, December 7, 2022
3) Federal Reserve Bank of San Francisco, August 27, 2018
5) Federal Reserve, 2022
6, 11) U.S. Bureau of Labor Statistics, 2022
7) The Conference Board, December 22, 2022
8)The Wall Street Journal, October 16, 2022
9) SIFMA, December 2022
10) USA Today, December 15, 2022
12) Federal Reserve Bank of Atlanta, January 5, 2023
U.S. Credit-Card Debt Levels See Record Drop in 2020
Despite the financial challenges experienced by Americans as a result of the coronavirus pandemic, U.S. credit-card debt dropped to record levels in 2020, decreasing by almost $83 billion. 1) This unprecedented drop was likely the result of individuals receiving financial assistance through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and having access to more cash. Economic aid in the form of stimulus payments, suspended student loan payments, and broad state-sponsored unemployment benefits, allowed Americans to pay down their balances. 2) In fact, according to a U.S. Census Bureau survey, almost 60% of adults in households that experienced a loss in employment income during the pandemic used their second stimulus check to pay down debt. 3)
If you are still struggling to pay down your balances, here are some strategies to help eliminate your credit-card debt.
- Pay off cards with the highest interest rates first. If you have more than one card with an outstanding balance, one option is to pay the most to the card with the highest interest rate and continue making payments to your other cards until the card with the highest interest rate is paid off. You can then focus your repayment efforts on the card with the next-highest interest rate, and so on, until they’re all paid off.
- Apply for a balance transfer. Many credit-card companies offer highly competitive balance transfer offers (e.g., 0% interest for 12 months). Transferring your credit-card balance to a card with a lower interest rate may enable you to reduce interest charges and pay more against your existing balance. Keep in mind that most balance transfer offers charge a fee (usually a percentage of the balance transferred), so be sure to do the calculations to make sure it’s cost-effective before you apply.
- Pay more than the minimum. If you pay only the minimum payment due on a credit card, you’ll continue to carry the bulk of your balance forward without reducing your overall balance. Instead, try to make payments that exceed the minimum amount due. For more detailed information on the impact that making just the minimum payment will have on your overall balance, refer to your monthly billing statement.
- Look for other sources of available funds. If you always seem to find that you don’t have the extra cash available to pay down your balances, you may want to look for other sources of available funds. Are you expecting an employment bonus or other financial windfall in the near future? If so, consider using those funds to help eliminate or pay down your credit-card debt.
1) Credit Card Debt Study, WalletHub, March 2021
2) Credit Card Debt in 2020, Experian, November 2020
3) Household Pulse Survey, U.S. Census Bureau, March 2021
National Consumer Protection Week: Beware of Pandemic Scams
This past year, scam artists have taken advantage of people’s concerns over the coronavirus pandemic to defraud them of money. According to the Federal Trade Commission (FTC), consumers reported losing more than $3.3 billion to fraud in 2020, up from $1.8 billion in 2019. (1)
This week is National Consumer Protection Week, the perfect time to take steps to protect yourself from the increase in fraud, identity theft and other scams. Here are some of the latest ones to watch out for.
Unemployment benefit scams
According to the U.S. Department of Labor, there has been a surge in identity theft related to unemployment insurance claims. In fact, over $5 billion in potentially fraudulent unemployment claims were paid between March and October of 2020. (2)
Typically, these types of scams involve a fraudster trying to use your personal information to claim unemployment benefits. If you receive an unexpected prepaid card for unemployment benefits, see an unexpected deposit from your state in your bank account, or receive a Form 1099-G for 2020 unemployment compensation that you did not apply for, report it to your state unemployment insurance office as soon as possible.
Economic impact payment scams
Scammers have come up with a number of schemes related to the economic impact payments sent to taxpayers by the federal government. It is important to note that at this time, all first and second economic impact payments have already been sent out. A third economic impact payment may be sent out to taxpayers in March.
The IRS is warning taxpayers to be aware of scammers who:
- Use words such as “stimulus check” or “stimulus payment” instead of the official term, “economic impact payment”
- Ask you to “sign up” for your economic impact payment check
- Contact you by phone, email, text or social media for verification of personal and/or banking information to receive or speed up your economic impact payment
In most cases, the IRS will deposit economic impact payments directly into accounts that taxpayers previously provided on their tax returns. If the IRS does not have a taxpayer’s direct-deposit information, a check or prepaid debit card will be mailed to the taxpayer’s address on file with the IRS. For more information visit irs.gov.
Fraudulent products and vaccine scams
This past year, the Federal Trade Commission has warned about scam artists attempting to sell fraudulent products that claim to treat, prevent or diagnose COVID-19.
With the arrival of new COVID-19 vaccines, the FTC is warning consumers to also be wary of possible vaccine scams. The FTC is urging consumers to contact their state or local health department in order to find out how, when and where to get a COVID-19 vaccine. In addition, the FTC warned consumers to avoid scammers who:
- Offer to put your name on a vaccine list or get early access to a vaccine for a fee
- Call, text or email you about the vaccine and ask for financial information
Protecting yourself from scams
Fortunately, there are some things you can do to protect yourself from scams, including those related to the coronavirus pandemic:
- Don’t click on suspicious or unfamiliar links in emails, text messages or instant messaging services — visit government websites directly for important information.
- Don’t answer a phone call if you don’t recognize the phone number — instead, let it go to voicemail and check later to verify the caller.
- Keep device and security software up to date, maintain strong passwords and use multi-factor authentication.
- Never share personal or financial information via email, text message or over the phone.
- If you see a scam, be sure to report it to the FTC at ftc.gov, the Treasury Inspector General for Tax Administration (TIGTA) at tigta.gov and your local police department.
(1)Federal Trade Commission, February 2021
(2)U.S. Department of Labor, February 2021
GameStop, Reddit, and Market Mania: What You Need to Know
Over the course of 11 trading days from January 13 to January 28, 2021, the stock of GameStop, a struggling brick-and-mortar video game retailer, skyrocketed by more than 2,200% — creating a mix of excitement and concern throughout the financial world, as well as among many people who pay little attention to the stock market.1 Other stocks of small, struggling companies made similar though less dramatic moves.
At the heart of this story are two very different sets of investors: (1) professional managers of multibillion-dollar hedge funds, who took large, risky positions betting that GameStop stock would drop in price; and (2) a small army of individual investors, connected through social news aggregator Reddit and other social media sites, who worked together to buy large numbers of shares in order to drive the stock price up.
As the stock price rose, fund managers were forced to buy more and more shares at ever-increasing prices to “cover their bets,” while individual investors continued to buy shares in hopes of continuing the momentum. The opposing forces created a feeding frenzy that sent the stock to dizzying heights far beyond the fundamental value of the company.2 The stock price peaked on January 28 and lost almost 90% of its peak value over the next five trading days.3
If you are confused, concerned, intrigued — or a combination of all three — here are answers to some questions you may have about the recent market volatility triggered by “meme” stocks, an Internet term for stocks heavily promoted through social media.
1. What is a hedge fund, and what were the hedge funds doing?
A hedge fund is an investment company that uses pooled funds to take an aggressive approach in an effort to outperform the market. These funds are typically open to a limited number of accredited investors and may require a high minimum investment. Hedge funds use various high-risk strategies, including buying stock with borrowed money or borrowing stock to sell, called buying or borrowing on margin. This enables the fund to increase potential profits but also increases potential losses. (Individual investors can use these high-risk techniques, but the investor must meet certain financial requirements in order to establish a margin account and accept the increased risk.)
In this case, certain hedge funds borrowed shares of GameStop and other struggling companies on margin from a brokerage firm and sold the shares at the market price, with the expectation that the share prices would drop significantly by the time they had to return the shares to the lender. The funds could then buy shares at the lower price, return the shares, and pocket the difference, minus fees and interest. When GameStop share prices began to rise quickly against expectations, the “short sellers” began to buy shares at market prices in order to protect against future losses. These purchases helped drive share prices even higher — supply and demand — which led to more purchases and even higher prices. This created a situation known as a short squeeze.4
To understand the level of risk faced by the short sellers, consider this: An investor who owns shares of a company can lose no more than 100% of the investment, but there is essentially no limit to the potential losses for a short seller, because there is no limit to how high a stock price might go. This is why short sellers were willing to buy at ever-increasing prices, accepting large losses rather than risking even larger losses. In addition, they were forced to add additional funds and/or other securities to their accounts to meet margin requirements; investors must keep a certain percentage of the borrowed funds as collateral, and the higher the stock prices went, the more collateral was required in the margin accounts.5
2. What is Reddit, and what were the Reddit investors doing?
Reddit is an online community with more than a million forums called subreddits in which members share information on a particular topic. Members of a subreddit dedicated to investing coalesced around a strategy to buy GameStop stock in order to push the price up and squeeze the hedge funds. The potential for this strategy was first suggested on the forum in April 2020, but it exploded on Reddit and other social media sites in January 2021, after a change in the GameStop board of directors that encouraged bullish investors coupled with an announcement from a well-known short seller predicting that the stock price would quickly drop.6
While some investors genuinely believed that GameStop was undervalued, the movement developed into a crusade to beat the hedge funds in what amateur investors perceived to be a “game” of manipulating stock values, as well as a more pragmatic belief that there was money to be made by buying GameStop low and selling high. The fact that many young investors were gamers who felt an affinity for GameStop added to the sense of purpose.7
The strategy worked more powerfully than the amateur investors expected, and some who bought the stock in the early stages of the rally and sold when it was flying high earned large profits. However, those who joined the excitement later faced large losses as the stock plummeted. Once some hedge funds had accepted losses and begun to close their short positions, there was no longer demand for shares at inflated prices.8
3. Why did brokerage firms limit trading activity for certain stocks?
At various points during the peak trading activity, some brokerage firms stopped the trading of GameStop and other heavily shorted and heavily traded stocks. They also placed restrictions on certain stocks, limiting trading to very small lots and/or raising margin requirements. In a typical situation, an investor must maintain a 50% margin, meaning the investor can borrow shares or funds equal to the shares or funds in his or her account. Restrictions varied in response to the recent trading, but at least one brokerage firm raised margin requirements on certain stocks to 100% for long positions (purchasing stocks to hold) and 300% for short positions.9
The stoppages and restrictions elicited accusations of unfairness from investors and some members of Congress, who believed the brokerage firms were protecting the hedge funds. In fact, the moves were dictated in large part by clearinghouses that process trades from the brokers. These clearinghouses require that brokers keep a certain level of funding (collateral) on deposit in order to cover both sides of any given trade. As trading and values increased, clearinghouses asked for larger deposits. By halting and/or restricting trading of highly volatile stocks, brokers were able to reduce the required collateral, which enabled them to meet the new deposit requirements in a timely manner.10
The restrictions also helped protect investors from being overextended and suffering outsized losses amid extreme volatility. And to an extent, they protected the broader stock market. The New York Stock Exchange (NYSE) regularly suspends trading of individual stocks when price swings exceed certain limits. On February 2, when the price of GameStop was plunging, the NYSE suspended trading five times throughout the day, with each suspension lasting less than 12 minutes. Although GameStop remained in the spotlight, more than 20 other stocks also had trading suspended throughout that day.11
4. What happens next?
It may take months or years before the full effects of the recent activity play out in the financial markets, but one clear takeaway is that social media, combined with accessible low-cost trading platforms, allows like-minded groups of retail investors to exert power that matches large-scale institutional investors. More than 10 million new brokerage accounts were opened in 2020, and many new investors are trading securities online and through smartphone apps.12
Some hedge fund managers have already stated that they will rethink their focus on short selling.13 And new services aimed at providing tools for professional investors to track investing discussions on social media platforms have quickly risen and may become a staple of investment research.14
Although the larger stock market remained resilient throughout the episode, extreme volatility is always a concern, and the Securities and Exchange Commission issued a statement saying, “The Commission is closely monitoring and evaluating the extreme price volatility…[which] has the potential to expose investors to rapid and severe losses and undermine market confidence. As always, the Commission will work to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation.”15
What about GameStop and other companies involved in the volatility? The huge price swings had little or nothing to do with the actual value of the companies, and they will need to make fundamental business changes to address the underlying weakness that caused them to be targeted for short sales in the first place. The changes on the GameStop board that helped spark the rally, adding leaders with online expertise, may help the company compete in the marketplace, but that remains to be seen.16
As an investor, the lesson for you might be to tune out market mania over “hot stocks,” especially when there is little to back up the sudden interest other than speculation. The wisest course is often to build a portfolio that is appropriate for your risk tolerance, time frame, and personal situation and let your portfolio pursue growth over the long term. This strategy may not be as exciting as the wild ups and downs of stocks in the spotlight, but it’s more likely to help you reach your long-term goals.
The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments offering the potential for higher rates of return also involve higher risk.
Margin accounts can be very risky and are not appropriate for everyone. Before opening a margin account, you should fully understand that: you can lose more money than you have invested; you may have to deposit additional cash or securities in your account on short notice to cover market losses; you may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities; and your brokerage firm may sell some or all of your securities without consulting you to pay off the loan it made to you.
1, 3) Yahoo! Finance, for the period January 13, 2021, to February 4, 2021
2, 4–5) Kiplinger, January 30, 2021
6–7) Bloomberg, January 25, 2021
8) The New York Times, February 3, 2021
9) CNBC, January 28, 2021
10) The Wall Street Journal, January 29, 2021
11) New York Stock Exchange, 2021
12) The Wall Street Journal, December 30, 2020
13) Barron’s, January 29, 2021
14) MarketWatch, February 1, 2021
15) Securities and Exchange Commission, January 29, 2021
16) The New York Times, February 1, 2021
Coping with Market Volatility: Cash Can Help Manage Your Mindset
Holding an appropriate amount of cash in a portfolio can be the financial equivalent of taking deep breaths to relax. It could enhance your ability to make thoughtful investment decisions instead of impulsive ones. Having a cash position coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.
That doesn’t mean you should convert your portfolio to cash. Selling during a down market locks in any investment losses, and a period of extreme market volatility can make it even more difficult to choose the right time to make a large-scale move. Watching the market move up after you’ve abandoned it can be almost as painful as watching the market go down. Finally, be mindful that cash may not keep pace with inflation over time; if you have long-term goals, you need to consider the impact of a major change on your ability to achieve them.
Having a cash cushion in your portfolio isn’t necessarily the same as having a financial cushion to help cover emergencies such as medical problems or a job loss. An appropriate asset allocation that takes into account your time horizon and risk tolerance may help you avoid having to sell stocks at an inopportune time to meet ordinary expenses.
Remember that we’re here to help and to answer any questions you may have.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.
Retirement Confidence Increases for Workers and Retirees
The 29th annual Retirement Confidence Survey (RCS), conducted by the Employee Benefit Research Institute (EBRI) in 2019, found that two-thirds of U.S. workers (67%) are confident in their ability to live comfortably throughout their retirement years (up from 64% in 2018). Worker confidence now matches levels reported in 2007 — before the 2008 financial crisis.
Confidence among retirees continues to be greater than that of workers. Eighty-two percent of retirees are either very or somewhat confident about having enough money to live comfortably throughout their retirement years (up from 75% in 2018).
Retirement plan participation
Retirement confidence seems to be strongly related to retirement plan participation. “Workers reporting they or their spouse have money in a defined contribution plan or IRA, or have benefits in a defined benefit plan, are nearly twice as likely to be at least somewhat confident about retirement (74% with a plan vs. 39% without),” said Craig Copeland, EBRI senior research associate and co-author of the report.
Basic retirement expenses and medical care
Retirees are more confident than workers when it comes to basic expenses and medical care. Eighty-five percent of retirees report feeling very or somewhat confident about being able to afford basic expenses in retirement, compared with 72% of workers. Confidence in having enough money to pay medical expenses in retirement was also higher among retirees than workers: 80% versus 60%. However, 41% of retirees and 49% of workers are not confident about covering potential long-term care needs.
Debt levels
The survey consistently shows a relationship between debt levels and retirement confidence. “In 2019, 41% of workers with a major debt problem say that they are very or somewhat confident about having enough money to live comfortably in retirement, compared with 85% of workers who indicate debt is not a problem. Thirty-two percent of workers with a major debt problem are not at all confident about their prospects for a financially secure retirement, compared with 5% of workers without a debt problem,” said Copeland.
The lessons learned from “the old Enron story” still apply.
The following is from Edward Mendlowitz’s Feb. 24, 2015 Blog.
“in his book Money: Master the Game, Tony Robbins dredges up the old Enron story, which I agree with, and want to call to your attention now. Here is a brief listing copied from Tony’s book of the lauds, Enron received right up until their bankruptcy filing.
Mar 21, 2001 Merrill Lynch recommends
Mar 29, 2001 Goldman Sacks recommends
June 8, 2001 J.P. Morgan recommends
Aug 15, 2001 Bank of America recommends
Oct 4, 2001 A G Edwards recommends
Oct 24, 2001 Lehman Brothers recommends
Nov 12, 2001 Prudential recommends
Nov 21, 2001 Goldman Sacks recommends (again)
Nov 29, 2011 Credit Suisse First Boston recommends
Dec 2, 2001 Enron files Bankruptcy
Millions of Investors trusted these venerable firms and followed their recommendations. A question I had at the time was, “How much work did they do before they made their recommendations?” I could not have been too much since every recommendation was wrong. Another observation is that many of the largest mutual funds has significant positions in Enron.
Now, lets fast forward to today. Has anything changed? Were lessons learned? Are more intensive analysis being done now? I suggest that nothing has changed. Examples are in the many recommendations to buy oil stocks a few months ago before a subsequent additional 35% drop. …Next, as Robbins points out, most actively managed mutual funds do not outperform the index they are trying to beat….
The principles in the book are easy to understand, digest and act on…. I have condensed them [his seven steps] and … restate as follows:
1. Commit to regular savings program
2. Know and understand why you are investing in
3. Develop a plan and, while at it, reduce spending, keep investment costs low and shed debt
4. Allocate your assets carefully and rebalance periodically
5. Create a lifetime income plan
6. Invest like the .001%, i.e. don’t be stupid and re-look at step 2
7. Be happy by growing and giving
All good advice you can start following today.
Fees of a Fee-Only adviser are only paid by the client.
I have not understood why there has been any resistance to requiring financial planners and investment managers to be held to a fiduciary standard. A recent article in the Wall Street Journal (WSJ) may indicate why some do not want to be held to a fiduciary standard.
The Free Dictionary by FARLEX defines a Fiduciary as: “An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.”
A fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by one person is actually accepted by the other person.”
Many of us believe it is putting the client first.
Jason Zweig’s September 20th article “ ‘Fee-Only’ Financial Advisers Who Don’t Charge Fees Alone” may show why there is resistance to a fiduciary standard for financial planners and investment managers. They found that 24% of the 33,949 certified financial planners (CFP) they analyzed described their compensation as “fee-only”.
The article notes that “Securities lawyers and government regulators say that an adviser who works for a brokerage firm or insurance company that charges commissions shouldn’t describe his services as ‘fee only’, even if the adviser himself doesn’t charge commissions to his clients.” Although none of the CFPs at major banks and brokerage firms, the WSJ identified 661 listed CFPs who call themselves ‘fee-only’” at some of the major banks and brokerage firms. The problem extends beyond CFPs.
Can you argue that if the compensation is not accurate, the advisor is not a fiduciary?
Risk
It is important for you to understand your tolerance for risk and capacity to recover from investment losses. Financial professionals need to understand this also. It is part of the understanding needed to help develop a foundation to guide you through your life’s journey.
Risk tolerance is your capacity to withstand a loss. Your capacity to withstand a financial loss is your ability to recover from or absorb a financial loss and still be able reach your financial goals. If the probability of an investment portfolio is too low, then the person does not have the capacity to withstand the loss.
If you do not have the tolerance or capacity to withstand a loss, something else may need to be changed. It may be any combination of actions including: increasing income, lowering expenses, increasing savings, or lowering financial goals.
The reliability of your sources of income is another factor to consider. If have a good job with a strong reliable company in a growing industry, you are in a better position to withstand investment losses. However, if you are not satisfied with your employment you are not in as good of a position to withstand investment losses.
Age and health are two other factors to consider. If you are in the earlier stages of you career, you have more time and resources to recover from investment losses. The existence of health issues generally reduces the ability and flexibility to withstand losses.
Future plans to start a new business and to travel extensively are two other factors to consider. These plans may reduce your ability and flexibility to recover from investment risks.
This discussion is an introduction to an understanding of your risk tolerance and capacity. Without this understanding, your financial planning may not be achievable.
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