Protecting Yourself From Identity Theft

We’re hearing a lot more about identity theft these days—from hackers stealing credit card numbers from big banks and retail stores to individuals opening up credit card or bank accounts in your name, which they can use to write bad checks or make expensive purchases.  Criminal identity thieves may also take out a loan in your name for a car or even a house, and some have managed to receive Social Security benefits or tax refunds that rightfully belong to others.  

In some cases, when arrested for some other crime, hackers have helpfully provided a victim’s name to the arresting officers, showing the police a falsified driver’s license with that person’s number and their picture.  They post bail and skip town.  When their victim doesn’t show up for a court date he was never informed of, he could be arrested.

How do you protect yourself?

According to the National Crime Prevention Council, the biggest threats are coming from places that might surprise you.  A study by Javelin Strategy and Research found that most identity thefts were taking place offline, where someone managed to steal your credit cards, or found social security information or credit card information in a dumpster, or filed bogus change of address forms to divert a victim’s mail to their address, where they can gather personal and financial data at their leisure. 

Even more surprising, 43% of all identity thefts were committed by someone the victim knows.

An organization called IdentityTheft.net estimates that over 10 million people are victimized by identity theft each year, although that number may be boosted by the aforementioned mass hacking incidents.

The Council and an organization called IdentityTheft.net say that you do a reasonable job of protecting yourself by taking a few common sense steps that make it much harder for someone to make purchases in your name or withdraw funds from your accounts. 

First, never give out your Social Security number, and don’t carry your social security card, birth certificate or passport around with you.

Copy your credit cards and your driver’s license, and put the data in a safe place, to ensure you have the numbers if you need to call the companies.

When you use a credit card to buy something in a retail store, take the extra copy of the receipt with you and shred it.

Create complicated passwords for your online bank and investment accounts, and don’t write them down on hard copy paper.  Try not to use the same password for every website you access.  (Can’t remember 50 complicated passwords?  A free program called LastPass lets you save all your user names and passwords in an encrypted format, so you only have to remember a single strong pass phrase.  You can also store security questions and answers.)

Don’t let anyone look over your shoulder when you’re using an ATM machine.

Be skeptical of websites that offer prizes or giveaways.

Tell your children never to give out their address, telephone number, password, school name or any other personal information.

Make sure you have a virus and spyware protection program on your computer, and keep it updated.

Check your account balances regularly to make sure no unexplained transactions have occurred.

These simple precautions will keep you safe from many of the criminal efforts to hack into your life.  If you feel like you need additional protection, there are a variety of protection services on the marketplace, which basically all do the same thing: they regularly monitor your credit scores, looking for changes and odd debts that might be a clue that someone has stolen your identity, and check public record databases to see if your personal information is compromised.  Some will prevent preapproved credit card offers from being sent to your mailbox, patrol the black market internet where thieves buy and sell credit card numbers, and the fancier services will provide lost wallet protection, identity theft insurance and keystroke encryption software. 

Which are the best?  A research organization called NextAdvisor has recently evaluated and ranked eight of these services, with costs ranging from $20 a month down to $7 a month.  The top rated was IdentityGuard (premium service price: $19.99 a month) which offers the most compete protection, including the aforementioned fancier services.  But seven of the protection systems, including TrustedID, AARP (a white-labeled version of TrustedID), LifeLock Ultimate, PrivacyGuard, IDFreeze and LegalShield all received good ratings; only Experian’s ProtectMyID was negatively reviewed for being expensive and only monitoring one credit reporting service.

Do you really NEED these services?  Possibly not.  However, with the growing publicity around identity theft, these firms have become very aggressive in their marketing efforts.  What they don’t tell you is that you can do many of the things they do on your own.  Every quarter, you can review one of your credit bureau reports for free, or—and this is easier—simply look at your statements and balances every day.  The more sophisticated services are a fancy replacement for promptly notifying your bank when a credit card is lost or stolen, or when a strange charge shows up because Citibank or the Target department store was using weak security protocols.

In the near future, as more transactions take place using thumb prints or other biometric security data, we may look back on this period as the Wild West of data security, a strange unsettling time when people had to worry about their lives being hacked by strangers.  Your goal is to arrive safely, unhacked, at that more secure period in our cultural evolution.

Your Financial Habits and Net Worth

You already know that our financial habits determine our financial fate.  If we avoid credit card debt, spend less than we earn and create a financial buffer against the unexpected, we tend to thrive financially.  If we carry a lot of debt or live constantly on the edge, with little savings, then our financial future is much cloudier.

 

Recently, a paper published by the Federal Reserve Bank of St. Louis proved these truisms in the real world.  For eight individual years between 1992 and 2013, the Fed’s Survey of Consumer Finances has posted a series of financial questions to thousands of people in all walks of life, at all income levels and ages.  Among them:

 

1) Did you save any money last year?

2) Did you miss any loan or mortgage payments in the last year?

3) Did you have a balance on your credit card after the last payment was due?

4) Do liquid assets make up at least 10% of the value of your total assets?

5) Is your total debt service—the cash you devote each month to paying principal and interest—less than 40% of your income?

 

The paper scored the answers, giving every positive answer (yes for 1, 4 and 5, no for 2 and 3) one point, assigning zero points to the “wrong” answers. Then they added up the scores for each household and looked at a financial health score taken from the same survey, and compared the two.  They found what you would probably expect: that good financial habits are highly correlated with the accumulation of wealth.  A small chart at the back of the study, which divided people according to age and ethnic profile, found that individuals who averaged a score of 2.63 had a median net worth of $25,199, while those who averaged a 3.79 score enjoyed a median net worth in excess of $800,000.  The average score: 3.01, associated with a net worth somewhere in the $70,000 to $75,000 range, which happens to fall neatly in between the median for people age 35-44 ($51,575) and those age 45-54 ($98,350).  

How Do the Markets Really Work?

We all do it.  But what do we really know about investing?  A recent post about investing wisdom features a lot of interesting (and often overlooked) facts and figures, plus some insights from Warren Buffett, Jeremy Siegel, William Bernstein, Nobel laureate Daniel Kahneman and a few economists you may have heard of.

Regarding market predictions, the post had this to say:

The phrase "double-dip recession" was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of "financial collapse" in 2006 and 2007. It did come. A similar story can be told virtually every year.

 According to Bloomberg, the 50 stocks in the S&P 500 that Wall Street rated the lowest at the end of 2011 outperformed the overall index by 7 percentage points over the following year.

 

Many of the items offered insight into how our investment markets actually work.  For instance:

Since 1871, the market has spent 40% of all years either rising or falling more than 20%. Roaring booms and crushing busts are perfectly normal.

Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days during that time period. (Investing is never a straight path up.)

Polls show Americans for the last 25 years have said the economy is in a state of decline. Pessimism in the face of advancement is the norm.

A broad index of U.S. stocks increased 2,000-fold between 1928 and 2013, but lost at least 20% of its value 20 times during that period. People would be less scared of volatility if they knew how common it was.

There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and identifying a winning investment are two different things.

According to economist Tim Duy, "As long as people have babies, as long as capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy."

The post had a few zingers about some of the best-paid executives in the financial and investment community:

Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. Hedge funds are a great business to work in -- not so much to invest in.

In 1989, the CEOs of the seven largest U.S. banks earned an average of 100 times what a typical household made. By 2007, that had risen to more than 500 times. By 2008, several of those banks no longer existed.

And finally, if you want to understand the difference between daily fluctuation and the underlying growth of value in the markets, consider this:

Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein: "He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner."

2015 Investment Report: Dare to Believe?

Looking back on 2014, people are going to say it was a great year to be an investor.   They won’t remember how uncertain the journey felt right up to the last day of a year that saw the S&P 500 close at a record level on 53 different days.  Think back over a good year in the market.  Was there ever a time when you felt confidently bullish that the markets were taking off and delivering double-digit returns?

The Wilshire 5000--the broadest measure of U.S. stocks and bonds—finished the year up 13.14%, on the basis of a strong 5.88% return in the final three months of the year.  The comparable Russell 3000 index will go into the history books gaining 12.56% in 2014.

The Wilshire U.S. Large Cap index gained 14.62% in 2014, with 6.06% of that coming in the final quarter.  The Russell 1000 large-cap index gained 13.24%, while the widely-quoted S&P 500 index of large company stocks posted a gain of 4.39% in the final quarter of the year, to finish up 11.39%.  The index completed its sixth consecutive year in positive territory, although this was the second-weakest yearly gain since the 2008 market meltdown.

The Wilshire U.S. Mid-Cap index gained a flat 10% in 2014, with a 5.77% return in the final quarter of the year.  The Russell Midcap Index gained 13.22% in 2014.

Small company stocks, as measured by the Wilshire U.S. Small-Cap, gave investors a 7.66% return, all of it (and more) coming from a strong 8.57% gain in the final three months of the year.  The comparable Russell 2000 Small-Cap Index was up 4.89% for the year.  Meanwhile, the technology-heavy Nasdaq Composite Index gained 14.39% for the year.

While the U.S. economy and markets were delivering double-digit returns, the international markets were more subdued.  The broad-based EAFE index of companies in developed economies lost 7.35% in dollar terms in 2014, in large part because European stocks declined 9.55%.  Emerging markets stocks of less developed countries, as represented by the EAFE EM index, fared better, but still lost 4.63% for the year.  Outside the U.S., the countries that saw the largest stock market rises included Argentina (up 57%), China (up 52%), India (up 29.8%) and Japan (up 7.1%).

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, was up a robust 33.95% for the year, with 17.03% gains in the final quarter alone.  Commodities, as measured by the S&P GSCI index, proved to be an enormous drag on investment portfolios, losing 33.06% of their value, largely because of steep recent drops in gold and oil prices.

Part of the reason that U.S. stocks performed so well when investors seemed to be constantly looking over their shoulders is interest rates—specifically, the fact that interest rates remained stubbornly low, aided, in no small part, by a Federal Reserve that seems determined not to let the markets dictate bond yields until the economy is firmly and definitively on its feet.  The Bloomberg U.S. Corporate Bond Index now has an effective yield of 3.13%, giving its investors a windfall return of 7.27% for the year due to falling bond rates.  30-year Treasuries are yielding 2.75%, and 10-year Treasuries currently yield 2.17%.  At the low end, 3-month T-bills are still yielding a miniscule 0.04%; 6-month bills are only slightly more generous, at 0.12%.

Normally when the U.S. investment markets have posted six consecutive years of gains, five of them in double-digit territory, you would expect to see a kind of euphoria sweep through the ranks of investors.  But for most of 2014, investors in aggregate seemed to vacillate between caution and fear, hanging on every economic and jobs report, paying close attention to the Federal Reserve Board’s pronouncements, seemingly trying to find the bad news in the long, steady economic recovery.

One of the most interesting aspects of 2014—and, indeed, the entire U.S. bull market period since 2009—is that so many people think portfolio diversification was a bad thing for their wealth.  When global stocks are down compared with the U.S. markets, U.S. investors tend to look at their statements and wonder why they’re lagging the S&P index that they see on the nightly news.  This year, commodity-related investments were also down significantly, producing even more drag during what was otherwise a good investment year.

But that’s the point of diversification: when the year began, none of us knew whether the U.S., Europe, both or neither would finish the year in positive territory.  Holding some of each is a prudent strategy, yet the eye inevitably turns to the declining investment which, in hindsight, pulled the overall returns down a bit.  At the end of next year, we may be looking at U.S. stocks with the same gimlet eye and feeling grateful that we were invested in global stocks as a way to contain the damage; there’s no way to know in advance.

Is a decline in U.S. stocks likely?  One can never predict these things in advance, but the usual recipe for a terrible market year is a period right beforehand when investors finally throw caution to the winds, and those who never joined the bull market run decide it’s time to crash the party.  The markets have a habit of punishing overconfidence, but we don’t seem to be seeing that quite yet. 

What we ARE seeing is kind of boring: a long, slow economic recovery in the U.S., a slow housing recovery, healthy but not spectacular job creation in the U.S., stagnation and fears of another Greek default in Europe, stocks trading at values slightly higher than historical norms and a Fed policy that seems to be waiting for certainty or a Sign from Above that the recovery will survive a return to normal interest rates. 

On the plus side, we also saw a 46% decline in crude oil prices, saving U.S. drivers approximately $14 billion this year. 

The Fed has signaled that it plans to take its foot off of interest rates sometime in the middle of next year.  The questions that nobody can answer are important ones: Will the recovery gain steam and make stocks more valuable in the year ahead?  Will Europe stabilize and ultimately recover, raising the value of European stocks?  Will oil prices remain low, giving a continuing boost to the economy?  Or will, contrary to long history, the markets flop without any kind of a euphoric top?

We can’t answer any of these questions, of course.  What we do know is that since 1958, the U.S. markets, as measured by the S&P 500 index, have been up 53% of all trading days, 58% of all months, 63% of all quarters and 72% of the years.  Over 10-year rolling time periods, the markets have been up 88% of the time.  These figures do not include the value of the dividends that investors were paid for hanging onto their stock investments during each of the time periods.

Yet since 1875, the S&P 500 has never risen for seven calendar years in a row.  Could 2015 break that streak?  Stay tuned.