If MCS clients’ investments were treated as one large portfolio including their cash, on average clients gained 1.44% after fees. The range of individual client returns was from -0.73% to 3.61%. For comparison purposes, the S&P 500 Total Return Stock index earned 1.35%, and the Barclays Aggregate Bond Index was up 3.03% for the year. Clients with the lowest returns were negatively impacted by more concentrated stock exposure and higher exposure to oil related securities. The clients with the highest return benefited from either no equity exposure or more concentrated low-basis stock positions that outperformed.
Global economic tension between acceleration and slowdown scenarios continues, as the US economy grows while European economies stagnate. As I write this, the US bond market has rallied in price (declined in yield) with 10 year US Treasury rates falling from their recent highs of 1.96% to 1.73%.
US bond prices have increased in response to negative yields in Europe – an effort by the European Central Bank to stimulate its economies.
What are negative yields?
A negative yield means that commercial banks are charged to keep deposits at the central bank. This includes European and Japanese central banks – not the US central bank (Federal Reserve Bank). Another negative yield example: an Investor putting $100,000 in two-year German government notes would receive
$99,000 at maturity (Assuming no change in the Euro /US dollar exchange rate). I will discuss more about the implications of negative rates in a future newsletter.
The US stock market is back to positive after falling about 10% during the quarter. The cause of the relief rally in stocks was a more cautious stance by the Fed (Federal Reserve Bank), indicating that the pace of interest rate increases would slow from its original projection. The markets had expected lower rates based on global economic factors but was unsure whether the Fed would back off from its projected increases. The Fed did back off and the market surged. The stock market’s reliance on ultralow rates gives me no comfort.
I believe longer term interest rates are headed higher over the next 12 to 18 months as US employment and hence inflation continue to firm. See charts below.
Consumer Price Index – All Urban Consumers
Source: US Bureau of Labor Statistics
On the following page is the inflation measurement the Fed prefers, the core personal consumption expenditures index which excludes volatile food and energy. The Fed’s inflation target for the index is 2%, meaning the Fed would like to see inflation around 2% but not moving much higher than that.
U.S. Core PCE Price Index
Source: FRED Economic Data
As many of you know, rising interest rates reduce the price of bonds and can also reduce the price of stocks and rental real estate. The transition away from near zero interest rates is just beginning, and I expect more downside volatility like we witnessed in January and February.
Investors are trapped in a low return world with high risks. The strategy outlined in my 2015 year-end newsletter has not changed. With the exception of some stock or bond special situations, I am defensively investing client cash in one- to two-year bonds. These bonds yield about 1% and will offset my management fee as we await better opportunities.
I’m keeping my market and strategy comments brief this quarter because there is no real change.
Protecting Yourself Against Computer Related Fraud
Recently, we thwarted the attempted theft of $80,000 from a client account. How did this happen? While we often read about big companies having their customer data stolen, it turns out that we can be our own worst enemies in the security chain.
Cyber- and Identity-Theft
Cyber-theft is defined as using a computer to take personal information and then using that information illegally. Twice so far this year, cyber-thieves attempted to steal money from our clients’ accounts by posing as our clients and emailing us money transfer requests. While our internal procedures thwarted those efforts, the frequency and sophistication of these cyber-attacks is alarming. In another instance, someone used a client’s personal information to open bank and credit card accounts.
Cyber-criminals can break into your email account by guessing your password (especially simple passwords) or by ‘snooping’ on a public or unsecured Internet connection (a home Wi-Fi connection that does not have a password, or a public Wi-Fi connection at an airport or other public space). Another way cyber-criminals attack is by ‘phishing’, or sending you emails that contain a virus or other malware that can take over your computer, record your keystrokes to learn your online passwords, and access a treasure trove of personal information stored on your computer.
In the first two instances, our clients email accounts were hacked. Once the hackers had control of the email accounts, they scanned saved messages for terms like “money transfer”, “account” or “investment.” That led the thieves to our clients’ email correspondence with us, and it taught them how our clients communicate with MCS. The scammers then emailed us distribution requests, posing as our clients and using our clients’ email accounts. In both instances, the hackers covered their tracks so our clients had no idea that someone was using their email accounts to try to steal from them.
Identity theft is using your personal information to steal from you, and it is similar to cyber-theft but it does not rely on a computer. Identity theft predates cyber-theft, and common ways thieves can access your personal information are by intercepting your mail, stealing your wallet or by going through your trash. My third story of financial fraud is from a client who was a victim of identity theft – someone had us ed his personal information to open bank and credit card accounts, then withdrew money from the bank and made charges to the credit cards in our client’s name. This form of theft is less common but much more difficult to unwind, because the onus is now on our client to prove that he did not open the accounts or make the charges. It is a long and tedious process to isolate the fraudulent accounts and make sure his legitimate accounts are secure.
How to Protect Yourself
There are three ways you can protect yourself from cyber- and identity-theft:
- Limit access to your computer
- Limit access to your personal information
- Protect your credit
Protect Your Computer
- Require a password to access your computer – this is ‘step one’. If someone walks away with an unprotected computer, they probably have all of your most secure personal information.
- Install robust anti-virus software on your computer/laptop/tablet/phone and set it to apply updates automatically.
- Keep your operating system up-to-date (Microsoft and Apple send out security patches regularly).
- Have an IT professional perform a security check/ scan on your computer and get rid of any suspicious files or programs. You can hire someone to come to your house, or you can stop by a Staples o r Office Max and drop off your computer.
Limit Access to Your Personal Information
- Create and use strong passwords for your computer and online accounts – at least 8 characters with a mix of upper and lower case letters, numbers and symbols (though each online secure login may have different requirements). A recommended method is to have a unique easy-to-remember password sentence. For example: “The quick brown Fox jumped over 2 Dogs!” give you the password “TqbFjo2D!” This example uses the first letter of each word and capitalizes the nouns- very hard to crack.
- Secure your home Wi-Fi connection with a password, and do not log in to secure sites (like email or your bank account) when using public Wi-Fi (at the airport, a coffee shop, or other public place).
- Set up “two-step” or “two-factor” verification for online accounts that offer it. This enhanced security option will generate a text message to your phone (or it will require you to enter a randomly generated
number from an app on your phone or tablet) whenever you log in to your account from an unfamiliar device. That way, if someone does hack into your email, when they try to log in you will get a text message letting
you know about the login attempt, and the person trying to hack your account will not be able to do so without the code that was texted to your phone.
- Do not include personal information in emails, such as your full account numbers, social security numbers, dates of birth or passwords.
- Beware of phishing scams, which are attempts to entice you to share personal information voluntarily, open a dangerous email attachment, or click on a malicious website prompt. Emails with personal warnings about your financial information, fake package delivery notices or invoices, social networking invitations, fake voice mail and fax attachments – all of these are common phishing tactics that will trick you into opening an attached and malicious file. A successful phishing attack will make you feel an urgency to take care of
something without really thinking about it. Security alerts that pop up while you are browsing on the Internet are also common and successful phishing traps.
- Be careful about how you use social media. First, make sure to set your privacy settings so that your updates are not public. Second, be careful about how much personal information you share online.
- Permanently delete all emails from your trusted advisors once they are no longer needed. Your deleted item folder should be cleaned out periodically.
- If you want to keep a record, print a paper copy and save.
- MCS is required to save your emails so we can retrieve them if needed.
- Shred your paper records rather than putting them in the trash. Like MCS does for our clients, your CPA, bank or attorney may allow you to drop off your sensitive documents to be disposed of securely.
Protect your credit
There are a lot of services out there who will monitor your credit for between $100 and $300 per year, but the value they offer is limited, and much of what they do you can do for yourself for free. There is values in the basic
services, but I do not recommend paying for a premium service. From the reviews I have read, Identity Guard’s basic service gets the best ratings. Another, simpler solution is to freeze your credit, which will prevent any one
(even you!) from opening new accounts without supplying a PIN that the credit agency will provide you when you initiate the freeze.
For a more thorough account of cyber- and identity-theft, including details about specific credit monitoring services; links to Gmail, Yahoo!, AOL and Microsoft two-step authentication pages and how to place a credit freeze; details about how hackers take over your email account without you knowing about it and more; please visit our website’s blog (www.mcsfa.com/category/blog).