Eccentric New York real estate mogul Leona Helmsley died leaving her little Maltese $12 million. Two of the hotel magnate’s grandkids, left with nothing but memories, took the matter to court. After months of legal wrangling, the grandkids were awarded $6 million combined, while the dog’s inheritance was reduced to $2 million.

More often, jilted heirs don’t hound the dog, but instead go after relatives who got the longer end of the stick. In the case of the estate of billionaire J. Howard Marshall, who died at age 89, only shortly after marrying Playboy model Anna Nicole Smith, it was a battle between widow Smith and her (much older) stepson. Family feuds also erupted over the estates of Hyatt hotel founder Jay Pritzker, socialite Brooke Astor, singers James Brown and Whitney Houston, and comedian Lucille Ball, to name just a few. And the Michael Jackson mess is just getting started. “Throw a dart at any list of deceased celebrities and chances are that you’ll hit upon someone whose family members fought over the inheritance,” says Adam Schucher, a Fort Lauderdale, Florida, attorney specializing in estate planning and administration.

Of course, it’s not just celebrities who die without making proper arrangements. Fewer than half of all adults have a will. And you can bet that those same people do not have an advance healthcare directive, either. Yet these are among several documents that you, as a responsible adult, need in place—for your own well-being and for the harmonious future of your family.

• A will. OK, you know what this is—the basic who-gets-what document. But, do you have one? Without a will, whatever you leave behind will be distributed per the laws of your state, which might mean that someday one of your least favorite relatives may be comfortably sleeping in your bed and eating off your fine china. If you have young children, the will names their guardians. The will also names an executor, who will handle the nitty-gritty details and usually gets compensated for the hassle, which can be considerable.

• An advance healthcare directive or living will. It lets you make end-of-life decisions in advance. If you were in a coma, for example, would you want to be kept alive by artificial means even if there was little hope of regaining consciousness? [For more on the horrors of failing to have a living will, see “How Doctors Die”]

• A healthcare surrogate designation. The living will can’t foresee every possibility. You also need a surrogate to make day-to-day medical decisions for you, should you no longer be able.

• A durable power of attorney. This gives power to another to handle essential matters beyond healthcare, such as managing your bank accounts, should you become unable to do so.

The bottom line: Every adult, and especially those with minor children, should have these documents completed, signed, and saved. Simple wills may be drawn up for as little as $150. Complete estate plans—which might include various trusts to allow for the smoother transition of assets and possible tax breaks—could run to $3,000 or more.

If you wish to save a few dollars, and don’t mind putting in some legwork, most state government websites offer some forms, including the advance healthcare directive form, for do-it-yourselfers. Need guidance? State bar associations often have an attorney referral service. You can also contact your county courthouse, and ask for a list of local pros who handle estate law. “The most important thing is that you don’t succumb to decision paralysis,” says Connie Fontaine, who teaches graduate-level estate planning at The American College in Bryn Mawr, Pennsylvania.

And finally, even if you have an estate plan, you need to update it regularly. “Refreshing is often a simple matter,” says Fontaine, who suggests casting an eyeball on your estate plan at least once every two years, or whenever you experience a major life change, such as a move or a death in the family. Had Leona Helmsley reviewed her plan in a calmer moment, who knows? She might have thought twice about her rather unusual pooch bequest and saved her heirs a major headache.

Are Your Vital Financial Documents in Order? The Saturday Evening Post

Indeed, in one recent study from Duke University, it was estimated that heavy portfolio-tweakers underperform light portfolio-tweakers by 1.25 percentage points a year. And that’s before taxes. But that doesn’t mean you should leave your portfolio forever on autopilot. Here are four occasions when tweaking is well warranted:

Your portfolio is out of whack
A year ago, you crafted a moderately aggressive portfolio of 60 percent stocks and 40 percent bonds. Now’s the time to check your allocations. If stocks have been good to you and your ratio has risen to 65/35, it’s time to rebalance. That means selling off some stocks and buying bonds. You do this to keep your risk in check. The other reason is to force yourself to continually sell high and buy low. Over the long run, experts say, regular annual rebalancing could juice your returns by more than half a percentage point a year.

You are close to retirement
A major exception to the buy-and-hold guideline is when your life circumstances change dramatically. As you get closer to retirement, the common wisdom is to lower your risk by moving more savings into bonds, less into stocks. The reason is that once you retire, you will be pulling money from the portfolio, rather than putting money in. Should markets crash, an older person has fewer years to recoup the loss. A very general rule of thumb is to invest your age in bonds. “As rough rules go, this isn’t a bad one,” says Brosious.

Your funds have become obsolete
There’s been a revolution in both stock and bond funds over the past decade or so, and management fees have come down considerably. But not all funds have followed suit. According to Morningstar Principia, dozens of index funds simply track the performance of Standard & Poor’s 500 index (500 of America’s largest company stocks), but with vastly different fees. You can spend 0.05 percent a year in management fees for the Vanguard S&P 500 ETF (ticker VOO), for example, or you can spend 10 times as much (0.50 percent a year in fees) for the virtually identical Dreyfus S&P 500 Index fund (PEOPX). There’s rarely a reason not to switch when the price difference is this dramatic.

Your investments are too popular
Investors have a bad habit of making trendy investments. Trouble is, by the time they’re trendy, they’ve very often peaked (think tech stocks in 1999 or real estate in 2006). Buying a stock when it’s hot often means needing to dump it when it’s cold. “Not a profitable strategy,” says Neil Stoloff of SweetSpot Investments in Bloomfield, Michigan. Instead of buying high and selling low, you want to do the opposite, he asserts. Rebalancing (see No. 1) will help you to buy low and sell high as a matter of routine. But if you wish, you can go a step further; be a contrarian and purposely buy what others have been fervently selling, says Stoloff. “That’s what we do—at the beginning of each year, we buy whatever kinds of investments saw the greatest outflow of investor dollars in the previous year.” You needn’t work through the complex number-crunching that Stoloff does to take advantage of a contrarian strategy. Simply look to see what’s hot and what’s cold in the world of investments. What is your brother-in-law selling? What have all the chattering heads on TV and radio been advising you to dump? Move opposite the crowd. For example, if European stocks are unloved by the masses (as they have been of late), you might put five to 10 percent more in European stocks than you otherwise would.

Portfolio tweaks, by definition, are done in moderation. “Tweak, yes,” says Brosious. “Overhaul? … Only with very good cause and … the blessing of your tax advisor.”

New Year, New Investments The Saturday Evening Post

Not since Hitler’s armies stormed into Paris have affairs in Europe received greater attention—or caused greater concern—than today’s debt crisis. But just how subject is the U.S. economy to contagion from across the Atlantic? And what actions—if any—might a wise investor take to protect against a potential financial blitzkrieg?

The first order of business is to put the dangers in perspective. Yes, the financial trouble is very real, but that trouble is mainly limited to five of the 27 countries in the European Union. These five—Portugal, Italy, Ireland, Greece, and Spain (often referred to as PIIGS)—are facing enormous financial problems, but the major European economies—Germany, France, and the U.K.—are not in such horrible shape. “Many EU nations are not only financially solvent, but are arguably in better financial health than the U.S.,” says F. John Mathis, professor of global economics and finance at the Thunderbird School of Global Management in Glendale, Arizona.

In fact, we do much more trade with Canada, Mexico, and China than we do with countries in the EU. And within the EU, the five most troubled nations (PIIGS) are minor trading partners with the United States. [See chart below.]

While a handful of EU nations face severe financial turmoil, those troubles alone cannot sink the U.S. economy, says Mathis. “The largest danger the debt crisis in Europe poses to the U.S. is psychological,” he asserts. The recent volatility in the U.S. stock market coupled with the collapse of housing have many of us fearful about investing in general. In this context, the potential of certain EU governments drowning in debt is creating more worry, not all of it justified, says Mathis.

How bad will the EU crisis get? Bugra Bakan, CEO of Shield Wealth Management, says many fears about the EU market have already been baked into stock prices. “The stock market tends be a great discounting mechanism that often anticipates the worst,” he says. In short, the recent decline of EU stock prices reflects the well-known possibility that one or more governments could go bust. “Given the current low prices of EU stock, whatever happens next, it is more likely that share prices will shoot up rather than fall further,” says Bakan.

With all the uncertainties ahead, you can assume that European stocks will be volatile. But so will U.S. stocks. And considering the huge size of their economy and the amount that the EU imports from the outside world, the rest of the world’s stock markets may be in for a wild ride, too.

You’ll have to decide if that ride is too wild for your taste, but Bakan favors keeping some EU holdings in a diversified portfolio. “In a moderately aggressive portfolio with 50 to 65 percent in stocks, I recommend that about 10 percent of the portfolio be allocated to EU stocks,” he says. Low-cost, well-managed funds that track the EU stock market are good options for most investors, says Bakan, including the Vanguard MSCI Europe ETF (symbol VGK), or the iShares MSCI EMU Index Fund (symbol EZU).

Paris, after all, was eventually liberated. And Europe, although severely damaged by World War II, came back strong. We may be in a down phase of an economic cycle, but “cycle” is the very word. This is not the end of times.

Europe and You The Saturday Evening Post

Illustration by James Yang

But, as consumers finally learned to be wary of out-of-the-blue offers of untold riches, clever Nigerian letter scammers found ways to adapt. These days, instead of just masquerading as monarchs, some also pose as wealthy foreign businessmen on dating websites, asking cyber sweethearts for money for a plane ticket to meet them or help them out of a jam. Others claim to be bank lenders who “approved” two percent loans in a tough economy—after the requested application fee is paid. Still others have been known to pose as FBI director Robert Mueller or even Hillary Clinton, threatening arrest or offering political help to get a hidden inheritance (depending on the letter) unless upfront fees are paid to keep you out of jail or put you on Easy Street.

The very latest spin on all of the above scams has been to abandon email (too common, too much competing spam) in favor of the old-fashioned fax. As with email, faxes also can be sent en masse, with “predictive dialers” that call thousands of random phone numbers per day; if a fax tone is reached, the transmission goes through.

Sigh! Just goes to show you, some old scams never die. Instead (and often after well-publicized warnings), they just get tweaked. So be aware—and beware—of these creatively sinister newly rewritten rip-offs, hustles, and cons:

Telephone Scams

Misleading telephone offers date back almost to Edison. Here are the most common and their newest incarnations:

1. Fake Lotteries. The classic approach is to say “you have already won” a lottery that, in fact, you never entered. (One tip-off: they’ll ask you to pay advance fees­—never part of legitimate winnings—in order to claim your prize.) Or, they call to ask for donations for phony charities (often in the wake of recent disaster) or to promise government grants, low-cost medication, or a “free” vacation (any of which they claim requires your personal information and credit card).

The New Twist. Now fraudsters who work the phone try to get you to call them. For example, you receive a mailed letter for any of the reasons above, or stating there’s a UPS package that cannot be delivered, or that you’re entitled to cash from a special (secret) government program. You’ll call what seems like an American area code, but is actually the number for a Caribbean country. Dialing that number may cost as much as $5 or more per minute. So, the scam is actually two-pronged: As an operator tries to weasel your personal or financial information for identity theft, you’re simultaneously running up sky-high phone bills—thanks to a series of transfers, long holds, and lengthy small talk to keep you on the line as long as possible.

2. Distress Calls. Another classic phone scam is the call to targeted grandparents. Scammers pretend to be a grandchild in need of money after being arrested or hospitalized while vacationing abroad. They often try a generic greeting such as “Hi, Grandma, it’s me, your favorite grandson!” with hopes you will reply, “Billy? Is that you?”

The New Twist. Now, scammers are increasingly identifying themselves with the specific names of grandchildren—as in “Hi, Grandma, it’s Billy, and I need your help!” They get grandkids’ names from Internet searches on ancestry websites, Facebook accounts, online telephone directories, or reading recent obituaries of the target’s spouse.

3. Timeshare Resale Agents. Timeshares have a tendency to lose value. For years, distraught timeshare owners have been barraged with offers to help unload their unwanted units by self-described “resellers.” These sleazy profiteers promise they already have an interested buyer. All they need is their fee—upfront, please—to make the transaction occur. (Of course, the buyer is nothing more than a figment of the scammer’s imagination.)

The New Twist. Timeshare owners who’ve been swindled of upfront fees by phony resellers are now being re-contacted by so-called “fraud recovery” specialists. Guess what they’re being offered? Help with recouping that lost money—for another upfront fee, of course. Sometimes, it’s the same “resellers” now calling as “recovery” specialists, according to FBI reports. At best, pay a “recoverer” and you’ll get little more than forms or instructions to file complaints with investigating government watchdogs—all of which you can get for free at websites for the Federal Trade Commission or your state Attorney General. At worst, you get nothing but a smaller checking account.

Protect Yourself from Phone Scams. Hang up on any unsolicited phone call seeking personal or financial information. To avoid the phone bill trap, be cautious about calling back anyone with an area code you don’t immediately recognize. The most commonly used Caribbean area codes are 876, 809, or 284 (Jamaica, the Dominican Republic, and the British Virgin Islands). Also be wary of Canadian area codes, which are also three digits long.

Illustration by James Yang

Debit Card Scams

The invention of the ATM machine has not just made banking a greater convenience: It’s been a source of unlimited inspiration to the criminal mind. Top scams include:

1. ATM Skimming. Portable “skimming” devices—sold online for as little as $100—are placed over or behind the card slot to record information encoded in the magnetic strip of debit cards. With miniature spy cameras placed nearby to record PIN numbers used to make cash withdrawals, crooks are able to make duplicate cards and score fast cash from multiple machines. Without a PIN, they can make fraudulent online purchases.

The New Twist. Automated card machines at gas pumps have become an even more desirable target. Reason: With only a couple of manufacturers of gas pumps, a single key—in the hands of a scammer who gains employment at one gas station—can open pumps at multiple stations to install the sinister skimmers.

2. Fake “Out of Order” Signs. In bank vestibules with several ATMs, crooks place “Out of Service” signs on non-tampered ATMs in order to get customers to use a neighboring ATM on which they already placed a skimmer. Such was one recent case that resulted in $390,000 in skimmed withdrawals—until the Secret Service nabbed the culprits.

The New Twist. In a newer spin, no skimmer is even needed. Instead, crooks apply adhesive to certain buttons—“enter,” “cancel,” and “clear”—to prevent keypad-using consumers from completing their cash withdrawals after they’ve already inserted their card and typed PIN codes. As frustrated customers leave the machine to report the problem (tin foil is sometimes used to prevent cards from being returned), lie-in-wait crooks use a screwdriver to release the keys to complete the transaction—and get cash.

Protect Yourself from Debit Card Scams. Before using an ATM, wiggle the card slot—if it’s loose, avoid that machine. Also ensure a light emits from the card slot; if obscured, that’s a sign of tampering. Inspect keypads to ensure buttons aren’t stuck and always cover the keypad as you enter your PIN. At gas pumps and checkout counters, a credit card is safer—federal laws limit your liability against credit card fraud to no more than $50 (it varies with debit cards, depending on when the fraud is reported). When using a debit card to buy gas or anything else, it’s safer to choose the “credit” screen prompt instead of “debit” so you don’t have to enter your PIN. The purchase amount will still be deducted directly from your bank account, but it’s processed through a credit-card network—providing greater protection in the event of fraud.

Sneakiest New Scams The Saturday Evening Post

In hindsight that was a clever move because not only are bonds less volatile than stocks but their value has risen steadily with the decline in interest rates. But with interest rates at historic lows, those gains won’t—in fact, almost can’t—continue, says Dirk Hofschire, senior vice president of asset allocation research for Fidelity Investments. He predicts that the safest bonds—U.S. Treasuries—are likely to pay just enough in the next decade to keep up with inflation.

Time to get out of bonds? Not so fast, says Hofschire: “The situation argues for realistic expectations not for the abandonment of bonds, and perhaps a portfolio with a good mix of bonds still has much to offer.”

The key word here is “mix.” If Treasuries are paying a paltry two percent, the strategy calls for diversifying. Bonds come in all flavors, just like stocks do.

“Complementing high-quality bonds with a variety of other sectors can help you increase your yield and return potential while protecting against risks such as potentially higher inflation,” says Hofschire.

Treasury bonds are available in both conventional form (with steady coupon payments) and inflation-adjusted (lower, fixed coupon payments but regular adjustments for inflation). Include both in your portfolio. In addition, consider the following:

• High-quality, “investment-grade” corporate bonds. These typically yield about 1 percent a year more than Treasuries.

• Municipal bonds. Historically, bond issues by cities and state governments haven’t paid as much as Treasuries. But right now they are about on a par—and, of course, the difference is that interest on municipal bonds is generally tax-free, making their effective return greater than Treasuries.

• Corporate high-yield bonds. Issued by less-than-financial-powerhouse companies, these bonds are riskier than the others mentioned above but are now paying about 3 percentage points a year more than Treasuries.

• Emerging-market bonds. Issued by countries such as Brazil, Russia, and Turkey, the bonds are now yielding a rate similar to corporate high-yield. These, too, carry risks, but offer good diversification power.

Within each bond sector you can further diversify by choosing a mutual fund or exchange-traded fund that allows you instant ownership of hundreds or more of individual bond issues. The strategy is crucial when investing in options like high-yield (aka “junk”) bonds, where the default of any one bond is more than a remote possibility.

Finally, it may be time for even the most conservative investor to venture cautiously into other areas. Consider lowering your bond exposure by investigating vehicles that pay higher interest rates, says David Lambert, founding partner and wealth advisor with Artisan Wealth Management of Lebanon, New Jersey. “For many of our clients we have lowered the overall allocation of bonds and replaced them with other income-producing holdings such as real-estate investment trusts and dividend-paying stocks.”

But sound money management will always dictate holding some bonds. As Lambert points out, even the largest and most stable stocks tend to be more volatile than bonds.

Taking Stock of Bonds The Saturday Evening Post

From Our Archives: From Farm Boy to Financier The Saturday Evening Post

It began in the colonial era when we had no conventional banks of our own. Banks were all in England, and England made sure they stayed there. So banks, right from the start, represented the wealth and domination of our foreign overlords. We didn’t even have a single kind of money; people used British and French coins and Spanish dollars, among other things, or just bartered goods. In Virginia, tobacco was used as money. Some colonies issued paper notes redeemable in gold. Not until 1775 did the Continental Congress issue the first all-American paper money used to fight the Revolution. With no gold or silver backing, the currency quickly lost value—thus the expression “not worth a Continental,” which survives even today.

It was Thomas Jefferson who gave birth to the American dollar and came up with the then-novel idea to divide it into an utterly rational 100 cents. Shortly afterward, Alexander Hamilton founded one of the new country’s first banks, the Bank of New York. He was still in his twenties at the time, and five years later he became the first Secretary of the Treasury.

1791: Our First National Bank

If you disapprove of the national debt, the blame goes back to Hamilton. He argued that the nation needed to be able to take on debt—to issue bonds and to invest in building and growth. National debt also was a tool that allowed the federal government to take over the various states’ crushing war debts. To oversee the flow of money, regulate all the country’s smaller banks, and manage the debt, he founded a national bank (the Bank of the U.S.).

Hamilton’s idea was that only a central bank could impose order on American money and banking. But Jefferson opposed the idea bitterly. He embodied the American horror of banks as manipulative tools of the rich. He once wrote, “My zeal against those institutions was so warm and open at the establishment of the Bank of the U.S. that I was derided as a Maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling, and barren gains.”

Jefferson was vindicated when almost right away there was a banking scandal. In 1792 people began starting up new banks and selling stock in them; there were rumors that the new national bank would buy at least some of the stocks, and a speculative bubble formed, expanded, and burst. The main speculator, William Duer, wound up in debtor’s prison, and Jefferson estimated that $5 million was lost.

In 1811 the Bank of the U.S.’s charter was allowed to expire, and, with no central authority, the banking business quickly became messier—true to Hamilton’s prediction. There was no national paper money, only banknotes printed by individual banks, and they were typically worth far less than their face value, depending on how much faith people had in the banks behind them. For the entire century, a series of tumultuous events periodically sapped American faith in the banking system. The major disasters included:

• Depression. A deep national economic depression that lasted for years hit in the late 1830s. The problem was caused by a rash of speculation on Western lands paid for with paper money issued by weak banks.

• Crash. Another big banking collapse followed in 1857. The blame is traced to the California Gold Rush, which pumped excessive amounts of money into the economy, leading to a tsunami of reckless borrowing and lending.

• Bad paper. In 1861 President Lincoln started printing the first federal paper money to pay for the Civil War. But without a federal bank behind the money, it lost value just like the old Continentals. In fact, the government itself didn’t accept these “greenbacks” for payment of taxes.

• Bust. Another speculative bubble burst in 1873 leading to still another depression that lasted six years.

• Panic. In 1893 a financial fever broke out that put more than 500 banks out of business, leaving many of their customers broke. The main problem this time was that silver strikes in the West meant there was suddenly a glut of silver. Therefore silver coins became worth less for the value of the raw metal than gold ones despite their equivalent face values. Naturally people started buying the more valuable gold coins with their silver coins, draining the federal Treasury.

1861: Confederate Money

Although the country had no federal bank in these years, it did finally get a head of banking, but a completely unofficial, self-appointed one. That was John Pierpont Morgan, by far the most powerful banker of his age. Morgan believed that the most important thing in business was character—an all-too-rare virtue then as now. He once said that “a man I do not trust could not get money from me on all the bonds in Christiandom.”

Morgan stepped in as America’s unofficial head banker to solve the crisis of 1893, finding a way to buy gold in Europe to keep the Treasury from running out of the metal that was the basis of American money. Still, the nation had to endure a depression that lasted for years, and in the 1896 presidential election people who had put their money in silver—largely Western and rural people who hated banks—rallied behind William Jennings Bryan and his famous proclamation that “you shall not crucify mankind upon a cross of gold.”

By 1907 the economy had grown much bigger than all the government’s gold could cover, yet the nation was still on a gold standard. That meant too much borrowing and too much circulating money against too little metal on reserve to guarantee the money’s worth. Another panic hit, and again Morgan had to come to the rescue. He announced that “if people will keep their money in the banks, everything will be all right.” That was entirely true, but saying so wasn’t enough. He singlehandedly called all the nation’s top bankers to his New York City mansion and got them to raise money so cash could keep flowing and to cooperate to keep weaker banks from going under.

This time a depression was averted, but the need for a strong central national bank was finally recognized. It came into existence in 1913 in the form of the Federal Reserve (Read on the Federal Reserve). The Federal Reserve could try to control the health of the economy and banks in general by setting interest rates for its own lending that would set a standard for how much or little borrowing and lending there would be, slowing down the economy when there was too much money and exuberance and speculation and then turning the spigot back on when there was too little. That worked, most of the time, until the Stock Market Crash of 1929 and the Great Depression that followed.

Financial game-changers who are on the money.
Click on the image to view it full size.

The Crash of 1929 was driven by the widespread belief in an endlessly growing economy. (continued on page 70) There was wildly excessive borrowing and investing in overvalued stocks. When it all came tumbling down, banks failed by the thousands. More than 3,000 of them went under in 1931 alone. Another 1,453 failed in 1932, and thousands more in 1933.

In 1933 Franklin Roosevelt was elected president. He leapt into action, immediately closing all the nation’s banks for several days as he pushed through Congress a bill to give the government unprecedented new powers to regulate the whole system. He also effectively took the nation off the gold standard, allowing the dollar to decline in value so that people’s debts would be worth less—and easier to repay. He made the Federal Reserve much stronger than it had been before. And, most important, he pushed through the Glass-Steagall Act. That law put a federal guarantee behind bank deposits, automatically increasing public confidence in them, and it also made banks choose to be either deposit businesses or investment businesses but not both. Banks could no longer be safe harbor for people’s hard-earned savings and casinos at the same time.

Finally, after more than a century and a half, the U.S. had a truly solid banking system. There had been runs on banks and major waves of bank failures throughout our history; there hasn’t been one since. This country has not been immune to crises, however. In the early 1980s there was the savings and loans (S&Ls) debacle. S&Ls were small local savings banks that dealt mainly in savings accounts and home mortgages instead of checking accounts and business loans. They ran into trouble because they weren’t allowed to raise the interest rates they paid on savings accounts when interest rates everywhere else were rising, so people started withdrawing their money from them. The government responded by letting them raise those rates, but the banks’ home mortgages didn’t make enough money to pay for the high rates. S&Ls went bankrupt en masse, and the federal government had to pay $20 billion in insurance to their depositors.

In the 1990s the federal government for the first time let banks operate across state lines, leading to a long series of mergers and the rise of the nationally operating institutions we’re all familiar with today. Unfortunately, it also—after more than half a century of dependable if unexciting banking—lifted Glass-Steagall’s ban on speculative investment by deposit banks.

2008: As banks teeter on verge of collapse, George W. Bush asks Congress for emergency funds. TARP Program loans banks $700 billion. Fallout: Most banks have since repaid TARP loans plus interest, but economic damage lingers. Many argue bailout undermines confidence in free enterprise system.

That development was one of the causes of the recent Great Recession, as banks discovered they could make the most of the housing boom—which turned into the housing bubble—by gambling on it, bundling ever-more-dubious mortgages, slicing them up, and blending them together to turn them into seemingly fail-safe investments. The banks’ gamble ended not only with millions of Americans bankrupt and homes in foreclosure but also with the huge government bank bailouts of late 2008. It then led to new attempts at stronger regulation again, including the Dodd-Frank Act and its Volcker Rule, which attempts to reinstate some of Glass-Steagall’s prevention of speculative betting by banks. However, many bankers are aghast at the new regulations, especially the Volcker Rule. Jamie Dimon, the head of JPMorgan Chase, recently said of the former Federal Reserve chairman who devised the rule, “Paul Volcker by his own admission has said he doesn’t understand capital markets. He has proven that to me.” The law is unquestionably extremely complex and expensive for banks to implement. Its proponents say it will keep the economy safe; its enemies say it will strangle the economy.

In other words, after centuries of hard experience, we still can’t agree about banking, how powerful banks should be, or how free they should be to do what they want to—or think they must—do. What then have we learned, after more than 200 years of banking disasters? We’ve learned a lot, actually. We’ve gone from a small, new, rural frontier nation of no banks at all to the world’s modern economic behemoth with banks and banking power to match. We’ve grown very painfully at times, but we’ve grown in ways no one ever could have begun to imagine. And we at least were able to keep the Great Recession from becoming another Great Depression. Unemployment reached 10 percent in 2009, but it hit 24.9 percent in 1932—and didn’t fully recover until World War II.

In the end there may, sadly, be a limit to what we can learn and how much we can control about banking. The people who run banks are only human. They see the world imperfectly, as we all do, yet they must make decisions of great consequence based on what they see. Only a national bank can try to control the sum of what all the nation’s bankers do, but that is almost like controlling the weather. An economy is the total of everybody’s activities everywhere, so it is as complicated as all the wind and rain and sunshine in the world combined. And even if bankers were superhuman and we could truly dominate something as complex as weather or an economy, there would still be that vexing choice between risk and opportunity. We all want a higher return on our investments, but that means taking a greater risk that we’ll lose it all. We all want to borrow at lower rates, but that means less money going into banks to create those higher returns we want. We all want to take chances, but we don’t want to be hurt if those chances go wrong.

Our whole economic system, like our political system, is but a reflection of the imperfectability of human nature. And that is why capitalism is, as Winston Churchill once said of democracy, the worst possible way of doing things—except for all the other ways that have ever been tried.

BANKS: A Love Hate Story

U.S. Banks: A Historical Timeline.
Click on the image to view it full size.

We can’t live without banks, but that doesn’t mean we have to admire them. Banking excesses and the attempts to curb them have shaped our economy since the founding of the republic.

In recent years we’ve seen the bailout of some of our largest banks—with the resulting hue and cry of such diverse groups as Occupy Wall Street and the Tea Party. Most banks have since paid off their loans, but critics warn that a “too big to fail” mentality will ultimately harm the nation.

Will a few big players—the top five banks today control more than half of all U.S. assets­—now be encouraged to engage in even riskier behavior, knowing the government will step in to catch them if they fall? Have we undermined the free enterprise system—not to mention the American sense of fair play—by sending the signal that the system supports the strong and abandons the weak?

Finally, did the bailout even work? Four years later the financial markets are in better shape, but unemployment continues to be unacceptably high, state and local governments are starved for cash, and housing has not yet recovered.

Some experts also ask whether it is even possible to manage domestic finance in a global economy: Today, more than ever, the collapse of a foreign country would have disastrous ripple effects on our shores.

Love it or hate it, the bailout is best understood in the context of the historical tug of war between those who support federal banking authority and those who oppose it. The latter group warns of the excess power and potential for corruption in a central bank; those favoring a centralized bank believe a united authority is essential for managing the money supply and the national debt. Key dates in banking history are at right.

Read Jekyll Island and the Secret Behind the Fed for more history from the Post.

Too Big to Fail? The Saturday Evening Post

Prior to the 1980s, credit cards were far less common, and personal loans were generally made by lenders who knew their customers. “Today, credit worthiness is determined almost entirely by computers based on credit scores,” says Platt. “Unless you use all cash, there’s no way around it … You need a credit score—the higher, the better.”

Your credit, or FICO, score determines not only whether you can obtain a credit card or borrow money to purchase a home, it also dictates what interest rate you’ll be charged. The higher your score, the lesser a risk you pose to creditors, so the lower your interest rate.

Want to boost your credit score? First you need to know what it is. To see just your credit report—what prospective creditors see when considering extending a loan—log on to annualcreditreport.com or call 877-322-8228. You can find out what each of the three major credit report companies—Equifax, Experian, and TransUnion—say about you. What you can’t get without paying extra is your numeric credit score, which runs from a low of 300 to a high of 850. You can get that number from creditkarma.com or creditsesame.com without paying a dime, though.

Scores are based on several factors, from your credit history to the amount of money you owe—essentially your track record of paying off past debts. For example, if there’s a delinquent payment on your record, it’ll certainly bring your number down. That’s why it’s essential to check your report every so often. If there’s a problem, you’ll see it and be able to contest it.

A score above 650 is widely considered good. If your score is 720 or greater, you are a candidate for the best credit deals. You don’t need to shoot higher than that; raising your score to 800 or above may give you pride, but is unlikely to lower your payments by much. Any score under 620 makes you a “subprime” borrower; as such, you may have a tough time getting credit and will certainly have a hard time getting the best rates. Want a higher score? The surest, quickest way is to clear away existing debt. “Pay off as much of your credit balance as you can, and your score will rise,” says Ken Lin, CEO of Credit Karma. “It isn’t the only factor, but it is the single biggest.”

Myths abound about getting a higher score. For example, the amount of money you earn doesn’t enter into the calculation. “Making six figures, winning the lottery, or inheriting a fortune will not give you a good credit score,” says Lin.

Also, it won’t necessarily raise your score to close old credit cards, as has been reported elsewhere. According to Lin, having a large amount of credit available to you may make some lenders nervous, but, on the other hand, having an account or two that’s been open for many years may actually work to your benefit.

What’s the best strategy for bringing up your numbers? Lin suggests that you shoot to apply for one new card each year, taking advantage of the juiciest perks you can find—free mileage, cash back, or zero-percent financing. “Do this until you have five or so cards,” says Lin. “Then start to cull your older cards with lesser perks, so that you’ll have three to five open credit cards in good standing with the oldest card giving you at least four years of history.”

Raising your credit score is something of a game, true. But it’s a game you can win.

Keeping Score The Saturday Evening Post

As uninsured ranks grow and insured employees cope with complex health plans with varying copays and coverage options, people struggle with understanding their bills and detecting potential errors. But help is available from a growing cottage industry of health advocates and firms specializing in reviewing medical bills; discovering mistakes; and negotiating with health care providers, insurers, and collection agencies, reports Barb Berggoetz in her Sep/Oct 2010 Saturday Evening Post article “Decoding Your Medical Bills.”

Here’s how to contact the medical billing companies mentioned in her article and take control of your health care costs:

1. Medical Billing Advocates of America

PO Box 1705
Salem, Virginia 24153
billadvocates.com
540-387-5870

2. MedReview Solutions, Inc.

4840 Willow Ridge Court
Zionsville, Indiana 46077
medreviewsolutions.com
317-873-4872

3. Chapman Consulting and Hospital Bill Review

14604 Mansfield Dam Ct Unit #1
Austin, Texas 78734
hospitalbillreview.com
800-906-8085

4. Health Advocate, Inc.

3043 Walton Road, Suite 150
Plymouth Meeting, Pennsylvania 19462
healthadvocate.com
610-825-1222

Decoding Your Medical Bills The Saturday Evening Post

Susan Ellis, 78, a retired U.S. Department of State worker residing in Washington, D.C., lives partly on a pension and partly from her savings. Those savings are half in stocks and half in bonds, with the lion’s share of those bonds being Treasuries. While Ellis’ stocks sagged in the recent recession, her Treasuries more than held their own. “Having part of my portfolio in U.S. government bonds provides me with great comfort,” says Ellis. “It helps me to sleep at night.”

Treasuries give many investors similar peace of mind. “When there is fear and turmoil in the markets, people seek safety; Treasuries fulfill that role admirably—and they always have,” says Christopher Philips, a senior analyst with the Investment Strategy Group at Vanguard Investments. Indeed, during this past recession, Treasury bonds were the only place to seek safety, adds Philips. “U.S. stocks were down, so were foreign stocks, real estate, and corporate bonds … every kind of major investment lost value, except for Treasuries.”

According to data from Morningstar, while U.S. stocks fell in value 46 percent between October 2007 and March 2009, long-term Treasuries rose by 25 percent. In the recession prior, between March 2000 and September 2002, U.S. stocks fell by 38 percent, while long-term Treasuries soared 40 percent. This zigzagging pattern of returns between stocks and government bonds has existed for decades, which is why smart investors, wanting to dampen volatility in their portfolios, own Treasuries.

The “catch” with Treasuries—in fact, all bonds, but especially Treasuries—is that they produce modest returns over time. Since 1926, per Morningstar data, stocks have returned 9.8 percent a year, while long-term Treasuries have generated 5.4 percent. If you mixed-and-matched, combining 60 percent stocks with 40 percent Treasuries, the average yearly gain of your portfolio would have been 8.6 percent.

To make Treasuries a part of a balanced portfolio, consider this:

• The first step in constructing a portfolio is to determine what portion you want in stocks and what portion bonds. The higher the return you desire, and the more volatility you can stomach, the more you want in stocks. Important note: Bonds in the past 20 years have done exceptionally well (see chart on page TK), but the relative return on bonds to stocks may revert to long-term norms, says Philips. “Treasuries have done very well in the past 20 years because bonds tend to shine when interest rates fall … but when rates rise, bonds tend to not fare as well.”
• Whatever your allocation to bonds, consider putting roughly 40 percent of that into conventional Treasury bonds, recommends Philips. The rest could be in corporate bonds (which tend to return slightly more than Treasuries), municipal (tax-free) bonds, foreign bonds, or inflation-protected Treasury bonds (discussed below).
• Treasuries, like all bonds, may be purchased with various maturities: short-term, intermediate-term, or long-term. In general, the longer the maturity, the higher the return, but the greater the price swings. Philips recommends that you shoot for the middle—“intermediate-term” bonds that mature in about seven years.
• You can buy individual U.S. Treasuries, free of trading costs, by going to Treasurydirect.gov. Or, you can buy a fund of Treasuries, which allows for instant diversification of maturities and ease of management. Choose a fund with low costs. Options include the SPDR Barclays Capital Intermediate-Term Treasury fund (ticker symbol ITE) or the Vanguard Intermediate-Term Treasury fund (VFITX).
• Add TIPS. Treasury Inflation-Protected Securities (TIPS) are a different breed of Treasury that offers little interest, but is adjusted for inflation twice a year. Consider allocating a part of your bond portfolio above and beyond conventional Treasuries to TIPS, suggests Philips. Like conventional bonds, TIPS can be purchased individually through Treasurydirect.gov or as a fund. Options include the Vanguard Inflation-Protected Securities fund (VIPSX) or the iShares Barclays TIPS fund (TIP).

Whichever way you decide to go to buy Treasuries, once you do, your sleep, like Ellis’, will likely improve, too.

Investing in America The Saturday Evening Post

Only the first question is easy. The traditional IRA allows you to sock money away and get an immediate 
tax deduction. But when you eventually withdraw the funds, you pay tax.

The Roth, in contrast, gives you no deduction stepping in, but you pay zero tax when taking the money out. In other words, the traditional IRA offers tax-deferred growth; the Roth offers tax-free growth.

The ability to convert from the traditional to the Roth is nothing new. That’s been allowed since 1998. As of January 1, 2010, however, there is no longer a $100,000 income cap on who can convert to a Roth. Now anyone can. All you have to do is pony up the taxes due. But just because you can convert does not mean that you should.

“For many people the conversion can make enormous sense. For others it can be a disaster,” says Robert Keebler, CPA, MST, a partner in the accounting firm of Baker Tilly Virchow Krause, LLP, in Appleton, Wisconsin.

Which group are you in? Here’s how to tell:

Will your future tax rate go up?

With the federal debt mounting and personal income tax rates lower than they’ve been in decades, taxes overall are likely to rise. But what about your personal tax bracket? That is perhaps the single biggest consideration in deciding whether to convert.

“If you are paying 30 percent in taxes today, or 30 percent tomorrow, you are, in a strict mathematical sense, going to be no better or worse off by converting,” says Keebler. If you expect your taxes to rise in future years, however, you are a good candidate for conversion. If you expect your taxes to fall, which might be the case for a highly paid professional looking to retire soon, the conversion will probably not make sense.

When will you need the IRA funds?

The longer you have before tapping the funds, the more the Roth can grow tax-free and the more the conversion will help secure your nest egg. If you plan to use the funds within the next three to seven years, converting to a Roth probably won’t work to your advantage, says Keebler. If, on the other hand, you plan to not touch the money for decades, or perhaps never touch the money—leaving it to your kids, for example—the Roth conversion may add substantially to family wealth, he says.

Do you have the cash to pay the taxes now?

If you convert, say, $20,000 of your traditional IRA to a Roth this year (you can choose to convert all or part of your traditional IRA), you will likely owe income taxes (both federal and state) on the $20,000. If you are in the 30 percent total tax bracket—assuming the $20,000 doesn’t push you up into a higher tax bracket—you’ll have to cough up an extra $6,000 ($20,000 x 30 percent) by tax time. Or, you can take advantage of a special law currently in effect that allows you to defer recognizing the conversion income until you file your 2011 and 2012 tax forms. “Either way, the conversion will be more advantageous if you have the cash outside of your IRA to pay the tax,” says Scott Jacobsmeyer, CFP, president of Argent Wealth Management in Round Rock, Texas. In addition, he warns, if you pay the tax due out of the IRA and you are not yet 59 1/2, you may be subject to a 10 percent penalty.

Fortunately, you don’t need to figure this all out today. To convert for tax year 2010, you need to make your move by the end of December. And there’s always next year … and the year after that. “In fact,” says Jacobsmeyer, “for many people, partial conversions over a number of years (so you’re not taking too big a tax hit in any one year) might be the best strategy of all.”

Should You Convert Your IRA? The Saturday Evening Post

A rash of media stories called for abandoning the diversified portfolio, rejecting buy-and-hold investment, or adopting new tactics, such as market timing (jumping in and out of the stock market in the hopes of buying low and selling high) and cherry-picking (banking on one or possibly a handful of investments that you think will do better than all the others out there). Other stories have advocated just keeping your money under the proverbial mattress.

Investors are listening. According to the investment resource Morningstar, $573 billion in cash flowed into low-yielding but secure money-market funds in 2008 when the stock and bond markets (other than Treasury bonds) were suffering the most. As soon as the stock and bond markets started to come back in 2009, so did the investment money.

We’re here to tell you that you might want to think twice before following the pack and abandoning the tried and true—the well-diversified, broad portfolio of stocks and bonds and cash that you pretty much buy and hold—and jumping onto any bandwagon that promises to do better. Here’s why:

1. Cash is costly. Keeping your money in cash (money-market funds, savings accounts) may spare you from market volatility, but in the long run, the return on a diversified portfolio of 60 percent stocks and 40 percent bonds still clobbered cash. According to Morningstar, the respective 30-year returns on the diversified portfolio, after accounting for inflation, were three to four times that of a portfolio held in cash.

2. Markets are unpredictable in the short run. If you’re thinking that you’re going to keep your money in cash and pop into the markets at just the right time, think again. Pro investors often can’t even time the markets, says Cathy Pareto, MBA, CFP, president of Cathy Pareto & Associates, a wealth management firm based in Coral Gables, Florida. “Studies show that investors who buy and hold a diversified portfolio, rather than try to rush in and out of investments, tend to do much better.”

3. Specific winners and losers are unpredictable, too. If, instead of diversifying your portfolio, you try to zero in on individual securities or small segments of the market, you may be adding to your risk, but not your return. “People are often overconfident in thinking they can pick one stock or perhaps one industry that is going to do well,” says Don Bennyhoff, CFA, a senior investment analyst at Vanguard Investments. “Professional investors often do a very poor job when they attempt such picks—the average investor won’t even do that well.”

4. Costs are bigger than you think. When you buy and sell (whether popping in and out of the market, or gambling on individual stocks or market sectors) there are substantial costs involved, says Bennyhoff. The “spread” (the middleman’s cut) on stocks can be as high as several percentage points. There is often a commission or markup to pay the broker on any trade of a stock or bond, and fees on fund swaps are not uncommon. You may also pay higher taxes on a shifting portfolio than on a buy-and-hold one.

5. Look at the bottom line. The downturn of 2008–2009 was unusual in the manner in which so many investments, and entire classes of investments, turned sour at the same time. Still, diversification paid off, assures Bennyhoff. Bonds overall didn’t do quite so bad; some bonds, namely Treasuries, did very well. Certain segments of the stock market even shot off like rockets in the second half of 2009. Overall, if you had a highly diversified portfolio of 40 percent bonds, 30 percent U.S. stock, 20 percent foreign stock, and 10 percent cash, your portfolio on September 30, 2009, would have earned you 4.25 percent annually, or 51.63 percent cumulatively, over the prior decade. “Despite what you may have read, diversification and patience hasn’t entirely let us down,” says Bennyhoff.

Russell Wild, MBA, is a NAPFA-registered financial advisor who has written nearly two dozen books, including Index Investing for Dummies and Bond Investing for Dummies.

Why It Pays to Diversify The Saturday Evening Post

Naturally, America wonders if a revival of the housing market will bring a return of the financial meltdown that began with subprime lending.

Hopefully, banks will bypass the short-term gains they can make out of high-risk home loans.

But consumers also need to be part of the solution. Even if mortgage officers in banks are ready to approve risky loans, buyers will still need to practice moderation. The instability of our economy will not disappear soon. Buyers should scale back expectations for their next house instead of gambling on long-term, unrealistic earnings.

The quote “Don’t count your chickens before they are hatched,” might be appropriate here, except Franklin didn’t say it—Aesop did.

Franklin’s comment is more pertinent to homebuyers, as he advises them not to let the possibilities of earnings obscure the realities of daily costs.

“Gain may be temporary and uncertain; but ever while you live, expense is constant and certain: and it is easier to build two chimneys than to keep one in fuel.”

Living Inside Your Means The Saturday Evening Post

You walk into a department store to make a purchase. You take your selection to the cashier and write a check. On that check is your name, address, and home phone number, the name of your bank and its address, and your bank account number. The cashier asks for your driver’s license. In nine states, the license number is your Social Security number. The cashier memorizes the birth date on your license and then asks for your work phone number, which will give them the name and address of your employer. A thief has sufficient information to apply for credit in your name. —Fraud expert Frank Abagnale illustrates an example of identity theft in a brochure for SafeChecks, Check Fraud and Identity Theft, Volume 7.

Frank Abagnale is a leading authority on crimes involving fraud, embezzlement, secure documents, and forgery. As the author of the novel, and Steven Spielberg-directed film, Catch Me If You Can, Abagnale is perhaps most famous for his five-year stint in the late 60s when he passed $2.5 million in bad checks in 26 countries, including every state in the United States. Several years after being “caught” and having served time in French, Swedish, and U.S. prison systems, he began working closely with the FBI, consulting financial institutions and implementing various fraud prevention programs. He is the founder of Abagnale & Associates, a secure document consulting company, and has worked with 65 percent of the Fortune 500 companies in America. Abagnale has authored numerous articles and three books on identity theft — The Art of the Steal, The Real U Guide to Identity Theft, and Stealing Your Life.

Don’t Let It Happen to You!

Consider this: For the grand total of $218, one could obtain on the black market a social security number, birth certificate, and driver’s license — one of the many sobering facts in Frank Abagnale’s most recent book on identity theft, Stealing Your Life.

20 Tips for Preventing Identity Theft:
Adapted from Stealing Your Life by Frank Abagnale

Check Your Credit Report
Unless you check your credit report periodically, you may not discover a problem until the damage has been done. An identity thief may have used your Social Security number and name to open a new credit card account with a fake address and phone number.

Don’t Give Out Your Social Security Number
Filling out a form that asks for your Social Security number doesn’t mean that it’s necessary to provide. Rule of thumb: the less information you give out, the better.

Protect Your Computer
Make sure your wireless Internet connection is secure by using an encrypted service. Update your virus protection regularly and install an adequate firewall. Assume that any e-mail requesting personal information is a fraud.

Keep Track of Your Billing Cycles
Follow up on any late or missing bills. It’s possible a thief may have changed the address.

Examine Your Financial Statements like an Obsessed Accountant
Carefully review credit card statements to make sure you can account for the purchased items.

Guard Your Mail from Theft
Try to pick up your mail soon after it’s delivered or consider a locked mailbox. If you live in a high-crime area, consider a post office box and drop outgoing mail in a drop box.

Invest in a Shredder
Shred documents before you throw them away, especially bills and documents containing personal information such as your Social Security number and financial account information.

Practice Safe Shopping
When shopping online, shop only from secure sites that will encrypt your order information and your credit card number before sending them to a merchant. Look for https:// at the beginning of the URL in the address bar. It’s the “s” that’s important. Use only one credit card for all online purchases or use department store-specific cards.

Avoid Sketchy ATMs
Be cautious of portable ATMs as seen in delis or hotel lobbies. Look for a protruding cord from the back that’s not plugged in as an indicator that the data isn’t being sent anywhere. Stick with real, secure bank ATMs.

Be Suspicious of Unexpected Calls or Letters
When a business calls or e-mails to inquire about personal information, be skeptical. Remember that banks and credit card companies don’t operate this way.

Example: You may receive an e-mail “from MasterCard” asking you to call an 800-number in order to verify recent charges. Upon calling the number, the person on the other end answers, “Hello, MasterCard.” You explain your e-mail, and the person begins by asking you to verify who you are by providing the card number, expiration date, and birth date. This is one of numerous scams detailed in Abagnale’s book, so practice a little healthy paranoia by not providing these details over the phone or Internet.

Put Real Passwords on Your Accounts
Your pet’s name is not a government secret. Also avoid using the last four digits of your Social Security number, your mother’s maiden name, your name, your birth date, your pet’s name, consecutive numbers, and the word password.

Keep Your Credit Card Close When Shopping or Eating Out
Observe how salespeople or wait staff handle your cards. Make sure they don’t have a chance to copy them.

Use Safe Checks, and Use Them Sparingly
Always get your checks from the bank as these checks are more likely to contain fraud protectors such as watermarks, thermochromatic ink, chemically reactive paper, and light-sensitive ink and fibers.

Secure the Home Front and Office Front
Locate a safe place, one that’s not obvious, in your home to store your Social Security card, passport, and all records, including credit card statements and tax forms. Don’t leave personal information on your desk or computer screen.

Carry Out What You Need
Leave your Social Security card at home and carry only the cards you plan to use.

Spring Clean Your Credit Cards
Cancel any cards that you don’t regularly use. Maintain organized records of all your credit cards so that if a theft does occur, you can report it promptly.

Opt Out
Remove your name from marketing lists that get sold and resold and opt out of other offers by calling 1-888-5-OPTOUT.

Read Privacy Policies
Not to be confused with junk mail, privacy policies are essential for understanding what your bank, financial institutions, and other businesses that you deal with do with your information. They also offer restrictions you can place on the dispersal of that information. Elect the restrictions available to you.

Protect a Deceased Relative
Contact the credit bureaus and have a “deceased” alert put on the person’s reports. Inform Social Security of the death yourself with a copy of the death certificate.

Place Fraud Alerts on Your Credit Reports
Limit a thief’s ability to open accounts in your name by placing a “fraud alert tag” on your credit report. Contact one of the three credit bureaus to place the alert. Fraud alerts are free and last for 90 days.

How to Prevent Identity Theft The Saturday Evening Post