The Equifax Data Breach and Steps You Should Consider

The recent hacking incident at Equifax, has created a lot of confusion and concern about what it means and what risks it has created for each of us.  As I was looking into it for my own sake, I thought I’d pull together my notes here as well.

First, what is Equifax and what do they do?  The lending business (e.g., mortgages, credit cards, auto loans etc) depend primarily on three companies to provide data to them to help assess the credit risk (i.e., the risk of not being repaid) when a person applies for a loan. Equifax, Transunion and Experian  gather and compile data on individuals through a variety of sources.

That data includes names, addresses, SSN’s, borrowing history and many other bits of information gleaned over time. This under-regulated industry is a prime target for hackers looking to steal data that can be used for a variety of illicit transactions including some where hackers could potentially wreak havoc with your financial life. Data thieves could:

  • Rack up charges on your credit cards.
  • Apply for a loan or credit card using your identity.
  • Steal money from your financial accounts.
  • File a false tax return claiming a refund.
  • Steal your medical information and then use it to, say, fraudulently fill prescriptions or submit medical expenses for insurance reimbursement.

One important first step is to see if your data may have been stolen during the Equifax hack. They have set up a site where you can input your information and learn your personal situation. Note this is per person (by name, SSN etc) so couples should do this individually. There was also a firestorm when Equifax initially caused people to waive their right to sue them if they used this feature – but they have since backtracked from that requirement.

If you have been affected (I was) then you should consider following through on the Credit Monitoring/Fraud Alert service Equifax provides (free for a year).  And unless you are going to be seeking a loan in the near future I would also recommend Freezing your Credit Report at each of the three companies.

A credit freeze will prevent a new creditor from accessing a consumer’s credit report. This move prevents anyone from opening a new line of credit in the name of the consumer who enacted the freeze. To initiate a freeze, consumers must contact each credit firm and follow their procedures. Consumers may contact each of the three major credit firms at:

I was able to do this easily online at the Equifax site but had to call in to the other two to complete the freeze.

You should also consider monitoring your credit report at Annual Credit report – you can do so once per year for free. I also read that you can get a free report once per year from each of the three credit reporting companies so effectively you could check once per quarter at no cost.

It’s a pain to have to deal with this but in today’s world it’s essential to take all steps to prevent the much bigger headache of identity theft.

 

Sources and more reading:

https://www.nytimes.com/2017/09/08/your-money/identity-theft/equifaxs-instructions-are-confusing-heres-what-to-do-now.html

http://www.humbledollar.com/2017/09/stop-thief/

http://www.humbledollar.com/money-guide/freezing-your-credit/

https://www.wsj.com/articles/putting-a-freeze-on-credit-thieves-a-look-at-your-protection-options-1505150917

https://www.bloomberg.com/news/articles/2017-09-11/equifax-hack-is-exhibit-a-in-case-for-regulation-durbin-says

 

 

What does Warren Buffett Know??

As the market grinds higher, despite overvaluation concerns, it’s been increasingly tough to maintain a conservative or even a neutral point of view.  And even if you just have a value-oriented style, like me, you’ve lagged the overall indices, and especially fallen behind growth strategies as the WSJ article documents:

Value investing is mired in one of its worst stretches on record, prompting concerns that the investment style favored by generations of fund managers is losing its effectiveness.

Value stocks, those that are cheaper than many peers relative to earnings or reported net worth and are typically purchased by fund managers anticipating long-term appreciation, have significantly lagged behind their growth stock counterparts this year, compounding a gap that has persisted since the end of the financial crisis.

Instead, investors have gravitated toward companies with fast earnings or price growth, such as Amazon.com Inc., Netflix Inc. and Tesla Inc., and the market’s price-earnings ratio has continued to rise—a trend that many value investors contend cannot continue forever.

And today we learn that the world’s leading value investor, Warren Buffett, is now holding over $100 billion in cash at Berkshire Hathaway.

Buffett is famous for his patience and unwillingness to buy at the wrong (i.e. high) prices. While he no longer looks for dirt cheap investments by favoring great businesses at reasonable prices, the fact that he apparently sees none today should be somewhat of a signal.

In any case the market moves in cycles and what’s unpopular today (Value) will undoubtedly have its return to favor one day.  Conversely chasing the currently hot T-FAANG (TeslaFacebook, Amazon, Apple, Netflix, Google) stocks today is probably not the best strategy if/when mean reversion sets in.

 

Low Volatility – Will it Continue?

Getting towards the half way point of the year and thus far 2017 has been one of the least volatile in terms of intra-year drawdowns.  The chart below was created by Charlie Bilello as part of his summary on the topic. Charlie notes that the median drawdown since 1928 is 13%.  That’s not to say we will see something on that order this year but the chart does put the current market into perspective.

Active Comeback?

The Wall Street Journal recently ran a story implying that actively managed funds – where stock picking strategies are employed – are on the “Comeback Trail”.  See chart:

Active comeback pic

While that may be true, relative to prior years, the unspoken message in the chart is that fewer than half of the actively managed funds produce superior returns vs. a comparable benchmark (e.g., S&P 500).

What’s also not shown here is that of the active managers who do beat the benchmark index in a given year, very few do so in the years that follow.  This suggests a randomness or luck factor at play.  However, these active managers charge high fees regardless of performance, and are often “closet indexers”, that is mostly mimicking the portfolio of their target benchmark index.

Over the past few years the flow of funds within the Mutual Fund and Exchange Traded Funds universe has been directed towards “passive” index funds which own all of the stocks in an index rather than trying to pick winners from the list.  Vanguard was the pioneer in index based investing and is the largest asset manager in the world with over $4 Trillion in assets under management.

Investors have come around to understanding that lower costs and simply buying the index is a better more consistent way to invest. Passive funds not only carry lower operating expenses, but also have much lower transaction fees due to much lower portfolio turnover, as well as being more tax efficient.

That’s why Warren Buffett famously bet $1 million that a simple index fund would outperform a collection of expertly picked Hedge funds over a 10 year period. He’s about to win that bet.

Or as Jonathan Clements, former personal finance writer for the WSJ who now manages HumbleDollar.com tweeted today:

There are those who buy and hold low-cost, diversified portfolios—and then there are those who generously contribute to Wall Street bonuses.

Costs matter and chasing the latest hot performing fund is a sure way to see your portfolio under-perform.

 

No One Wants Simple Advice

University endowments have flocked to an investment model pioneered by David Swensen of Yale that involves heavy concentration in “alternative” investments.  Swensen’s success, like most others, is of course hard to replicate.

This interesting post  by Ben Carlson highlight how a simpler approach to investing, using index funds – called the Bogle Model after Vanguard founder John Bogle – consistently outperformed the much more complex and costly alternative model.

“the fact that the Bogle Model portfolio was in the top quartile and even top decile of endowment returns is insane when you consider the depths these universities will go try to beat the market and how sophisticated they are in the eyes of other professional investors.

These funds are invested in venture capital, private equity, infrastructure, private real estate, timber, the best hedge funds money can buy; they have access to the best stock and bond fund managers; they use leverage; they invest in complicated derivatives; they use the biggest and most connected consultants, and the vast majority of these funds still fail to beat a low-cost Vanguard index fund portfolio.”

Why would Colleges and Universities continue to spend wildly in chase of excess performance when they can access the majority of the returns of most investments via ultra cheap index funds?  Answer – no one wants simple advice.  Imagine how many endowment management jobs would be eliminated – not something any of them want to contemplate.

Push to Lower Fees Continues

The chart below highlighted by Michael Batnick further demonstrates that investors are voting with their wallets as they realize they have been paying high fees for chronically under-performing funds.  In the first half of 2016 well over 80% of actively managed funds – experts researching and hand picking the stocks in their funds – saw investment returns that lagged the market in general.

And this is particularly important as market returns are forecast to be low – in the 3% range for the near future.  Much of these funds are moving to passive index based funds that cost a fraction of the fees charged by actively managed funds.

So if you are paying a fund 1% that could eat up a third of your return, or more if the fund did not beat the market / benchmark.  What’s worse is many fund managers are “closet indexers” who get most of their return from the overall market, not from their specific stock picks.

So pay close attention to the fees you pay, both for investments and for financial advice. It’s a buyer’s market in that regard and what you don’t pay you keep.

flows

 

Dividends as Part of Total Return

Receiving dividends is a tangible way of seeing returns from your investments.  Along with price increases (or decreases) dividends comprise what is known, not surprisingly, as total return.

And it’s intuitive – if you are being paid dividends you are getting a return on your investment. But good luck seeing that calculated into the returns shown on your brokerage statement or web site.

Schwab, for instance, will show you annualized dividends on the monthly statement.  But on their web interface if you check for Unrealized Gains/Losses you see only the change in price. If you automatically reinvest dividends back into a holding, they will track and report that as a new investment, not part of the return from the original investment.

Brokers do this as it ties to capital gains/losses that are realized, which they will feed into the 1099’s they issue for tax return purposes.

But as an investor seeking to understand the total return of a given investment you are often left to your own devices, with calculator in hand.

Eddy Elfenbein of Crossing Wall Street just published the following:

Investors sometimes overlook the importance of dividends. Consider these stats: From the market’s closing low on March 9, 2009 until yesterday’s close, the S&P 500 gained 233.74%. But the S&P 500 Total Return Index, which includes dividends, gained 294.06%. That’s a nice boost.

Like individual brokerage statements, most discussion of market returns focus on price change alone.

The point is that dividends are a major contributor to total returns, so keep them in mind when evaluating the performance of your investments.