Whose Fault Is Fraud? The Complicated Reality Of Debit Card Transactions

When you use your debit card, you visibly see an actual interaction between three people.

1.) You tell a merchant you’d like to buy something.
2.) That merchant tells your credit union to pay out some of your money.
3.) Your credit union asks you to authorize the transaction.
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If something goes wrong in that process, it must be the fault of one of those people, right? The assumption is, either your credit union, the merchant or you gave out information that resulted in fraud.

Like most realities of the modern financial world, though, nothing is simple about your transaction. Let’s take a look at three other places a financial transaction could break down, and what you can do to protect yourself.

1.) The point-of-sale system

Ever notice how most of the boxes that process credit and debit transactions look pretty similar? It turns out there are only a few companies that manufacture those systems. They’re called Point of Sale (POS) terminals, and they’re the lifeblood of many of today’s small businesses.
The problem with anything made by so few manufacturers, though, is that anyone who learns how to defraud one of these terminals can do some serious damage. That was the weakness exploited in the Home Depot and Target hacks of 2014. These companies had one style of POS terminal for every store, so when a hacker group learned how to break into it, group members could steal data from a wide range of targets.
POS systems have a variety of other vulnerabilities, from PIN tracking keypads to miniature cameras. Always be on the lookout for small modifications in the keypads and other devices. If something looks suspicious, don’t be afraid to back out of a transaction, or ask if there’s another register you could use. Merchants are usually unaware of such rip-off efforts and will be grateful for alert customers.

2.) The merchant’s processor

TIny margins are critical to most businesses, especially places that do a lot of transactions, such as gas stations, grocery stores and restaurants. To help keep costs low, these businesses turn to third-party payment processors. These companies take all the transactions a merchant has in a day, bill the appropriate entity (like a credit card issuer, such as a credit union), and pay the merchant. In exchange for this work, processors take a percentage of each transaction, usually less than 1 percent.
There’s a great deal of competition in this niche, as companies continually offer lower prices to try to attract merchant business. This price competition also means processing companies are cutting costs, trying to stay profitable. One of the unfortunate ways in which they do so is by cutting corners with security.
Payment processing companies also deal with hundreds of thousands or even millions of transactions daily. When not all of these companies use industry-standard data safeguards, they represent another point in the chain where data security can be compromised. These processors represent a real risk of fraud.
When shopping at unfamiliar places, you can be extra-safe by using a pre-paid debit card, cash or another form of non-electronic payment. When in doubt, don’t be afraid to visit an ATM and pay cash. ATMs are usually maintained by organizations with in-house processing, which limits the number of steps your data goes through. If you’re working with a merchant you trust, you might ask who does their payment processing. Most of the big credit card companies have preferred providers who follow the highest quality payment processing procedures. A little research can help you find out if you should continue to take the highest precautions with that merchant.

3.) Clearing houses

The last stage in the payment processing chain is the clearing house. Large credit organizations, like major credit card companies, have external organizations that make the transfer of funds for them. They’re the go-betweens for the merchant’s payment processor and the credit organization.
There’s a wide network of American Clearing House (ACH) payment centers. Most of them are entirely functional organizations that process millions of dollars worth of transactions every day without a hiccup. However, they are staffed by people. People occasionally make mistakes or have bad days, and some of those millions of transactions may be processed improperly. Fortunately, clearing houses are insured against losses, so they very quickly correct any mistakes they do make.
Every payment system has the possibility for fraud. A clerk could make change using phony bills. A check could be cashed multiple times. Goods can be counterfeit, or registers can overcharge. Electronic payment processing is among the most secure and convenient form of exchange possible, and its failures are public, but fixable. Use your debit card with confidence, knowing your liability is limited thanks to the strong paper trail protection offered by electronic payment processing.


Savings Certificates: How To Keep Your Money Spinning

A share savings certificate is much like the familiar certificate of deposit (CD) offered by banks. It acts like a traditional savings account in that you deposit money to collect dividends over time. It differs from a traditional savings account, though, because you cannot withdraw or deposit money at will.

Instead, you agree to place your money on deposit for a preset period of time, called the “term length,” during which you may not make withdrawals without a penalty. Because you trust your money with the credit union for a longer period of time, longer term CDs are likely to have much better rates than a savings account.

You can deposit your money for as few as several months or as long as several years, but the longer you keep it on deposit, the better your rate will be (in most instances). For example, the average rate on a three-year deposit is, at the moment, 0.49%. Also, this rate is usually locked in, meaning it is not subject to change based upon how well the economy is doing at any given moment. In general, share savings certificates offer a much higher return than savings deposits, if you’re willing to wait the time it takes to get your money back.

What are the risks involved?

First, if you decide to withdraw your money earlier than the term you’ve chosen, a penalty typically applies. On average, these will cost you between three and six months of earned dividends. Depending on when you decide to withdraw, this can cost you more than you’ve made in dividends if you deposit in a certificate and then immediately withdraw it.

There’s also the risk of inflation. Should you choose to keep the money in the account for years at a time, you could actually end up losing money when taking inflation into account. Unfortunately, the only way to avoid that is to withdraw your money and take that penalty. Of course, inflation applies to all savings strategies, even the “tin can buried in the yard” approach. Other than inflation and penalties, your money is safe.

What insurance do I have against loss?

At for-profit banks, all certificates of deposits are backed by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures them for up to $250,000. At a credit union, the National Credit Union Administration (NCUA) or a private insurance corporation (sometimes both) will insure your certificate for the same amount. The insurance works the same way, for the same amount, regardless of who provides it. This insurance for your money happens automatically and requires no action on your part.

If you’re unsure, look for stickers near the teller windows with the letters FDIC or NCUA. If you see these letters, your deposit is secured. If you don’t, be sure to ask the representative assisting you with your account about insurance for your deposit. They’ll be able to tell you the name of the institution that provides it. The FDIC and the NCUA will automatically back you and keep you covered through the worst of economic disasters.

What are some different options of certificates I can have?

Though people tend to stick with the traditional certificate option, there are many more to choose from.
A high-yield certificate is more or less an advertising gimmick for one institution competing with another one for higher rates. Sometimes, they do have the higher rates promised, but they usually come with loopholes or very high minimum deposit requirements to secure the higher rates. Rates also change frequently, so be sure to ask your representative what the current rates are.
A bump-up certificate allows your rate to rise. This means that, if the institution offers a higher rate after you’ve purchased your certificate of deposit, you can request to change your rate to the higher one. The downside is that they may offer lower initial rates.
A certificate sold through a brokerage is called (as one might guess) a brokerage certificate of deposit. These are less like traditional CDs or certificates and are more like stocks. These notes can be bought and sold on a secondary market.
A liquid certificate allows you to withdraw money at any time without penalty. Unfortunately, the rates are often much lower than the rate on a traditional certificate of the same value would be.
One to watch out for is the callable certificate. In this, the institution can “call” your deposit back. Typically these have much higher interest rates, which is a positive. On the flip side, your institution retains the ability to shorten the term and give you your money back without the interest you would’ve earned.
Is a certificate right for me?

There are many good reasons why a certificate would be the right choice. Certificates usually have minimum deposit amounts, so be sure you’ve got enough savings to spare that you can lock away a few hundred dollars, at least. If you’ve got trouble with impulse spending, certificates can be a great choice to lock your savings away from yourself. They also make an excellent vehicle for an emergency fund. Using a technique called “laddering,” you can take advantage of the higher rates offered by longer-term certificates while preserving the flexibility of shorter-term ones. If you’ve got the discipline to keep your money locked in a certificate for its term, you can seriously muscle up your savings. Stop by Great Meadow FCU to get the details on the account that’s right for you!


What Is a CD (Certificate of Deposit)?
Certificates Of Deposit Aren’t Risk-Free
What type of CD account is best?

The Sky Isn’t Falling: Financial Repercussions Of The Brexit Vote

Listening to financial pundits, it’s easy to think that the end of the world occurred Thursday, June 23rd. The United Kingdom voted to leave the European Union in a contentious referendum. While the implications of this decision are many and wide-ranging, there’s no need to panic.
What the Brexit does

The referendum in the United Kingdom was to leave the European Common Market. The Market is a network of countries (called the Eurozone) that don’t charge each other import or export taxes and simplify the process for citizens of any Eurozone member to get permission to work in any other country. The Brexit vote means that the United Kingdom is leaving that network.

For citizens of the United Kingdom, this decision could have very serious implications. On one hand, the country will get more control over its immigration policy. It is no longer obligated to follow European Union rules on migration or refugee handling. The desire to secure their borders was, in large part, the motivator for those who voted in favor of leaving the European Union.

What most financial experts are concerned about, though, are the trade implications. The United Kingdom will have to negotiate its own trade policies with every other member of the Eurozone. Over the short term, this will be incredibly complicated. For the past 20 years, British trade policy with the rest of Europe has been determined by the Common Market rules. It will take time to reestablish trade policies with the many nations of the Union.

No need to panic

The one thing that drives markets down more than anything else is uncertainty. If no one has reason to believe that trade will occur and profits will be made, there’s no motivation to invest. That’s the current circumstance. There are no clear trade rules governing Britain’s participation in the Common Market, which is driving investors in both European and British markets away. This same fear is also impacting other markets of countries that do business with the United Kingdom. This behavior is driving concerns about a short-term recession.

Ultimately, trade agreements will be mended. The United Kingdom and the rest of Europe are too close, both politically and economically, to remain at odds for long. Business as usual will return sooner rather than later, and short-term losses will rebound.

This is small consolation to those who will lose their jobs due to the economic slowdown, though the most pronounced effects of this loss will be in the United Kingdom. U.S. companies that conduct a great deal of business with Europe and the United Kingdom may have some staff reductions, but job loss should be minimal in the U.S., at least over the long term.

Normalcy will return

Many doom and gloom economists and pundits predicting mass economic ruin rely on a number of things happening, each of which is unlikely. First, investors must abandon the Pound Sterling, the British currency, en masse. This is unlikely. The British government’s ability to pay its bills is still sound, and the currency holds enough value to resist the impulses of speculation.

Second, those who predict financial catastrophe assume a trade war will spark between the United Kingdom and the rest of Europe. Such analysis ignores the likely galvanizing effect that the Brexit vote will have on British moderate voters. As Prime Minister David Cameron has recently resigned, and with opposition leader Jeremy Corbyn likely to do the same, new elections will install a new British government shortly after the British leave the European Union. Those who were opposed to the Brexit referendum, but stayed home because they considered it impossible that the referendum would pass, will heavily influence this new government. These voters will elect moderate leaders capable of returning a degree of normalcy to trade relations, and thus preventing a trade war.

What this means for your portfolio

Over the short term, stocks and foreign currency funds will likely take a significant beating. Resisting the urge to cut and run from these positions will take discipline, but it will reward investors with the courage to ride out the storm. When normalcy returns to international trade, these positions will rebound. This sudden downswing may mean postponing retirement for a few years in order to take advantage of bargain-priced securities in the interim, but investors who sell now may end up regretting the decision.

For those still saving for retirement, it may be prudent to find another place to stash gain-seeking money in the interim. Instead of investing in the typical instruments, consider long-term share accounts. As governments in Europe cut interest rates in an effort to stimulate their economies, traditional safe instruments – such as government bonds – will lose some of their luster. Long-term share accounts will keep current interest rates through the economic trouble and provide a better 3- to 5-year return than many other traditionally safe investments.

The bottom line

The Brexit vote will likely cause some damage to the global economy, but the damage will probably be minimal. After an interruption of trade, everyone will get back to business as usual across Europe. Some companies may cut their staff down for a short time, but they will re-expand once the economic situation returns to normal. Keep calm, and keep saving.


Some Possible Brexit Consequences

The 6 Biggest Consequences of the U.K.’s Brexit Vote, So Far

Beyond Brexit: The consequences of Britain’s great exit

We asked Mohamed El-Erian if there is a Brexit silver lining — he said there are two!

Trust Your Intuition To Shop Online (And Offline) Safely

In one way, shopping online is very similar to shopping at kiosks, in shops and in malls. Personal and financial safety is always of great importance, but it’s easy to forget about safety when we’re distracted or in a rush. Either way, online or offline, searching for the best item at the best price can be very distracting, and distraction can be a real problem.

Think about the actions of a pickpocket for a moment. Professional pickpockets are looking for victims who are distracted, making it much easier to lift wallets, phones, purses and bags from preoccupied shoppers. Victims in hectic airports and on busy sidewalks are often distracted by the crowd, and they might be talking or texting on their phones at the same time, too.

How many times have you passed through an airport and consciously thought about a pickpocket or a thief? And whenever you’re making your way through a downtown crowd or attending a special event, are you thinking about your personal and financial protection?

If you’re not inclined to think about your safety while in a crowd, you’re probably not thinking too much about your safety online either. Sadly, unscrupulous online vendors are well aware of that fact. They may set up a website, or a Craigslist or eBay listing, based upon the fact that most shoppers are too busy and too distracted to take a moment to consider their personal shopping safety.

Trusting your intuition is a very useful safety measure … assuming you pay attention to it.

If you just don’t feel right about a particular brick-and-mortar store, you probably avoid it, right? That’s natural. But do you avoid a website or auction listing just because something doesn’t look or feel right about it? If so, good for you. You are ahead of many folks in this area.

Most people who have used online dating sites become well-acquainted with profiles that don’t seem to make sense. It’s not always easy to identify the problem, but something just seems off, so they click away and check out other profiles as they shop for a possible date. Maybe it’s just a feeling, but they learn to trust it.

Online dating can teach you a lot about using your intuition when you shop online. Even if you haven’t explored online dating yourself, no doubt you’ve heard stories about fakers and scammers who compromised the personal and financial safety of someone they met online. Sadly, it’s not an uncommon experience.
That’s why internet shopping safety is primarily a matter of considering the real person or company behind every website and each listing you visit. Trust your intuition to guide you. To do this, you have to set aside distractions and you can’t be in a rush.

Look for:
• Product descriptions that are too short, clipped and inadequate. If a normal person needs more information to make an intelligent purchase, move on to another site to make your purchase. Something may not be right.
• Spelling and grammar errors that stick out and detract from your shopping experience. Reputable companies hire experienced copywriters and editors to eliminate basic spelling and grammar mistakes. Scammers, many of whom are not located in the United States, skip the expense and try to do it themselves.
• A physical address in the United States. If you can’t find a physical address at the bottom of a website, or on the About or Contact pages, there’s a problem. The CAN-SPAM Act requires commercial emails to include the physical address of the sender in the email and on the website to which any commercial email is linked. But, CAN-SPAM does not require websites to list a physical address, and it does not impose a fine as it does on commercial emails without physical addresses.
In other words, the law does not protect you by requiring a physical address on every website, but your own intuition can protect you by raising a red flag whenever you can’t locate a physical address. Reputable sellers are eager to provide the information buyers need to identify and verify them. Go elsewhere to shop if you don’t find a physical address you can verify online by making sure it matches the business you found on the web.
• A secure payment portal. Look carefully at the website address in the address bar at the top of your browser screen. It should begin with https:// because the “s” indicates a level of security you need whenever you’re going to enter credit card or other personal information.
However, you may visit a site with an address beginning with http:// (without an “s”) and it can also be safe because it will direct to a secure site for credit card or checking account information when you check out. Usually, you’ll need to begin a purchase transaction before you know how a merchant is set up to collect your data. So, it’s not a bad idea to select one item and simply begin the checkout process, stopping short of clicking, “confirm”. That way, you’ll know what to expect with your real purchase.

Your Turn: Do you trust your own intuition when you’re shopping online? Do you make sure to pay attention and take the time to protect your personal and financial safety wherever you shop? Share your experiences – good or bad – here.


Financial Self Defense: How To Spot And Avoid A Fake Tickets

After months of dreaming, wishing and praying; after a five-hour car ride without air conditioning and after waiting in line for what feels like a lifetime, you’ve finally gotten into the concert experience of a lifetime. Beaming, you step forward and hand your ticket to the security guard at the entrance. You begin to stride forward, but he stops you dead in your tracks. He can’t let you into the concert because your ticket won’t scan. I’m afraid to be the one to tell you this, but you’ve been sold a fake ticket.
In a world where almost everything can be accessed online, live performances are a valuable experience. Unfortunately, scam artists across the globe have realized this and are turning that value against people. Users on sites like Craigslist and eBay have been selling fraudulent tickets for performances and sporting events for years. Concert or sporting event tickets can cost hundreds of dollars at face value these days, and much more than that as the date of the event approaches. Scam artists have tapped into that market big-time. All they need to do is ask you to pay online or mail your payment to a private PO box, and they’re almost untraceable.
So, without question, by purchasing tickets online, you’re putting your wallet at tremendous risk. Shelling out hundreds of dollars for a piece of paper anyone can forge is a gamble any way you look at it, but using faulty tickets can pose other dangers as well. For example, if you pay with a personal check, an experienced con artist might attempt to use the information on it to steal your identity. Even if nothing else goes wrong with the sale, if you show up to the event with a faulty ticket, you could be arrested for trying to pass it off as real.
Given the spread of online ticket exchanges, it may seem that there’s no alternative to buying tickets online. The era of the box office windows may be drawing to a close, but that doesn’t mean the safety it provided has gone away. So, what can you do to protect yourself? Try these 6 handy tips.
1.) Do your research
For starters, find out as much background information as you can. See if you can find out exactly what a real ticket looks like, so you can spot differences in a forged one. For sporting events, most national sanctioning organizations include holograms and other hard-to-fake pictures on their tickets. When in doubt, contact the venue.
2.) Spot the spec
“Spec” tickets are being sold speculatively. These are not tickets that the seller has in his or her possession. They are tickets the seller expects to have after they come up for sale. If you see tickets for events that haven’t been released by the box office yet, this is likely how they’re being sold. Steer clear, as a “spec” seller is just as likely to take your money and run as they are to give you a ticket.
3.) Make sellers do their homework
There are ways you can strike preemptively against fake ticket scammers. Ask for a copy of the seller’s invoice, proving that the tickets have been paid for in full. This is no different than asking for a receipt to prove the goods you’re buying aren’t stolen. For season ticket holders selling one event, you can also ask them for the ticket account number, which will always be printed at the top of the ticket.
Also, ask the seller why they’re selling. Imagine yourself as a teacher and the seller as a child who’s asking for a homework excuse. Be skeptical of reasons why the seller is missing the event. No one schedules a funeral a month in advance.
4.) Deal with reputable websites
Craigslist should be the last resort for buying tickets to events. Check reputable websites like Seatgeek, StubHub and Ticket Exchange before you dive into Craigslist. Better yet, ask your friends if they know anyone with tickets. It’s always easier to deal with friends or coworkers than with anonymous strangers.
5.) Trust your instincts
Always be wary of people who are selling tickets at face value or less. Unless prohibited by state law, many people who resell tickets will do so at many times face value. Someone with a last-second conflict will still likely attempt to get at least face value for tickets to a popular event. Think like a scalper. If you saw a ticket for sale below face value, wouldn’t you snap it up, knowing you could multiply your money at the event? If a deal feels too good to be true, you know what to do.
6.) Manage the meet
See if you can meet your contact in person. Aim to meet in a well-lit, public place. Many grocery stores and other large retailers offer their parking lots as safe spaces for all sorts of transactions and they would be excellent candidates for this one. As far as payment goes, cashier’s check is the safest way to pay a stranger, since it contains little personally identifiable information and doesn’t require the same level of trust as a personal check. With the rise of mobile payment apps like PayPal and Square, it might be wisest to pay through one of these in order to create a digital paper trail should something go wrong with the ticket. Always inspect the ticket carefully for signs of fraud before handing over any money. If the seller doesn’t agree, walk away.
No matter how high-definition the video gets or how free of ads it is, it’ll never compare to the thrill of being at a live performance. That being said, even a live performance is never worth giving up your account information and funds for the possibility of being arrested at the gates. Go enjoy your concert, but never stop being wary of scam artists in the digital age.
Bonus Tip: Once you have your tickets in hand, you may be want to share your exciting news on social media sites like Facebook or Twitter. That’s cool. You’re excited and you should be. But also be careful not to post a picture of your ticket(s) containing all the relevant info that is unique to your purchase (such as seats and ticket serial numbers). Sophisticated scammers can replicate your ticket using that data and leave you facing a lot of questions when you try to attend the event.


Craigslist Ticket Scams



Keeping A Checkbook Register- A 20th Century Solution To A 21st Century Problem

Thirty years ago, trying to spend more money than you had wasn’t just embarrassing; it was a scandal. Since checks didn’t process instantly, a shopkeeper would have no way of knowing until days after the purchase. Writing one bad check would cost you check-writing privileges at that establishment and possibly land your likeness on a “wall of shame.”

Balancing your checkbook was critical, since there was no online account history you could check. You had to document every transaction in the checkbook register for keeping an accurate running balance. You got a statement once a month, which you would use to double check your work – and the work of your financial institution!

With modern technology, many people don’t bother to balance their checkbooks any longer. Most transactions that had been made with a check are now made with a debit card. Many consumers don’t even carry a checkbook, which means no register. But who cares, right?
You should! Balancing your checkbook can still do wonders to improve your financial awareness and security. Let’s look at the how’s and why’s of this “ancient” art and what mastering it in the 21st century can do for you.

A Check Register For A New Age

At its core, a check register is just a running list of credits and debits (money in and money out). You could just keep a notepad, but it would be easy to lose. Plus, it’s just one more thing to carry around. It’s much easier to put something you already have to work.

If you always carry a checkbook, the pages in the back can still be an effective check register. If you’d like something a little more modern, there are plenty of options. A quick check of an app store shows more than a dozen checkbook balancing apps for both iPhone and Android devices. If you’re looking for something shareable, a Google Sheet that you and your partner share could help with a joint account.

Whatever you use, the process is the same. You write your current checking account balance on the first line. Whenever you write a check or use your debit card, you write the check number if it’s a check, the date of the transaction, a description of the transaction, and the amount. Follow a similar process for online bill payments or automatic withdrawals. Then, subtract the debit from your balance and write the new balance next to the transaction. Any time you add money to your account (a credit), do the same thing, but adding instead of subtracting.

Once a month, sit down with your checkbook register and compare it to your account statement. Put a checkmark next to items that appear on your account statement. This is called reconciling your checking account.

Say Goodbye To Overdrafts!

The most obvious reason for keeping your checking account balanced is to have constant tracking of your finances. You’ll never have to worry if this tank of gas is going to put you in the red or that you can’t really afford to meet friends for drinks. In fact, this method can actually provide you MORE security than checking your balance on a smartphone app.

Different transactions process at different speeds. If you run your debit card as a credit card, that transaction goes to a payment processor, then to your credit union, then back to the payment processor, then to the merchant. The whole process can take as much as 3 days (more if it is over a holiday weekend). If you use your debit card at a busy restaurant, the manager may not get around to processing the receipt until a day or two later. Of course, if you write a check, the person you write it to may forget about it until the next week! All of these can cause your account balance to inaccurately represent your funds available.

By updating your account balance as soon as you make the transaction, you can avoid the chain of overdrafts that can really put you in a bind. Even if you never have a problem with your account balance, the security that comes from being sure is invaluable. You can’t put a price on that peace of mind.

Fraud Alert!

Double-confirming your transactions is a great way to stay ahead of identity thieves and other forms of fraud. Because you’ve documented all your transactions, you should be able to quickly spot any irregular expenditures. You’ll be able to spot stolen cards, fraudulent purchases and merchant overcharges quickly, and your record will be an excellent form of evidence on your behalf.

Facing Your Finances

A lot of us have monthly subscriptions we’re not using. Maybe you signed up for a free trial of a cloud storage product or music streaming service and forgot to cancel. Maybe it’s a magazine subscription you thought you canceled a year ago. Whatever it is, it’s easy enough to not think about it.
When you perform your reconciliation and really examine your statement, you’ll see your spending habits differently. You’ll see (and have to record in your register) all those little expenses. This makes a great time to cancel those recurring charges!

Being forced to write down all your spending also forces you to put an extra step between desire and gratification. Would you really be so quick to whip out plastic to grab a snack if it meant an extra transaction to record? Could you, at the end of the month, justify all those daily indulgences? Keeping records can be a great way to get your spending under control.

Keeping a checkbook register might seem like an outdated habit, but knowing where your money goes is a timeless need. If you would like help setting up a checkbook register or want to better understand how you can take charge of your finances, call, click, or stop by Great Meadow FCU today!

It might be the first step you take on the road to financial security.


Smart Beta: Is It Better To Be Lucky Than Smart?

Smart Beta: Is It Better To Be Lucky Than Smart?

Individual investors have long been cautioned away from trading individual securities. Less than a third of professional stock traders beat benchmarked funds — those whose value follows some large-scale economic indicator. Rather than trying to pick winners and losers, individual investors have chosen to invest while assuming there will be winners. It’s still a good idea. If you don’t have time to research your investments, a whole-market index fund with low fees will provide a safe, predictable return over time.

As is always the case with investing, though, some people are prone to looking for a few dollars more. This impulse has led market professionals to tweak the traditional benchmark strategy in favor of a middle ground between actively managed investing and passive index-based investing. This new class of investment vehicles is collectively called “smart beta” investments.

Smart beta investments have received a great deal of press coverage lately after one of the founders of the strategy called their value into question. Immediate response to the news was alarmist, as tends to be the case for most stock market news. Investors retreated from smart beta investments. Should you reconsider the contents of your portfolio? Before we address the pros and cons of this investment class, let’s take a minute to understand exactly what a “smart beta” strategy is.

Smart Beta Explained

Typical ETFs follow some underlying index. For example, the Vanguard Total Market Index (VTI) tracks the performance of the entire stock market. If average prices go up, the price of the fund goes up. If average prices go down, so does the price of VTI. A manager, or a computer program, buys and sells stocks to maintain the index at this value. This is the traditional approach.

Smart beta ETFs still follow an index, but they tweak it some way in search of better returns. For example, a fund may shift its ownership of food processing companies down somewhat after peak harvest season. The fund designer expects the price of those companies to fall as the cost of their raw materials increases. Doing so may allow this fund to do better than its underlying index, and therefore provide better returns for investors.

Rules like this one may seem sensible, but not all smart beta ETFs are so simple. Many employ far more complex rules that target securities that are performing well over the short term or being actively traded at high volumes. Some critics, including strategy founder Rob Arnott, see such rules as enabling consumers to “chase” performance. This chasing leads to speculation, which has only worked so far because of the large number of smart beta ETFs following similar rules. When savvy investors realize the impact of this speculative bubble, many of these funds will be in for a rude awakening.

Smart beta ETFs are designed to increase value and transparency for investors while still keeping costs lower than comparable actively managed funds. Some do, and some don’t. Is it worth the risk?

Smart Beta ETF Risks

Many experts are concerned about the speculative bubble forming among stocks traded by a number of smart beta ETFs. They see the situation playing out like this: One particular stock is performing slightly better than its market peers in some predictive statistic, like volatility. This performance causes smart beta ETFs to purchase it. This purchase drives the price up and encourages other smart beta ETFs to buy the same stock. This circle of purchases continues to inflate the value of the stock until its value exceeds what is predicted by some fundamental statistic, like earnings. This announcement causes value investors and others to sell the stock, driving the price drastically down. These smart beta ETFs are left holding a lot of worthless paper, and their investors are losing money.

While such a scenario is far from a certainty, the possibility of a bubble bursting among this class of funds should be in the minds of investors who are considering them. Smart beta ETFs have been gaining in popularity based upon their ability to generate superior returns. Whether those returns are the result of a better strategy or merely a charging herd remains to be seen.

Whatever the future of smart beta ETFs, they are riskier investments than traditional ETFs. No matter how sound a set of trading rules seems, they could always be wrong. Being wrong, in this case, means the ETF actually underperforms its underlying index, costing earnings for investors. Examining the prospectus of any investment is a necessary step in investing. That goes double for smart beta ETFs.

Benefits of Smart Beta

When developed sensibly and employed shrewdly, smart beta rules can provide investors with better value. They can even employ balancing strategies to shield investors against risk. Income-oriented ETFs can pursue a specific yield rather than a specific price, enabling them to provide consistent, predictable returns for investors. Of course, actively managed funds can provide the same degree of specificity, but smart beta ETFs have two advantages.

These funds can provide the customizability and personalization of a managed fund while improving transparency . With an actively managed fund, investors carry some concern that the manager is buying and selling securities to benefit themselves instead of the investors. A smart beta ETF eliminates those concerns by telling investors up front what conditions will trigger buying and selling.

Because of the clear rules of a smart beta ETF, managers don’t need to invest a lot of hours. This helps keep the management costs of the ETF down, which in turn means more money for investors.

The Bottom Line

As Arnott put it, “You can use smart beta smartly or you can use smart beta dumbly.” This class of investments, like any other, boils down to individual tolerance for risk. If you can handle the possibility of loss, smart beta might be for you, but you need to carefully consider the rules involved and make sure they make sense on the ground. If you’d rather not take the risk, traditional ETFs may be a better fit.


Are Your Financial Realities Keeping Up With Your Financial Priorities

Are Your Financial Realities Keeping Up With Your Financial Priorities?

Happy New Year! It isn’t three months late, it’s just a different calendar. That’s because filing your taxes effectively closes the book on the financial year gone by while opening up a world of possibilities. Will this be the year you break free from the clutches of debt? Will you set up an emergency fund? Maybe you’ll finally start saving for retirement! New years are typically a time of reflection, and the financial new year is no exception. It’s time to kick back and dream big about what goals you’ll achieve in the financial year to come (provided you’ve finished your taxes first)!

Whatever their goals are, many Americans are about to get a big chunk of change back from the federal government in the form of a tax refund. How they choose to spend that money will be a good indicator of their financial priorities. Here, it is worth noting that there’s a big disconnect between what they say those priorities are and how they act in reality.

When surveys ask Americans what their top financial priorities are, they most commonly name managing bills, paying off debt and saving. Yet, only about half of Americans plan to save their tax refund or use it to reduce debt. Worse still, the number of Americans planning to use their tax refund in those two ways is down for the third straight year.

If you want to know what someone’s priorities are, don’t ask them. The answer you’ll get is more about what they think you want to hear than what relates to their actual priorities. If you want to know what someone prioritizes, see where they spend their money.

Do you ever get the feeling that your financial priorities might be out of whack? Since you’ve already got your receipts, account statements, credit card bills and other piles of paper that comprise your recent financial history, it’s a good time to find out. Don’t worry – this won’t be nearly as hard as filing your taxes! Try this 3-step process.


1. Establish your priorities

Going through the daily motions of life, you may never have time to think about the reasons for which you’re earning money. Very few people are getting up and punching the clock every morning with the hope of building a Scrooge McDuck-style money room. Most of us are trying to put food on the table, keep the lights on and provide for our loved ones. Those things are our priorities.

Write down on a sheet of paper the top five things you want to achieve with your money  Number one will likely be paying bills, but there’s quite a bit of flexibility in the rest of the list. Are you saving for a down payment for a house? Maybe you want to take a dream vacation or start a small business. Perhaps financing your children’s higher education is a priority for your family. You might have charities you like to support, or dreams of retiring early.

Spend some quality time thinking about where you want to spend your money. If five options feels too limiting, feel free to go beyond that. Just keep the list in order of what you want to do. There aren’t right and wrong answers here. If your priority is owning the world’s largest Barney the Friendly Dinosaur costume collection, that’s fine. What matters is that your list reflects your values and commitments.

2. Identify your realities

This is where that mountain of paper in front of you comes in handy. Take stock of your spending in any given month. For each of your financial priorities, how much of your paycheck goes to each?

Make a list of your top 10 categories of spending. Try to account for a much of your paycheck as you can. Put your biggest expenses at the top, and then list all the way down to the smallest. Feel free to make categories as you go and reshuffle them as patterns become more apparent. Don’t stress too much about where to categorize things. Just go with your gut.

Now, compare the list of expenditures to the list of priorities. Is your money going where your mouth is? Are you spending to bring yourself closer to your priorities, or do they just exist on that sheet of paper you had in step one?

3. Make a plan to fix it

Don’t get discouraged if you find you’re nowhere near your priorities. Remember the statistic in the beginning. Half of Americans are going to spend their tax refund on a big-ticket purchase or a vacation, and most of them also say they want to save for retirement and get out of debt. You’re not alone in living far away from your financial ideals.

It might not be a bad idea to revisit your priorities briefly. Perhaps you were too strict when you set your priorities. It might be that you prioritize day-to-day comfort. There’s nothing wrong with doing so, but look where it ranks on your list of priorities. Is the joy you get from your daily indulgences worth the trade-offs it brings? In short, given the plans you have, do you regret any purchases? Those are the ones you want to cut from your budget and lifestyle.

You don’t need to switch overnight from your current financial attitude to one that’s totally in line with what you want your money to do. Making too strict of a plan will make you unhappy, frustrated and more likely to bend back the other way. Don’t let perfect be the enemy of good.

Pick one action you can take tomorrow to bring yourself closer to achieving your priorities. Cancel a monthly music subscription and put the $10 into a savings account. Cook in one more time next week and put the difference toward your credit card bill. Once these changes start to feel effortless, look for more ways you can tweak your spending habits to make your priorities and realities line up a bit better.

If you need help reaching your savings goals, Great Meadow FCU can help. There are many ways you can automate your savings and assist in keeping you on the right track. Call, click or stop by Great Meadow FCU today!