With Good and Bad Advice Flowing, Learn to Discern

By Michelle Singletary
Thursday, September 18, 2008

If your e-mail inbox is like mine, it's filling up with tips on how to handle the crisis on Wall Street.

Given the turmoil, this is prime time for scams, bogus business opportunities and questionable advice.

I understand if you are rightfully worried about losses in your investment account. But stay calm. Don't be so eager to make money or preserve what you have that you make a costly mistake.

First, be leery of offers online or otherwise that guarantee you'll make money in a down market. I got one e-mail from someone pitching a deal in whichyou set up a Web site for $250 and watch the money just click its way into your bank account. All you have to do is make deals with credit card companies for jewelry and clothing. You don't actually take possession of any inventory. You just act as what they call an "affiliate marketing middleman."

"No risk," you're told. "If you do it right, you can make a six-figure income."

Sure, there are folks who have found ways to make money online. But it is not as easy as just setting up a Web site and waiting for checks to arrive.

There are some helpful tips for investors or people trying to make do in this rough economy -- but be mindful that much of this is coming from biased sources.

Biased advice isn't inherently bad. I certainly have no problem passing along tips from legitimate industry sources. I received an e-mail from the CMPS Institute, an organization that provides training, examination and certification for mortgage bankers and brokers. The subject line on the e-mail read: "Hurricane Wall Street: Four Steps Consumers Can Take To Protect Themselves."

"With Wall Street engulfed in the biggest financial crisis in a generation, there are a few things that consumers can do to protect themselves from this perilous storm," wrote Gibran Nicholas, the institute's chairman.

Of the four tips, I thought the first two were very helpful.

Tip No. 1: Make sure your investments are protected through the Securities Investor Protection Corp. If you have a brokerage account, you might want to read up on what protection you have in light of the Chapter 11 bankruptcy filing of Lehman Brothers.

The SIPC maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms. If customer assets (cash and securities) are missing as a result of a closure or bankruptcy, the SIPC steps in and, within certain limits, works to return customers' cash, stock and other securities.

SIPC coverage is limited to $500,000 per customer, including up to $100,000 for cash. For more information about SIPC coverage, read "The Investor's Guide to Brokerage Firm Liquidations," which you can find at http://www.sipc.org.

However, there's no point in calling the SIPC if the value of your investment portfolio is down or you lost money as a result of the Lehman bankruptcy. The SIPC does not insure your investment against market losses.

Tip No. 2 from the trade group urges that you make sure all your bank accounts are covered by the insurance offered by the Federal Deposit Insurance Corp. To find out what protection you may have, visit http://www.fdic.gov and click on the link for "Deposit Insurance." Likewise, if you keep your money in a credit union, check your coverage with the National Credit Union Share Insurance Fund at http://www.ncua.gov.

I would be cautious about following the final two tips from the CMPS Institute.

The organization advises people to max out their home-equity lines of credit before lenders cut them off. Nicholas advised consumers to borrow the money and put it in an FDIC-insured account.

It is true that lenders have been reducing or terminating home-equity lines of credit across the country. But if you're not having financial trouble or don't foresee any and you have ample capital reserves, don't tap these borrowed funds as a "just-in-case fund."

A loan isn't a good safety net. Instead of borrowing and paying interest on money you don't need, save more while you have the resources.

"Although it sounds counterintuitive, you should have as big a mortgage as possible -- even if you don't need it," Nicholas said.

Why recommend that people take out a mortgage if they don't need it?

The answer becomes clear when you consider that CMPS is also a membership group for mortgage professionals, who have a financial interest in getting you to take out a mortgage.

When I pressed Nicholas about the reasoning behind the recommendation that people take out the largest mortgage possible, he said the organization is only trying to advise people to reserve cash in case of an emergency or to take advantage of bargain investment opportunities during this market downturn.

"I'm not saying people should be reckless and get a mortgage they can't afford," he said.

Haven't recent events proved that we all -- corporations and regular folk -- should be saving more and borrowing only as absolutely necessary? The two strategies together put you in a better position to handle a financial crisis.

In this economy, you'll hear a lot of advice about what you should do to preserve or produce money. Just consider the affiliations and motives of the people handing out this wisdom before you make any financial move.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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