NerdWallet's Smart Money Podcast - Zelle Scams, and When to Sell Investments

Episode Date: October 17, 2022

It’s Cybersecurity Awareness Month. Do you know where your passwords are? To start off this episode, Sean Pyles and Sara Rathner discuss the risks of peer-to-peer payment apps. Then they talk about the one thing you should do this month to protect yourself online. In this episode’s money question segment, Sean and Liz Weston answer a listener’s question about when to sell stock — and when buy-and-hold might be too much of a good thing.  To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Timestamps: This Week in Your Money segment: 0:00 - 10:05  Money Question segment: 10:08 - 28:26  Like what you hear? Please leave us a review and tell a friend.

Buy and hold is a time honored way to invest, but can you take it too far? Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sarah Rathner. And I'm Sean Piles. If you want the nerds to answer your money question, call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD or email us at podcast at nerdwallet.com. And as a note, we want to hear as many of your questions as possible. So please send us a voicemail or a voice memo if you can, but email is still fine. No pressure. Also subscribe to get new episodes in your feed every Monday. And if you like what you hear, leave us a review and tell your friends.

In this episode, my regular co-host Liz Weston and I answer a listener's question about buy and hold investing. Stick around to the end of the episode to hear our takeaway tips about what to do if you've held onto your stocks for too long. But first, in honor of Cybersecurity Month, Sarah and I want to talk about how you can protect yourself from fraud. First of all, I did not know it was Cybersecurity Month. I don't know how to celebrate this. I'm going to go change all my passwords. We'll get to that, yes. So speaking of Cybersecurity Month, let's start with Zelle, which is the payment system created

by big banks as an alternative to PayPal and Venmo. It's been in the news recently because Senator Elizabeth Warren recently released a report showing that Zelle fraud claims had more than doubled at four large banks since 2020, and that losses were on track to exceed a quarter of a billion dollars this year. Yeah, that's a lot of money, guys. And the losses are likely much higher because those numbers don't include three of the banks that own Zelle. Warren said that those three banks didn't provide complete information despite several requests. So that's bad. But it's going to get worse because most of the time,

when people are tricked into sending money to scammers, the banks decide the transaction was authorized and refuse to reimburse the victims. Yeah. Based on data from three banks, less than 10% of those who reported losing money to a Zelle scam got their money back, according to Warren's report. And it's a shame because a lot of people might trust Zelle because it is promoted by their bank. But Zelle doesn't have the same protections that you would get using a debit card, a credit card, or even a good old fashioned check. Often once the money is sent, it's just gone. Poof. So listen, Sean, you and I, we talked a little bit, we both use peer to peer money sending programs. Yeah. poof. So listen, Sean, you and I, we talked a little bit, we both use peer to peer money sending programs. Yeah. And they all come with risks. This is not unique to Zelle. But one way

that you can protect yourself, if you do choose to use programs like Zelle or Venmo or PayPal, is to only transact with people and businesses you know well and make sure to verify them. Exactly. And I would say 95% of the transactions that I make on my peer to peer payment app are with friends. I'm covering brunch and they're sending me money or something like that. The other 5% is typically when I'm at a market and they accept payment through Venmo or PayPal, what have you. In that case, I see them right in front of me. I'm sending the money directly. I know that they are getting it and I'm getting the product in my hand right then and there. It's not some nebulous thing I'm getting off the internet and hoping that it all works out. Right. And there are some professionals I hire,

pet sitters, handymen, things like that. They'll take payment from Venmo, which is very convenient for me. But it's a real person standing in front of you holding out their QR code on their phone for me to scan and for me to pay them directly. So I always make sure that I am paying the right person, especially if they have a really common name, because it is possible to accidentally send money to the wrong person if you sent it to Mike Jacobs one instead of Mike Jacobs two. So that's something that you want to know and verify before you send the money. On the other hand, a lot of scammers will try to do things like plan your emotions. We see this a lot with people who try to buy dogs online for some reason, you'll see a listing for a dog and it will be the one that you've been

looking for hoping for for months and months. And the breeder might demand that you send over a certain amount of money to put a hold on the dog or just buy the dog outright. But the thing is, that dog might not be real. And now you've been duped and you've sent money that you will most likely not get back. So that is a very common example of a zealous skin that you'll see online because they're rushing you into something using a high pressure tactic and playing on your emotions, promising that you'll get something that you've been wanting for a long time. This really bothers me as a dog lover. I know. On so many levels. I know. Because like, first of all, don't bring innocent dogs into your scam. Don't do that. Don't buy a dog from a random stranger on the internet. It's just not a good move. No. And I'm just going to say it's another good reason to adopt from a shelter versus buying

one online. So there's that too. You should meet the dog before you get the dog, whether you go through a shelter or a breeder. Right. You should know that a real dog exists. But to bring it back to Zelle, know that you do have consumer rights, despite what your bank might tell you. I would suggest filing a complaint with the Consumer Financial Protection Bureau and your state's attorney general. So beyond being wary of sending money over the internet, if you're going to do one thing during this made up government Hallmark holiday month, please, for the love of your own information and privacy and everything that's holy, make your passwords stronger and more secure. This is something that many people brush off. I'm guilty of it too, because laziness, but it can have a

huge impact on your life. I was talking about this with a friend the other day, because I kind of get into these death spirals with my passwords, where I make these really elaborate ones for one account, and then I have a variation for another account, and then I can't keep straight which is for which. And I was talking with my friend about how I finally sorted out my own system for keeping track of my passwords. And they said, Oh, well, I'm just using the same password I've had for my AM account since elementary school. And I'm like, Why did you tell me this? Like, please, I'm so worried for you. But also go change your password. So this is a hill I am happy to die on. Just everyone, please spend maybe 30 minutes, possibly even less, making your password stronger and more secure. So there are a couple

simple don'ts. One is don't use the same password for every account and don't have that same password you've been using since elementary school. One thing that folks should do is think of password phrases that are harder to crack than one word passwords. Think of something that it could even be like a favorite song lyric or something that you like to say to yourself, like a little mantra, just make it so that it's a little bit easier to remember for yourself beyond just one word and a variation of numbers and letters and capitalization and punctuation, all of those things. And then also use some sort of password management system. This can be an official password manager, like an app, a lot of them have free tiers that you can use.

Some charge you around $30 to $60 a year. I don't use one of those, to be honest. I actually use something that is much lazier, but works for me. I have a note on my phone that I keep all my passwords in. And you can secure notes on your phone. People may not know this, but you can actually make a password for certain notes. So that way, only I know the password to this note on my phone where I have all my passwords secured. So that's what works for me. Yeah, another thing I like to do is don't use words

or phrases that are easily Google-able about yourself, like your hometown, or your maiden name, or pet's names, or where you went to college, things like that. You don't want like Penn State and your birthday to be like your password. Because those are all things that somebody can find out about you with a couple of quick searches. Instead of picking a number that's easy to identify like your birthday, if there's a certain date that has meaning for you, maybe it's the date of your first date with your partner or the date you adopted a cat or something. It's just a random day that's not part of your personal identifiable information.

And those numbers could be helpful to include if you need to include numbers in a password, things like that. Just get creative about things in your life that are memorable to you, but are not things that are commonly known about yourself. And that could help you make a good password. Yeah. And one thing that motivates me or did motivate me to take care of my passwords and get them all sorted and organized is the sheer risk and terror of someone getting into my accounts, because they can wreak havoc really quickly if they can access your bank account. And if you have the same password on your bank account as you have on your credit card, then they can do a lot of damage to your finances

that can make a big mess for you to have to clean up. I'll also say this, you should set your phone up so that it locks and you have to enter a key code or you have to use your thumbprint or your face to unlock the phone. A lot of people don't do that. And you keep a lot of important personal information on your phone, including access to your various financial accounts through bank apps. So set that up. So if your phone gets lost, or if you just kind of leave it on the table at a coffee shop while you go to the bathroom or something, people can't open up your phone and access your information. Well, folks, I hope you take at least 30 minutes sometime in this coming month to think about your cybersecurity, do a little bit of work to make yourself more secure online. You will thank

yourself later on. Well, now I think we can get on to this episode's money question segment. Let's do it. This episode's money question segment. Let's do it. This episode's money question comes from Michael, who uses he, him pronouns. Michael wrote, Hi, nerds. Thank you for your helpful and entertaining advice. My question is, I have been a buy and hold investor for many, many years. So one could say I am a buy and hold and hold and hold investor. Over the years, the portfolio has done relatively well.

And therefore, if I was going to make any changes that would be advisable at this time, the portfolio would incur very sizable tax events. This scares me because it might be a good long-term strategy, but I may not have a long time. So I have just continued to hold and get old. Not bad, but what would you suggest? Thanks. Gotta say, Michael, I appreciate the lyricism in your question. And it's very thoughtful. It's a question we don't get very often, but it's one I've been curious about. So to help us answer Michael's question on this episode of the podcast, we are joined by investing nerd Alana Benson. Welcome back to Smart Money, Alana.

Hey, guys. Before we get into these questions that I have for you, which are many, quick disclaimer, we are not investment advisors. We're not going to tell you what to do with your money. This is all for general educational and entertainment purposes. So with that out of the way, Alana, can you give us a quick rundown of what it means to be a buy and hold, or in Michael's case, buy and hold and hold and hold investor. Yes. So buy and hold, it's a popular investment strategy. And the idea behind it is that you're investing in a company stock or a fund, just an investment that you think has long-term growth

potential. You buy the investment and then you hold onto it for a long time in the hopes that it grows a lot, but not overnight. You're really looking for the long-term. This strategy is great because it's really easy and hands-off. It's popular with retirement investors, but your listener has a really great point. You buy, and then you hold, and then you hold, and then what do you do? It's not always easy to know. Can you contrast that with other investment strategies? One of the best contrasts I can make is with day traders. So these are the folks who are looking to make profits off of short term investments. Maybe they'll look at the news or politics and try to predict which companies are going to do well and which ones will not.

This is really risky. It's highly speculative, whereas buy and holds tends to be less risky, especially if you're doing it with a well-diversified portfolio instead of individual stocks. But there are some risks to buy and hold and hold and hold, right? Yes, there are. As with all forms of investing, nothing is guaranteed. There will always be risks. And your listener gets to a great point that we may talk about a bit later is taxes and how do we navigate that kind of tricky terrain. And Alana, you mentioned well-diversified portfolios, and that brings us to another

danger of buy and hold, which is that you can wind up with a very, very concentrated portfolio if you just let your winners run and you never trim them back. So we've had this in our family where somebody really hated taxes and so refused to sell and wound up having a handful of stocks represent 80 or 90% of the total portfolio. And that is kind of scary. So even if you are a buy and hold investor, you've got to have some kind of exit plan, some kind of strategy to make sure that your portfolio doesn't get that lopsided. Yeah, well, what I find really interesting about Michael's question is that I feel like in the personal finance world, there are kind of two prevailing

narratives around investing. And one tends to be more around the day traders, the meme stock people that we saw back in early 2021, just hopping aboard a company and riding it high and then getting off before it crashes. And then on the other end of the spectrum, there are folks who invest for a very, very long time, like our listener here. And then what about the middle ground? When should people think about selling stock and how should they do this in the right way? It's really difficult to know, right? Because there's always that little bit of tension where you're like, oh, maybe it'll do better tomorrow and I should continue holding on to it. But we have to remember what the basis of investing and personal finance is all about. It's about building wealth so that you can eventually use it for something

in the future. It's not just about the number in your investment account. It's what do you need that money for in retirement? And that's paying for things. It's paying for housing. It's paying for food. It's paying for your lifestyle. And if you buy and hold and hold and hold and never sell, then you won't actually get to use that money. So it seems like it would behoove our listener or anyone else in a similar situation to think about why they would maybe want to sell the stock or why not. And that's a great point. I think that when it comes to selling stock, there are a couple of things that are really good to consider. So one, why are you selling it? Just like you said, are you selling out of fear that the market is doing badly?

Or are you looking at the fundamental numbers of the company and you've made an informed decision that now is a good time to sell? You know, selling based on fear can really lock in your losses. So if your primary motivation is an emotional response that's not really based on hard numbers, maybe just take a day or two and calm down and then maybe make a decision later. Yeah, I really like that point because I think a number of folks have seen how the stock market has performed since the beginning of 2022 and are thinking, should I stay in the stock market because things are looking shaky? You don't

want to lock in losses because investing is often a long-term game. But that is a good point, right? If you are right on the verge of retirement right now, and you see that the market is not doing really well, you may want to reconsider the strategy that you have. If you're heavily invested in riskier assets and you're on the precipice of retirement, you want to be able to protect all that money that you've earned over the long period of time by investing. And so we can talk about strategy in a bit, but sometimes it may be good to switch up your strategy depending on what the market's doing, not necessarily reacting out of fear, but saying, hey, I'm going to actually want to use this money in the next few years. So I want to make sure it's actually protected. And that comes back to the asset allocation thing is you need to have some

idea of what breakdown you want to have between stocks and bonds and cash and different kinds of stocks and different kinds of bonds and stick to that asset allocation over time, because that can help you be a more disciplined investor and not be so emotional. And even if you are kind of ratcheting back your risk as you get closer to retirement, most of us are still going to need the returns that only stocks can offer if we want to have a comfortable retirement. So you can't completely bail out of stocks. As we know, things like inflation can eat away at the value of a dollar and stocks beat inflation over time.

So some sort of exposure is still something you need to have. And another thing to think about is that if you want to sell an individual stock, you can always consider selling it to reinvest in a more diversified way. As Liz was saying, if you're getting really overweighted in one particular stock, you could sell that and potentially reinvest it into something like an index fund or some other more diversified way that protects you a little bit more. Our listener is really concerned about the tax implications of selling stock. So let's dig into that. What should they consider? So unfortunately, or fortunately, if you profit off the sale of a

stock, right, we all want to do that. Meaning if you bought it at $10 and you sold it at 50, you'll likely have to pay tax on the $40 that you earned, right? Government is always going to want some of your profit. Typically, if you held the shares for more than a year, you'll pay what's called long-term capital gains tax, meaning the profit that you made will be taxed at either 0%, 15%, or 20%, depending on your income. Now, if you held the shares for a year or less, you'll pay short-term capital gains tax, and you'll be taxed at your regular tax bracket. And then any dividends you receive from stocks are also usually taxable. So there will be a taxable event more than likely.

But at this point, given Michael's hold and hold and hold strategy, he would be facing most likely long-term capital gains. We can assume that. Of course, everyone's financial situation is different. And we've been talking for the most part about federal taxes. State and local taxes can be another layer on top of this. And if you live in a state like California, which doesn't really recognize capital gains as a separate thing, it all gets taxes income. So if you have a high enough income, you could be looking at a pretty good chunk of your money going out the door in taxes. Yeah, it's an interesting point.

We don't know where Michael lives, but that could have a big implication on how concerned he should be around taxes. miss out on is called your net capital gain. And if your losses are greater than your gains, that's called a net capital loss. And you can actually use it to offset your ordinary income by up to $3,000 or $1,500 for those who are married filing separately. And any additional losses can actually be carried forward to future years to offset capital gains of up to $3,000 of ordinary income per year. So this is a bit of an advanced strategy. It involves a lot of math. So always talk to a tax advisor or a CPA, if you have one, to make sure that you are doing this correctly, if you're going to use this strategy. Yes. And we should also talk about what's pretty much the ultimate tax break, which is a step up in tax basis. And that means that if Michael bequeaths these stocks to his heirs, all the appreciation is tax free. In other words, nobody ever pays taxes on the gain that happened with the stocks that he's been holding. So this is true for stocks. This is true for real estate. It's true for a lot of assets that when somebody dies and passes things on to their heirs,

it essentially gets a new value for tax purposes and none of the capital gains is ever taxed. I've seen this more often around real estate where mom and dad want to give their kid the house and so they'll put them on the deed. And if they do that before mom and dad pass away, the kids can be liable for all the gain value since the parents bought that house however many years ago. Whereas if they had given it to them through their will, they would get that step up in tax basis and they wouldn't be on the hook for those taxes. Yeah, this is definitely something to consider if you're older and you have assets that have appreciated a lot in value. You definitely want to get some good tax advice

to guide you going forward. One thing that can help anyone who is concerned about taxes and investing are tax advantaged accounts. Alana, can you give us a rundown of these? Yes. So your listener is concerned about triggering taxable events because they've been holding onto their investments for a long time. And that's a very fair concern, especially if those investments have seen a lot of growth, which hopefully they have. But we don't know what type of account Michael has his investments in. And this will make a really big difference because depending on the investment account they have, that will really impact the tax treatment.

So for instance, if Michael had been investing through a Roth IRA all this time, any dividends and capital gains in a Roth IRA grow tax-free. If they're holding those investments in a standard brokerage account, they will have to pay tax on them. And if they're in a traditional IRA, taxes will just be deferred until later. If all of these letters are confusing you, then talk with a tax pro, read a couple of Nerva articles, and you'll make sense of it. But there can be pretty significant differences from one account to the next. Now, if you have a traditional IRA, you can actually convert that into a Roth IRA so that withdrawals and retirement are tax-free, but there's no only post-tax dollars get to go into Roth IRAs. And also if you've deducted traditional IRA contributions on your taxes and then decide to convert this to a Roth,

you'll need to pay taxes on the money you contributed, just like everyone else who invests in a Roth IRA. And just like Sean said, this is confusing. All that to say, these investment accounts are just where your investments live. And depending on the type of account you have, how your investments and your capital gains will be taxed will really vary significantly. So if you're opening an account or looking to roll something over, it's really worth reading the fine print on what these accounts can do for your taxes. One thing I want to talk about, which is I think really the undercurrent of Michael's question, is how investment strategies

change as you age. Liz, Alana, how do you think about that? So typically as people get older or closer to retirement, their investment strategies tend to get more conservative. If you have a lot of years until retirement or a different goal, you can kind of ride out the highs and the lows of the stock market and take a lot of risk. And over time, those huge jumps and dips will likely smooth out into a line that hopefully gradually trends upwards, as long as you actually stay invested for the long haul. But as you get closer to retirement and you need that money, if the stock market crashes, you'll have to take it out at a loss. A lot of times people would shift their investment portfolios from riskier assets earlier in their investing journey and move them into more conservative strategies over time.

So conservative assets like bonds don't necessarily offer a really high rate of return that stocks potentially can, but they can safeguard the money that you've been building over time. Yeah, and there's a special risk for people who retire into a bear market. In other words, when the stock market is going down, because they might be selling those stocks and taking the shares out of the market, you know, obviously, because they need the money, those shares won't be there when the rebound inevitably happens. This is called a sequence of return risk. And what it basically boils down to is if you are retiring when the market drops, you have a greater likelihood of running through your money. So running out of money before you run out of life, and that's not

a good thing. You need another set of eyes, professional eyes on your portfolio to make sure that you are protected against that. And just keep in mind, you've never retired before, but an experienced financial planner has helped many, many, many people retire, has seen many, many, many different types of stock markets and can really help you get through what can be a pretty risky time. That's a really great point, Liz. And it's really important to talk to someone, like you said, get another set of eyes. But if you are mostly doing this yourself and you're not exactly sure how to tweak your strategy, one cool thing that you can do is look up the asset allocation that's used in target date funds. These are funds that are typically used in 401ks and they can help people with their retirement asset allocation because it changes over time depending on what your target date of retirement is. And asset allocation is just a fancy way of saying what proportion of your investment

portfolio is in what type of investment. So maybe 70% of stocks and 30% bonds, that would be a higher risk allocation. Yeah, it still does people towards talking to the only financial planner, if they're within, say, five to 10 years of retirement, just because there's so many decisions that have to be made around this time. And you know, allocations can vary quite a bit. If you got a guaranteed source of income, like a very generous pension, for example, maybe you can take more risk. If you got a guaranteed source of income, like a very generous pension, for example, maybe you can take more risk. If you're in a position where you really don't have that much money, maybe you want to take

even less risk. But a financial planner, once again, could really help guide you through this. Okay. Alana, do you have any final thoughts for Michael or anyone else who's thinking about when to sell their stock? Remembering the big picture, that this is money that you need to use to live off of. And really what Liz said of talking with a financial planner, if you're not sure, this is really important money

that's going to see you through a really important part of your life. And making sure that it's actually going to hold the value that you've worked so hard to ensure, it's honestly worth spending a little more money to talk with a professional to make sure that it's going to do everything it can for you. All right. Well, thank you so much for sharing your insights today.

Yeah, happy to be here. And with that, let's get on to our takeaway tips. And Liz, will you please start us off? With pleasure. First, know your strategy. Buy and hold is usually a better strategy than day trading, but you still need an exit plan. Next up, consider your account options. Different accounts carry different tax implications, so research the account you're investing from just as carefully as you'd consider your actual investments. Finally, evolve as needed.

It's okay to adjust your strategy as you get closer to your investment goal. If you need help, talk with a financial advisor. And that is all we have for this episode. Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. This episode was produced by Liz Weston and myself. Kaylee Monahan edited our audio. Jay Bratton wrote our show notes. And a major thank you to the pros on the NerdWallet copy desk for all of their help. And here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance

writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.