Another Data Breach, the Dark Side of Cryptocurrencies, and One Big Retirement Mistake

Hotel giant Marriott (MAR 0.96%) just announced a massive data breach, and consumers can take some steps to ensure their personal information remains safe. Plus, two celebrities are in hot water with the SEC after helping to promote some initial coin offerings, or ICOs, without disclosing they were being paid.

And finally, a new study found that the majority of young Americans have tapped into their retirement savings early -- and often for the wrong reason. Host Jason Moser and Fool.com contributor Matt Frankel, CFP, talk about all of this and more on this week's episode of Industry Focus: Financials.

A full transcript follows the video.

This video was recorded on Dec. 3, 2018.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, December 3rd. I'm your host, Jason Moser. On today's show, we're going to talk the downside of the crypto hype. We'll talk about why young workers are dipping into their retirement accounts, and it doesn't seem like they're doing it for all the right reasons. We'll tap into Twitter, of course. We'll give you One to Watch for the week. 

We're going to begin today's episode talking about this massive data breach for Marriott that was just announced late last week. Joining me in the studio via Skype this week, as always, is certified financial planner, Matt Frankel. Matt, how's it going?

Matt Frankel: Pretty good. It's nice weather here. I can't complain. Good weekend. 

Moser: You know my philosophy -- you could complain, nobody wants to listen, so why even bother.

Frankel: Especially not you, right?

Moser: [laughs] We'll try to make this show uplifting, give people something to look forward to. Probably not picking the right topic to start with this week. This was a massive, massive data breach on Marriott's part. It seems like it goes all the way back to 2014, which predates Marriott's megadeal with Starwood. It also sounded like the breach, perhaps, started on the Starwood side of the business.

Let's dig into this a little bit. While Marriott isn't necessarily a company that we're going to cover here in the financials universe, this is one of those things that happens, and as investors, as consumers, we have to be used to this fact now that data breaches are a matter of if, not when. The more people that use technology, the bigger these data breaches are going to be. I always approach these data breaches as a matter of when, not if. There are things we as consumers can do to help out our cause here. 

You used to work for Starwood for a time, didn't you, Matt?

Frankel: Yes. Not in any department that would be related to this incident.

Moser: Ah, OK. We're are not pointing any fingers, then.

Frankel: [laughs] No. I used to work for Starwood, not in any capacity related to this. There are some key takeaways from this, just like there was about the Equifax breach last year, that we did a whole episode on on this show. The key things to know: first of all, what was taken. They said their whole database was breached. I don't know about you, but I really don't care if anybody sees my historical hotel reservations. 

Moser: Nope, I don't either. 

Frankel: I'm happy to share with anyone where I've stayed on Starwood properties. When I go to HQ, I stay at a Starwood hotel. The real issue is credit card numbers and other identifying information like that. 

The thing to know is what to do. One, take a step back. We're not sure exactly what anybody got, or who got it, or whether it's even going to become an issue. The important thing to do as a consumer is to be sure you're monitoring your credit regularly. You should be doing this anyway. There are a lot of services out there that will let you monitor your credit report for free. You're actually entitled to a free copy of each of your three major credit reports once a year. Annualcreditreport.com is where you get the official one. It's a really good practice to get into it, especially a credit alert service that'll send you an alert if a new account has opened up or a new inquiry happens. You can nip these problems in the bud before they start.

Going beyond that, what you could do is create what's called a fraud alert on your credit. To do this, you only have to let one of the three credit bureaus know. They're required to notify the other two. This sets an alert when credit is applied for in your name. That lender will see a fraud alert, meaning that they should take additional steps to verify that you are who you say you are. If you're applying for a credit card and they see a fraud alert, they might ask you to send them a copy of your driver's license, or something like that. 

And if you're really worried about your identity being stolen, and you don't need to use your credit anytime soon, you can put what's called a credit freeze on there. Thanks to the recent bank reform bill, that's now free. You can create a credit freeze. You have to do that with each individual credit bureau. That will effectively prevent anybody from opening new credit in your name. What it does is locks your credit report. When someone applies for credit in your name, that lender is physically unable to pull your credit, therefore has no way to make a lending decision. 

So, there are three things you could do. Just to recap, one: keep monitoring your credit, set alerts so you know exactly what's happening at all times. Two: put a fraud alert on if you're worried. If you're a regular Starwood customer like I am and you're worried that this might have affected you, a fraud alert is a great way to go. And, a credit freeze, especially if you notice anything suspicious, is the more drastic step you could take. 

Moser: I like your point there about consistently and regularly monitoring your credit report. That's something that, perhaps a time ago, may have been a little bit more difficult to do, a little bit costlier. But as you noted, there are so many different ways to go about that now. It really can be so easy. Just as an example, I have an American Express card, and they give me a little service I can subscribe to where every quarter, they give me a copy of my credit report. It costs really nothing over the course of a year. It's something that I never have to worry about. I know, every quarter, I'm going to get a copy of my credit report, so I can see it, make sure everything is in line. If there are any discrepancies, there's an easy way to go about trying to address it and settle.

I don't know that people recognize, maybe at a younger age, at least, how important, how valuable an asset that credit score really is. That is something that can open up a lot of doors for you. If you don't maintain it, if you don't protect it and build it and grow it, you're selling yourself short there.

Frankel: Sure. A lot of younger people also underestimate what a pain it is to fix it once your identity is actually stolen.

Moser: That's a good point. 

Frankel: Ultimately, you should be able to get everything removed from your credit report, but it can take some time and a lot of headaches, a lot of paperwork you have to fill out, police reports and things like that. You have to convince each creditor the account wasn't actually yours. It could be a big, uphill battle. I know friends who have taken a year or more to completely clear their credit after a serious breach. 

Moser: That sounds like a massive hassle. Another thing I've done before, I don't do this religiously, but when I do hotels or bigger purchases like that, I tend to use a credit card as opposed to a debit card. The reason why is, if someone's going to steal my identity -- and let's face it, we live in an age where oversharing is rampant. People are posting what they're having for breakfast on Facebook every day and telling you what they're doing right after. It seems like stealing someone's identity would be pretty easy, given the status of social networking today. For me, I'll use a credit card oftentimes as opposed to a debit card because at least if someone gets my credit card number, that's fine. I mean, it's not good, but at least it's not something linked to my checking account, where they can just drain the cash out of my bank account. 

At the end of the day, your bank is going to take care of you. Your credit card company is going to take care of you. But I've always had this little phobia about linking too many things to our checking account or a debit card, thinking that if something was hacked or stolen... you get that cash siphoned right out of your account, that's a more pressing issue than dealing with credit card fraud. You're not in a time crunch as much with credit card fraud, and you're not put in a cash crunch with a credit card like you might be with a debit card or linking something to your checking account.

Frankel: Yeah, definitely. Credit cards generally have zero fraud liability. With debit cards, you have some liability. I think it's $50 or so now. But credit cards generally have universal zero fraud liability these days. That's definitely a good point. 

Moser: Bottom line, these data breaches are going to happen. There's nothing you can do to control that, so always keep this kind of stuff top of mind. Protect your identity, protect your credit report, your credit score. You have ways to do that. We encourage you to always keep that in mind. 

Let's talk about something a little bit, I don't want to say the lighter side of news, because I'm sure there are some people that probably ended up losing a little bit from something these guys were pushing. We were reading an article over the weekend in regard to this massive gold rush of cryptocurrency and these ICOs, initial coin offerings, that seem to be popping up left and right. It's difficult enough for someone to explain Bitcoin and how it works and why it matters. Now, we've got all of these other coins that are coming from these ICOs. And apparently, there are some celebrities that felt like they would get in there and get a little piece of the action. 

DJ Khaled and Floyd Mayweather are in a little bit of trouble with the SEC. It sounds like they may have been able to come to a resolution there. These two guys were backing these ICOs, they were pushing these ICOs, telling consumers, telling people, "Man, you've got to get in while the getting's good. You have to get in on this game-changer." Bottom line was, they never disclosed the fact that they were actually being paid to tell people that. It wasn't like they were doing it out of the goodness of their heart. Lo and behold, the SEC finds out, and now they've found themselves in a little bit of hot water. It sounds like the SEC is settling, the two individuals will pay fairly heavy fines and I think give back all the money that they were paid in doing the promotions there.

It goes back a little bit to this crypto craze, Matt. I understand why it exists. I understand that there's potentially a future there. We had Aaron Bush on here a few weeks back to talk a little bit more about it. But when I see stuff like this, I become so disenchanted.

Frankel: It's completely understandable. People have lost enough money in legitimate cryptocurrencies lately. Not even counting the ICOs, the total cryptocurrency market cap has gone down by about $700 billion since the peak.

Moser: That's phenomenal!

Frankel: So there's been some money lost here. With these ICOs, personally, I hope that DJ Khaled and Floyd Mayweather aren't the only two who get in some kind of trouble for pumping these ICOs over the past few years. Just to give you a little bit of context, in 2018, so far, there have been about $12 billion raised with these ICOs. A study found that only 8% of them ever even make it to a cryptocurrency exchange. The rest either fizzle out, get stuck in the fundraising stages, or just disappear and fail entirely. Only 8% make it to an exchange at all. The rest are complete money losers. The study found that 81% were flat-out scams. I even heard a Bitcoin expert on CNBC recently talking about how the ICO market is dead now, that it's been so bad, it's turned off so many investors, that it's just not a way that companies are going to be able to raise capital anymore. It's just been ruined. It's kind of crazy, what's happened there.

Moser: It really is. It's been a mania. I was thinking about this, and it strikes me, one the investing lessons I take away from something like this, it's a good reminder that it's OK to just look at something and admit to yourself that you don't know enough about it to really be able to offer an educated opinion, where you're going to put money behind it. It's OK to just take a pass. Warren Buffett does it all the time. He'll read through something and be like, "Nah, I'm just going to throw that in the 'too hard' pile." I've heard many people talk about crypto, and Bitcoin in particular. I understand what they're telling me. It's difficult for me to still quite connect the dots there in understanding why I personally want to be exposed to that. So I throw it in the "too hard" pile. I just don't want to mess with it. I don't want to bother with it. 

It strikes me that in the case of crypto, with the ICOs and the mania that came about, I bet you 98% of the people who were actually piling money into this didn't really have a clue as to how this works and why it matters, or why it doesn't matter.

Frankel: It's kind of the greater fool theory at work here. People see these things going up and up and up and up, and they say, "I'm going to buy it and someone else will pay more for it." Kind of the same thing that led to the housing meltdown in '07, '08. People saw other people getting rich on real estate, so they bought real estate at these inflated, astronomical prices, saying "Oh, the next guy's going to pay me $100,000 more for the same house." The same thing is happening here, and it's really not panning out very well.

Moser: No, it's not working out very well. I never ended up investing any money in any type of crypto. Did you?

Frankel: I actually mined about 30 bitcoins when they were worth about $10. I really wish I had those back.

Moser: Mined a couple? What did you do to do that? 

Frankel: Well, back then, it was really easy. In the early days, you could do with a basic graphics card or repurposed graphics chip. Now, you need these giant mining rigs. And I just did it to figure out how everything worked and what it was all about, and I wound up getting about 30 coins. I think I bought about 10 of them and mined about 20 of them.

Moser: What did you do with the coins that you had?

Frankel: I sold them when it was about $200. 

Moser: At least you made something out of it.

Frankel: I sold it thinking I made the best move ever. Then I watched them go up to about $20,000 a piece. You do the math, $20,000 X 30.

Moser: That's better than the story of the guy who used his Bitcoin back in the day to buy Papa John's Pizza or something. You made out better than that individual, at least yeah.

Frankel: There was another guy who threw out a hard drive that had the encryption key for about $100 million in Bitcoin.

Moser: Lord!

Frankel: He actually paid somebody a couple of hundred thousand dollars to search an entire landfill for it, and they never found it.

Moser: The hits just keep coming. Well, it's a good reminder for investors out there, make sure you know what you're getting into. And when you hear these celebrities screaming from the mountaintops about it, maybe give it a second look there and make sure they have a clue as to what's going on before you just start buying in based on their word.

All right, Matt, we were talking before taping about this article that we ran across over the weekend. It's disconcerting, to say the least. Apparently, most young workers are using their retirement accounts like an ATM. And that just doesn't sound good in any way, shape or form.

Frankel: Yeah, that's bad. [laughs] About 60%, I think 59% to be exact, of people in the 18 to 34 age group have tapped into their retirement savings. Clearly, these people aren't retired. Some of this, to be honest, was for a good reason. If you have, say, medical expenses that you have no other way to pay, that could be a valid reason to tap into your retirement money early. Same with if you're unemployed and have no other way to cover your day-to-day expenses. That can be a good reason. 

But, just to run down some of the stats, 16% said they took the withdrawal to make a large purchase for themselves. 13% said it was just to spend the money. Another 7% said they took money out of their retirement to go on vacation. 

First of all, none of those are allowable reasons to take your money out, so you're going to get slapped with a penalty for doing that. The IRS penalty for early withdrawals is 10%. And if you take it out of a tax-deferred account like a 401(k) or a traditional IRA, you have to pay tax on the money on top of that. So you're talking about, depending on your tax bracket, like a 30%-plus haircut right off the top when you take the money out. 

The real bad reason is, you're robbing from your future self here. From the financial planner's perspective, let's say you have $5,000 in your 401(k) and you leave your job. You might want to take a vacation or something. If you withdraw that $5,000, that could easily become $3,000 or so after taxes and penalties. Meanwhile, if you leave that invested for 30 years, at just the average rate of return of the stock market over history, that $5,000 would become more than $76,000 by the time you're ready to retire in 30 years. $3,000 now, $76,000 later. Sounds like the biggest no-brainer of all time to me, but a lot of younger people are making the wrong decisions.

Moser: Yeah. I do remember, once upon a time, when I was that age, it's a little bit more difficult to see that far down the road, to actually believe that it really matters. It's very easy to say, "Nah, I'll just cross that bridge when I come to it." But the problem is, eventually, you do come to that bridge. And if you've been misbehaving all the way up there and spending your savings, well, then you're stuck with nothing, and you've wasted your biggest advantage in time. You can't make it up, you can't gain back what you lost. That's why we tell people, you have to get started immediately, right when you get that first job. Even if it's just 5-7% of what you're getting paid. Just start putting that stuff away. Time is really what allows you to become rich if you just take the discipline to do that.

I tell you, withdrawing it for those types of reasons... I understand a medical emergency or something like that. And, I mean, you can borrow from your retirement account in some cases to make a payment on a house, and you can pay yourself back. There are qualified reasons for doing it. But just to spend the money, or a vacation or something like that? I personally would never do that. That could put people in a really big crunch when they get a little bit older.

Frankel: Yeah. Especially because a lot of them don't realize that it results in a big tax hit when you do that. They'll take this money out, then get to tax time in April, and, "Oh, jeez, I owe $3,000 to the IRS that I wasn't thinking of." That's a problem, too. And then they do it again, and they have to take that $3,000 out of their retirement account to pay the IRS, and the cycle repeats. It can become a real cycle, and it can be really tough to get back on track once you start withdrawing from your retirement account for silly reasons. 

Moser: Let's hope that the young folks out there hear this and choose to not start pulling out of their retirement accounts like an ATM. I'll tell you, you have to have that. You can't rely on something like Social Security when the time comes. You can't really count on how much that's going to be able to take care of you. You have to be able to take advantage of the time that you have. That's what it boils down to. 

Let's take a look here at Twitter for the week. A couple of tweets out there. Now, there's one here that goes back to the story we talked about at the beginning of the show, the Marriott data breach. @CashRulesPN on Twitter. Palbir says, "Use my credit cards and passport number any way you want, but if my points are drained, there will be hell to pay." [laughs] There's a loyalty customer who doesn't want his points going anywhere. I get it, I appreciate that.

Then, a tweet we got from Caleb, @Caleb_WVU. I got this tweet earlier in the week. This was a good question. I wanted to get your feedback on it, too, Matt. Caleb says, "Jason, a question I've been mulling over and would like your take on. When you get to the point that there aren't many stocks that you would like to add at the current moment, whether it's because the stocks I love are already heavy in my portfolio or I'm just not ready to pull the trigger on anything new on my watchlist, is it most beneficial to stockpile that cash, average it into an index fund, or a combination of both? Thanks for your input in advance." Matt, what's your take here?

Frankel: My answer is cash, but to a point.

Moser: Right.

Frankel: I like to keep cash until it builds up over a certain level. I suggest that you get a percentage of your assets in your head that you're willing to hold in cash at any one time. For me, it's 10%, just for an example. If at any given time, more than 10% of my portfolio's value is cash, I either look into some stocks to try to find ways to put that money to work. I almost always choose stocks over index funds, but index funds are fine if you really can't find any other way to put it to work. 

I'd say cash is great. It's always good to have cash to take advantage of opportunities. At some point, you'll find stocks that look attractive to you. But, to a point. You don't want to have half of your portfolio in cash because then, if what happened over the past few years happens again, you'll really miss the boat on a great time to be an investor. So, mine is 10%, but set whatever you feel comfortable with. Once it gets past that point, try to find ways to put it to work.

Moser: Yeah, I think that makes sense. I've gone a little bit more cash-heavy recently due to harvesting some gains from some holdings. I don't normally like holding that big of an amount of cash, either. One of the things people always ask, they say, I need to do something with that cash to earn something on it. I've got this big slug of cash sitting in there, and it's earning no return. And I get that. I understand that. But, one way I've tried to look at that is to say, you may not be earning any return on that cash right now, but you could look at the return as really being the ability, the liquidity, to put that cash to work whenever you are ready, so that if something does come up, then you don't have to try to trim from another position or figure out other ways to raise cash. Really, the return is that liquidity, it's that availability. 

To your point, I think everybody has to determine their own number there. 10% is a good one. I'm probably a little bit more cash-heavy right now, and I'm really trying to put that cash to good work. But the point stands. The market out there, there's not a bunch of steals out there to be had. Just be deliberate, be patient. Remember, it's a marathon, not a sprint. Very good question from Caleb. Appreciate it. Appreciate your perspective there, too, Matt. 

Let's wrap up the week, as always, with One to Watch. Matt, what is your one to one for the coming week? 

Frankel: Last week, I suggested a financials index fund. This week, I'm going to narrow it down. I'm going to say Goldman Sachs (GS 1.59%), ticker GS, which is one of my favorites. Listeners know that. I've mentioned before that Goldman has a lot of room to run with their consumer banking business. They're still arguably the No. 1 brand name on Wall Street. When you hear Wall Street, it's pretty much synonymous with Goldman Sachs for a lot of people. And now, they're in this legal problem with Malaysia. Malaysia is trying to get back $600 million in fees that it paid in a bond fund that went bad. Now that they're wrapped up in this, the stock's taken another hit down, and it's actually trading for less than its book value for the first time in over two years. I think Goldman looks really, really interesting at this point.

Moser: And what is the ticker for Goldman?

Frankel: GS.

Moser: GS. Yeah, that is. Folks who follow me on Twitter may know that on November 20th, I bought Ameris Bancorp, along with another stock, Etsy, but I'm going to go ahead and shine the light on Ameris Bancorp this week, because I did add shares of Ameris to my portfolio. Most folks, you've probably heard it on this show before. Ameris is a small-cap bank down there in southwest Georgia. About a $2 billion market cap, but it really has grown by leaps and bounds over the last several years. The FDIC found it to be a very good partner in rolling up some of those failed institutions from the financial crisis. Ameris has always been able to maintain healthy capital ratios, which is really encouraging. I think the stock is a little bit on sale around this time of year here, around 20X earnings today. In their most recent quarter, they announced they grew total assets to close to $11.5 billion vs. approximately $7.5 billion at the end of 2017. With a bank like this, growing that asset base, growing that deposit base, really helps them generate the return on assets that we value a lot of these banks by. 

And then, they have a nice diverse lending book, which is a testament to smart leadership. They're good stewards with the capital and look after shareholders. I think this is an attractive long-term idea, one that I look forward to holding for many years to come, and I think listeners would benefit from probably looking into it there. 

So, we got a big, megabank, and we got a little, tiny bank. Those are a couple of good ideas for listeners out there.

Matt, thanks a lot! Appreciate it as always!

Frankel: Of course. Always good to be here!

Moser: Have a great week, my friend! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. The show is produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening! We'll see you next week!