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CNN Live Saturday
Dollar Signs: Preparing For The Worst
Aired July 26, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ANDREA KOPPEL, CNN ANCHOR: How would you like to retire rich? Well, in "Dollar Signs" today we're going to look at just how you can do that and without winning the Lottery or robbing a bank. Boy, those aren't necessarily your first choices. But to get started, you have to know yourself pretty well. And as our financial correspondent Ali Velshi explains, that includes knowing how comfortable you are with risks.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL, NEWS CORRESPONDENT: If this is your idea of fun, then the roller coaster ride your investments have taken probably doesn't faze you much, but if a downward plunge makes your stomach turn, then you need to take a closer look at your financial risk tolerance.
GREG LAI, AFFAINITY INVESTMENT ADVISORS: If you're kind of a risk-taker in life then you kind of treat your investments the same way.
VELSHI: High risk tolerance is important to be an aggressive investor which would put the vast majority of your investments in stocks. Over time, they've paid the highest returns, but it means you assume the highest risk.
Moderate risk tolerance would make you an average investor. You'd accept some volatility in exchange for higher potential returns. That means you'd probably have more than half your portfolio in stocks.
If your risk tolerance is low, you're cut out to be a conservative investor. You should consider putting less money in stocks and more in conservative investments like money market funds and CDs. You may get lower returns, but you'll assume less risk.
Not sure where you are on the risk spectrum? One way to find out is to ask yourself questions, like the ones financial services companies use to gauge your risk tolerance.
JAMES AWAD, AWAD ASSET MANAGEMENT: So really ask yourself, what is your threshold of pain? Because what you don't want to do is go into a tough period, lose the money and psychologically be forced out of the market at a time when you should be buying stocks instead of selling them. So don't put yourself in a position where you're going to be so uncomfortable that you're going to blow it.
VELSHI: Once you've decided where your comfort level is, of course, there are other considerations as you allocate your assets. Most important, your knowledge and understanding of the markets. Next, your age or time horizon. How long until you need the money? Also, consider your current savings and income level. And finally, remember, to thy known self be true.
STUART RUBINSTEIN, TD WATERHOUSE: It's very important for customers to be honest with themselves when answering those risk questions. How will they react when the market goes up? How are they going to react when the market goes down? It's very easy to be an aggressive investor when you see the market going up every day, but sometimes it's a little difficult to stay the course when you see the market coming down.
VELSHI: Still feel like rolling the dice? Before you do it with retirement money, try this, take a good guess about your risk tolerance, then ask your adviser or log on to a financial services Web site and take a tolerance test. It may not have the rush of a casino game, but in the end, you may take more money home.
(END VIDEOTAPE)
VELSHI: Now, one of the things, Andrea, that people have to look at is while they do a lot of research on the stocks that they're going to put in their portfolio, most people who don't have a trading account of their own don't take the time to realize what their risk tolerance really is. These questionnaires at the financial services companies offer, they really are 20 or 30 questions, and some of them don't seem as obvious, but in the end, it gives you a score, you can find them on the Internet yourself, you can take the test, and you might actually be surprised -- Andrea.
KOPPEL: Okay, Ali. And I want to apologize for mispronouncing your name. I want to ask you how much risk is good?
VELSHI: Well, one of the things people have to remember is that they think they're being safe by putting things in the lower-risk investments, in the story we talked about lower-risk investments. Well sometimes those are bonds, and that's not necessarily a safe as people think. Or if you put your money into money markets or CDs, you're actually getting an interest rate which is lower than the rate of inflation. So over time, your money is being eroded, your savings are being eroded, you're not growing it.
The bottom line is, you have to assume some risk in order to grow your investments so that you can retire safely or have the money you need. You can't be afraid of the market, but you can make proper decisions. Once you have your risk tolerance, Andea, you can figure out what your asset allocation is going to be and make an informed decision.
KOPPEL: Okay, so you're starting to figure out how comfortable you are with risk. What's next? In his book, "What You Need To Do Right Now", Ric Edelman has written an eight-point action plan to financial security and he joins us now live. One of those eight steps, Ric Edelman, how do you make money? RIC EDELMAN, AUTHOR "WHAT YOU NEED TO DO RIGHT NOW": Well, we can pick up right where you just left off which is assessing your own attitude. Assess your goals, what is it you're trying to accomplish in life? Until you really know where you're headed, it's impossible to make effective investment decisions. So you have to understand your risk, and you have to understand your goals. You put the two of them together and you can map out a very effective game plan for financial success.
KOPPEL: Your book is, as I've just said, is called "What You Need To Do Right Now". What kind of climate is there now, and what do people need to do now, if they want to seize the moment?
EDELMAN: No. 1, I'd say, is that we are in a period of dramatic uncertainty. We really don't know what's going to happen next. I mean, the stock market has been doing a lot better in the past seven or eight months than the last two and a half years, but are we really out of the bare market or is this just a bare-market rally? And what's going to happen in the war against terrorism? What's going to happen with the presidential election next year? What's going to happen in the California gubenatorial election in just a couple of months?
There's so many things going on we can't figure out. We don't know if this is a good period of time or not. So the big challenge that people are facing is answering the question, what do I need to do now? And our message is very simple. What you need to be doing is something that is going to survive and thrive even in periods of uncertainty like this one.
KOPPEL: Okay. Let's go through that eight-point action plan to financial security. We're going to go through the points quickly. But if folks want to get out their pens and pencils, we're going to do it now.
They include: preparing money for personal, for money emergencies, providing for family, preserving assets, securing their homes, protecting income, defending your business, helping others, planning next investments move.
Now, which is most important in your opinion?
EDELMAN: Is the number one item is the most important, and that is preparing against the negatives, preparing against things that can go wrong. So many people are living paycheck to paycheck. They have no financial resources if they suddenly lose a job or suffer a major medical crisis, or any one of the number of things that can go wrong in life. And their planning is those things are always going to be good. That's not planning, that's wishful thinking.
What we need to do is have ample cash reserves. That's number one, if you will have money set aside in cash reserves, money markets, CDs, just like your correspondent talked about before this break, what you discover is you can tide yourself over, if you suddenly lose your job or have a financial crisis or financial expense that's unexpected, you have the cash to get you through. So without question, cash reserves is number one on the list.
VELSHI: Ric, it's Ali here in New York. I wanted to ask you, you talk about dividing your portfolio, making sure you understand your goals and your portfolio meets your goals. One of the things that happens to people in tough markets like is, is they pull back completely from stock investments or really take a lot less of their money and put it into stocks. The danger here is that those safe investments are getting people in some cases less than 3 percent on their money. You almost need to be using your money more effectively in tough times than you do in good times.
EDELMAN: You're absolutely right, Ali. There's no question but that wealth has created during bad markets. In other words, it's the decisions you make today that's going to determine your future prosperity. And you hit it exactly, that many people are making their investment decisions out of emotion. If they are afraid of what's coming down the pipe or what they perceive is coming down, then they're going to move out of stocks and into bonds.
In other words, they're going to get out of stocks after they've gone down and they're going to go into bonds after they've gone up. In other words, they're going to be doing the very wrong thing at exactly the wrong time. And then they're going to try to wonder, gee, why is it I'm not achieving financial success? It's usually because people are allowing their emotions to control decisions and that's rarely a good strategy.
KOPPEL: All right, Ric Edelman, Ali Velshi, if you gentlemen would stand by. We'll be right back. And, of course, you can still e-mail us at dollarsigns@CNN.com or call in. That number is 1-800- 807-2620. Well be right back.
(COMMERCIAL BREAK)
KOPPEL: Welcome back to "Dollar Signs". We're talking about the steps that you can take to achieve financial independence. Among those steps, establishing cash reserves, keeping your large 30-year mortgage, or if you don't have one, get one. Make sure your job is secure and make sure your family is financially protected. You can also provide for your family by getting the right kind of insurance, for health, life, disability, long-term care, your autos, and your home.
Now, we have our first phone call from Jeff in Denver for Ric Edelman. Ric -- go ahead, please, caller.
CALLER: Hi. I retired early at 60, believe it or not, from broadcasting, sold a bunch of real estate I invested in and actually took the hit on capital gains, made a lot of money, becuase it was the high end of the market. Since that time the market has gone to heck. After the attack on 9/11, I put a bunch of money in a market, haven't made a nickel. I have very low risk tolerance, 3 percent does not excite me as far as return on my money. You know, I've been -- I've talked to a couple people about REITS, Real Estate Investment -- you know what I'm talking about. Is it still risky? EDELMAN: It sounds like you want to have your cake and eat it, too. You don't want to take risk but want to get a better return than banks are offering at 3 percent.
CALLER: Absolutely.
EDELMAN: Well, I want that, too. The problem is we can't have it all. We really have to choose between keeping our money safe and protected or having the opportunity to earn a higher return. It is a question of one of the other or a combination of the two as Ali was talking about before the last break.
So what I would recommend is that you take a more sober analysis of, not so much your attitude about investments, but rather your willingness to accept the economic realities that investment world offers. In other words, let's put a goal-oriented procedure to it. How much money do you need to have to support your lifestyle today and for your lifetime and then we can do some number crunching to see if the amount of money you've got is going to be enough to have us enjoy that lifestyle.
What it comes down to is simple, never take any more risk than is necessary to achieve the financial goal. If you can achieve your goals by putting all your money in a bank account, then that's exactly what you should do. But if doing that will not achieve your goals, then you can't keep your money in the bank. And what your attitude is has nothing to do with it.
So I would encourage you to look more at a goal-oriented perspective as opposed to trying to find what you think are hot investments, things that are going to do now.
VELSHI: Hey, Ric, one of the points you make in your book is kind of interesting and kind of counterintuitive to people and that's the idea of keeping your large, 30-year fixed rate mortgage, or getting one if you don't have one. This was not the idea 20 or 30 years ago in our parents' world. The idea was you pay that mortgage off as quickly as you can. But in this day and age where you don't have a lot of tax deductions, there's a very good reason for holding on to that mortgage, isn't there?
EDELMAN: Yes, you're absolutely right, Ali. You said it correct on both points. Number one, it's not what your daddy taught you or your grand daddy, they told you to pay off your mortgage, own your house outright, its the American dream. But today we discover that, due to the economy and today's tax laws, having that mortgage is one of the smartest, safest things you can do.
This is counterintuitive. It isn't what most people understand. It's very important that you be willing to rethink your mortgage strategy. Because quite frankly, that is a key element in your ability to achieve financial success.
KOPPEL: Okay, Ric, we have another question from a caller. Kevin in Florida. Go ahead with your question for Ric, please. CALLER: Okay, thank you. I appreciate it. This is for either gentleman. Could you address how much money you should put in the stocks, bonds and cash as you start off in your 20s and 30s, your 40s and 50s, all the way up to retirement? I mean, the guy -- or woman that is starting to invest at 20 may be a little bit more aggressive than that person at 50 or 60. Could you address that for me, please?
EDELMAN: Sure. It's not a question of aggressiveness, it's a question of time horizon. And Ali talked about that earlier in the program. What you want to do is examine a simple question, how long are you going to leave your money invested? The longer you leave it invested the better you can tolerate the volatility of the market, because we all know that stocks go up and stocks go down, but over very long periods, it is, at least historically, the numer one, way to invest. So the 20-year-old can easily put all of their money into stocks, if they are going to leave it alone for 20 or 30 years. The 50 year old probably can't do that. So it makes perfect sense that the younger you are the longer your time horizon, the more of your money you can put into stocks.
KOPPEL: OK, Ric, we have an e-mail from Adam in New York that I want to read to you. It says, "I've just sold my house and made a nice profit. We have $20,000 in credit debt. We want to pay that debt off. Is that a smart move."
EDELMAN: Yes, it absolutely is. Let me give you the four-step process for money management, if you want to be successful financially. Number one, participate in your company retirement account, your 401k , 403b, whatever your boss offers, join that plan to the maximum you can. That's step number one, before anything else.
Step number two, pay off the credit card debt. And that's the opportunity you have right now. It makes no sense to have money in savings and investments while also carrying credit card debt. So use that money to pay off the credit cards and promise yourself you're never going to build up that credit card debt again.
Step number three, build cash reserves. You want to have 6 to 12 months worth of spending sitting in a bank account safe, liquid, available, conservative, you can get your hands on it anytime you want.
And then fourth, finally, you're ready to start buying investments. So take that home sale proceeds and pay off those credit card debts.
VELSHI: Ric, I want to ask you something. We were talking earlier about risk tolerance and dividing up your portfolio. Following on that last question where the gentleman was talking about age and amount of money you can have in stocks, it is possible that you could be 20 years old, have 80 percent of your money in stocks, but have it in a fairly conservative stock portfolio versus somebody who's 50 years old, having 50 percent of their investment in stocks but their stock portfolio is just made up of equities more aggressive. So once you've decided on the way you're allocating that pie, you've got to decide what you want in the pie. EDELMAN: You're absolutely right. That's a really, very important point, because people have to understand that it's not really a stock market. It's a market of stocks.
VELSHI: Right.
EDELMAN: We're talking about thousands of individual companies. And I think we'd all agree that there's a big difference between General Electric and some Dot-com Internet company that someone's building out of their garage.
So you're absolutely right. It's not just how much of your money you put into stocks but which stocks and what combination of industries are really putting your money into.
KOPPEL: Okay, Ric, we have a quick e-mail from H.C. Harper. He says, "I'm 46 years old and make $7 an hour. I have no savings, IRA's or any retirement plan what so ever. Can not afford health insurance much less the luxury of investments. Is there any hope for me?
EDELMAN: There absolutely is and you know why? You're only 46 years old. You have a life expetancy of 40 to 50 years. Your not even at your halfway point yet. And what's the message there? Take advantage of time. It's the biggest weapon that you've got. Your own good health and your own natural abilities.
What you want to do is develop an education that will give you the opportunity to earn more money than you currently are earning. Don't be daunted by the fact that you can only go to school part-time, one class a semester. Don't give that a thought at all. Who cares if it takes you five years or more to get an Associate's or Bachelor's Degree? Start now. Develop the skills to enter a new career that's going to give you the earning capacity which will then give you the opportunity to enjoy the opportunity for saving and investing and insurance protection.
KOPPEL: Okay. Ric and Ali, stand by. More of your calls and e- mails after the break. We will be right back.
(COMMERCIAL BREAK)
KOPPEL: Welcome back to "Dollar Signs". We're talking about how you can become financially independent. Imagine, living life without ever worrying about money again. It may sound impossible, but our experts, financial adviser Ric Edelman and CNN financial correspondent Ali Velshi say we can all do it. We have a caller, Jason in Chicago who is on the line. Go ahead, please.
CALLER: Yes. How are you?
KOPPEL: Very well, thank you.
CALLER: I wanted to ask, in terms of -- a follow-up point on the diversification that we spoke about, I'm 25. I'm a long-term investor. I've read in a number of places that long-term small cap stocks and value stocks, particularly, do better than large cap. And now, in terms of diversification for long-term investors, what is recommended in terms of -- I've read, you know, percentages like 40 to 50 percent large cap, maybe 10 percent international, and you know when you're talking about kind of where we want to divvy up, you know, our money, long-term, what would be suggested? I've read things, and I'm curious to hear what you think about that.
EDELMAN: That's a good question, Jason. The statistics you're referring to are largely erroneous. It's a misconception. One of the many myths on Wall Street is the fact that growth stocks make more money than value stocks, that small caps make more money than large caps. Not true. If you look at very long period of times and I mean, 20, 30, 40-year periods, you discover that they earn pretty much the same amount. There's only about a 1 percent differential in total return on average long-term basis.
What varies is when they make their money. In any given marketplace, either large cap or small cap is outperforming the other. So there's a big dispersion between how they perform but over long periods, they basically perform pretty much the same. And Therefore our message is, to our clients, you should own both all the time. Rather than trying to guess whether this is the time for large cap or small cap, own both. Be heavily diversified and that means owning everything all the time.
VELSHI: Ric, and Jason, over 75 years, broad investment in stocks in the United States would have given you a return of 12 percent. Over the last 20 years a broad investment of stocks in the United States would have given you axactly the same return.
Your risk tolerance is a little more constant. Your balance of stocks in your portfolio can be a little more active. You can move in and out of sectors on an annual basis or every couple of years. That kind of mix can adjust. There will be times when certain industries do better in certain sectors do better. That's got to be -- you've got to be pretty knowledgeable about that. You've got to read up on that some people use an advise tor make decisions for them.
But in the end, if you balance it out well, you should be able to beat the market average over the long term, which is 10 to 12 percent.
KOPPEL: Gentlemen, in our remaining minute, I want to squeeze in another email. This one from Chad in Virginia, "Renting seems like throwing money into someone elses pocket", he writes, "You have nothing else to show for it and no tax break. How long should one rent before buying a house. Should they wait until they're completely out of debt?"
VELSHI: In New York City, you should never stop renting. It's too expensive to buy.
EDELMAN: And I would agree. I would say, you know, you shouldn't wait till you get out of debt. But on the other hand, a lot of very successful investors never own their homes. It's a myth to think that you're throwing money away simply because you're renting. If that's the case, how do you argue that you own a television? Try to sell it for what you paid for it. So very clearly, buying is not always the right financial thing to do. Don't assume you're throwing money away by renting. Don't buy until you're ready to own that home for seven to ten years or more.
VELSHI: And once again, there are calculaters on Web sites that can help you make the difference between renting and buying. And Ric's right, sometimes you'd be surprised at the lack of difference between the two options.
KOPPEL: Well, with mortgage rates at 40-year lows, this is, perhaps the time if people think they can handle it. Thank you both. Financial adviser Ric Edelman and CNN financial correspondent Ali Velshi, thank you both very much.
VELSHI: Pleasure.
KOPPEL: Here is what's coming up on CNN. "PEOPLE IN THE NEWS" is next with a profile of Scott and Laci Peterson. Also on the program, John Walsh of America's most wanted.
Then at 6:00 "CNN SATURDAY" is live from Waco, Texas, where police may have found the body of missing Baylor basketball player Patrick Dennehy.
And at 7:00, "THE CAPITAL GANG" weighs in on the 9/11 report and why some families are so upset with it.
END
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Aired July 26, 2003 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ANDREA KOPPEL, CNN ANCHOR: How would you like to retire rich? Well, in "Dollar Signs" today we're going to look at just how you can do that and without winning the Lottery or robbing a bank. Boy, those aren't necessarily your first choices. But to get started, you have to know yourself pretty well. And as our financial correspondent Ali Velshi explains, that includes knowing how comfortable you are with risks.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL, NEWS CORRESPONDENT: If this is your idea of fun, then the roller coaster ride your investments have taken probably doesn't faze you much, but if a downward plunge makes your stomach turn, then you need to take a closer look at your financial risk tolerance.
GREG LAI, AFFAINITY INVESTMENT ADVISORS: If you're kind of a risk-taker in life then you kind of treat your investments the same way.
VELSHI: High risk tolerance is important to be an aggressive investor which would put the vast majority of your investments in stocks. Over time, they've paid the highest returns, but it means you assume the highest risk.
Moderate risk tolerance would make you an average investor. You'd accept some volatility in exchange for higher potential returns. That means you'd probably have more than half your portfolio in stocks.
If your risk tolerance is low, you're cut out to be a conservative investor. You should consider putting less money in stocks and more in conservative investments like money market funds and CDs. You may get lower returns, but you'll assume less risk.
Not sure where you are on the risk spectrum? One way to find out is to ask yourself questions, like the ones financial services companies use to gauge your risk tolerance.
JAMES AWAD, AWAD ASSET MANAGEMENT: So really ask yourself, what is your threshold of pain? Because what you don't want to do is go into a tough period, lose the money and psychologically be forced out of the market at a time when you should be buying stocks instead of selling them. So don't put yourself in a position where you're going to be so uncomfortable that you're going to blow it.
VELSHI: Once you've decided where your comfort level is, of course, there are other considerations as you allocate your assets. Most important, your knowledge and understanding of the markets. Next, your age or time horizon. How long until you need the money? Also, consider your current savings and income level. And finally, remember, to thy known self be true.
STUART RUBINSTEIN, TD WATERHOUSE: It's very important for customers to be honest with themselves when answering those risk questions. How will they react when the market goes up? How are they going to react when the market goes down? It's very easy to be an aggressive investor when you see the market going up every day, but sometimes it's a little difficult to stay the course when you see the market coming down.
VELSHI: Still feel like rolling the dice? Before you do it with retirement money, try this, take a good guess about your risk tolerance, then ask your adviser or log on to a financial services Web site and take a tolerance test. It may not have the rush of a casino game, but in the end, you may take more money home.
(END VIDEOTAPE)
VELSHI: Now, one of the things, Andrea, that people have to look at is while they do a lot of research on the stocks that they're going to put in their portfolio, most people who don't have a trading account of their own don't take the time to realize what their risk tolerance really is. These questionnaires at the financial services companies offer, they really are 20 or 30 questions, and some of them don't seem as obvious, but in the end, it gives you a score, you can find them on the Internet yourself, you can take the test, and you might actually be surprised -- Andrea.
KOPPEL: Okay, Ali. And I want to apologize for mispronouncing your name. I want to ask you how much risk is good?
VELSHI: Well, one of the things people have to remember is that they think they're being safe by putting things in the lower-risk investments, in the story we talked about lower-risk investments. Well sometimes those are bonds, and that's not necessarily a safe as people think. Or if you put your money into money markets or CDs, you're actually getting an interest rate which is lower than the rate of inflation. So over time, your money is being eroded, your savings are being eroded, you're not growing it.
The bottom line is, you have to assume some risk in order to grow your investments so that you can retire safely or have the money you need. You can't be afraid of the market, but you can make proper decisions. Once you have your risk tolerance, Andea, you can figure out what your asset allocation is going to be and make an informed decision.
KOPPEL: Okay, so you're starting to figure out how comfortable you are with risk. What's next? In his book, "What You Need To Do Right Now", Ric Edelman has written an eight-point action plan to financial security and he joins us now live. One of those eight steps, Ric Edelman, how do you make money? RIC EDELMAN, AUTHOR "WHAT YOU NEED TO DO RIGHT NOW": Well, we can pick up right where you just left off which is assessing your own attitude. Assess your goals, what is it you're trying to accomplish in life? Until you really know where you're headed, it's impossible to make effective investment decisions. So you have to understand your risk, and you have to understand your goals. You put the two of them together and you can map out a very effective game plan for financial success.
KOPPEL: Your book is, as I've just said, is called "What You Need To Do Right Now". What kind of climate is there now, and what do people need to do now, if they want to seize the moment?
EDELMAN: No. 1, I'd say, is that we are in a period of dramatic uncertainty. We really don't know what's going to happen next. I mean, the stock market has been doing a lot better in the past seven or eight months than the last two and a half years, but are we really out of the bare market or is this just a bare-market rally? And what's going to happen in the war against terrorism? What's going to happen with the presidential election next year? What's going to happen in the California gubenatorial election in just a couple of months?
There's so many things going on we can't figure out. We don't know if this is a good period of time or not. So the big challenge that people are facing is answering the question, what do I need to do now? And our message is very simple. What you need to be doing is something that is going to survive and thrive even in periods of uncertainty like this one.
KOPPEL: Okay. Let's go through that eight-point action plan to financial security. We're going to go through the points quickly. But if folks want to get out their pens and pencils, we're going to do it now.
They include: preparing money for personal, for money emergencies, providing for family, preserving assets, securing their homes, protecting income, defending your business, helping others, planning next investments move.
Now, which is most important in your opinion?
EDELMAN: Is the number one item is the most important, and that is preparing against the negatives, preparing against things that can go wrong. So many people are living paycheck to paycheck. They have no financial resources if they suddenly lose a job or suffer a major medical crisis, or any one of the number of things that can go wrong in life. And their planning is those things are always going to be good. That's not planning, that's wishful thinking.
What we need to do is have ample cash reserves. That's number one, if you will have money set aside in cash reserves, money markets, CDs, just like your correspondent talked about before this break, what you discover is you can tide yourself over, if you suddenly lose your job or have a financial crisis or financial expense that's unexpected, you have the cash to get you through. So without question, cash reserves is number one on the list.
VELSHI: Ric, it's Ali here in New York. I wanted to ask you, you talk about dividing your portfolio, making sure you understand your goals and your portfolio meets your goals. One of the things that happens to people in tough markets like is, is they pull back completely from stock investments or really take a lot less of their money and put it into stocks. The danger here is that those safe investments are getting people in some cases less than 3 percent on their money. You almost need to be using your money more effectively in tough times than you do in good times.
EDELMAN: You're absolutely right, Ali. There's no question but that wealth has created during bad markets. In other words, it's the decisions you make today that's going to determine your future prosperity. And you hit it exactly, that many people are making their investment decisions out of emotion. If they are afraid of what's coming down the pipe or what they perceive is coming down, then they're going to move out of stocks and into bonds.
In other words, they're going to get out of stocks after they've gone down and they're going to go into bonds after they've gone up. In other words, they're going to be doing the very wrong thing at exactly the wrong time. And then they're going to try to wonder, gee, why is it I'm not achieving financial success? It's usually because people are allowing their emotions to control decisions and that's rarely a good strategy.
KOPPEL: All right, Ric Edelman, Ali Velshi, if you gentlemen would stand by. We'll be right back. And, of course, you can still e-mail us at dollarsigns@CNN.com or call in. That number is 1-800- 807-2620. Well be right back.
(COMMERCIAL BREAK)
KOPPEL: Welcome back to "Dollar Signs". We're talking about the steps that you can take to achieve financial independence. Among those steps, establishing cash reserves, keeping your large 30-year mortgage, or if you don't have one, get one. Make sure your job is secure and make sure your family is financially protected. You can also provide for your family by getting the right kind of insurance, for health, life, disability, long-term care, your autos, and your home.
Now, we have our first phone call from Jeff in Denver for Ric Edelman. Ric -- go ahead, please, caller.
CALLER: Hi. I retired early at 60, believe it or not, from broadcasting, sold a bunch of real estate I invested in and actually took the hit on capital gains, made a lot of money, becuase it was the high end of the market. Since that time the market has gone to heck. After the attack on 9/11, I put a bunch of money in a market, haven't made a nickel. I have very low risk tolerance, 3 percent does not excite me as far as return on my money. You know, I've been -- I've talked to a couple people about REITS, Real Estate Investment -- you know what I'm talking about. Is it still risky? EDELMAN: It sounds like you want to have your cake and eat it, too. You don't want to take risk but want to get a better return than banks are offering at 3 percent.
CALLER: Absolutely.
EDELMAN: Well, I want that, too. The problem is we can't have it all. We really have to choose between keeping our money safe and protected or having the opportunity to earn a higher return. It is a question of one of the other or a combination of the two as Ali was talking about before the last break.
So what I would recommend is that you take a more sober analysis of, not so much your attitude about investments, but rather your willingness to accept the economic realities that investment world offers. In other words, let's put a goal-oriented procedure to it. How much money do you need to have to support your lifestyle today and for your lifetime and then we can do some number crunching to see if the amount of money you've got is going to be enough to have us enjoy that lifestyle.
What it comes down to is simple, never take any more risk than is necessary to achieve the financial goal. If you can achieve your goals by putting all your money in a bank account, then that's exactly what you should do. But if doing that will not achieve your goals, then you can't keep your money in the bank. And what your attitude is has nothing to do with it.
So I would encourage you to look more at a goal-oriented perspective as opposed to trying to find what you think are hot investments, things that are going to do now.
VELSHI: Hey, Ric, one of the points you make in your book is kind of interesting and kind of counterintuitive to people and that's the idea of keeping your large, 30-year fixed rate mortgage, or getting one if you don't have one. This was not the idea 20 or 30 years ago in our parents' world. The idea was you pay that mortgage off as quickly as you can. But in this day and age where you don't have a lot of tax deductions, there's a very good reason for holding on to that mortgage, isn't there?
EDELMAN: Yes, you're absolutely right, Ali. You said it correct on both points. Number one, it's not what your daddy taught you or your grand daddy, they told you to pay off your mortgage, own your house outright, its the American dream. But today we discover that, due to the economy and today's tax laws, having that mortgage is one of the smartest, safest things you can do.
This is counterintuitive. It isn't what most people understand. It's very important that you be willing to rethink your mortgage strategy. Because quite frankly, that is a key element in your ability to achieve financial success.
KOPPEL: Okay, Ric, we have another question from a caller. Kevin in Florida. Go ahead with your question for Ric, please. CALLER: Okay, thank you. I appreciate it. This is for either gentleman. Could you address how much money you should put in the stocks, bonds and cash as you start off in your 20s and 30s, your 40s and 50s, all the way up to retirement? I mean, the guy -- or woman that is starting to invest at 20 may be a little bit more aggressive than that person at 50 or 60. Could you address that for me, please?
EDELMAN: Sure. It's not a question of aggressiveness, it's a question of time horizon. And Ali talked about that earlier in the program. What you want to do is examine a simple question, how long are you going to leave your money invested? The longer you leave it invested the better you can tolerate the volatility of the market, because we all know that stocks go up and stocks go down, but over very long periods, it is, at least historically, the numer one, way to invest. So the 20-year-old can easily put all of their money into stocks, if they are going to leave it alone for 20 or 30 years. The 50 year old probably can't do that. So it makes perfect sense that the younger you are the longer your time horizon, the more of your money you can put into stocks.
KOPPEL: OK, Ric, we have an e-mail from Adam in New York that I want to read to you. It says, "I've just sold my house and made a nice profit. We have $20,000 in credit debt. We want to pay that debt off. Is that a smart move."
EDELMAN: Yes, it absolutely is. Let me give you the four-step process for money management, if you want to be successful financially. Number one, participate in your company retirement account, your 401k , 403b, whatever your boss offers, join that plan to the maximum you can. That's step number one, before anything else.
Step number two, pay off the credit card debt. And that's the opportunity you have right now. It makes no sense to have money in savings and investments while also carrying credit card debt. So use that money to pay off the credit cards and promise yourself you're never going to build up that credit card debt again.
Step number three, build cash reserves. You want to have 6 to 12 months worth of spending sitting in a bank account safe, liquid, available, conservative, you can get your hands on it anytime you want.
And then fourth, finally, you're ready to start buying investments. So take that home sale proceeds and pay off those credit card debts.
VELSHI: Ric, I want to ask you something. We were talking earlier about risk tolerance and dividing up your portfolio. Following on that last question where the gentleman was talking about age and amount of money you can have in stocks, it is possible that you could be 20 years old, have 80 percent of your money in stocks, but have it in a fairly conservative stock portfolio versus somebody who's 50 years old, having 50 percent of their investment in stocks but their stock portfolio is just made up of equities more aggressive. So once you've decided on the way you're allocating that pie, you've got to decide what you want in the pie. EDELMAN: You're absolutely right. That's a really, very important point, because people have to understand that it's not really a stock market. It's a market of stocks.
VELSHI: Right.
EDELMAN: We're talking about thousands of individual companies. And I think we'd all agree that there's a big difference between General Electric and some Dot-com Internet company that someone's building out of their garage.
So you're absolutely right. It's not just how much of your money you put into stocks but which stocks and what combination of industries are really putting your money into.
KOPPEL: Okay, Ric, we have a quick e-mail from H.C. Harper. He says, "I'm 46 years old and make $7 an hour. I have no savings, IRA's or any retirement plan what so ever. Can not afford health insurance much less the luxury of investments. Is there any hope for me?
EDELMAN: There absolutely is and you know why? You're only 46 years old. You have a life expetancy of 40 to 50 years. Your not even at your halfway point yet. And what's the message there? Take advantage of time. It's the biggest weapon that you've got. Your own good health and your own natural abilities.
What you want to do is develop an education that will give you the opportunity to earn more money than you currently are earning. Don't be daunted by the fact that you can only go to school part-time, one class a semester. Don't give that a thought at all. Who cares if it takes you five years or more to get an Associate's or Bachelor's Degree? Start now. Develop the skills to enter a new career that's going to give you the earning capacity which will then give you the opportunity to enjoy the opportunity for saving and investing and insurance protection.
KOPPEL: Okay. Ric and Ali, stand by. More of your calls and e- mails after the break. We will be right back.
(COMMERCIAL BREAK)
KOPPEL: Welcome back to "Dollar Signs". We're talking about how you can become financially independent. Imagine, living life without ever worrying about money again. It may sound impossible, but our experts, financial adviser Ric Edelman and CNN financial correspondent Ali Velshi say we can all do it. We have a caller, Jason in Chicago who is on the line. Go ahead, please.
CALLER: Yes. How are you?
KOPPEL: Very well, thank you.
CALLER: I wanted to ask, in terms of -- a follow-up point on the diversification that we spoke about, I'm 25. I'm a long-term investor. I've read in a number of places that long-term small cap stocks and value stocks, particularly, do better than large cap. And now, in terms of diversification for long-term investors, what is recommended in terms of -- I've read, you know, percentages like 40 to 50 percent large cap, maybe 10 percent international, and you know when you're talking about kind of where we want to divvy up, you know, our money, long-term, what would be suggested? I've read things, and I'm curious to hear what you think about that.
EDELMAN: That's a good question, Jason. The statistics you're referring to are largely erroneous. It's a misconception. One of the many myths on Wall Street is the fact that growth stocks make more money than value stocks, that small caps make more money than large caps. Not true. If you look at very long period of times and I mean, 20, 30, 40-year periods, you discover that they earn pretty much the same amount. There's only about a 1 percent differential in total return on average long-term basis.
What varies is when they make their money. In any given marketplace, either large cap or small cap is outperforming the other. So there's a big dispersion between how they perform but over long periods, they basically perform pretty much the same. And Therefore our message is, to our clients, you should own both all the time. Rather than trying to guess whether this is the time for large cap or small cap, own both. Be heavily diversified and that means owning everything all the time.
VELSHI: Ric, and Jason, over 75 years, broad investment in stocks in the United States would have given you a return of 12 percent. Over the last 20 years a broad investment of stocks in the United States would have given you axactly the same return.
Your risk tolerance is a little more constant. Your balance of stocks in your portfolio can be a little more active. You can move in and out of sectors on an annual basis or every couple of years. That kind of mix can adjust. There will be times when certain industries do better in certain sectors do better. That's got to be -- you've got to be pretty knowledgeable about that. You've got to read up on that some people use an advise tor make decisions for them.
But in the end, if you balance it out well, you should be able to beat the market average over the long term, which is 10 to 12 percent.
KOPPEL: Gentlemen, in our remaining minute, I want to squeeze in another email. This one from Chad in Virginia, "Renting seems like throwing money into someone elses pocket", he writes, "You have nothing else to show for it and no tax break. How long should one rent before buying a house. Should they wait until they're completely out of debt?"
VELSHI: In New York City, you should never stop renting. It's too expensive to buy.
EDELMAN: And I would agree. I would say, you know, you shouldn't wait till you get out of debt. But on the other hand, a lot of very successful investors never own their homes. It's a myth to think that you're throwing money away simply because you're renting. If that's the case, how do you argue that you own a television? Try to sell it for what you paid for it. So very clearly, buying is not always the right financial thing to do. Don't assume you're throwing money away by renting. Don't buy until you're ready to own that home for seven to ten years or more.
VELSHI: And once again, there are calculaters on Web sites that can help you make the difference between renting and buying. And Ric's right, sometimes you'd be surprised at the lack of difference between the two options.
KOPPEL: Well, with mortgage rates at 40-year lows, this is, perhaps the time if people think they can handle it. Thank you both. Financial adviser Ric Edelman and CNN financial correspondent Ali Velshi, thank you both very much.
VELSHI: Pleasure.
KOPPEL: Here is what's coming up on CNN. "PEOPLE IN THE NEWS" is next with a profile of Scott and Laci Peterson. Also on the program, John Walsh of America's most wanted.
Then at 6:00 "CNN SATURDAY" is live from Waco, Texas, where police may have found the body of missing Baylor basketball player Patrick Dennehy.
And at 7:00, "THE CAPITAL GANG" weighs in on the 9/11 report and why some families are so upset with it.
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