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Your Money

Prices Are on the Rise; Will Moves by the Fed Help the Economy?; Renegotiating a Home Loan; Are Candidates Spending Enough Time Focusing on Your Wallet?

Aired March 23, 2008 - 15:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

(NEWSBREAK)
ALI VELSHI, CNN HOST: Welcome to YOUR MONEY where we look at how the news of the week and affects your wallet. I'm Ali Velshi.

CHRISTINE ROMANS, CNN HOST: I'm Christine Romans.

Coming up, today's program feeling the squeeze and the economy is issue number one with Americans. Find out if moves by the Fed, aggressive moves by the Fed this week could mean better time to risk.

VELSHI: What an optimist you are. Prices are on the rise. Why you are paying more for everything from a croissant to a slice of pizza.

ROMANS: And renegotiating a home loan, our Greg Hunter is going to tell us why it is much harder to do that than some would lead you to believe.

VELSHI: First, issue number one, it the economy. Many Americans are feeling squeezed at home everything from rising gas prices to rising food costs. Putting pressure on household budgets and now, the bigger economic picture is also showing very serious signs of a meltdown.

ROMANS: That's why the Fed was so busy this week trying to fix what many say is looking like a broken economy. Slashing interest rates, pumping money into the financial system, even helping out with the sale of a battered invest bank, Bear Stearns. The market responded with wild swings, investors, consumers, reporters, we are all trying to understand what's going on right now.

VELSHI: But we have help. Here to break down the big picture on this struggling economy and to take a look at what it means for your job and your wallet is Lakshman Achuthan, he is the managing director of the Economic Cycle Researching Institute which a group of economists who do nothing else but sort of figure out where this economy is going. You look ahead and as you have told us this week, as far as you are concerned, at this point, a recession is unavoidable.

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INST.: That's correct, a recession is unavoidable. We haven't said that for a long time. We haven't said that since early 2001, which was the last time we had a recession. We have held off despite all of this kind of negative talk for the last few years because, quite frankly, this economy had a lot of good things going for it.

What happened in the midst of all of this drama that was going on with the Fed and the markets is that our leading indicators for the nonfinancial services sector of the U.S. economy took a dive. The reason that's important and kind of pushes us into this unavoidable recession situation is because 6 out of 10 of us, all of us, we work in the nonfinancial services sector.

VELSHI: You are talking about jobs, the concern about jobs?

ACHUTHAN: Well, the fact that we are in the receptionary job loss spiral, that's underway. We have just seen the tip of that in the last couple of months. That's continuing. We have already seen sectors like construction and financial services in recession. Now, with nonfinancial services joining, that's most of us. So the recession that has been long-awaited, is now here.

ROMANS: Here is what so many people are trying to figure out. Are we at the climax of the bad news or the beginning of the bad news?

VELSHI: And how long might this last?

ACHUTHAN: And in some ways, admitting and saying it is here and it is done it has finally happened. It might be part of the healing process. Policy makers are playing catch up. That is a lot of what you saw last week.

ROMANS: But so aggressive. I mean, Lakshman in your career can you ever imagine a Fed being so aggressive trying to prop up the economy?

ACHUTHAN: That is correct. This is unique in my career. It's a great example of a stitch in time saves 9. I think we are on our 10th stitch here, I mean that is where we are at. If we would have moved earlier, we will never know but I think we wouldn't have come to this. What they are doing here is laying the stage for the recovery. The last two recessions were eight-months long each.

ROMANS: The last two recessions were eight months longs.

VELSHI: And the average over the last ...

ACHUTHAN: The last recession, we ended up losing three million jobs. We have lost jobs after the recession ended. I don't think it will be quite that bad this time. There were some structural issues going on there. We have more job losses ahead. That will make people feel more wary.

It will be particularly hard, as it often is, on lower income people, because, with all the stimulus, what's happening, a side effect which is unintended, it is pushing up in the markets food and energy prices. This hurts lower income people because they spend most of their income on eating and staying warm and driving.

VELSHI: One thing you have pointed out, we talked about the markets gyrating, markets are followed the success or failure of markets is really something that is more important to people, maybe in middle income but higher, people who are more conscious of their investments as opposed to more working people that spend more of their income. At the lower income level, what the Dow does is less relevant to you.

ACHUTHAN: Absolutely. I think for lower income, it is about food and energy prices which is a key part of their budget. They are going to take it on the chin for the time being. Middle income, I am being simplistic here, middle income people, a big interest is in the home price. That's the largest allocation of their investment and their retirement. And higher income, while they have large homes, they also have often a market portfolio that is substantial. They are certainly watching the gyrations there.

ROMANS: And as we know we've been watching the people who have adjustable rate mortgages, there are jumbo loans that are adjusting higher this year, many, many of them all across the income spectrum; people are losing wealth out of their homes. So that is something to consider as well.

ACHUTHAN: Absolutely, on the mortgage rates, you have on the adjustable rates, those things you don't want to touch, those rates are actually falling. On the fixed rates, the banks are a little low to pass on the lower rate. They are keeping those a bit higher. So hopefully as confidence comes back into the credit markets, there will be more competition on the fixed rates.

VELSHI: You always bring in that silver lining where you can. Thank you so much.

ACHUTHAN: Cycles turn, it will turn.

VELSHI: That is right.

ROMANS: And congratulations on your new baby.

ACHUTHAN: Thank you very much.

VELSHI: Lakshman Achuthan the Economic Cycle Research Inst. good to see you.

ROMANS: OK. Up next on YOUR MONEY as we have been telling you and as you have been telling us, the economy is issue number one in this election. But are the candidates spending enough time focusing on your wallet? We will tell you.

(COMMERCIAL BREAK)

ROMANS: If this economy is issue number one and the presidential candidates are taking notice.

VELSHI: Now if past history is any indication, the state of the economy is going to play a big roll come Election Day.

CNN senior political analyst Bill Schneider is in Washington with the latest in a series of polls that he has been bringing us. Hello, Bill.

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Hi, Ali.

Well, it looks like the economy is likely to swallow the agenda for 2008. When people are asked which issue will be the most important when you decide how to vote for president, 42 percent of Americans say the economy, according to the new CNN opinion research poll just taken over last weekend. The economy now leads the war in Iraq you can see it there by 2-1, 42-21.

Concern about the economy has nearly doubled since October, now the reason, nearly three-quarters of Americans think the economy is now in recession. That's up from two-thirds who felt that way last month and just under half who felt that way as you see 46 percent back in October. Most Americans believe that this recession that they see already here is likely to last at least for another year. We are finding that three-quarters of Americans say they have already cut back money on leisure activities, movies and going out to dinner and clothing purchases.

And among Americans under $50,000 a year almost two thirds say they have had to cut back spending on heat and electricity for their homes. When the economy is bad, the economy is the issue. That happened in 1992, the first year Bill Clinton got elected. It looks like it is going to happen again in 2008.

ROMANS: So Bill, what do these three candidates do about this at this point and how do they appeal to voters that they are going to be the one that has the background or the magic combination to weather or fix this economy?

SCHNEIDER: Well it is a natural Democratic issue for a couple of reasons. One is they are the out party. Voters always hold the president's party even if the president is not running for reelection, the president's party responsible for managing the economy. Bush gets very low marks for the way he is handling the economic issue. The Democrats have both come out with fairly detailed plans involving tax cuts for lower and middle income Americans to try to boost the economy.

John McCain right now is not very strongly linked to the Bush administration because he hasn't been part of that administration, but you can bet as the campaign goes on, the Democrats are going to argue to elect John McCain is to vote for a third term for George W. Bush and most voters don't want to do that.

VELSHI: You were mentioning about how people blame the administration to some degree or Congress to some degree. In this particular case, the Democratic Congress isn't getting blamed as much for the turn in the economy that we have seen?

SCHNEIDER: That's right. The Democratic Congress, for a couple reasons, one is they control Congress. We have a presidential system. So Americans identify the Federal government mostly with the president of the United States. Also, he has been in office now for more than seven years. The Democrats have been in control of Congress only a little over a year.

In our country, the president is seen as commander and chief of the economy. That is quite wrong. No one is commander and chief of the economy, not the president, not even the Federal Reserve System, even though they act as if they are sometimes. This is too large and too complicated of an economy. People have to put the blame somewhere. They usually hold the president responsible and his party if he is not running for election.

ROMANS: All right. Bill Schneider in Washington. Thank you, Bill.

SCHNEIDER: Sure.

VELSHI: Well consumers aren't the only ones feeling squeezed. Business owners are hurting too. Alan Chernoff has been following that part of the story for us and he joins us now with more on that -- Allan.

ALLAN CHERNOFF, CNN SENIOR CORRESPONDENT: Ali, Christine, how much do you think this bagel goes for?

VELSHI: Sixty cents.

ROMANS: Maybe a buck.

CHERNOFF: Try a $1.20 for this bagel. The cost of ingredients is rising rapidly. And that means that we are going to have to shell out more dough to buy anything made from dough.

(BEGIN VIDEOTAPE)

CHERNOFF (voice-over): Gold Medal brand flour seems more golden than ever.

JOE VICARI, OWNER: Yes, like I told you.

CHERNOFF: The pizza dough that Joe Vicari and his temporary apprentice need is suddenly more precious than ever. Because the flour from which it is made now costs $37 for a 50-pound bag. The price that has more than doubled in the past month.

VICARI: I cannot believe how much it goes up, the flour. That's so much money.

CHERNOFF: Vicari raised the price of a slice of pizza up to $2.50 earlier this year after the cost of cheese jumped. If flour keeps climbing, Joe says he will have to hike it again.

VICARI: Over here people who come to buy pizza are working people. It will go up to over $40 and then I have to raise.

CHERNOFF: Prices for all kinds of baked goods are going to be heading up. That's all because of the rapid rise in the cost of a bag of flour, which is the result of wheat trading near an all-time high. The price of wheat is now 2.5 times what it was just a year ago. Why? A huge demand for ethanol has farmers planting more corn for fuel when they could be growing wheat. And the dollar sinking to a record low is making U.S. wheat relatively cheap for farms.

As a result, nearly 60 percent of the wheat harvested last year is being exported, leaving wheat supplies here at the lowest level since the end of World War II. Another factor pushing prices sky ward.

FRANK KARALIS, EUROPAN BAKERY CAFE: It is killing us.

CHERNOFF: Bakery owner, Frank Karalis, plans to raise the price of every item on his menu next week.

KARALIS: Someone is going to come in here and buy it for $2.00 and tomorrow they are going to pay $2.50 for it. People are not going to like it.

(END VIDEOTAPE)

CHERNOFF: So if you are thinking of trying a low-carb diet, this might be the best time.

VELSHI: This is a tough thing. Because the convenience of buying pizza or a bagel, is a convenience and when people start to feel squeezed that is the thing that they can give up and that is what hurts these business owners because it is very hard to take all these increases in bran or cheese or milk or chicken or eggs or any of these things that pass the market ...

CHERNOFF: They are passing some of them on. As we saw, the pizzeria owner, he doesn't want to pass it on just yet but the price of flour is going to go over 40 bucks a bag, he is going to have to do it he says.

ROMANS: For the consumer, if you go in everyday and it costs you $3.50 to get your coffee and your donut and suddenly it is $4.25, you are being confronted with that every day.

CHERNOFF: At some point, you have to pull back on something, whether it is less driving or whatever. Most people, the select few, who don't have to worry too much about money.

ROMANS: Oh, the select few.

VELSHI: Allan, thank you for that. We are going to take a break. When we come back, the bumpy ride for U.S. airlines continues. What Delta's moves mean for your next trip.

And buy low, sell high. Guess what? You are probably doing neither of those. This is issue number one that we are covering so we are going to tell you about the state number one in stormy markets. You are going to want to stick around for that.

(COMMERCIAL BREAK)

VELSHI: Delta airlines is cutting its workforce, it is another sign that times are still rocky for U.S. airline industry. Delta is offering retirement and buyout packages to 30,000 employees. They are hoping this will result in 2000 employees getting off their payrolls.

As for passengers, the company plans to cut domestic capacity by 5 percent, because of record high fuel costs and the struggling U.S. economy are to blame. The company also announced they raised domestic prices by $10 round trip. So that is fewer employees, less capacity and higher prices. I don't know when this airline situation is going to get worked out.

ROMANS: A CNN research poll shows rising gasoline prices are causing financial hardship for nearly three-quarters of Americans. The medium price of gas is at a record high around $3.30 a gallon and it is higher in some parts of the country.

More than 70 percent of those polled thought it was very likely that prices at the pump were headed for the $4 mark. The bottom line many Americans are finally cutting back on driving. A trend that will only continue if prices continue to sore.

VELSHI: And Best Buy is reaching out to customers caught up in the HD DVD versus Blue-ray battle. We have discussed this before HD DVD is you know sort of loosing out to the Blue ray standard. Now Best Buy has announced it will give $50 gift certificates or gift cards to customers who purchased HD DVD players or attachments from its U.S. stores before February 23 of this year. The company expects to give away more than $10 million in gift cards through that program.

ROMANS: All right. Gold is now a red hot commodity. The price hit a record of more than $1,000 a month.

It pulled out a little bit. Out west, there is something of a gold fever. In Arizona, they are hoping to strike it rich by digging for gold. Dan Simon reports.

(BEGIN VIDEOTAPE)

DAN SIMON, CNN CORRESPONDENT (voice-over): The Arizona desert is known for cactus, blistering heat and for some, gold. An hour and a half north of Phoenix, these people are literally digging for it.

DON DUSNBERG, HUNTING FOR GOLD: Everybody thinks they are going to get rich.

SIMON: Don Dusenberg is a retired construction worker who started doing this seven years ago.

DUSENBERG: Some people play golf. They don't make any money. All they do is spend money. Here, I get some back.

SIMON: Like times of old, they still use pans but metal detectors and other modern equipment make finding the gold easier.

DUSENBERG: If everything works the way it is supposed to, that's where the gold is trapped.

SIMON: About 70 to 80 years ago, this area was worked by professional gold miners. They found the easy stuff and the place was abandoned. Now these prospectors are back trying to find any scraps that were left behind.

We need scraps. You practically need a magnifying glass to see them in their vials. But Dave Cusack says they can add up quickly at least that is the plan.

DAVE CUSACK, HUNTING FOR GOLD: I am semi retired. I thought I will get a part-time job or something that will pay well. I thought, well, maybe looking for gold would be the same as a part-time job. So far, it hasn't turned out quite that well but I am still hoping. I will start over.

SIMON: It seems to me you would have to have a lot of patience to do this.

DAN WARE: A lot of patience and love to be in the outdoors.

SIMON: Dan Ware heads up a club for local prospectors. The club secured permit to search this and other federal lands. Membership in the last couple of years has soared from 70 to more than 400. His treasure-hunting shop also brings in novices trying to get in on the action.

WARE: I keep thinking when it is going to end. But everybody just keeps thinking there is more and more out there. There is.

SIMON: One customer thought he found the nugget of a lifetime. It turned out to be just a worth less rock.

UNIDENTIFIED MALE: It looked like gold to me but it wasn't.

SIMON: Are you finding that some of your members are actually doing this to supplement their income?

WARE: Well, they have that idea. We try to explain to them, this is a hobby, if you get any gold, it's a bonus. Don't plan on making a living doing it.

SIMON: Good idea said gold experts.

NYAL NIEMUTH, AZ. DEPARTMENT OF MINES AND MINERALS: Go to the hills and see if you find anybody who has 10 pounds in his hand.

SIMON: It's rare.

NIEMUTH: It's rare.

SIMON: Maybe so but it doesn't stop the dream of someday finding the mother load.

Dan Simon, CNN, Arizona.

(END VIDEO CLIP)

ROMANS: A hobby as old as time.

VELSHI: That does seem like fun. At least you would be out there in the outdoors.

ROMANS: The fresh air, the nice sun, the rattle snakes, the bugs.

Coming up, some homeowners in trouble are trying to renegotiate their mortgages. Greg Hunter is going to join us and look at how hard that really is and we will tell you how to try to do it if you are in that undesirable situation.

VELSHI: Stay with us.

(COMMERCIAL BREAK

(NEWSBREAK)

ROMANS: OK, so something like 1,700,000.00 foreclosures filings just since July. I mean that number just keeps rising. Some people are getting tossed out of their houses or coming home from work and there is a foreclosure notice from the U.S. marshal on the front door. I mean it is getting kind of ugly out there.

VELSHI: And the home prices continue to decline. On average almost 10 percent. How does somebody who is mind in their mortgage payment still hang on to their home? Greg Hunter is here now who is looking out for you. Greg what is -- you are a consumer reporter. Tell us. This is a consumer issue. People are loosing their houses.

GREG HUNTER, CNN CORRESPONDENT: If you are in trouble with your mortgage, how hard is it to get help? How much help can you expect in permanently lowering those mortgage payments? Here is the real deal.

(BEGIN VIDEOTAPE)

HUNTER (voice-over): For two years, Yolanda Cruz has been trying to renegotiate her mortgage. Her $1500 monthly payment did not include taxes and insurance, with she claims her mortgage company promised.

YOLANDA CRUZ, HOMEOWNER: I feel like I was taken advantage of.

HUNTER: After filing mountains of paperwork with her loan servicer, Cruz finally thought she had a deal in the form of a catch up payment of $3,000 which she paid. She later received a foreclosure notice. Cruz said the company told her she sent the wrong amount.

CRUZ: I hope it doesn't come to that. This is not a house. This is our home.

HUNTER: Housing advocates say Cruz's experience is fairly common.

ERIN KEMPLE, CT. FAIRHOUSING CTR.: The problem is that the servicer doesn't have the power to renegotiate a loan.

HUNTER: Because?

KEMPLE: Because they don't actually own the loan in order to make changes to the payment plan.

HUNTER: Many mortgages are owned by a group of institutions, not by a single bank. Housing counselor, Erin Kemple says the loan servicers are beholden to those investors.

KEMPLE: If they don't have a sufficient return for what they are being paid for that they are not going to get any more business. That the investors are not going to employ them.0

HUNTER: Borrowers may be offered temporary repayment plans that made higher payments later on or extend the life of the mortgage. But getting mortgage payments lowered is much harder, even for someone like Odelle Boykin, who may have been the victim of predatory lending. Boykin says her lender promised she could refinance when her payments went up.

ODELLE BOYKIN, HOMEOWNER: They told me that they weren't doing refinances anymore.

HUNTER: In October, her payments shot up nearly $300 a month. Next month, they are said to increase again.

KARIN NIGOL, HOUSING EDUCATIONAL RESOURCE CTR.: She should not have been given this loan in the first place.

HUNTER: Why?

NIGOL: Because she can't afford it. They fudged her income on it.

HUNTER: All though Boykin says she kept making payments at the lower rate. The servicer stopped excepting them. Now she is being threatened with foreclosure. The hope of lenders and services is doing some good. It has kept more than a million borrowers from foreclosure since July.

HUNTER: Most people so far aren't getting their payment actually cut, isn't that true?

FAITH SCHWARTZ, EXEC. DIR., HOPE NOW ALLIANCE: The vast majority.

HUNTER: In fact, at least three-quarters are not getting their payments cut. Aren't a lot of people just simply going to be forced to walk away or go into foreclosure?

UNIDENTIFIED FEMALE: Yes.

(END VIDEOTAPE)

HUNTER: Contacted the loan services for both Cruz and Boykin, Cruz's server is owned by Wells Fargo Bank who says they cannot share specific customer loan information with anyone other than the customer. Then they go on to say, for the past several months, we have attempted to reach out to Mr. and Mrs. Cruz in an effort to resolve their situation but have not had success in making contact with them. ROMANS: I thought they couldn't talk about individual situations.

HUNTER: Freed by Investments who services Mrs. Boykins' loan would not address the accusation her broker misreported her income but it says a proposed modification program and will be following up with the efforts made to reach out to the borrower directly to discuss the problem.

VELSHI: First of all, for Wells Fargo, you are welcome to contact us here at CNN without divulging anything. We will put them in touch.

HUNTER: We sure will.

VELSHI: That's ridiculous.

ROMANS: Cruz is more than eager to talk to Wells Fargo.

VELSHI: I can find pretty much anybody in this country in about 4.5 minutes.

ROMANS: We have talked to people over and over again who going over their numbers, you can see somewhere along the way where something got off track. Either they never should have been in that loan or the number on the form for how much they make is absolutely inappropriate and wrong with, they say, the blessing of the bank and the mortgage broker.

VELSHI: Greg ran into somebody who didn't have that income but the broker stated that they were an employee of theirs.

HUNTER: I said, why did you do that? She said, because they told me I would get a refinancing. The people we talked to, two more years of this, hiring staff to take care of this. I asked one of them at Connecticut, a mortgage advocate. He said, how many people you have gotten a permanent adjustment. That would be none.

ROMANS: Let me ask you about help now. Because this is something that some of the housing advocates on the ground have been saying it is not doing as much good as it could because you have to be current in your payments to qualify. That leaves a lot of people out of the federal program.

HUNTERS: The numbers are not good. One in four so far have had some kind of modification. When I asked the Hope Now folks about permanent reduction in principal that was not well-received. They said, well, we haven't done it so far. She couldn't answer me.

VELSHI: Greg, thanks. It is not great news but thank you for at least letting our viewers know what's going on. Greg Hunter, our consumer's affairs reporter.

Coming up next, issue number one is the economy. Find out when we come back what mistake number one is for investors. Stay with us.

(COMMERCIAL BREAK)

ROMANS: Well, just think Monday seems like so long ago.

VELSHI: Yeah, what a day. When the market was tanking your inner voices probably if you bother to look at the stock market yelling sell. If you listen to that inner voice, you probably missed the Dow's biggest one-day point gain in 5.5 years which happened the next day.

ROMANS: Here is the frustration in trying to trade in time markets. Then on Wednesday, the markets tumbled again giving back 75 percent of the gains that were made on Tuesday, are you following? These swings are a great reminder that you cannot time the market. Doug Flynn is certified financial planner with Flynn, Zito Capital Management he is here with more.

You know sometimes we think we are, we look at a big down day and we say, OK, I have ridden these swings for two months now, I am getting out. Then, you miss a big day the next day.

DOUG FLYNN, CERTIFIED FINANCIAL PLANNER, FLYNN, ZITO CAPTIAL MANAGEMENT: That's pretty common and that is getting you away from your long term plans. If you are talking about retirement money or money you put in place to not be needed for a very long time, you want to ignore those day to day fluctuations.

VELSHI: So you shouldn't even be involved in things that are going to -- somebody asked me yesterday, how you avoid losing sleep at night. Don't be in investments that make you lose sleep at night. We talk about risk tolerance in the past, everybody has got one. You can invest in a way that generally puts you there.

FLYNN: That's right. Your short-term money should be invested very differently than your long-term money. Your short-term money should probably not have been in the market. Your long-term money, if it is, you can't worry about it, especially if you are adding. You are taking advantage of those swings. There is a sentiment that goes up and down with people. It is a natural human emotion that people feel at different times in the market.

ROMANS: I wish there was a gene for buying low and selling high. I wish I had that gene but I don't. When you look at the trajectory of decision making, you see people making mistake number one.

FLYNN: That is right and mistake number one is to completely get off your game of your long-term plan. We will here it from clients who call up and express some concern at the low point. Listen I should have never gotten in here. I am not comfortable with it. You can see this is a pretty common human emotional cycle.

When you market is down, they are feeling never and then as things get up, they are feeling, well, maybe. As the cycle goes back down, people start having regrets and buyer's remorse. None of that should enter into the equation long-term if it is your long term money. That's the trick. VELSHI: We have talked about people right at the end of that chart where people think they were wrong and they bail out almost at rock bottom sometimes.

FLYNN: Yeah. We keep track of when people call to say, I can't take it anymore. Just when you can't possibly take it anymore, is typically the time when it turns around. So, no, you don't want to make those adjustments because you are going to make a big mistake. If you sell out, you going to miss a couple of those days like we have had in the last two weeks. If you miss a couple of those days over any period of time, you will give up the majority of your return.

ROMANS: This is what it means to be fully invested in the market. If you pull out, you can look at the numbers, over a 10-year period, you pull out for the 20 best days because you got crazy and pulled out right at the bottom. You have lost a lot of money.

VELSHI: This is a 10-year period from 1997 to 2007 that just ended. We are not talking about the 20 best days of the year. We are talking about the 20 ...

ROMANS: Through thick and thin.

FLYNN: In fact, two of those days could be, in the last week. This is the point. Even though the return on the market wasn't spectacular over the last 10 years, if you were out and missed just on average two of the best days per year, your return goes from positive to negative.

ROMANS: It is human nature to catch the worst days and miss the best days if you are trying to time the market. That's why people look at charts and that is why people make careers in this. Humans, unfortunately repeat history. That's why markets continue to go up and down.

VELSHI: How many mutual funds should the average person have in their 401(k) or their IRA?

FLYNN: Probably about 10 to 12 would be OK. If you do that, you do want to do tweaking and you want to re-examine your risk level. But other than that, unless something has drastically changed in your financial situation in the last week or month where you have lost your job or something like that, unless something dramatically has changed, you should not be making changes to your long-term portfolio right now that would be a mistake.

VELSHI: For somebody watching for starters, should they just even that out, distribute it evenly?

FLYNN: You can get into where you should probably have less small capital, less value right now, less international than we have had. Generally, evening them out is better than doing all into one area. That's for sure.

ROMANS: It depends on your risk tolerance, where you are, how close you are to retirement and all that kind of stuff too. The bottom line is diversify; keep your head on straight. Don't be pulling out of the market after a big move one way or the other.

FLYNN: Because you will not know the right day to get back in. That's the trick. You could get back in when it is higher.

VELSHI: Doug good to talk to you. Thank you. And by the way CNNMONEY.com is following this, if you go to CNNMONEY.com/issue. They have a lot of ways to calculate your risk and risk tolerance. Do that. It's worth a few minutes.

Market ups and downs, beside the number one enemy of your 401(k) isn't necessarily volatility it is fees.

ROMANS: Fees, the brokerage managing your 401(k) probably doesn't charge you a penny but the mutual funds inside your retirement account have what's called an expense ratio. That's the percentage you pay for someone else to manage that fund.

VELSHI: It could be costing you as much as 1 in every $3 you expect to have in your old age says Bob Sullivan, he is the author of "Gotcha Capitalism" and he joins us now.

ROMANS: Hi Bob.

BOB SULLIVAN, AUTHOR, "GOTCHA CAPITALISM": Hi.

VELSHI: Bob, the first thing to make note of obviously when you are looking for a return on your money, the fees are, if you were in a mutual fund that's earning you a lot of money, the fees become less relevant. It is when you are making an average or below average amount of money, you could be losing it all to fees.

SULLIVAN: Fees are always relevant whether you are making money or you are loosing money. The bad news here is no matter what you are doing, no matter what that fund is doing, somebody is taking 1 to 2 percent of your money every year.

VELSHI: I don't care. If they are making 1 to 2 percent of my money if they are making the 10 to 20 percent more.

SULLIVAN: They are still taking a lot of your money.

VELSHI: It doesn't matter if they are taking 1 or 2 percent if they are making me lots of money.

SULLIVAN: I think it is rare they are going to be making 10 or 20 percent every year.

VELSHI: We have seen markets where that has happened so it isn't irrelevant.

ROMANS: I am not making 10 to 20 percent on my mutual funds.

VELSHI: People get paid for things. Talking about fees being generally bad isn't the case. To your point, Bob.

SULLIVAN: The point is if somebody is taking 1 or 2 percent of your money every year for 30 years, by the time you retire you are going to be out of about a third of your money. The track record of mutual funds like stocks in general is that folks can't pick them. The best thing to do, especially if you are confused about where your money is, is don't donate your money to some kind of Wall Street money manager when you don't know what they are doing for you.

Put it in a low cost index fund and let it sit there and you will get the maximum return back from your money instead of having it sucked out in fees and you won't have to think too much about it. That is really the best thing to do.

To the point of diversification in your 401(k), most people have between 5 and maybe 15 mutual funds in their 401(k), for the most part, the holdings within those funds are often very similar. You might think you are diversified by being in four or five mutual funds but you are not.

VELSHI: This is a good point. How do you achieve that? That's absolutely true. Somebody might think they are in a bunch of different things and you will find the same stock in a number of those funds. What sort of tools should people use to figure out that they are really investing in 10 or 12 different things?

SULLIVAN: It is really common that that happens. You can use an investing site like Yahoo finance or any of those kinds of sites. Just look up the top 10 holdings in that mutual fund. If you see the same name in those top 10 holdings. You want to make sure you really are diversified and you don't really think you are diversified.

ROMANS: OK, if I am worried about fees overall, and I want to make sure that I am keeping what I am paying somebody else to a minimum, tell me exactly what I should be doing. I know. There are some surveys that show that some 80 percent of workers don't know how much they are paying in fees. I am one of those people. A report found that 1 percent point different in fees can cut your benefits at the end by up to 20 percent.

SULLIVAN: That is right. I would actually take probably 100 percent of 401(k) investors don't know what they are paying in fees. It is almost impossible to do the calculations and get a dollar amount for what you spent last year. If you are paying more than 1 percent a year, you are probably paying too much. So what you can do if you don't know what else to do is find the index funds that are in your set of funds that you can pick from and park the money there.

Those index funds are managed by a computer instead of a person and the expenses are usually much lower. The important thing is that you know what that expense ratio is and sometimes it is pretty hard to find from your company. You want to go to one of those investing sites and look up what the expense ratio is so you know what you are losing if you are losing that much.

VELSHI: Well I will agree with you on that. It is not always worth paying it, I won't agree with that. You should no what it is and make a decision as to whether that fee is worth it to you or not. SULLIVAN: Well let's agree on this at least. I think there are very few investors out there who can intelligently decide, this particular mutual fund is going to do great for me, I am willing to invest this much in a money manager. Most people who are doing that right now have no idea that they are giving that much money to Wall Street.

VELSHI: I think you may be right about that.

SULLIVAN: Of course there are funds that are worth it, but you have to pick very carefully and most people aren't in a position to do that.

ROMANS: Bob Sullivan, "Gotcha Capitalism." How hidden fees can rip you off every day and what you can do about it. Thanks Bob.

SULLIVAN: Thank you.

ROMANS: Coming up next on YOUR MONEY why one auto exec says the future of cars in this country is a combination of electric, plug-in cars and hybrids.

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VELSHI: Now let's take a look at a couple of other headlines this week. Grocery store chain Hannaford Brothers has announced a credit card data breach. The stores 4.2 million credit card numbers have been exposed and could be vulnerable to fraud. Hannaford stores in New England and New York and Sweepbay stores in Florida were most affected by the intrusion. So far Hannaford Brothers say, fewer than 2000 cases of fraud has been reported.

VELSHI: Two top auto executives say their companies are prepared for an economic downturn. That is nice. Speaking of separate events this week Ford CEO Alan Mulally and Chrysler chairman and CEO Bob Nardelli both said the restructuring and other cost-cutting moves will help the companies make it through a slowdown.

None of the three U.S. automakers is expected to make a profit in 2008.

ROMANS: The International Auto Show kicked of this week in New York.

VELSHI: I caught up with Jim Press, he is the second in command over at Chrysler, and he has about 30 years over at Toyota in the United States. I asked him how high fuel costs have the auto industry racing for some of the worse sales in a decade.

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JIM PRESS: There are a lot of challenges. Gas is one of them. But the fact of the matter is the auto industry is slowing down for some time. Largest manufacturing sector in the number of jobs, it can and it will and it is coming back.

VELSHI (voice-over): What are the things that can be done differently?

PRESS: Focusing on customers first. Building vehicles for people that earn a paycheck and have to buy a car. That's who we work for now. We don't work for the manufacturer. Now that we are a private company, our owners, have been fantastic. We don't have Wall Street looking over our shoulder. We can work for the customers and work for society.

VELSHI: What is the answer to fuel economy is it more ethanol, is it something else, is it hybrids, and is it hydrogen, what is it?

PRESS: The real answer that we see right now given technology is hybrids and plug-in hybrids and use of electricity, because the electric energy and the gas petro energy together are really efficient when they use each other.

VELSHI: Where do you see America in 10 years from a driving perspective?

PRESS: They will be driving more. Miles driving continues to increase. That's a priority people have, they have to go to work, and they have to get to the doctor's office. We will have vehicles that will be much more fuel efficient with hybrids. We will be seeing 100 miles per gallon vehicle in the long distant future. Everything will be a hybrid.

(END VIDEOTAPE)

ROMANS: We will be right back with more YOUR MONEY but first this week's "Right on Your Money."

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ROMANS (voice-over): Alan Castro enjoys his vegetable garden. It's a passion since early retirement.

ALAN CASTRO, RETIRED IN HIS 40s: Only have to cook them.

ROMANS: While in college, Castro and a friend cooked up a business reselling textbooks.

CASTRO: We were taking the books away from the landfills and reselling them. We started growing a whole industry from that.

ROMANS: The company grew and last year a competitor bought it, allowing Castro to retire at age 44. He says, the business tapped into a nearby as a one-stop shop for educators.

CASTRO: We are getting them to think like a college kid could buy a used book first.

ROMANS: He also gave back, traveling to the Philippines and Kenya, donating books to villagers and helping fund a school. Giving back is one of the keys to his success. Castro says, be practical and down to earth. CASTRO: Have a good accountant. Know where you stand on paper. Don't fool yourself. Always try to do things that humble yourself and take you down a peg.

ROMANS: Castro says, if you are trying to build wealth, don't put all your eggs in one basket.

CASTRO: It's all a risk.

ROMANS: For Castro, his next chapter is still being written. But he is willing to take risk to keep growing.

CASTRO: When I am gardening is when my next idea will come, when I am outside.

(END VIDEOTAPE)

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ROMANS: OK, the jobless claims are rising, the Fed is working like we've never seen before trying to sort of blunt a recession and credit crises.

VELSHI: Markets we are not even going to talk about.

ROMANS: Yes, up, down, up, down. You heard what we sort of figured out here. That you can't time the markets. You are not smart enough to; I'm not smart enough to. Stay in, be diversified, and think for the long term. Things have been really, really nuts. But it is all very important stuff for your money and it is issue number one for voters.

VELSHI: We are going to stay on it so thank you for joining us for this edition on YOUR MONEY.

ROMANS: We will see you back here next week.

VELSHI: Saturday at 1:00 and Sunday at 3:00. See you then.

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