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CNN LIVE EVENT/SPECIAL

Gimme My Money Back

Aired January 3, 2009 - 13:00   ET

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


(THE ACTUAL BROADCAST OF THIS HOUR WAS PARTIALLY PREEMPTED BY LIVE COVERAGE OF THE ISRAELI INCURSION INTO GAZA. THAT TRANSCRIPT WAS SENT AS A SEPARATE DOCUMENT. THIS TRANSCRIPT IS THE ENTIRE SHOW OF "GIMME MY MONEY BACK.")
ALI VELSHI, CNN HOST: Chances are you've lost money this year. It's been a rough year, but you can fight back. You want answers. You want to know how to make up what you've lost. Well, this is the hour for you. Everything you need to know about how to manage your money and get back on the road to financial recovery, and fast. It's time for real information. It's time for sound advice. It's time to "Gimme My Money Back.

Hello, everyone. I'm Ali Velshi. Over the last several months you've called and e-mailed me asking what happened to my money? Well the truth s there's very little you could have done to not lose money in these markets. Virtually no one escaped 2008 unscathed. Well, it doesn't have to stay that way. We're calling this hour "Gimme My Money Back." That's the name of a book I've written for you. This hour will help you make up lost ground no matter where your money is invested. Before you start to build or rebuild your wealth, you need to understand how we got here.

Well in just the past year a robust U.S. economy has fallen to its knees and it's taken other world economies with it. Millions of jobs have been lost and more will be lost in the coming months. The housing market is in shambles. Wall Street institutions run by the smartest guys in the world have collapsed. The U.S. financial system continues to bleed money, and if that's not bad enough, the credit markets froze up.

But beyond your own credit, why do the credit markets matter to you? Let's take a look at this. Banks help our economy grow by providing loans. They make loans to you, but those same banks also loan money to the retailers you shop at, allowing them to pay the manufacturers that fill their stores with goods and the banks loan money to the manufacturers, so those manufacturers can buy material and pay their workers.

Well, when the credit freeze set in in late 2008, much of this money flow came to a halt. The cycle was thrown off. Markets plunged and jobs at places like those retailers or manufacturers and so many other companies were lost.

Well the job now is to move forward, to realize that this is the best time to build your wealth and to find out about the opportunities that you still have to prosper, and in order to get you started with that we have assembled some of the best minds to help you straighten out your financial issues and figure out where to go from here.

I'm joined by Robert Reich, he is the former labor secretary under the Clinton administration, he's also served as an economic adviser to President-Elect Obama. Reich is now a professor at UC Berkeley and the author of "Supercapitalism."

Also joining us here in the studio, Liz Ann Sonders, chief investment strategist for Charles Schwab and Chrystia Freeland, the U.S. managing editor of "The Financial Times." Thank you to all of you for joining us.

Professor Reich I'll start with you. This credit crisis really pushed us over the edge but we've learned that we were in a recession since December of 2007. Are the two connected? Would we still be in a recession if not for this credit crisis?

ROBERT REICH, FORMER SECRETARY OF LABOR: The credit crisis certainly accentuated the recession, Ali, but actually the recession was on its way and some would argue for many years because consumers obviously have to buy if businesses are going to sell and if people are going to have jobs and consumers were running out of money. They were deep in debt. That housing bubble allowed consumers to borrow against their homes, refinance and home equity loans actually kept the economy going, but the bubble was bound to burst. Houses could not continue to raise and rise in value so fast to provide consumers all that money, and when the bubble burst, consumers discovered they just were at the end of their ropes. No more money, no more purchasing.

VELSHI: All right. That sounds like an economic cycle. Chrystia, was it just the way it was going to be, because markets had risen and housing prices had risen or was it some sort of a lack of regulation? Was it greed? Was it something else at play?

CHRYSTIA FREELAND, "THE FINANCIAL TIMES": Well, one of the things we've seem to have learned which is humbling and will be really painful for a lot of people, even though we're all smart and Internet has been invented we haven't defined the business cycle. Having said that I think it's also hard to deny the lack of regulation, I would say particularly mortgage lending standards and capital requirements on banks, absolutely fueled this crisis. It was sort of, this isn't just a bubble that burst. It's a superbubble and that's why the impact is going to be so deep and so painful and so global.

VELSHI: Liz Ann, all through the year we've been getting phone calls and e-mails from people. And the insinuation which led to the title of the book, someone took my money. I did what they said I should do, I diversified my investments properly and I got the legs cut out from under me. Did someone steal the money?

LIZ ANN SONDERS, CHARLES SCHWAB: Oh, I think that's probably pushing it a little bit. Look, bear markets are not always consistent in terms of either what their drivers are or what the magnitude of the decline is. This is unquestionably a severe one, down over 50 percent. But we had that close to that even in the last bear market and in the case of the NASDAQ, significantly worse declines. So investors lose money in bear markets. You made a good point it's the correlation thing I think that's different.

And maybe one of the downsides and I don't think there are many of globalization, we saw this massive increase in correlation, as you see about introduced the show, with the exception U.S. treasuries nothing was unscathed.

VELSHI: And what you mean by that is you typically divide up your assets a certain way and some things go up and some go down in the same environment. We're going to talk about that later in the show. That didn't work for you. Robert Reich, as bad as this is, does it get worse, and can our viewers do something to protect themselves from the outcomes of a recession like this?

REICH: Will it get worse? That's the billion, maybe trillion-dollar question, Ali. If we have hit bottom, it is the wise and very, very smart investment strategy to get back into the markets, because there's no place to go but up, but if we have not hit bottom and a lot of strategists, a lot of economists think that maybe we have not yet hit bottom, the wisest thing is to continue for an individual, to go to as much safety as possible. Not under the mattress, but maybe CDs or treasury bills. You see, what is rational for the individual may be irrational for the society as a whole. It's rational for the individual to hold back but in society we want people to spend money and to invest.

VELSHI: All right. Chrystia, what role has our interconnectedness with the rest of the world played in this? We know that this recession has now spread to other parts of the world. Are we too interconnected in terms of credit and markets or is that just a consequence of the way the world is developed?

FREELAND: Well I think whether you judge us to be too interconnected or not depends on where in the world you find yourself. The interesting thing about this crisis in contrast with, say, the Asian crisis or the Mexican peso crisis is that this time it's a crisis that was made in America and exported to the rest of the world, rather than coming from the emerging markets and shaking everybody else.

Having said that, you know, I think it would be a real shame if we had grave doubts about globalization as a result of this crisis. I think still the evidence is the globalization of the world economy has made a lot of people much more prosperous in America but also a billion people have been lifted out of extreme poverty in India and China. That can't be a bad thing.

VELSHI: Bob Reich was making the comment, what's good for the individual may not be good for the economy because the individual needs to sort of hold on o-to-their money and not overextend themselves in terms of credit. Will we see credit flow the way we've seen it flow the last 15 years?

SONDERS: I think if you're looking for credit to know as freely in the last several years, I would say no. I think we will at some point get back to some sort of historical norm but you have to go beyond the last decade where we saw it flow freely. Banks are in the business to lend. We know we need it. It's the backbone of the economy. The problem is that confidence thing is esoteric and there isn't necessarily a single catalyst that is going to trigger its return. That's what we need and I think it will be a process over time. I don't think it's going to be a moment in time.

VELSHI: And that confidence has to be rebuilt before people are going to be able to say I'm prepared to take that money out. Bob Reich, do you think that comes back. Do you think Americans will fundamentally believe that this economy is strong, that we're part of a strong growing world economy and we should get back into the markets.

REICH: Yes, Ali it, will happen eventually. Nobody knows exactly when it starts. Economies are not based on mathematical models. They're really closer to human psychology. When people are very hopeful, they invest and buy. They get depressed, hence the word depression or recession they hold back from the market.

There are some animal spirits here at loose, as some economists say. It will turn around. The big question is it going to turn around in 2009 or do we have to wait for 2010? I hope it doesn't -- the wait is not too long.

VELSHI: Robert Reich, thanks very much. We'll wrap this up with you in little while. Liz Ann Sonders and Chrystia Freeland will also both be right back with us.

This show is all about managing your money and growing it. Should you invest in the stock market if you're carrying debt? That's a big question for a lot of us. Personal finance guru Jean Chatsky is here with her answer to that question and with some free advice you can start using right away.

(COMMERCIAL BREAK)

VELSHI: Well, it's your money so you should have as much control of it as you can. So let's start now with how to straighten out your money situation. Jean Chatzky is a personal finance expert and the best selling author of many books including "Make Money Not Excuses". Jean, thank you for being with us.

JEAN CHATZKY, "MAKE MONEY, NOT EXCUSES": Sure, thanks for having me.

VELSHI: This book and this show is about investing. But you can't be an investor if you don't have money to start with.

CHATZKY: That's right.

VELSHI: And frankly when ye talk about the returns you can get from investing they are offset if you're paying double digits on your debt. So let's start by discussing where do you start to see yourself as investor if you're carrying debt.

CHATZKY: You shouldn't be investing for the long-term with the exception of your 401(k), which we'll get to in a second if you haven't gotten out of credit card debt and if you don't have a six- month emergency cushion that could bail you out in a jam. Those have to be priorities with the credit card debt. Because the return that you get from paying off that credit card debt is equivalent to the interest rate and so if you're paying off debt at 29 percent ...

VELSHI: If you're getting a market return like that ...

CHATZKY: And it's guaranteed so it's a good investment so to speak.

VELSHI: If you have a lot of debt, that includes a car loan and student loan and car loan, what do you want to not have and what do you want to be okay with?

CHATZKY: I think there's a real clear delineation between good debt and bad debt. And to me good debt has always been the debt that gets you someplace, the debt that puts a roof over your head, it's the debt that buys the car that gets you back and forth to work, not the third or the fourth car, mind you, but that first one. It's the debt that pays for your education, and thankfully, you can usually tell which debts these are, because the interest rates on them tend to be lower than the higher ones that you might be paying on your credit card.

VELSHI: Credit card debt -- the bad debt is the one that gets you no where other than gets you whatever you buy.

CHATZKY: Exactly. For the record, I don't hate credit cards. I think that they are fine tools when used wisely. I put everything on my credit cards, get frequent flyer miles, pay them off every single month and don't pay a dime in interest. And that's the way you should be doing it.

VELSHI: Well, Doug Flynn who is going to be on the show later on, sometimes people pay off their credit cards but have a threshold for building them back. So it's really more about your own discipline than the credit card. The credit card is not a problem. It's your ability to handle that.

CHATZKY: And if you can't handle the credit card and we know from research that people spend more on credit cards than they do on debit cards and more on debit cards than they do if they're spending cash. If you know about yourself that you can't handle it, use a different means of payment.

VELSHI: Your quick advice for trying to get that credit card debt down. You're saying double your payment on it?

CHATZKY: Absolutely. If you're only paying the minimums, double your payment, but from a strategic point of view, lay all those credit cards out on the table, figure out which one has the highest rate of interest, make phone calls to all of those credit card companies to see if you can bring the interest rates down and then put all of your additional muscle to paying off of the highest rate credit card, while pay the minimums on the rest, snowball it down, so you get rid of the big one and move to the next one and finally you're out of debt.

VELSHI: So basically you're saying while you're paying high interest don't think of yourself as an investor but you made the exception for the 401(k).

CHATZKY: Because of the company match. We talked about the return that you get from putting money toward a 29 percent credit card. If somebody's handing you 50 cents for every dollar that you put in to a 401(k), that's a better return. You got to go where the money is and in many cases although unfortunately we have seen a bit of retrenching in 401(k) plans where companies are either reducing or eliminating their matching dollars if you're still getting that match you got to go for it.

VELSHI: All right. Without the match is there something to be said just for the discipline, even if you've got other debt of establishing a savings program and establishing an investment program so that you're in the habit of doing it, you can increase the amount later? What do you think about that?

CHATZKY: I think it's an absolutely sound idea but start with the emergency cushion first. The problem with 401(k) and IRA dollars is that they are not accessible an emergency and you need that cushion taken needs to be larger than we told people years ago in this environment. You need six months. You need nine months if possible. So use automatic transfers, best way to save for any purpose to move money into a savings account first, once you've got that established, then make sure you're in your IRA through automatic transfers as well.

VELSHI: You have found in the last year or so that people have changed in their response to that? Because a lot of people say how could I possibly have six months of expenses saved away in this environment? Now you really need that because we've seen millions of jobs lost. You could be one of them.

CHATZKY: And if you still have a job, and even if you're not fearing that that job could potentially be lost, you have to be thinking strategically. It's the good offense, and that means putting as much money away as you possibly can.

VELSHI: Tell me briefly about an IRA. A lot of people think about their 401(k) or 403(b) because it's through work. What about the IRA? What should you be thinking about there?

CHATZKY: Very same deal. An IRA allows to you put away $5,000, $6,000 if you're 50 or over, and this is money that you can invest any way you want for retirement. It, unlike a 401(k), you can't borrow money from that IRA so the liquidity is a little bit more of an issue, but it's a good, basic retirement account for many, many people and if you qualify for a Roth IRA, particularly if you're youngish, I encourage you to go that direction.

VELSHI: Like you said the IRA offers you, your 401(k) is often limited by what your company offers, might be 10 or 20 choices. The IRA is anything that's out there in the investment world, any regulated investment.

CHATZKY: That's right, and just look to keep the fees down. There tend to be fees on IRA accounts. They're not onerous. Make sure you're not paying an absurd amount to get into this sort of program.

VELSHI: All right. Jean thanks for coming to help out our viewers.

CHATZKY: Sure.

VELSHI: We wish you luck. And I know you have a new book coming out. If you follow Jean's advice you can tighten your own belt and do well with very little. This is going to be an important year for to you think that way. Here is the sum of Jean's points. Remember there's good debt and there's bad debt. Good debts are those that get you someplace and give you something back. Bad debts are those that offer you no return. Pay your mortgage and car loan and try and double the minimum on your credit card bills. And start to save now even if it's just a few bucks a month.

Use the automated deduction tool on your checking account and start contributing to your 401(k) right now, if you haven't already done so. We're calling this hour "Gimme My Money Back." That's also the name of this book I've written in response to your calls and e-mails about investing. But this is more than just a book. It's a tool to help you better understand your money and the potential that you have to grow it.

It's been a rough year for so many of you and for your finances and this book gives you the opportunity to take control of your cash. Go to amazon.com or barnesandnoble.com or your local bookseller.

"Gimme My Money Back" is a book I hope you'll use for years to come.

Coming up on "Gimme My Money Back," we're going to get very specific about your investing options. Stocks versus bonds. U.S. versus international. Financial success is in the details and this is all to help you get your money back from the financial crisis.

(COMMERCIAL BREAK)

VELSHI: Stocks versus bonds, do you keep your money in cash or buy commodities to capitalize on future world growth? Speaking of the world, are international investments better than U.S. investments? This is all less complicated than it may sound. We have got the team that's best at breaking it down by.

I'm joined by Stephen Leeb, an economist, author and the president Leeb Capital Management. Jim Ellis is the assistant managing editor of "Business Week" and my good friend and co-host of "YOUR $$$," Christine Romans is here as well. Christine, let's start with you. You and I have had this discussion many times in 2008. Why should anybody who has been burned or watched everybody else get burned in this stock market think about getting back into stocks or getting in to stocks?

CHRISTINE ROMANS, CNN CORRESPONDENT: If you wait until everything looks clear and the all clear signal has rung you have missed the opportunity to get back into the market and start to make some money. I mean, the people who are going to build wealth and build their portfolio and grow their money are already trying to find ways they can profit from these declines. We know the studies show Ali and you know it, too, when you are out of the market even for a short period of time, you miss the rebound. You miss it. We can't time the bottom of the market and so that's why exposure to the stock market, to the commodities markets, all of these different kinds of markets is critical with the right kind of allocation for your risk tolerance, of course.

VELSHI: And we're going to be able to get into that. We're going to take our viewers along, we're going to take you along and show you how to determine your risk tolerance and how to allocate your assets. Steven, you and I have had had this conversation in the past about psychology. There are some people who have got out of the market maybe by dumb luck early in 2008 and didn't have to face the turmoil in the market. Even though they saved themselves, which is great, why shouldn't others think we should get out while it settles?

STEPHEN LEEB, LEEB CAPITAL MANAGEMENT: I guess it's the same reason you don't go to Atlantic City. You are lucky. Someone's going to win the lottery but you don't win your life playing the lottery. What's going on in the past will probably more or less go on in the future, stocks which have been an uptrend or 70, 80, 100 years will probably remain in an uptrend and that the stock market will be a pretty good place to be, and you just look at people like Warren Buffett. He doesn't trade in and out of the market. I mean, he recently bought ConocoPhilips at $80, and it went way down after he bought it. I'm sure he's not thinking I hope I can get back my $80. He's saying when will I get $150 pour it. It's that kind of thinking that has been very, very successful.

VELSHI: Makes the rich get a little richer.

LEEB: Yes.

VELSHI: Jim, you celebrated a quarter of a century at "Business Week" which means you've seen other recessions come and go. And you know when they come people run for the hills, they get very, very frightened. Christine and I talked about this. We both worked at various stock markets or at commodities markets. We call it the market, but it's many, many different things, and our viewers need to be thinking of many different things.

JIM ELLIS, "BUSINESS WEEK": There's a number of individual markets out there, whether it's stocks, it's bonds, it's sort of international equities but I think right now, probably the place where people want to think about is stocks, simply because they have very, very beaten down and also, they're something that most people actually understand. There's a lot of exotic instruments out there but for the average person we want to stay away from that. I think we've actually seen this year a lot of people got burned by investing in things they didn't know anything about.

Christine happens to know a lot about one other large category we talk about, bonds. People make the assumption that different things -- we're going to talk a little to Jean Sihadi (ph) about this later. Different things work differently in the same environment. So should people be thinking about bonds or commodities or non U.S. investments?

ROMANS: If it's right for them. It's going to be different for everybody. That's why this crisis is such a great opportunity for people to sit down and figure out what is right for you. The other thing that I think is so important for people is that they don't talk about getting back what they lost. Because it might take a very, very long time.

VELSHI: The market doesn't care what you lost.

ROMANS: The market doesn't care, it doesn't know and you just need to look -- this is where we are today. It hurt. Now how am I going to capitalize on today and make sure that I have the right basis going forward? You might not get what you lost near-term but you want to figure out how much you can get back as much of it as you can.

LEEB: Just following up on Christine's point, a mistake I've seen so many people make, Ali, through the years, they have a stock, it goes down and they want to hold that particular stock to get back even.

VELSHI: Right. After the tech bubble burst, we saw that people held on to their Lucent stock.

LEEB: It might make sense to take a loss even if it's a big loss in that stock and get into a better stock because the market doesn't know that your stock is down, just following up on what Christine said.

Sometimes a bad market can be an excuse for housecleaning, looking at different kinds of stock that you think are going to be the beneficiaries of what's happening now in the world.

VELSHI: Jim, let's talk about the rest of the world. It's a big world out there. It's all hurting right now. This recession is worldwide. But should we be thinking about an allocation of our investments that does take advantage of growth in other parts of the world and do you do that buying commodities or do you do that by actually investing in mutual funds in other parts of the world?

ELLIS: I actually think the smarter way to do it investing in mutual funds in other parts of the world and investing in large cap U.S. stocks that have big exposures overseas.

VELSHI: And that's by the way more than half of them.

ELLIS: That's more than half of them and big names like Coca-Cola for example. It gets 80 percent of its earnings from outside the U.S., things like that, that are going to basically, you know, grow as the middle class in the developing world continues to grow. That's a good way to play China, especially when you don't have a lot of visibility into individual Chinese stocks, you have got to actually do it through a manager, through a fund or through investing in a U.S. consumer products company that's enjoying growth in the developing world.

VELSHI: And one of the things we're going to talk about later is that there are many ways to invest broadly in the market with index funds or ETS but there are some instances you might want an actual fund manager because it's in an area you don't know enough about. What a pleasure to have you all here. Thank you so much.

Stephen Leeb, Jim Ellis and of course my TV partner, Christine Romans.

ROMANS: My pleasure.

VELSHI: We will see you all again, thank you.

Well, we know a bit about who's out there, what's out there in the world of investment, but that's kind of like having all the ingredients for a cake, and not knowing how to put them together. There are some basic rules of investment that you need to think about, although following them would not have saved you from this market in the past year or from this recession, but those rules can help you build or rebuild your nest egg, if you're starting right now.

Jeanne Sahadi is here to break it down for us. She is a senior writer with cnnmoney.com and she has been writing about personal finance issues since I had a full head of hair.

JEANNE SAHADI, CNNMONEY.COM: I don't remember a full head of hair. I wish I did.

VELSHI: Here's the thing, Jean. People are very, very concerned about how they do this and we had a bit of an intro of what's out there in the world but you have to put it together for us and part of putting it together actually means putting it in different places, diversification.

SAHADI: Well, no matter where you are in your investment cycle, whether you're just starting out or you're nearing retirement, you do want to be diversified and this last fall really showed us why. Not all principles of diversification worked this fall. For instance asset classes tended to perform the same. Stocks and bonds were down.

VELSHI: Right, we think of those as opposites, we think of those as doing different things in the same economic climate. This time that didn't pan out.

SAHADI: Right, you want asset classes that perform differently. That didn't work out this time.

What did work out is diversification by sector. Best example, if you were heavily concentrated in financials, either in a financial sectors fund or in individual financial companies, you got hammered, hammered beyond belief. You still got hammered even if you were well diversified but much less.

VELSHI: You got hammered less, and less if you were young and followed an aggressive asset allocation you also got hurt by it. You got probably hurt more but you've got more time to make it up.

SAHADI: Everybody says people expect the market to be oversold whether it is now or will be when it hits bottom and nobody can predict when. It really is going to be a good time to buy into stocks for the long-term. But what everybody says and Jack Vogel at Vanguard is a big proponent of this. You're never smart enough to get in or out so stay the course. Especially over the long term.

VELSHI: Diversification is the idea that you can take all of your stuff and divide it. Let's say there are 10 asset classes and you put 10 percent into each. That may not make the most sense to you. So you need to allocate.

SAHADI: You want to allocate according to time horizon and your risk tolerance.

VELSHI: Right.

SAHADI: The reason you want to do it according to your risk tolerance is if you don't and too risky of a portfolio for what you can tolerate, you're going to get out at all the wrong times, you're not going to be able to stomach it.

VELSHI: Easy to find out your risk tolerance. I've got a quiz in the book but you can go on to our Web site and answer a few questions. It gives you a sense of how much risk you are prepared to take.

SAHADI: And we do have a very simple starter calculator at cnnmoney.com, Fix Your Mix, which is two seconds, get in there, get out, and it gives you at least a ballpark of where you stand.

VELSHI: So if you really - you just don't want to go too far down the road, better than keeping your money nowhere, better than keeping it in one place and better than just randomly allocating it across 10 different sectors, at least you can do this, you can go in, find your risk tolerance and get those assets allocated in a way that makes sense for you.

SAHADI: That's right and thinking about your risk tolerance, too, you want to remember how inflation will affect your holdings. The lower the risk that you're willing to assume in your portfolio, the more in your mind you have to say I have to save more to compensate.

VELSHI: Because risk and returns sort of go together.

SAHADI: Risk and return go together, the lower your risk, the lower your return. But the lower your risk the lower your return, the more likely inflation is to outpace your investments.

VELSHI: Which gets to our last point. You know you have to diversify, you have to allocate your assets and optimize. That's based on you who are, what you're able to tolerate. You have more or less in your 401(k) or IRA to try and get you the best return for the risk that you are prepared to tolerate?

SAHADI: That's -- It's my understanding you can do that well with a planner and if you're working with a smart planner, that person should be able to -- there's software out there that helps you optimize your risk return but it's based on theory, it's based on statistics, it's based on bell curves. I don't think it's worked in the last ...

VELSHI: You can't look at a couple of mutual funds and decide they're going to be optimal for you.

SAHADI: Right, a planner I talked to, Murray Adam (ph), she says she will always override some of those recommendations because she knows the person she's working with and she also knows how the world works. Life can really deal you a tough hand and optimizer doesn't take that into account but it can get you, again, into the ballpark of where you need to be.

VELSHI: All right. Jeanne, thanks very much. Make sure to check out Jean Sahadi's work on cnnmoney.com and that asset allocation calculator that she talked about. Here is the sum of it. Stocks allow to you to be part of the company by owning a share of it. Bonds provide safe returns if you hold onto them. CDs and money market deposit and money market mutual fund accounts are safe as well. Diversifying your investments by spreading your money around will give you more predictable and better returns over time.

And it's not just about dividing your money up between types of investments. It's about dividing them up the right way according to your risk tolerance. Allocate your assets wisely and you can get the best return on your money.

OK, grab something to write on if you haven't been taking notes already. We're about to tackle one of the biggest and perhaps most intimidating challenges of investing. And when you're done with this you're going to be able to call yourself an investor.

(COMMERCIAL BREAK)

VELSHI: Much of what we're talking about this hour is understanding your money and knowing how to invest and grow. The word diversify, the word scares some folks off. You know what it means but pulling it off without messing up seems like a tall order for someone who doesn't spend their day thinking about investments. Well, that confusion ends now. We're going to clear up exactly what you can buy to get the right mix of stuff in your portfolio. We're going to show you how to spread it around the right way. Ryan Mack is the president of Optimum Capital Management. Ryan, thank you for being with us.

We've discussed diversification and asset allocation. If someone hopes up their 401(k) or IRA or adjust it after the show they're going to get hit by terminology, some types of funds.

RYAN MACK, OPTIMUM CAPITAL MANAGEMENT: Right.

VELSHI: I want to get to that first. Now the issue is, some people think it's a matter of choosing mutual funds or stocks. I think for most of our viewers, stocks are not the best idea. Mutual funds allow you access to the stock market without some of the same risk.

MACK: Exactly. The thing about individual stocks, individual stocks are great and many of the guests before us said we should purchase individual stocks but many individuals don't have enough money to get proper asset allocation and diversification, so in order to get access to that, and lower your cost you can purchase mutual funds.

VELSHI: Which are basically just a collection of stocks all in one fund.

MACK: You can get 20, sometimes 30, even more individual stocks being managed by a professional portfolio manager that has adequate or great experience at managing funds o so that alleviates your worry and stress watching the stocks yourself. VELSHI: All right. So generally the best way to choose a mutual fund, let's just talk about actively managed mutual funds, these are investment firms that have professionals that buy stocks and sell stocks in a portfolio. What is a best way to choose which ones to buy?

VELSHI: Well, as far as mutual funds are concerned, there are tons and millions of different types of mutual funds. Make sure you select the best one. One selection method, make sure you look at the portfolio manager itself, five to 10 years experience minimum. We have to make sure that the portfolio manager has been there to establish enough return over the time. So three to five-star ratings on Morningstar, make sure 1.5 percent expense ratio or less.

VELSHI: That expense ration is going to eat into your return.

MACK: Actually in many exchange rate funds have exchange ratios at low as .08 percent.

VELSHI: Let's get to that, let's start with index funds first of all, there are things called index funds which basically just track indexes.

MACK: Right.

VELSHI: So when we talk about the Dow or the S&P 500 you can buy a fund that mimics those and thousands of others.

MACK: Exactly. I ask individuals all the time if you buy one stock it's not a diversified account but if you buy two or more is more diversified. But what's the most diversified you can actually get? That's actually buying the entire market. You can do that, you can buy the SPDRs, you can buy the Diamonds and the Dow Jones.

VELSHI: SPDRs are S&P 500, Diamonds are Dow Jones.

MACK: And the QQQs, which follows the NASDAQ 100 so these are funds that actually follow the entire markets. So you can get access to the entire market with one stock or one fund with very low expense ratio.

VELSHI: And these ones that you just mentioned, Diamonds, the SPDRs, the QQQs, they're a type of index fund, they're called exchange traded funds. You buy them as a stock.

MACK: You can buy them all day. Obviously you have individual fees for purchasing and selling them but you do get maximum diversification.

VELSHI: And they do not much in the way of fees.

MACK: Exactly. So for instance the S&P 500, the SPDRs 0.08, is one of the oldest and most prominent exchange rated funds out there, 0.08 percent.

VELSHI: Let's talk about bond funds.

MACK: Yes.

VELSHI: Why buy a bond fund as opposed to a bond?

MACK: Well, a lot of individuals again don't have the capital to pay $5,000 to $10,000, sometimes that maybe purchase a mutual fund or a corporate bond fund, they have access to adequate diversification. You can buy a bond fund and get access to for a good portfolio manager who is buying and selling bonds and getting access to that return buying corporate bonds or high yield bonds or foreign bonds. And he's going to get access to a diversified portfolio of funds for a minimal amount of price. So again diversification and cheaper price.

VELSHI: And there are certain instances which you want to manager, you want to buy a fund from somebody who actually manages as opposed to an index fund.

MACK: Exactly. The intellectual capital of the people overseeing the fund can sometimes, that's one of the differences between mutual funds and exchange rated funds or indexed funds, where they essentially have a computer generated return like the Lehman Aggregate Bond Fund, for instance.

VELSHI: Yes.

MACK: As opposed to a fund that actually goes out and has a professional portfolio manager that's been here that understands ...

VELSHI: And knows the business.

MACK: And he can go out and purchase a good bond fund that fits your needs.

VELSHI: Ryan, thanks very much for that and for giving such good advice to our viewers.

Here is the sum of, it, to diversify or spread your money around wisely, best choices, mutual funds, index funds and exchange traded funds, which are also known as ETFs. You don't have to invest directly in individual stocks but if there's a certain sector or industry that excites you, find a mutual fund that specializes in that area.

When choosing a mutual fund look for ones with low expenses. And make sure that in your effort to diversify you're not investing in different funds that do the same thing. It's called "Gimme My Money Back" for a reason. We're about to give you the final step that you can take right now to start building wealth. Whether you already have a portfolio or you want to start one today we're going to show you exactly how to build the right portfolio for your financial situation.

(COMMERCIAL BREAK)

VELSHI: OK, folks, this is the payoff. We've given you all the tools you need, all the knowledge you need to help you and your money get back on track and now it's the grand finale. It all starts with your portfolio. We're going to help you build one that is designed specifically for your financial situation. Whether you're an avid investor or you simply want to take a closer look at your 401(k) or your IRAs. Doug Flynn is a certified financial planner, he is the founder of Flynn Zito Capital Management. And he actually worked with me on the portfolios you can find in the book "Gimme My Money Back."

Before you assemble a portfolio, Jean Sahadi touched on this a little while ago. You have to understand your risk tolerance. There's a questionnaire in the book if somebody were to come to you or another financial planner you couldn't get started without understanding how much risk a person can take.

DOUG FLYNN, FLYNN ZITO CAPITAL MANAGEMENT: That's true and age is one factor. We have clients who are older who are more aggressive and younger that are more conservative. So age has something to do with the amount of time you have to invest but also about your nature and how much risk you can handle.

VELSHI: And that's why Jeanne said sometimes software works but sometimes it's the planner who helps you optimize your portfolio. You have built for us five portfolios from the highest of risk tolerance to the lowest. Let's start with very high risk tolerance. This is a portfolio that would be 75 percent in stocks and 25 percent in alternatives. Normally we think of stocks and bonds.

FLYNN: True.

VELSHI: Tell me what alternatives mean.

FLYNN: Well, alternatives would be things that would participate in the market that might not only go straight up. And a normal very high, if you look at an average aggressive growth portfolio in most places, you're going to find 95 to 100 percent stocks, still no bonds, but rarely a mention about alternative investments. And alternative investments today can take advantage of the market going up and down, sideways markets and alternate kinds of strategies.

VELSHI: Might be called market neutral strategies, they might be called balanced funds.

FLYNN: That's right. If you're looking on Morningstar, you can find it under the long short category.

VELSHI: So somebody who is betting the markets will go down and up.

FLYNN: Right.

VELSHI: So you're saying this is somebody who might be up in their 30s, this type of return, historically, this type of portfolio has returned more than 11.5 percent a year over the long-term. Your trick is though if you don't have five years to invest don't be in the market.

FLYNN: Absolutely. It's always been that way. If you don't have the time frame you can't afford to be in there. The key to this portfolio has the same average return as 100 percent stock portfolio ...

VELSHI: But with less risk.

FLYNN: A lot less volatility and risk which people are finding all of the sudden is important.

VELSHI: That is important. Let's move this.

Right over to the next category, this was very high risk. Let's take it over to a high risk category, high risk portfolio. This one is a little less in terms of stock, 64 percent in stocks, 16 in bonds, 20 percent in alternatives. This gives you a little less than 10 percent average annualized return and the pie chart breaks it down. So you've mixed a few more things into this.

FLYNN: Right. This is the first portfolio, you start to bring a little bonds into the mix. In a normal allocation you might see an 80/20 stock-to-bond mix. What we're doing is backing off of that a little bit to bring in some of the alternatives. Because you do need them to diversify. They will zig when everything else zags.

VELSHI: That's the point, that's the diversification. By the way, you can see all of these in the book. Let's move it over to moderate risk. You describe this as growth with some income. Some people buy stocks to have them go up and other people buy stocks because they throw off of a dividend or bonds that give you an interest return. So some cash.

FLYNN: That's right if I had to classify where most people end up for whatever reason, their pension, their retirement they end up in the traditional 60/40 moderate allocation. Rather than just be 60 stocks and 40 bonds you back them off a little.

VELSHI: So you're down to 52 stocks, 33 bonds and you still keep 15 percent in alternatives.

FLYNN: You do. And again the same return, less volatility and less risk than a traditional 60/40 portfolio.

VELSHI: And this is the kind of stuff you can go right to your 401(k) or IRA and try and match these. They may not have all of the offerings available but at least our viewers can go and do these very quickly. Let's take it over to a low risk portfolio, as you're getting older, this is a low risk portfolio. You call it income with moderate growth, you shift it over to more emphasis on the income side.

FLYNN: That's true. And therefore you need the bonds, diversified bond portfolio which is broken out here and you can also if it's in a taxable account you can use municipal bonds instead of the taxable bonds but the concept is the name. You need some alternatives. But coming back to the 401(k) for a moment, a lot of the 401(k)s don't have alternative investment choices.

VELSHI: Correct.

FLYNN: You may have to do this, complementing with your IRA around what you have in your 401(k). VELSHI: So in your taxable accounts you can try and find these alternatives. There are many of them available. So here even with this low risk portfolio it gives you an annual average annualized return of seven percent.

If you're perhaps in retirement, maybe you're 65 or older, we get a lot of calls from people, who say what about me? There's a portfolio for them, too. Lo and behold it's still got 35 percent stocks in there.

FLYNN: No actually, should be a little less.

VELSHI: Nineteen percent stocks.

FLYNN: And what is is people that say I can't take it any more, I want to get out and I want to buy CDs my answer to that is you are going to guarantee two things, one you'll have your money in a small return but that you have zero chance of recovery ever from where your portfolio was.

VELSHI: Right. That's important.

FLYNN: What this will allow by having a little bit, could be the longest term piece in the portfolio you touch, the last piece, it allows you some opportunity to get some of that money back.

VELSHI: That still gets you a six percent annualized average return. Doug, thank you very much. Obviously there is more information is in the book and on cnnmoney.com.

Here is the sum of it. For starters the more time you have before you need the money in your portfolio, the more volatility you can accept. To that end, rebalance your portfolio once a year to keep it up to date with your investment objectives. Remember, never go into the market if you need the money within the next few years.

Well, "Gimme My Money Back" is more than this hour of television. You can watch this hour and then it's over. My new book "Gimme My Money Back" is something you can keep on your desk and use a reference and run those risk tolerance tests and look at those portfolio. Go to amazon.com, barnesandnoble.com or check your local book store. Think of this as a financial tool for years to come.

(COMMERCIAL BREAK)

VELSHI: We've assembled some of the best minds to help you straighten out your financial issues. Now the single most important pieces of advice when it comes to investing your money. I'm rejoined by my YOUR $$$$ co-host Christine Romans, also back with us Charles Schwab's Liz Ann Sonders and Chrystia Freeland of "The Financial Times" and former Labor Secretary Robert Reich.

Thank you all for being here. Christine, you and I have been talking about this months and years on end. What does our viewer who is still somewhat frightened by this whole thing and who wouldn't be after the year we've gone through, what do they have to understand to get back into this market?

ROMANS: We've become meteorologists, go on TV every day and say it is raining outside. It is raining. There is that old saying, save for a rainy day, prepare for a rainy day. We didn't as a country, we didn't as investors and now everyone, it's raining and whether it's your job ...

VELSHI: And we don't have enough credit to buy an umbrella.

ROMANS: Whether it's your job, whether it's your savings or whether it's your investments we have to prepare and plan the next couple of years like it's raining because it could rain for some time so you have to look at all of your investments, your job and your savings through that very important prism, I think.

VELSHI: Protect yourself.

If you haven't done so already, Liz Ann, the lesson here is, make sure you do, because you still could lose your job but fundamentally, are investments a priority for people right now? Should they be thinking of them?

SONDERS: I think they always should. I think the key, Christine sort of touched on this, this you need to have a plan. Too many investors, savers, consumers, however you want to define it, human beings, wing it. They certainly wing it with investments. They don't have a long- term plan. It's all in, all out, neither of which are investment strategies. And I think there's no better time to get people to realize that they need a long-term plan that incorporates not only the investing side but the savings side and all of those more personal issues that are so important.

VELSHI: And there's a big sale of stocks if you weren't invested in them before.

ROMANS: They're 50 percent cheaper than they were a year ago.

VELSHI: That's right. Chrystia, what do you think?

FREELAND: I would lean toward the prudent side of the equation. I do really think that the lesson of all of this has been America was spending and consuming more than it was earning, and I think people have really gotten that, you know, there was some interesting numbers that last month for the first time in a long time American households actually saved more than they consumed. The other thing that I would say is, even though this has been a really rocky year, and I think the human instinct is to think, well, next year's got to be better, it's not entirely clear that the financial part of this crisis is over yet. It's not clear that all of that toxic debt has been revealed, that it's all been cleared from the system. I think everyone has to fasten their seat belts.

VELSHI: Protect yourself. Robert Reich I saved the last one for you. Because you did point out at the beginning of the show, what might be good for our viewer, what might be good for the consumer and what might be good for the investor is not necessarily good for the economy. Do we fasten our seat belts, be prudent and stay tight for this year or do we bet that it's all going to be better by the end of the year?

REICH: My advice for individuals, save what you can, pay off your credit card debts, don't get out of the stock market. Don't cash your stock market investments because you don't want to sell right now but with regard to any new savings you might have, you might to be quite conservative, certificates of deposits or treasury bills. But don't panic, try to keep your job to the extent you can, prepare for the worst, hope for the best. It's going to be rough, rough sailing certainly over 2009. I wish it could be better, but that's the reality.

VELSHI: You're optimistic about it otherwise and Bob Reich, great to get the personal finance advice from such an august panel. Good to have you here, thanks so our panel, Liz Ann Sonders, great to see you again of Charles Schwab, Chrystia Freeland of "The Financial Times" thank you to you and for your great reporting this past year and to my good friend and co-host Christine Romans thank you for being with us.

Most importantly, Christine and I will be all over this news and how it affects your money. We'll try to be less of the meteorologist and tell you what you actually do with the news we give you. Check us out every Saturday at 1:00 p.m. and Sunday at 3:00 p.m. on YOUR $$$$ from your job, to your house, your savings and your debt, it's really what you need to know about the economy and what it means to you and your family, and make sure you pick up a copy of my new book "Gimme My Money Back."

We touched on a lot of key points but there's so much more in the book, advice that you will value for years to come. Read it and send me your thoughts to ali@cnn.com. Thanks for spending this hour with us. We'll see you soon.

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