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CNN Live Saturday

Interview with Mike Kavanagh

Aired July 20, 2002 - 18:05   ET

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

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CATHERINE CALLAWAY, CNN ANCHOR: Well, most economists and financial analysts say that despite the questionable economy and the market downturns, there's no reason for investors to freak out. Easier said than done, though.

Certified financial planner Mike Kavanagh is here with us now to discuss all this and give us some advice. I've been listening to "Money Matters" for years. I'm so glad to have you with us.

MIKE KAVANAGH, WSB RADIO: Thank you, it's a pleasure to be here.

CALLAWAY: And we're hoping you're going to make us all feel a little bit better because I'm sure I'm like a lot of people, I was pulling out my papers last night thinking what do I do? Do I need to sell? You know -- and I'm -- don't plan on retiring any time soon, so -- you know -- who should be thinking about getting out of the market now and perhaps putting it in a more steady position than it's in now?

KAVANAGH: Well, that's -- that whole thing that we as financial planners call diversification. Big long word says don't have all your eggs in one basket. We know the stock market does this. We know it happens from time to time. We just don't know when and how sudden it's going to be and how volatile and so we've always preached diversification. And, so, it's nice to have a plan.

And, going forward, you want to be sure that this plan is something that makes common sense to you. So that you can deal with another one when it happens again. Not if it happens again but when it happens again. So, we'll go through this, we'll come out of this, and then we'll have good times again and then bad times again and the whole thing is when you can -- when you realize that these things happen all the time, then you have a plan so that you have things in stock funds, you have things in U.S. savings bonds, boring but good. Have some real estate. Own a home. This is a -- we forget about that as a good investment as well.

CALLAWAY: You know, Mike, I was thinking about the age of when you should start, perhaps, thinking about doing some of the things you're talking about. Maybe a little faster rate than those are, say, in their 30s. But, at what number? We were talking about this before the newscast. Some people say if you're planning on retiring in ten years, then you really need to think about making some changes.

KAVANAGH: Oh, absolutely. CALLAWAY: And with the market like it is now, this is the lowest in four years that we saw Friday. Four years! That's a long time.

KAVANAGH: It is. Well, I look at it this way: the last seven years, I've doubled my money in the stock market and the failed S&P 500 Index Fund. I'm looking to make money in stocks long term.

And, by the way, when you retire and you're 60 and 65 and that sounds like old, you've got another 30 years of your life going for you. So, I would -- my clients, say -- I've got to get you to 95.

So, you're always going to be in the stock market to some degree or another. How much you have in the stock market, how much you can stand, how much income that you need -- all of these are factors that you have to put into the plan that you have for yourself.

So, I could sit here and say, well, you should have 37.25 percent in stocks today. You know, do the pie chart and all that kind of thing, but there's no basis for that, there's no general rule of thumb. It's, again, what you can stand and that's why we always ask as financial planners what kind of risk tolerance a person has.

CALLAWAY: Yeah, but you know I think that's what a lot people want, though. They want an a, b, c. They want a map of what to do, so they feel like they're doing the right thing. And that is what's scary.

KAVANAGH: Well, let me give you a general rule of thumb. And, it's a very general rule of thumb and so I don't want anybody to go planning their whole life finances around this, but take your age. And whatever your age is that should be the amount of money you're putting into something that's other than stocks.

So, if you're a 20-year-old, you should be putting 20 percent into a money market fund, for example, in your 401(k). But, 80 percent of it stocks. Now, vice versa. A 60-year-old would have 60 percent of their money in cash and only 40 percent in stocks. Again, a very general formula. It works pretty well and it's a good place to start. It's a good way to gauge yourself.

CALLAWAY: That is a good formula. I can remember getting out of college and thinking if I could just make my salary would be my age, I'd be so happy. Cause there was hardly any salary.

Uh, the other thing we need to talk about is this consumer confidence out there and not just consumer confidence but in -- you know -- investors.

KAVANAGH: Right.

CALLAWAY: We're seeing so many scandals, corporate scandals and we know that it's getting a lot of attention out there, but how do you know when you're making that investment with the stock market, into one of the major corporations that what you're reading about them is accurate? KAVANAGH: Right, well that's where buying individual stocks is a very risky business. Now, why we as financial planners like to use mutual funds, why we like to use the broad indexes. Today you can buy the entire U.S. stock market in the mutual fund. The Vanguard Total U.S. Stock Market Fund.

And, you can take a lot of these issues away from you by simply indexing for the market place. Buying large chunks and large pieces in the market and by the way that's a very, very good, inexpensive and time-honored philosophy of doing business which tends to be superior to a lot of the other things that you hear about.

CALLAWAY: How prevalent do you think the problem of inaccurate statements from corporations that are trying to get investors. Any idea? I mean, it's -- I think most of us think and some of the polls that we have done -- most people believe that probably most major companies are fudging a little bit on their financial statements.

KAVANAGH: Fudging, bending, let's call it being aggressive. Whatever you want to call it -- yes. But, you know -- we're having this in the headlines now. This debate was going on in our community over the last several years. But it was not news. You would not have led the news tonight -- you know, three or four years ago -- with let's talk about generally accepted accounting practices.

Well, today we're talking about those things. So, this has been an ongoing debate within our community and the financial community about how we measure some of these things. Warren Buffet for years, for example, says stock options are an expense; we're not expensing it. Today we're expensing it. It took a scandal, it took a scare.

CALLAWAY: A big scandal.

KAVANAGH: In order to get these things changed. Again, you take that out of the equation for yourself. Because, remember some of these bending and aggressive rules were done by bending, aggressive companies. In a diversified index fund, where you're buying the best companies in the world, you're going to be fine.

CALLAWAY: All right, Mike Kavanagh, thank you so much and, again, it's an honor to meet you.

KAVANAGH: Thank you for letting me be here.

CALLAWAY: And, we'll be listening for you on the radio. Mike Kavanagh.

The markets create -- sorry, wrong camera, here we go -- teh markets create a couple of problems for the president, boosting confidence as we mentioned, but also to help his party. Congressional elections are three and half months away, and analysts believe the G.O.P. has the most to lose if the markets don't turn around. More now from CNN's Kelly Wallace.

(BEGIN VIDEOTAPE) KELLY WALLACE, CNN CORRESPONDENT (voice-over): President Bush facing a plunging stock market quickly tries to calm investors. Demanding that Congress pass tough corporate reforms before the August recess.

GOERGE W. BUSH, PRESIDENT OF THE UNITED STATES: It's time to act decisively, to bring a new era of integrity to American business.

WALLACE: The president continues to enjoy a sky-high approval rating, which normally would help his party. But, after corporate scandals and questions about his and the vice-president's corporate pasts, political analysts say this year might be like traditional off- year congressional elections, when the president's party is the one suffering losses.

STU ROTHENBERG, POLITICAL ANALYST: The problem is, is that while the president's numbers are remaining high; there are some other indications that the public is increasingly nervous about the future.

WALLACE: In fact, according to the latest Newsweek poll, only 21 percent believe the economy is in excellent or good shape; 78 percent said the economic outlook is only fair or poor. And, the president's own words don't seem to be soothing investors. Ever since he headed up to Wall Street earlier this month to tackle corporate misdeeds, the Dow has dropped more than 1,200 points.

Aides bristle and say a president can't turn the markets around but can boost consumer confidence by talking up the economy.

PRESIDENT BUSH: I'm very optimistic about our economy.

WALLACE: Aides concede privately if the markets don't turn around; Republicans could be blamed in November. Publically, though, House Republican leader Tom Delay said he's not worried.

REP. TOM DELAY: We feel very confident that we already have the majority in the bag and we're working hard to grow our majority. We think we're going to pick up seats. Not very many, but we could pick up anywhere from five to ten seats.

WALLACE: A Congressional Democratic aide told CNN Delay's predictions are "simply not grounded in fact." Both sides posturing a bit, knowing the stakes are huge for November, with the House and Senate still narrowly split. Kelly Wallace, CNN, the White House.

(END VIDEOTAPE)

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