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CNN Live Saturday
Dollar Signs: Retirement Savings
Aired January 31, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDERICKA WHITFIELD, CNN ANCHOR: Now time for DOLLAR $IGNS segment. If you're baby-boomer age or older and you're not yet prepared for retirement, is it too late? Today on DOLLAR $IGNS we'll help you make the best of the time left. To start with, one key strategy is called hedging. CNN Financial Correspondent Ali Velshi reports.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL CORRESPONDENT (voice over): Meet Doug Stives. He's a CPA and a financial adviser. Not someone you'd expect to have been burned by the stock market. But he was. And like many Americans in their 50s and 60s, Doug needs to make up for lost time.
DOUG STIVES, THE CURCHIN GROUP, LLC: Back in the '90s when we were all making nice returns on our portfolios I was advocating the buy-and-hold routine. You know, for the last few years that wasn't a very good philosophy.
VELSHI: Because he's so close to retirement, Doug needs to be conservative, which these days often means averaging a rate of return that's lower than inflation.
STIVES: OK, if you get out of the stock market, what in the world are you going to invest in?
VELSHI: Running back into stocks may be the last thing on a conservative investors' mind.
JIM AWAD, AWAD ASSET MANAGEMENT: I would describe it as walking a mile up a mountain. You know if you can walk that mile you're going to get to where you need to go. Don't stop walking or you'll never get there. Don't try to run up, because you may break your ankle and never get there.
VELSHI: One way to start that journey is to use a new class of mutual funds known as alternative funds. Some people use them in place of bonds. Here's how they work.
By buying stocks short, investing in currencies and commodities and using other hedging strategies, alternative funds allow you to protect your portfolio from downturns in the market. Hedging does cost you something. It's like buying insurance so you may give up part of your return, but you gain some protection from the downside. Overall, your return may be slightly lower but with less volatility and less risk. LEE SCHULTHEIS, ALPHA HEDGE STRATEGIES: What hedging does specifically is mitigates against the general market risk. It takes the general market movement out of the equation, leaves it more in the hands of the manager and their stock picking ability.
VELSHI: Lee Schulthies runs the Alpha Hedge Strategy Fund. He aims to be market neutral, trying to make money regardless of which way markets move. He does this by choosing assets that are non- correlated.
SCHULTHIES: Non-correlating tends to refer to any asset class that doesn't really move in lockstep with the popular indices, such as the S&P. Things that don't quite correlate to either an equity or a fixed-income benchmark too tightly.
VELSHI: If you're concerned about stock market risk and you're nearing retirement, hedging could help you achieve your goals without keeping you up at night.
As for Doug Stives? He's not as heavily invested in stocks as he was in the '90s. He's decided to spread his risk around by finding alternative investments. When it comes to the markets, even experts don't have a crystal ball.
STIVES: If I could tell you what the market's going to do I would be on my yacht in the South of France somewhere.
(END VIDEOTAPE)
WHITFIELD: We have no crystal ball either, but we do have some expert advice on late retirement planning. Ali Velshi is with us live now -- not from the South of France but from New York.
VELSHI: Fredricka, good to see you.
WHITFIELD: Good to see you. And from Atlanta, certified financial planner and radio talk show host Mike Kavanagh.
MIKE KAVANAGH, CERTIFIED FINANCIAL PLANNER: Thank you, Fredricka.
WHITFIELD: Good to see you, Mike.
Ali, let me begin with you. If this is such a great idea, hedging, how come everyone's not doing?
VELSHI: Well, here's the problem. The issue is that people call us all the time and say I lost money in the markets, I'm 10, 15 maybe even five years away from retirement. And the experts all tell me to put a lot of my money in fixed income, things like bonds that are very secure and I won't lose any more money.
The bottom line is nowadays people approach retirement and they're going to live maybe 30 more years. And they're just not going to make it. They need an alternative. When it comes to hedging, it's not a one size fits all strategy. So it's not like you can go to Morningstar or Lipper, the mutual fund sites, punch in hedge, or market neutral, and buy these funds and trade them the way you would stocks, or even other mutual funds. This has to be part of an overall strategy that you have to discuss with your financial planner, someone like Mike.
WHITFIELD: So Mike, it sounds like this really is for the experienced investor.
KAVANAGH: Well, I find it amusing this whole thing about hedge funds. It is like this is the latest fad on Wall Street. Hedging your portfolio is something financial planners have been telling people to do for years and years. And it comes down to not putting all your eggs in one basket.
Stocks are a great investment if you have the long-term time frame to put up with the roller coaster ride. But I like plain old U.S. Savings Bonds.
One great hedge that I like to use, and we always say you have to have an inflation hedge in your portfolio. But one of the things I like to use U.S. Savings I-Bonds. There you have a guaranteed index to inflation, to the consumer price index, and after taxes you're actually ahead of inflation.
So, yes, we have all these new fancy funds on Wall Street and they're selling them and there are enormous expenses and commissions and so forth. But buy some good old U.S. Savings I-Bonds and there's a great inflation hedge for your portfolio.
WHITFIELD: Ali, you agree that's always a good bet, bonds?
VELSHI: Mike's got exactly the right philosophy. The fact is you have to hedge. The issue becomes of concern, if you're 30 or 40 and you've got your portfolio properly hedged, you'll get to the finish line the right way.
What we have right now is a difficult situation with people 50, 60, 65, people who decided a few years ago that they weren't going to be smart enough to play the markets and now realize that they weren't smart enough to play the markets.
It's kind of like dentistry if they had said $8 a filling, do it yourself, we'll provide all the tools and we'll clean them for you, you wouldn't have gone to do that yourself. Why you decided to invest in the market yourself is a mystery.
The bottom line now is we have to get people out of that problem. And, in fact, to make that lost time up you've got to be smarter than you thought you were five or six years ago when you lost that money.
WHITFIELD: But, Mike, certainly the person who's just starting out and planning for retirement way down the line has to take completely different approach from the baby boomer whose retirement is encroaching upon them. Perhaps you would think that the baby boomer really can't afford to take as many risks as the person starting out. KAVANAGH: Right. That's what we financial planners call "asset allocation". We don't put all the eggs in one basket. Stocks are fine for that money. As Ali points out you're going to live to be 95. So, there's money that you can afford to put away for 10 years or longer, even if you're 60 or 70 years old.
However, we, in the financial planning business have always told our clients, when you have a short-term time frame stocks are a completely inappropriate thing to be in. And you need to look at alternative investments.
That can be as conservative as CDs, U.S. Savings Bonds and income investments. What about a good old dividend stock that just sits there and pays dividends quarter after quarter, something like utility stocks. Not a lot of growth, but when you're getting paid 4.5 and 5.5 percent as dividends, that's a nice strategy, especially in an IRA.
WHITFIELD: Ali, do you ever see that it's ever too late for a certain candidate to get into the game of investing?
VELSHI: You know, there's probably no point in telling anyone it's too late. It's too sad what happened to some people, but if they -- you know, Jim Awad, who was in my story, said you've got to know where you are today.
You've got to know where you need to be. And you've got to walk that mile. If you don't succeed 100 percent in getting everything you need, start doing the things you need to do.
One of the things people forget is you may want to get a 7 or 10 percent return on the market, but if you're carrying any debt whatsoever, well getting rid of some of that debt, tightening your belt is going to achieve that same result. You're going to get that as a return.
The other thing is Mike just talked about risk tolerance. We've talked about this before. You have to know what you're able to do and still go to sleep at night. But there is a strategy. The worst thing to do is stick your head in the sand and not plan.
WHITFIELD: All right. Ali and Mike, hold the phone. Because we've got calls and e-mails coming up next on DOLLAR $IGNS.
And, of course, you can still send your questions to DOLLAR$IGNS@CNN.com. Or you can call in, the number is 1-800-807-2620. We'll be right back.
(COMMERCIAL BREAK)
WHITFIELD: Are you late in saving and investing for retirement? Or did the stock market turn some of your nest egg into a rotten egg? Today on DOLLAR $IGNS how hedging can help. With us to answer your calls and your e-mails are CNN Financial Correspondent Ali Velshi in New York and Mike Kavanagh, host of "Money Matters" on WSB Radio in Atlanta.
All right. John from Massachusetts is on the phone with us. Ali and Mike, let's listen in.
KAVANAGH: Hi, there.
WHITFIELD: Hi, what's your question?
CALLER: Hello.
KAVANAGH: Hello.
WHITFIELD: John, what's your question?
CALLER: If John's not there can you take Mike?
KAVANAGH: We'll take Mike, sure.
WHITFIELD: Sure, Mike.
KAVANAGH: We'll take anybody who comes along.
CALLER: A miss feed on the phone line. \
I would just like to say I'm a college graduate in economics, and what you are not telling the public is the amount of corruption that has pulled down the Dow industrial. There's a reverse cyclical equation that you're missing when you're informing the public about bad investments, I-bonds, U.S. Security.
Please tell the market that the people that take advantage of people who don't have an education --
WHITFIELD: OK, so it doesn't look like you have a question there, Mike. Do you?
CALLER: No, no. This not an (UNINTELLIGIBLE)...
WHITFIELD: All right.
VELSHI: Well, mind if I address that point for a second, Fredricka?
WHITFIELD: Yes.
VELSHI: Here's the thing, the bottom line is, and I think Mike will tell you this, there's no way to make money in this country and retire other than to work, to invest in the stock market, or to have your own business. You've got to be invested. So while there may be corruption all over the place this is exactly the danger.
If people worry that they get out of the market because of corruption, there are thousands and thousands of publicly listed companies, thousands and thousands of mutual funds out there. You just have to make wise decisions. You might get a rotten apple once in awhile. We've seen them in the last few years.
It shouldn't scare you away from the market. There are all sorts of reasons why people get out of the market. You can't afford to -- in the end you shoot yourself in the foot. If you're not in there, you'll pay the price at retirement time.
WHITFIELD: Ruth at University Heights, Ohio, e-mails a question.
She says: In an already diversified portfolio, if one took some money out of bonds, how would you rate alternative types of investments such as Merger Funds, and Rydex Sphinx Fund?"
Mike, you started on this earlier, what do you think?
KAVANAGH: Well, yes, getting out of bonds right now makes a lot of sense because there's an inverse relationship between interest rates and the value of bond funds. So we know when interest rates rise the bond funds fall. So this makes a lot of common sense.
I'm not a big believer in market timing, but if you're in bond funds and that's part of what you're doing why wouldn't you take a look at that -- instead of that -- dividend paying stocks? In other words, it's the old adage you want to be in an investment that behaves a certain way.
And utility stocks may be stocks, but for all intents and purposes they behave like bonds. They pay quarterly. They stay relatively stable. I like to look at income investments as opposed to bonds as a category. I like to diversify IRAs in those things that pay great interest and diversify my portfolio.
That could be utilities and energy trusts. How about real estate trusts? Everybody is talking about the stock market and so forth. And good old fundamental real estate trusts are out there. They collect rent and they pay out. Gosh, it's nice to have that as part of your portfolio, too.
WHITFIELD: All right.
VELSHI: Real estate trusts, income trusts, the energy trusts that Mike's talking about. The interesting thing about some of the market neutral funds, I'm certainly not going to pick a fight with Mike because he does this for a living. But I have to say, some of the managers for these funds do this stuff. They buy into bonds, they buy into income producing things. They do currencies.
KAVANAGH: Right.
VELSHI: The merger funds, they do that merger arbitrage game, which you should never try on your own.
KAVANAGH: Right.
VELSHI: The Rydex Funds, they do things like long/short. Which is dangerous, it is market timing if you did it on your own. But if you allow fund managers, who do this for a living, to take a bit of your portfolio, what you're doing is you're hedging all the way along the road. It smoothes out your return over time. So, in a year like the one we've just gone through, where the markets go through the roof, your portfolio won't. But in rough years your portfolio will look a lot smoother than other peoples'.
WHITFIELD: All right. We're going to try the phones one more time. With Carar (ph) out of California with a question.
Carar? (ph)
KAVANAGH: Hello, Carar? Are you there?
WHITFIELD: It looks like we're having a hard time with our call-ins right now. All right, so how about another e-mail?
This from Rafael out of Arlington, Virginia: I have in the bank a savings account with over $50,000 in funds. I do not trust 401(k)s, banks or the stock market. Are there other options to make my money grow?"
Mike?
VELSHI: No. No, if you don't trust any of those people you've got to put it in your mattress.
(LAUGHTER)
There's nothing you can do.
KAVANAGH: That's right.
We live in the greatest economy, the greatest country in the world, with companies that are global in nature that they make money all the time. The bottom line, when you invest in a business, when you go to work for a business, wherever you are, that business is making profits.
Doesn't it make common sense, common sense to invest in some of those companies? You know, you can live scared all of your life, and never get on a plane, and just be scared of everything all the time. Or you can say gosh, you know, it makes a lot of sense to invest in the greatest companies and the greatest economy on the earth.
Please, I agree with Ali. It's okay to diversify your portfolio, to hedge in all sorts of ways, but to be scared of things, to say I'm never going to invest in stocks, it just doesn't make any sense.
WHITFIELD: All right. Three strikes you're out. We're going to try this one more time on the phones. This time it's my friend Fred out in California.
Fred?
CALLER: Hi. My question is, I found a company that I feel is fundamentally a really good company. However, it trades on the pink sheets. I do believe it's going to be relisted on the Nasdaq soon. But is it dangerous to buy a company that's on the pinks?
WHITFIELD: Ali?
VELSHI: Well, this is an interesting -- there are a number of questions. There are a lot of reasons why a company trades on the pinks. Pink sheets, mean it's off the automated system and goes back to the old way of trading stocks where you've got to find a buyer for every seller.
That means it is illiquid. It's going to be hard to buy and sell that stock. If something happens to it you're going to have a hard time getting out of that position.
Number two, as an average investor, an individual investor, you've got to really think twice about getting into stocks individually, if you're not prepared to do that with most of your day. Pay attention to that sort of thing, especially with volatile companies like those on pink sheets.
Number three, if you want to be in the stock market you can get into index funds. You can get into these hedge funds. There are a lot of ways to get into mutual funds and enjoy the stock market. And if this is all play money. If you don't have to worry about this money and you're not depending on it, I'd say knock yourself out.
But if this is money that you are investing for your retirement I'd think twice about investing in pink sheets right now.
KAVANAGH: Yes, Ali, I look at investing and speculating. What I hear this fellow wanting to do is speculate a little bit. There's nothing wrong with speculation. That's perfectly fine, but it's not investing.
VELSHI: That's right, it's fun.
KAVANAGH: Right.
WHITFIELD: All right. Gary from Redmond, Washington writes: I've seen a fairly good run up in my bond fund. How do I protect it against horizon of rising interest while still seeing some return on my cash?"
KAVANAGH: Sell. That's the one thing. This is one of the few times, you can go back to the stock market bubble of the late 1990s when we all should have realized that maybe this thing was really way up there.
Well, bond funds, we kind of have an idea that bond interest rates are going to rise. And either you shorten your duration very dramatically or you go into other things. And again the things that I'm looking at right now -- I don't have any of my investors in individual bonds at all. And the bond funds they're buying are foreign bond funds, convertible bond funds.
VELSHI: Yes. KAVANAGH: The types of things that might have a little bit of growth but again are alternative types of investments, but still behave the same way. In other words while I'm waiting for the security to recover, by golly they're paying me 6, 7 and 8 percent. That's the kind of thing I like.
VELSHI: One of the things we've talked about before, Fredricka, and I think we're probably going to talk about it in a couple weeks is the whole idea that if you decided at some point that you're half in bonds and half in stocks because that's your risk tolerance. If your bonds all of a sudden represent a much bigger part of that or your stocks end up representing a big part of that, you have to sell. You have to get back to balance. You have to keep your discipline as an investor. It is when you lose your discipline you start losing money.
KAVANAGH: Right, rebalance. You're right, Ali.
WHITFIELD: You can't get too greedy.
VELSHI: That's right.
WHITFIELD: All right, stay with us we'll take more of the calls and e-mails right after a short break. (COMMERCIAL BREAK)
WHITFIELD: Welcome back to DOLLAR $IGNS. We're taking your calls and e-mails on hedging, and how it can help you, just in case you've lost some ground as you're trying to plan for your retirement. In New York CNN Financial Correspondent Ali Velshi, and in Atlanta, Certified Financial Planner Mike Kavanagh.
All right, gentlemen, we've got Shahin from North Carolina, who has been waiting very patiently.
Shahin, what's your question?
CALLER: Hi. My question is, I just started a Roth IRA account. And I put some money in there, and opposing to the traditional IRA you don't pay taxes on that -- I mean there's no tax advantage to it now, but it is once you get to 60 and take your money out.
Do you recommend this to -- I'm 30 years old right now. Do you think this is a good strategy for me? Or is there an alternative strategy to this?
KAVANAGH: Oh, gosh, yes.
CALLER: And one last thing, could you explain to me what short selling means in the stock market? I would really appreciate it. Thank you so much.
KAVANAGH: Ali, why don't you take the short selling question.
VELSHI: I'll take the short selling, very quickly.
Basically what happens is most investors invest in a company or a fund with the hope and expectations that it will increase in value over time. But you know because of the economy or the way a company is managed that some companies, the stock of those companies is going to decrease in value over time. If you expect that to happen, you short that stock.
Which means you buy it at a price, let's say $10, on the expectation that it goes down. If it goes up you could end up losing a lot more money than you bargained for. It's not usually a practice that most average investors should use. It's left for professionals generally, but you can use it if you needed to.
KAVANAGH: A bit of gambling there.
And a Roth IRA, what a terrific investment. There's an old adage, a very fancy phrase, that we financial planners have had for years and that is: Tax free is for me.
The Roth IRA is tax free. Just think about it. When you're 65, 70 years old, being able to reach over into an investment and pull out that money and use the income tax free. That's a wonderful investment.
A great strategy that I like to use is to fund my 401(k) up to a match. And then take the money that I otherwise might have put into the 401(k), especially the younger client, and put that into a Roth IRA and have the best of both worlds.
WHITFIELD: Now it's $3,000 a year in which you can invest in your Roth, right?
KAVANAGH: Right. And that's going to go up in the years to come. We're going to cap off in a couple of years at about $5,000 a year. So especially younger investor who can afford to put money into a Roth IRA, should take a look at it.
WHITFIELD: All right. And this e-mail from Ellen Johnson: "What do you think about the use of options as a hedging strategy? Specifically in the use of covered calls to generate income?"
Ali?
VELSHI: You know, now we're talking about something that the average, but sophisticated investor can educate themselves on and can do. Covered calls are a much safer -- it's insurance. It's the same concept we're talking about.
When you buy these hedged mutual funds, it's a form of insurance. This a strategy that we're not going to get a chance to really get into here. But it's worth educating yourself on covered calls. A lot of mutual fund managers who get into this hedging world do use them. It's a way of covering your potential loss while getting the upside in the stock.
WHITFIELD: OK.
VELSHI: It's about as far as the average investor should go in getting into these kinds of strategies. WHITFIELD: Ali, before we lose our next caller, because it's the last one for this half hour. Joe from Kentucky has a question.
KAVANAGH: Hi, Joe.
CALLER: Hello?
WHITFIELD: What's your question?
KAVANAGH: What's your question for us?
CALLER: Well you know, back in '96, I invested in what you call commodities, a lot of unleaded gasoline. I lost as much as $10,000. I think they mismanaged my account. And I've been scared ever since to do anything else like that. So I'm just trying to figure out another kind of investment that would be risk-free and maybe, you know, something I could manage myself.
KAVANAGH: Oh, gosh, yes. Commodities you can lose everything. And it is speculation, not investing. So I always try to coax investors back into investing by saying, Let's at least start taking a look at something that's obvious around you. People have to put gasoline in their cars. Why not buy an energy index fund, an energy index stock.
People have to use health care and pharmaceuticals. You know, we're getting a little older and grayer, us baby boomers, and we're going to be using health care and pharmaceuticals. Why don't we buy the index stock? The IYH I-Share, for example, and buy America's best health care pharmaceutical companies.
And let's buy some utilities because without it there's no air conditioning, there's no lights, there's no CNN. And the world would not be the same place without that.
WHITFIELD: Certainly not. Mike Kavanagh and Ali Velshi, thanks very much, gentlemen for helping us to plan our golden years.
KAVANAGH: Thank you.
WHITFIELD: That's all we have time for now.
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Aired January 31, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDERICKA WHITFIELD, CNN ANCHOR: Now time for DOLLAR $IGNS segment. If you're baby-boomer age or older and you're not yet prepared for retirement, is it too late? Today on DOLLAR $IGNS we'll help you make the best of the time left. To start with, one key strategy is called hedging. CNN Financial Correspondent Ali Velshi reports.
(BEGIN VIDEOTAPE)
ALI VELSHI, CNN FINANCIAL CORRESPONDENT (voice over): Meet Doug Stives. He's a CPA and a financial adviser. Not someone you'd expect to have been burned by the stock market. But he was. And like many Americans in their 50s and 60s, Doug needs to make up for lost time.
DOUG STIVES, THE CURCHIN GROUP, LLC: Back in the '90s when we were all making nice returns on our portfolios I was advocating the buy-and-hold routine. You know, for the last few years that wasn't a very good philosophy.
VELSHI: Because he's so close to retirement, Doug needs to be conservative, which these days often means averaging a rate of return that's lower than inflation.
STIVES: OK, if you get out of the stock market, what in the world are you going to invest in?
VELSHI: Running back into stocks may be the last thing on a conservative investors' mind.
JIM AWAD, AWAD ASSET MANAGEMENT: I would describe it as walking a mile up a mountain. You know if you can walk that mile you're going to get to where you need to go. Don't stop walking or you'll never get there. Don't try to run up, because you may break your ankle and never get there.
VELSHI: One way to start that journey is to use a new class of mutual funds known as alternative funds. Some people use them in place of bonds. Here's how they work.
By buying stocks short, investing in currencies and commodities and using other hedging strategies, alternative funds allow you to protect your portfolio from downturns in the market. Hedging does cost you something. It's like buying insurance so you may give up part of your return, but you gain some protection from the downside. Overall, your return may be slightly lower but with less volatility and less risk. LEE SCHULTHEIS, ALPHA HEDGE STRATEGIES: What hedging does specifically is mitigates against the general market risk. It takes the general market movement out of the equation, leaves it more in the hands of the manager and their stock picking ability.
VELSHI: Lee Schulthies runs the Alpha Hedge Strategy Fund. He aims to be market neutral, trying to make money regardless of which way markets move. He does this by choosing assets that are non- correlated.
SCHULTHIES: Non-correlating tends to refer to any asset class that doesn't really move in lockstep with the popular indices, such as the S&P. Things that don't quite correlate to either an equity or a fixed-income benchmark too tightly.
VELSHI: If you're concerned about stock market risk and you're nearing retirement, hedging could help you achieve your goals without keeping you up at night.
As for Doug Stives? He's not as heavily invested in stocks as he was in the '90s. He's decided to spread his risk around by finding alternative investments. When it comes to the markets, even experts don't have a crystal ball.
STIVES: If I could tell you what the market's going to do I would be on my yacht in the South of France somewhere.
(END VIDEOTAPE)
WHITFIELD: We have no crystal ball either, but we do have some expert advice on late retirement planning. Ali Velshi is with us live now -- not from the South of France but from New York.
VELSHI: Fredricka, good to see you.
WHITFIELD: Good to see you. And from Atlanta, certified financial planner and radio talk show host Mike Kavanagh.
MIKE KAVANAGH, CERTIFIED FINANCIAL PLANNER: Thank you, Fredricka.
WHITFIELD: Good to see you, Mike.
Ali, let me begin with you. If this is such a great idea, hedging, how come everyone's not doing?
VELSHI: Well, here's the problem. The issue is that people call us all the time and say I lost money in the markets, I'm 10, 15 maybe even five years away from retirement. And the experts all tell me to put a lot of my money in fixed income, things like bonds that are very secure and I won't lose any more money.
The bottom line is nowadays people approach retirement and they're going to live maybe 30 more years. And they're just not going to make it. They need an alternative. When it comes to hedging, it's not a one size fits all strategy. So it's not like you can go to Morningstar or Lipper, the mutual fund sites, punch in hedge, or market neutral, and buy these funds and trade them the way you would stocks, or even other mutual funds. This has to be part of an overall strategy that you have to discuss with your financial planner, someone like Mike.
WHITFIELD: So Mike, it sounds like this really is for the experienced investor.
KAVANAGH: Well, I find it amusing this whole thing about hedge funds. It is like this is the latest fad on Wall Street. Hedging your portfolio is something financial planners have been telling people to do for years and years. And it comes down to not putting all your eggs in one basket.
Stocks are a great investment if you have the long-term time frame to put up with the roller coaster ride. But I like plain old U.S. Savings Bonds.
One great hedge that I like to use, and we always say you have to have an inflation hedge in your portfolio. But one of the things I like to use U.S. Savings I-Bonds. There you have a guaranteed index to inflation, to the consumer price index, and after taxes you're actually ahead of inflation.
So, yes, we have all these new fancy funds on Wall Street and they're selling them and there are enormous expenses and commissions and so forth. But buy some good old U.S. Savings I-Bonds and there's a great inflation hedge for your portfolio.
WHITFIELD: Ali, you agree that's always a good bet, bonds?
VELSHI: Mike's got exactly the right philosophy. The fact is you have to hedge. The issue becomes of concern, if you're 30 or 40 and you've got your portfolio properly hedged, you'll get to the finish line the right way.
What we have right now is a difficult situation with people 50, 60, 65, people who decided a few years ago that they weren't going to be smart enough to play the markets and now realize that they weren't smart enough to play the markets.
It's kind of like dentistry if they had said $8 a filling, do it yourself, we'll provide all the tools and we'll clean them for you, you wouldn't have gone to do that yourself. Why you decided to invest in the market yourself is a mystery.
The bottom line now is we have to get people out of that problem. And, in fact, to make that lost time up you've got to be smarter than you thought you were five or six years ago when you lost that money.
WHITFIELD: But, Mike, certainly the person who's just starting out and planning for retirement way down the line has to take completely different approach from the baby boomer whose retirement is encroaching upon them. Perhaps you would think that the baby boomer really can't afford to take as many risks as the person starting out. KAVANAGH: Right. That's what we financial planners call "asset allocation". We don't put all the eggs in one basket. Stocks are fine for that money. As Ali points out you're going to live to be 95. So, there's money that you can afford to put away for 10 years or longer, even if you're 60 or 70 years old.
However, we, in the financial planning business have always told our clients, when you have a short-term time frame stocks are a completely inappropriate thing to be in. And you need to look at alternative investments.
That can be as conservative as CDs, U.S. Savings Bonds and income investments. What about a good old dividend stock that just sits there and pays dividends quarter after quarter, something like utility stocks. Not a lot of growth, but when you're getting paid 4.5 and 5.5 percent as dividends, that's a nice strategy, especially in an IRA.
WHITFIELD: Ali, do you ever see that it's ever too late for a certain candidate to get into the game of investing?
VELSHI: You know, there's probably no point in telling anyone it's too late. It's too sad what happened to some people, but if they -- you know, Jim Awad, who was in my story, said you've got to know where you are today.
You've got to know where you need to be. And you've got to walk that mile. If you don't succeed 100 percent in getting everything you need, start doing the things you need to do.
One of the things people forget is you may want to get a 7 or 10 percent return on the market, but if you're carrying any debt whatsoever, well getting rid of some of that debt, tightening your belt is going to achieve that same result. You're going to get that as a return.
The other thing is Mike just talked about risk tolerance. We've talked about this before. You have to know what you're able to do and still go to sleep at night. But there is a strategy. The worst thing to do is stick your head in the sand and not plan.
WHITFIELD: All right. Ali and Mike, hold the phone. Because we've got calls and e-mails coming up next on DOLLAR $IGNS.
And, of course, you can still send your questions to DOLLAR$IGNS@CNN.com. Or you can call in, the number is 1-800-807-2620. We'll be right back.
(COMMERCIAL BREAK)
WHITFIELD: Are you late in saving and investing for retirement? Or did the stock market turn some of your nest egg into a rotten egg? Today on DOLLAR $IGNS how hedging can help. With us to answer your calls and your e-mails are CNN Financial Correspondent Ali Velshi in New York and Mike Kavanagh, host of "Money Matters" on WSB Radio in Atlanta.
All right. John from Massachusetts is on the phone with us. Ali and Mike, let's listen in.
KAVANAGH: Hi, there.
WHITFIELD: Hi, what's your question?
CALLER: Hello.
KAVANAGH: Hello.
WHITFIELD: John, what's your question?
CALLER: If John's not there can you take Mike?
KAVANAGH: We'll take Mike, sure.
WHITFIELD: Sure, Mike.
KAVANAGH: We'll take anybody who comes along.
CALLER: A miss feed on the phone line. \
I would just like to say I'm a college graduate in economics, and what you are not telling the public is the amount of corruption that has pulled down the Dow industrial. There's a reverse cyclical equation that you're missing when you're informing the public about bad investments, I-bonds, U.S. Security.
Please tell the market that the people that take advantage of people who don't have an education --
WHITFIELD: OK, so it doesn't look like you have a question there, Mike. Do you?
CALLER: No, no. This not an (UNINTELLIGIBLE)...
WHITFIELD: All right.
VELSHI: Well, mind if I address that point for a second, Fredricka?
WHITFIELD: Yes.
VELSHI: Here's the thing, the bottom line is, and I think Mike will tell you this, there's no way to make money in this country and retire other than to work, to invest in the stock market, or to have your own business. You've got to be invested. So while there may be corruption all over the place this is exactly the danger.
If people worry that they get out of the market because of corruption, there are thousands and thousands of publicly listed companies, thousands and thousands of mutual funds out there. You just have to make wise decisions. You might get a rotten apple once in awhile. We've seen them in the last few years.
It shouldn't scare you away from the market. There are all sorts of reasons why people get out of the market. You can't afford to -- in the end you shoot yourself in the foot. If you're not in there, you'll pay the price at retirement time.
WHITFIELD: Ruth at University Heights, Ohio, e-mails a question.
She says: In an already diversified portfolio, if one took some money out of bonds, how would you rate alternative types of investments such as Merger Funds, and Rydex Sphinx Fund?"
Mike, you started on this earlier, what do you think?
KAVANAGH: Well, yes, getting out of bonds right now makes a lot of sense because there's an inverse relationship between interest rates and the value of bond funds. So we know when interest rates rise the bond funds fall. So this makes a lot of common sense.
I'm not a big believer in market timing, but if you're in bond funds and that's part of what you're doing why wouldn't you take a look at that -- instead of that -- dividend paying stocks? In other words, it's the old adage you want to be in an investment that behaves a certain way.
And utility stocks may be stocks, but for all intents and purposes they behave like bonds. They pay quarterly. They stay relatively stable. I like to look at income investments as opposed to bonds as a category. I like to diversify IRAs in those things that pay great interest and diversify my portfolio.
That could be utilities and energy trusts. How about real estate trusts? Everybody is talking about the stock market and so forth. And good old fundamental real estate trusts are out there. They collect rent and they pay out. Gosh, it's nice to have that as part of your portfolio, too.
WHITFIELD: All right.
VELSHI: Real estate trusts, income trusts, the energy trusts that Mike's talking about. The interesting thing about some of the market neutral funds, I'm certainly not going to pick a fight with Mike because he does this for a living. But I have to say, some of the managers for these funds do this stuff. They buy into bonds, they buy into income producing things. They do currencies.
KAVANAGH: Right.
VELSHI: The merger funds, they do that merger arbitrage game, which you should never try on your own.
KAVANAGH: Right.
VELSHI: The Rydex Funds, they do things like long/short. Which is dangerous, it is market timing if you did it on your own. But if you allow fund managers, who do this for a living, to take a bit of your portfolio, what you're doing is you're hedging all the way along the road. It smoothes out your return over time. So, in a year like the one we've just gone through, where the markets go through the roof, your portfolio won't. But in rough years your portfolio will look a lot smoother than other peoples'.
WHITFIELD: All right. We're going to try the phones one more time. With Carar (ph) out of California with a question.
Carar? (ph)
KAVANAGH: Hello, Carar? Are you there?
WHITFIELD: It looks like we're having a hard time with our call-ins right now. All right, so how about another e-mail?
This from Rafael out of Arlington, Virginia: I have in the bank a savings account with over $50,000 in funds. I do not trust 401(k)s, banks or the stock market. Are there other options to make my money grow?"
Mike?
VELSHI: No. No, if you don't trust any of those people you've got to put it in your mattress.
(LAUGHTER)
There's nothing you can do.
KAVANAGH: That's right.
We live in the greatest economy, the greatest country in the world, with companies that are global in nature that they make money all the time. The bottom line, when you invest in a business, when you go to work for a business, wherever you are, that business is making profits.
Doesn't it make common sense, common sense to invest in some of those companies? You know, you can live scared all of your life, and never get on a plane, and just be scared of everything all the time. Or you can say gosh, you know, it makes a lot of sense to invest in the greatest companies and the greatest economy on the earth.
Please, I agree with Ali. It's okay to diversify your portfolio, to hedge in all sorts of ways, but to be scared of things, to say I'm never going to invest in stocks, it just doesn't make any sense.
WHITFIELD: All right. Three strikes you're out. We're going to try this one more time on the phones. This time it's my friend Fred out in California.
Fred?
CALLER: Hi. My question is, I found a company that I feel is fundamentally a really good company. However, it trades on the pink sheets. I do believe it's going to be relisted on the Nasdaq soon. But is it dangerous to buy a company that's on the pinks?
WHITFIELD: Ali?
VELSHI: Well, this is an interesting -- there are a number of questions. There are a lot of reasons why a company trades on the pinks. Pink sheets, mean it's off the automated system and goes back to the old way of trading stocks where you've got to find a buyer for every seller.
That means it is illiquid. It's going to be hard to buy and sell that stock. If something happens to it you're going to have a hard time getting out of that position.
Number two, as an average investor, an individual investor, you've got to really think twice about getting into stocks individually, if you're not prepared to do that with most of your day. Pay attention to that sort of thing, especially with volatile companies like those on pink sheets.
Number three, if you want to be in the stock market you can get into index funds. You can get into these hedge funds. There are a lot of ways to get into mutual funds and enjoy the stock market. And if this is all play money. If you don't have to worry about this money and you're not depending on it, I'd say knock yourself out.
But if this is money that you are investing for your retirement I'd think twice about investing in pink sheets right now.
KAVANAGH: Yes, Ali, I look at investing and speculating. What I hear this fellow wanting to do is speculate a little bit. There's nothing wrong with speculation. That's perfectly fine, but it's not investing.
VELSHI: That's right, it's fun.
KAVANAGH: Right.
WHITFIELD: All right. Gary from Redmond, Washington writes: I've seen a fairly good run up in my bond fund. How do I protect it against horizon of rising interest while still seeing some return on my cash?"
KAVANAGH: Sell. That's the one thing. This is one of the few times, you can go back to the stock market bubble of the late 1990s when we all should have realized that maybe this thing was really way up there.
Well, bond funds, we kind of have an idea that bond interest rates are going to rise. And either you shorten your duration very dramatically or you go into other things. And again the things that I'm looking at right now -- I don't have any of my investors in individual bonds at all. And the bond funds they're buying are foreign bond funds, convertible bond funds.
VELSHI: Yes. KAVANAGH: The types of things that might have a little bit of growth but again are alternative types of investments, but still behave the same way. In other words while I'm waiting for the security to recover, by golly they're paying me 6, 7 and 8 percent. That's the kind of thing I like.
VELSHI: One of the things we've talked about before, Fredricka, and I think we're probably going to talk about it in a couple weeks is the whole idea that if you decided at some point that you're half in bonds and half in stocks because that's your risk tolerance. If your bonds all of a sudden represent a much bigger part of that or your stocks end up representing a big part of that, you have to sell. You have to get back to balance. You have to keep your discipline as an investor. It is when you lose your discipline you start losing money.
KAVANAGH: Right, rebalance. You're right, Ali.
WHITFIELD: You can't get too greedy.
VELSHI: That's right.
WHITFIELD: All right, stay with us we'll take more of the calls and e-mails right after a short break. (COMMERCIAL BREAK)
WHITFIELD: Welcome back to DOLLAR $IGNS. We're taking your calls and e-mails on hedging, and how it can help you, just in case you've lost some ground as you're trying to plan for your retirement. In New York CNN Financial Correspondent Ali Velshi, and in Atlanta, Certified Financial Planner Mike Kavanagh.
All right, gentlemen, we've got Shahin from North Carolina, who has been waiting very patiently.
Shahin, what's your question?
CALLER: Hi. My question is, I just started a Roth IRA account. And I put some money in there, and opposing to the traditional IRA you don't pay taxes on that -- I mean there's no tax advantage to it now, but it is once you get to 60 and take your money out.
Do you recommend this to -- I'm 30 years old right now. Do you think this is a good strategy for me? Or is there an alternative strategy to this?
KAVANAGH: Oh, gosh, yes.
CALLER: And one last thing, could you explain to me what short selling means in the stock market? I would really appreciate it. Thank you so much.
KAVANAGH: Ali, why don't you take the short selling question.
VELSHI: I'll take the short selling, very quickly.
Basically what happens is most investors invest in a company or a fund with the hope and expectations that it will increase in value over time. But you know because of the economy or the way a company is managed that some companies, the stock of those companies is going to decrease in value over time. If you expect that to happen, you short that stock.
Which means you buy it at a price, let's say $10, on the expectation that it goes down. If it goes up you could end up losing a lot more money than you bargained for. It's not usually a practice that most average investors should use. It's left for professionals generally, but you can use it if you needed to.
KAVANAGH: A bit of gambling there.
And a Roth IRA, what a terrific investment. There's an old adage, a very fancy phrase, that we financial planners have had for years and that is: Tax free is for me.
The Roth IRA is tax free. Just think about it. When you're 65, 70 years old, being able to reach over into an investment and pull out that money and use the income tax free. That's a wonderful investment.
A great strategy that I like to use is to fund my 401(k) up to a match. And then take the money that I otherwise might have put into the 401(k), especially the younger client, and put that into a Roth IRA and have the best of both worlds.
WHITFIELD: Now it's $3,000 a year in which you can invest in your Roth, right?
KAVANAGH: Right. And that's going to go up in the years to come. We're going to cap off in a couple of years at about $5,000 a year. So especially younger investor who can afford to put money into a Roth IRA, should take a look at it.
WHITFIELD: All right. And this e-mail from Ellen Johnson: "What do you think about the use of options as a hedging strategy? Specifically in the use of covered calls to generate income?"
Ali?
VELSHI: You know, now we're talking about something that the average, but sophisticated investor can educate themselves on and can do. Covered calls are a much safer -- it's insurance. It's the same concept we're talking about.
When you buy these hedged mutual funds, it's a form of insurance. This a strategy that we're not going to get a chance to really get into here. But it's worth educating yourself on covered calls. A lot of mutual fund managers who get into this hedging world do use them. It's a way of covering your potential loss while getting the upside in the stock.
WHITFIELD: OK.
VELSHI: It's about as far as the average investor should go in getting into these kinds of strategies. WHITFIELD: Ali, before we lose our next caller, because it's the last one for this half hour. Joe from Kentucky has a question.
KAVANAGH: Hi, Joe.
CALLER: Hello?
WHITFIELD: What's your question?
KAVANAGH: What's your question for us?
CALLER: Well you know, back in '96, I invested in what you call commodities, a lot of unleaded gasoline. I lost as much as $10,000. I think they mismanaged my account. And I've been scared ever since to do anything else like that. So I'm just trying to figure out another kind of investment that would be risk-free and maybe, you know, something I could manage myself.
KAVANAGH: Oh, gosh, yes. Commodities you can lose everything. And it is speculation, not investing. So I always try to coax investors back into investing by saying, Let's at least start taking a look at something that's obvious around you. People have to put gasoline in their cars. Why not buy an energy index fund, an energy index stock.
People have to use health care and pharmaceuticals. You know, we're getting a little older and grayer, us baby boomers, and we're going to be using health care and pharmaceuticals. Why don't we buy the index stock? The IYH I-Share, for example, and buy America's best health care pharmaceutical companies.
And let's buy some utilities because without it there's no air conditioning, there's no lights, there's no CNN. And the world would not be the same place without that.
WHITFIELD: Certainly not. Mike Kavanagh and Ali Velshi, thanks very much, gentlemen for helping us to plan our golden years.
KAVANAGH: Thank you.
WHITFIELD: That's all we have time for now.
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