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CNN Live Event/Special

Dollar Signs

Aired January 18, 2003 - 16:30   ET

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

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


CAROL LIN, CNN ANCHOR: Well, today we're going to begin a new feature that you're going to see every Saturday in this time slot.
ANDERSON COOPER, CNN ANCHOR: That's right. It's called DOLLAR SIGNS. That's what we're calling it at least, looking for ways to help you at home do more with your money.

LIN: And, of course, since this is the start of the New Year when many of us are trying to make plans to either start exercising so that we can shape up.

COOPER: Or, in my case continue to watch my body rapidly deteriorate. So, even if you don't exercise your muscles, why not at least try to shape up your finances this year?

LIN: Well, here to help us we brought in Jack Otter of "Smart Money" magazine. We're also taking your calls and e-mails, and our phone number is 1-800-807-2620, and the e-mail address is dollarsigns@cnn.com.

But we've got a lot of ground to cover today, Anderson.

COOPER: Yes, we're going to be talking about a lot of different things in terms of people at home who want to e-mail or write in. They can call in really with a variety of financial questions, really whatever they want to talk about.

We're going to start off with how to shape up in 2003, and we're going to talk first about people, for people who own a home, and then for people who are thinking about buying a home. Let's start off with people who own a home. What should they be thinking about?

JACK OTTER, "SMART MONEY" MAGAZINE: Well, first of all, interest rates are at a 40-year low right now so it's a great time to be getting a mortgage. Prices might be high but it's probably going to be offset by the low rates.

Obviously you're going to have to save up for this. Presumably if you're thinking about buying a home you've already started putting money aside for a down payment. You want to make sure that that's in a safe investment. You don't want to be in Nasdaq stocks or something and then suddenly you're ready to put the down payment and you've lost money, so you don't want to be in that situation.

LIN: Well, let's break down some of the tips that you were offering us earlier. OTTER: Sure.

LIN: For example, if you already own a home, then you're talking about refinance a mortgage that if you have a mortgage that's seven percent or higher, also a home equity loan to pay off credit card debt, and you also tell people to control their spending which sounds like common sense.

COOPER: That's a tough one right there.

LIN: Yes, that is a tough one.

OTTER: Sure.

LIN: But let's start at the top.

OTTER: Start at the top absolutely.

LIN: When do you know when to refinance? I don't know many people who still have a seven percent fixed. Most people I know have refinanced.

OTTER: That's what you would absolutely think; however, you can tell. You look at those big packages in the secondary mortgage market, the big banks. They take all of our mortgages and they package them together and sell them to investors and there are lots of people out there with seven percent, 7.5 percent, and the banks love that because they're making a lot of money on that but you don't want to be paying the bank.

So, first of all the best thing to do is go on the web. Find a mortgage calculator and you can plug in your precise numbers and find out whether you would save money. Now, refinancing is actually cheaper than it used to be, so as little as three-quarters of a percentage point can make it worth your while to refinance.

COOPER: How much does it cost to refinance?

OTTER: It varies a lot, about $2,000 but that's a very, very rough figure.

LIN: And you can finance that into the loan right?

OTTER: Absolutely.

LIN: It's not out of pocket.

OTTER: And you can also do a modification if you're lucky and you purchased a home recently. Sometimes they actually haven't sold that package out to the secondary market yet and so they'll be willing to work with you and for a much lower fee, just change it.

COOPER: Really?

OTTER: It's not a full blown refinance. COOPER: I just bought an apartment actually in New York two months ago and I got what I thought was a pretty good mortgage, but then you know you hear a month later oh now mortgages are at their lowest rate ever. I mean but we're still not talking -- we're probably talking less than a full percentage point. Is it still worth refinancing?

OTTER: Go on the net, find out. Plug your -- you know the full length of your mortgage and the full cost, the two different rates and you'll find out.

COOPER: Right, OK.

LIN: But it seems insane to not try to refinance. I mean when you're seeing fixed rate mortgages. I mean we got a fixed rate mortgage that it's like around, it's a 30-year fixed for five and a half percent, which is not something that you've seen since before I was born.

OTTER: Yes, exactly, exactly.

COOPER: When I got my mortgage recently, I decided to go for a five-year adjustable rate mortgage and now I'm thinking maybe I should be thinking about a 30-year mortgage if rates are so low.

OTTER: Well, it's tough. It depends. It certainly would be nice to lock that in for that long. However, say you expect you're probably going to sell that apartment in five or six years, you can't take that mortgage with you, so you're better off saving that extra money now and then sell it and you'll be better off, so it really depends on how long you want to stay in the property, although it's tempting. At five and a half percent, 30 years, I'd say for almost anybody grab it.

LIN: Yes, because it's almost like free money when you think about -- I mean the way I calculate it is if you're in say the 30 percent tax bracket and when you count your write-off, your real cost of that loan is like you know two percent, which is almost like free money.

OTTER: It's true, although remember inflation is so low that it's different than if inflation were raging at five percent and you would be making money on that, you're still paying a little bit but it's great.

COOPER: Now you also mentioned the home equity loan.

OTTER: Right.

COOPER: To pay off your credit card debt.

OTTER: Which is an interesting point with a huge however, now if you're disciplined it's a great deal. Say you owe a lot of money on one of those credit cards that charges 17 or 18 percent.

LIN: What's a lot of money do you think? I mean what do you consider a lot of money?

OTTER: Well, frankly at that rate almost anything is a lot of money.

LIN: Right.

OTTER: But there are -- Americans have $700 billion in credit card debt right now.

COOPER: That's remarkable.

OTTER: So, obviously a lot of people with $10,000 debt, $10,000 debt on two different cards.

LIN: On a credit card?

OTTER: So, $20,000 debt. Say that's at 17 or 18 percent, if you can get a home equity loan at say four percent, you've just made 14 percent tax free. Warren Buffet would be real happy to have that kind of a return.

COOPER: But you said there's a danger.

OTTER: Yes, now the danger is this. If you don't rein in your spending, you've just given more of your house to the bank and if you go out and spend more money and rack up more credit card bills you're worse off than you were before because you own less of your house and you're stuck with the credit card bills.

LIN: Right.

OTTER: So, if you're going to do that, you really have to be disciplined, cut up those credit cards, whatever it takes, and you'll save a lot of money.

LIN: So, how do you gauge how much equity you should take out of your house to pay down your credit card bills? I mean what if you have five credit cards or a total of $50,000 in debt but you only have maybe $70,000 equity in your house, is it worth it?

OTTER: Well, again, if you could be completely disciplined and the bank would give you the money, yes it would be worth it because you'd be saving a lot of money. But there is a danger there, as you point out. Suddenly you would own -- you would almost double the amount of your house that essentially the bank own. So, it's tricky territory but if you can be disciplined absolutely do it.

LIN: Some people have lost their homes because they were so tempted by home equity loans.

COOPER: Yes. As we've been saying, we are taking people's calls and also your e-mails throughout this next half hour. Right now, we have a woman Norma on the line right now from Maryland. Norma, what's your question?

NORMA: I'm considering going through a non-profit credit counseling company to negotiate the interest rate of my high interest debt versus filing bankruptcy and I wanted to find out how that would affect my credit report going through one of these credit counseling and what I can do after it's paid off to have it reflect better on my credit report?

OTTER: That's an excellent question and you're doing exactly the right thing. If you're going to do this, you want to go to the non- profit agencies to help you because there are profit agencies. You see the ads on television. They'll repackage your loan. They charge...

COOPER: Wipe the slate clean.

OTTER: Yes, yes, for an immense fee and really high interest rates.

NORMA: Right.

OTTER: So, first of all, Norma, you're doing exactly the right thing by going to a non-profit. As far as how it will affect your credit rating, I don't know precisely what they have to report. I mean I think your credit rating is instantly going to look better if suddenly you're paying, I'm making this up, but say six percent on whatever your loan is versus 18 percent.

So, you're going to show not only do you have less interest that you're paying but, you know, you took the bull by the horns and you made a responsible decision.

LIN: Norma, are they hitting you up for money for this service? I think we've lost her. I was just curious to see whether it was one of those, you know, saying clear your credit record. For $5,000 we'll make everything right.

OTTER: Yes, no don't do that, but the short answer is, you know, she's absolutely doing the right thing. She's taking control and that should not come back to haunt her in any way. I mean any problems with her credit, unfortunately she's already incurred those, so now by reducing her debt she's doing exactly what's needed.

COOPER: All right, Norma we appreciate your call and if you want to call us you're more than welcome to. We'll be here all of the half hour.

Coming up we're going to look at some smart investments in the year ahead and mistakes to avoid in what are going to be some difficult financial times ahead. You can e-mail us at dollarsigns@cnn.com.

LIN: Or we'll take your phone call, so give us a call at 1-800- 807-2620. We're going to be right back.

(COMMERCIAL BREAK)

LIN: We are taking your calls and your e-mails and, in fact, we've got Louise on the telephone with us to talk with our expert here, Jack from smartmoney.com, Louise in West Virginia, what's your question?

LOUISE: Yes. Yes. I'm 84 years old and I've lost six percent of my stock. Fifty percent of my stock was in utility, one utility that my husband bought in the '80s and he died.

So anyhow, my stockbroker said he didn't sell any of that because I would have had to pay so much tax on it. So, therefore, he didn't sell any of it but the rest of my stock is technical. And this is since 2000 it's been going down in value and it's been worrying me and I don't know how far down it's going to go and I don't have many years to make it up, does that make sense?

LIN: Right, so Louise what is your question?

LOUISE: I'm from Virginia, by the way, not West Virginia.

LIN: Oh, OK.

LOUISE: My problem is what to do now, whether to stick with my stockbroker or to change stockbrokers or what do I do now? I don't now.

LIN: Tough categories and not really diversified especially at her age.

LOUISE: No, it's not diversified and I have been interviewed by six stockbrokers, different companies, and they all said that I'm too high, too much into one utility.

LIN: All right, let's get an answer for you, Louise. Jack what do you think she should do?

OTTER: Well, believe it or not you're actually in a slightly good situation. It's unfortunate but I'll tell you how to make the best of it. Because you've lost money in tech, you have a tax deduction, so you can actually sell those tech stocks. You'll take a loss, but then sell some of that utility stock and you won't pay taxes on your gains because you've got an offsetting loss in the tech stock. Frankly, I mean I can't see your portfolio. It would take...

LOUISE: Right. He did sell the first of -- last day of December he sold 1,000 shares. I had 4,000 shares of the utility stock. He sold 1,000 shares of it and put it into other things that weren't so volatile and I hope that was a good move.

OTTER: Absolutely. Absolutely.

LOUISE: Well, I don't have far I'm going to go down. I can't just sit here and not do anything. And I'd like to know one other thing, where do people like me learn more about stock and what to do? I know nothing about -- I can't read the New York Stock Exchange. I don't know what all those little abbreviations mean.

COOPER: You know I think Louise brings up a good point which is, I mean probably a question a lot of people have, a lot of investors have right now, where to invest. I mean where do you put your money? The times have been so volatile the last couple of years. You had a couple of tips for viewers that we'll just put up on the screen.

The first one you say obviously educate yourself. Secondly, you talk about diversifying to low-risk, low fee funds, and the possibly hire a financial adviser and again that depends on how much money you have. Let's talk about the first one, educate yourself.

OTTER: Well, I don't know if you have access to the Internet, Louise, but there's some great sites out there. The vast majority of it is free. I mean frankly I think smartmoney.com is pretty good. We have something called Smart Money University. It's very basic and can help you out.

There's something called the Motley Fool. They call it Fool School and that's also quite good and just in terms of the basics. It's not like, as you said, trying to read the New York Stock Exchange numbers in the newspaper. It lays it out very simply for you.

So, I think that's really important. Whether or not you're going to hire a financial adviser, nobody cares about your money as much as you do, so educate yourself.

COOPER: Secondly, you talk about diversifying.

OTTER: Yes, diversifying is crucial. I think it sounds like Louise has started that process. Sell those tech stocks. Take the losses. Sell some of the utility. Deduct those gains against the losses and then with that money you've got, you're going to want to diversify broadly across both stocks and bonds. Now in her case, she sounds like she's all in stocks, so I'm going to recommend mostly bonds. I think we're going to talk about bonds in a minute.

LIN: Right.

OTTER: So we won't get into specifics there. But then the third point is the financial adviser and you mentioned it so we'll talk about that. You said you've been interviewed by financial advisers. My guess is they called you and I'm really suspicious of a financial adviser who calls you.

COOPER: That's a bad sign.

OTTER: My personal preference is for what's called fee only advisers, and they charge you a fee. That's how they get their name and it's going to sound expensive when you talk to them but I think ultimately in the long run, the money you save will make it worth it.

COOPER: Because they don't have a vested interest in making money from buying and selling?

OTTER: Exactly. They get no commission. They only make money that you pay them. There's an organization called the National Association of Personal Financial Advisers on the web. That's NAPFA. The name's too long but anyway the head of it is a guy named Gary Schatsky in New York and he has sort of a standard line but it makes a lot of sense. He says investors have lost more money through these subtle conflicts of interest than in all of the scandals that have made headlines and it's a good point. I mean I hate to pick on American Express, but those brokers are financially penalized if they sell a fund that's not in the American Express family.

LIN: Oh, OK.

OTTER: Now how can you expect them, I mean I wouldn't expect the guy to recommend a fund that he's going to get penalized for giving me.

LIN: Exactly, exactly, good point.

OTTER: So, go with the fee only people. You now pay them and I think in the long run you'll end up making a lot more money.

LIN: And, on that note, coming up in fact we're going to be talking about some common mistakes that people make.

COOPER: Which is about, I think I made just about all of them by the way.

LIN: But you learn from your mistakes and that's what's important.

COOPER: Yes, I don't know about that.

LIN: All right, well we're starting fresh in the New Year so we're going to have some of those tips for you when we're coming back in just a moment. We'll be right back.

(COMMERCIAL BREAK)

LIN: And Jack Otter is with us from "Smart Money" magazine. We're talking about dollar signs today and trying to get you off to a good start and we want to talk about common mistakes that people make with their investments, and all of us are feeling the pain from the last couple of years.

But some of the most common mistakes, Jack, that you've been talking about, for example you're saying that some people have too much money in a money market account for example, or too much in bond funds, or they're buying into T-Bills because they think it's safe but maybe they're overpriced.

OTTER: Right, exactly. Let's start with the money market. I mean anybody who has invested in the money market in 2002 is probably pretty happy right now. They made about one percent.

LIN: But they didn't lose anything.

OTTER: Everybody else is losing 20 percent so that's not bad but don't make the mistake of thinking so therefore for the rest of my life I'm going to leave it in a money market. At times, if inflation should pick up, you could actually slowly lose money. I mean supposedly money markets are going to keep up with inflation but just in case they don't, and you're certainly not going to get the kind of growth that you'd get in a broadly diversified portfolio.

Bond funds, the danger here is that people don't really realize bonds have been on about a 20 year bull market. Bonds have been doing great for decades because interest rates have slowly been coming down.

LIN: And when that happens the principal of your bond goes up.

OTTER: Exactly. It's not very -- it's hard to understand but as the more rates go down, the more your principal increases exactly, and they've gone, rates have gone down about as far as they're going to go at this point.

And so should rates go up even one percent, say the ten-year treasury bonds at four percent goes up to five, that's a 20 percent difference and you can lose that out of your principal.

LIN: Oh, OK.

OTTER: So, don't think that bond funds are super safe just because you've been in them. You want to take a look at corporate bonds and, again, you should do this through a mutual fund, not individual bonds in most cases.

But corporate bonds might be a place to go. Foreign bonds sound scary but the PIMCO Foreign Fund, Foreign Bond Fund, excuse me, hedges its bet so you don't have the currency dangers that you would by just investing overseas normally and interest rates abroad are higher and might have a little bit farther to go down, so you might sort of catch the tail end of that bull market.

LIN: But the higher the interest rate on a corporate bond, doesn't that mean that the company is in trouble, they have to pay out a little bit more to get you to invest your money with them?

OTTER: That's true and not true. I mean absolutely within the corporate world they charge higher rates for riskier companies, but even a really rock solid company is still giving you a better interest rate than you're getting on treasury bills right now.

LIN: But it's taxable.

OTTER: It is taxable, absolutely.

LIN: All right.

COOPER: We've been taking questions all this half hour. We've got Sandra on the line right now from deep in the heart of Texas. Sandra, what's your question?

SANDRA: I retire in about 13 months and part of my retirement is based on stock investments and with the way they're going down, I wonder if I should stay where I am or find a different investment for my money?

COOPER: All right, Jack what do you think?

OTTER: My recommendation would be to do what's called dollar cost averaging, so I would start selling your stocks but I wouldn't go tomorrow and dump them because let's hope the market goes up.

The reason you're selling is because the market might not go up. It might go down and as a retiree you're going to need that money so you can't leave it all tied up in risky stocks.

However, there's no reason to dump it all immediately. Figure out a plan. Now maybe you sell once, a little bit once a month, maybe it's every two months, every six months, and then you're going to start putting it into some probably corporate bond funds would be an excellent place to go and some in the money market if you're going to need it in the short term.

Or, another possibility is a short term government bond fund because at the shorter end there's a little bit less risk. Frankly, I'd probably go the short term corporate bond fund, again very safe.

LIN: A little less volatility and add some diversity.

OTTER: Very safe but less volatility.

LIN: Thank you so much, Jack, some great tips.

OTTER: Absolutely.

LIN: And I think some comforting advice for people that they can do something in this volatile market.

OTTER: I hope so.

COOPER: We're going to be here every Saturday at 4:30 p.m., Carol and I. I hope you join us. We'll always be taking your questions and your e-mails.

LIN: And it's good to be with you. I'm Carol Lin with Anderson Cooper. We've got a news alert, so stay right there.

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Aired January 18, 2003 - 16:30   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CAROL LIN, CNN ANCHOR: Well, today we're going to begin a new feature that you're going to see every Saturday in this time slot.
ANDERSON COOPER, CNN ANCHOR: That's right. It's called DOLLAR SIGNS. That's what we're calling it at least, looking for ways to help you at home do more with your money.

LIN: And, of course, since this is the start of the New Year when many of us are trying to make plans to either start exercising so that we can shape up.

COOPER: Or, in my case continue to watch my body rapidly deteriorate. So, even if you don't exercise your muscles, why not at least try to shape up your finances this year?

LIN: Well, here to help us we brought in Jack Otter of "Smart Money" magazine. We're also taking your calls and e-mails, and our phone number is 1-800-807-2620, and the e-mail address is dollarsigns@cnn.com.

But we've got a lot of ground to cover today, Anderson.

COOPER: Yes, we're going to be talking about a lot of different things in terms of people at home who want to e-mail or write in. They can call in really with a variety of financial questions, really whatever they want to talk about.

We're going to start off with how to shape up in 2003, and we're going to talk first about people, for people who own a home, and then for people who are thinking about buying a home. Let's start off with people who own a home. What should they be thinking about?

JACK OTTER, "SMART MONEY" MAGAZINE: Well, first of all, interest rates are at a 40-year low right now so it's a great time to be getting a mortgage. Prices might be high but it's probably going to be offset by the low rates.

Obviously you're going to have to save up for this. Presumably if you're thinking about buying a home you've already started putting money aside for a down payment. You want to make sure that that's in a safe investment. You don't want to be in Nasdaq stocks or something and then suddenly you're ready to put the down payment and you've lost money, so you don't want to be in that situation.

LIN: Well, let's break down some of the tips that you were offering us earlier. OTTER: Sure.

LIN: For example, if you already own a home, then you're talking about refinance a mortgage that if you have a mortgage that's seven percent or higher, also a home equity loan to pay off credit card debt, and you also tell people to control their spending which sounds like common sense.

COOPER: That's a tough one right there.

LIN: Yes, that is a tough one.

OTTER: Sure.

LIN: But let's start at the top.

OTTER: Start at the top absolutely.

LIN: When do you know when to refinance? I don't know many people who still have a seven percent fixed. Most people I know have refinanced.

OTTER: That's what you would absolutely think; however, you can tell. You look at those big packages in the secondary mortgage market, the big banks. They take all of our mortgages and they package them together and sell them to investors and there are lots of people out there with seven percent, 7.5 percent, and the banks love that because they're making a lot of money on that but you don't want to be paying the bank.

So, first of all the best thing to do is go on the web. Find a mortgage calculator and you can plug in your precise numbers and find out whether you would save money. Now, refinancing is actually cheaper than it used to be, so as little as three-quarters of a percentage point can make it worth your while to refinance.

COOPER: How much does it cost to refinance?

OTTER: It varies a lot, about $2,000 but that's a very, very rough figure.

LIN: And you can finance that into the loan right?

OTTER: Absolutely.

LIN: It's not out of pocket.

OTTER: And you can also do a modification if you're lucky and you purchased a home recently. Sometimes they actually haven't sold that package out to the secondary market yet and so they'll be willing to work with you and for a much lower fee, just change it.

COOPER: Really?

OTTER: It's not a full blown refinance. COOPER: I just bought an apartment actually in New York two months ago and I got what I thought was a pretty good mortgage, but then you know you hear a month later oh now mortgages are at their lowest rate ever. I mean but we're still not talking -- we're probably talking less than a full percentage point. Is it still worth refinancing?

OTTER: Go on the net, find out. Plug your -- you know the full length of your mortgage and the full cost, the two different rates and you'll find out.

COOPER: Right, OK.

LIN: But it seems insane to not try to refinance. I mean when you're seeing fixed rate mortgages. I mean we got a fixed rate mortgage that it's like around, it's a 30-year fixed for five and a half percent, which is not something that you've seen since before I was born.

OTTER: Yes, exactly, exactly.

COOPER: When I got my mortgage recently, I decided to go for a five-year adjustable rate mortgage and now I'm thinking maybe I should be thinking about a 30-year mortgage if rates are so low.

OTTER: Well, it's tough. It depends. It certainly would be nice to lock that in for that long. However, say you expect you're probably going to sell that apartment in five or six years, you can't take that mortgage with you, so you're better off saving that extra money now and then sell it and you'll be better off, so it really depends on how long you want to stay in the property, although it's tempting. At five and a half percent, 30 years, I'd say for almost anybody grab it.

LIN: Yes, because it's almost like free money when you think about -- I mean the way I calculate it is if you're in say the 30 percent tax bracket and when you count your write-off, your real cost of that loan is like you know two percent, which is almost like free money.

OTTER: It's true, although remember inflation is so low that it's different than if inflation were raging at five percent and you would be making money on that, you're still paying a little bit but it's great.

COOPER: Now you also mentioned the home equity loan.

OTTER: Right.

COOPER: To pay off your credit card debt.

OTTER: Which is an interesting point with a huge however, now if you're disciplined it's a great deal. Say you owe a lot of money on one of those credit cards that charges 17 or 18 percent.

LIN: What's a lot of money do you think? I mean what do you consider a lot of money?

OTTER: Well, frankly at that rate almost anything is a lot of money.

LIN: Right.

OTTER: But there are -- Americans have $700 billion in credit card debt right now.

COOPER: That's remarkable.

OTTER: So, obviously a lot of people with $10,000 debt, $10,000 debt on two different cards.

LIN: On a credit card?

OTTER: So, $20,000 debt. Say that's at 17 or 18 percent, if you can get a home equity loan at say four percent, you've just made 14 percent tax free. Warren Buffet would be real happy to have that kind of a return.

COOPER: But you said there's a danger.

OTTER: Yes, now the danger is this. If you don't rein in your spending, you've just given more of your house to the bank and if you go out and spend more money and rack up more credit card bills you're worse off than you were before because you own less of your house and you're stuck with the credit card bills.

LIN: Right.

OTTER: So, if you're going to do that, you really have to be disciplined, cut up those credit cards, whatever it takes, and you'll save a lot of money.

LIN: So, how do you gauge how much equity you should take out of your house to pay down your credit card bills? I mean what if you have five credit cards or a total of $50,000 in debt but you only have maybe $70,000 equity in your house, is it worth it?

OTTER: Well, again, if you could be completely disciplined and the bank would give you the money, yes it would be worth it because you'd be saving a lot of money. But there is a danger there, as you point out. Suddenly you would own -- you would almost double the amount of your house that essentially the bank own. So, it's tricky territory but if you can be disciplined absolutely do it.

LIN: Some people have lost their homes because they were so tempted by home equity loans.

COOPER: Yes. As we've been saying, we are taking people's calls and also your e-mails throughout this next half hour. Right now, we have a woman Norma on the line right now from Maryland. Norma, what's your question?

NORMA: I'm considering going through a non-profit credit counseling company to negotiate the interest rate of my high interest debt versus filing bankruptcy and I wanted to find out how that would affect my credit report going through one of these credit counseling and what I can do after it's paid off to have it reflect better on my credit report?

OTTER: That's an excellent question and you're doing exactly the right thing. If you're going to do this, you want to go to the non- profit agencies to help you because there are profit agencies. You see the ads on television. They'll repackage your loan. They charge...

COOPER: Wipe the slate clean.

OTTER: Yes, yes, for an immense fee and really high interest rates.

NORMA: Right.

OTTER: So, first of all, Norma, you're doing exactly the right thing by going to a non-profit. As far as how it will affect your credit rating, I don't know precisely what they have to report. I mean I think your credit rating is instantly going to look better if suddenly you're paying, I'm making this up, but say six percent on whatever your loan is versus 18 percent.

So, you're going to show not only do you have less interest that you're paying but, you know, you took the bull by the horns and you made a responsible decision.

LIN: Norma, are they hitting you up for money for this service? I think we've lost her. I was just curious to see whether it was one of those, you know, saying clear your credit record. For $5,000 we'll make everything right.

OTTER: Yes, no don't do that, but the short answer is, you know, she's absolutely doing the right thing. She's taking control and that should not come back to haunt her in any way. I mean any problems with her credit, unfortunately she's already incurred those, so now by reducing her debt she's doing exactly what's needed.

COOPER: All right, Norma we appreciate your call and if you want to call us you're more than welcome to. We'll be here all of the half hour.

Coming up we're going to look at some smart investments in the year ahead and mistakes to avoid in what are going to be some difficult financial times ahead. You can e-mail us at dollarsigns@cnn.com.

LIN: Or we'll take your phone call, so give us a call at 1-800- 807-2620. We're going to be right back.

(COMMERCIAL BREAK)

LIN: We are taking your calls and your e-mails and, in fact, we've got Louise on the telephone with us to talk with our expert here, Jack from smartmoney.com, Louise in West Virginia, what's your question?

LOUISE: Yes. Yes. I'm 84 years old and I've lost six percent of my stock. Fifty percent of my stock was in utility, one utility that my husband bought in the '80s and he died.

So anyhow, my stockbroker said he didn't sell any of that because I would have had to pay so much tax on it. So, therefore, he didn't sell any of it but the rest of my stock is technical. And this is since 2000 it's been going down in value and it's been worrying me and I don't know how far down it's going to go and I don't have many years to make it up, does that make sense?

LIN: Right, so Louise what is your question?

LOUISE: I'm from Virginia, by the way, not West Virginia.

LIN: Oh, OK.

LOUISE: My problem is what to do now, whether to stick with my stockbroker or to change stockbrokers or what do I do now? I don't now.

LIN: Tough categories and not really diversified especially at her age.

LOUISE: No, it's not diversified and I have been interviewed by six stockbrokers, different companies, and they all said that I'm too high, too much into one utility.

LIN: All right, let's get an answer for you, Louise. Jack what do you think she should do?

OTTER: Well, believe it or not you're actually in a slightly good situation. It's unfortunate but I'll tell you how to make the best of it. Because you've lost money in tech, you have a tax deduction, so you can actually sell those tech stocks. You'll take a loss, but then sell some of that utility stock and you won't pay taxes on your gains because you've got an offsetting loss in the tech stock. Frankly, I mean I can't see your portfolio. It would take...

LOUISE: Right. He did sell the first of -- last day of December he sold 1,000 shares. I had 4,000 shares of the utility stock. He sold 1,000 shares of it and put it into other things that weren't so volatile and I hope that was a good move.

OTTER: Absolutely. Absolutely.

LOUISE: Well, I don't have far I'm going to go down. I can't just sit here and not do anything. And I'd like to know one other thing, where do people like me learn more about stock and what to do? I know nothing about -- I can't read the New York Stock Exchange. I don't know what all those little abbreviations mean.

COOPER: You know I think Louise brings up a good point which is, I mean probably a question a lot of people have, a lot of investors have right now, where to invest. I mean where do you put your money? The times have been so volatile the last couple of years. You had a couple of tips for viewers that we'll just put up on the screen.

The first one you say obviously educate yourself. Secondly, you talk about diversifying to low-risk, low fee funds, and the possibly hire a financial adviser and again that depends on how much money you have. Let's talk about the first one, educate yourself.

OTTER: Well, I don't know if you have access to the Internet, Louise, but there's some great sites out there. The vast majority of it is free. I mean frankly I think smartmoney.com is pretty good. We have something called Smart Money University. It's very basic and can help you out.

There's something called the Motley Fool. They call it Fool School and that's also quite good and just in terms of the basics. It's not like, as you said, trying to read the New York Stock Exchange numbers in the newspaper. It lays it out very simply for you.

So, I think that's really important. Whether or not you're going to hire a financial adviser, nobody cares about your money as much as you do, so educate yourself.

COOPER: Secondly, you talk about diversifying.

OTTER: Yes, diversifying is crucial. I think it sounds like Louise has started that process. Sell those tech stocks. Take the losses. Sell some of the utility. Deduct those gains against the losses and then with that money you've got, you're going to want to diversify broadly across both stocks and bonds. Now in her case, she sounds like she's all in stocks, so I'm going to recommend mostly bonds. I think we're going to talk about bonds in a minute.

LIN: Right.

OTTER: So we won't get into specifics there. But then the third point is the financial adviser and you mentioned it so we'll talk about that. You said you've been interviewed by financial advisers. My guess is they called you and I'm really suspicious of a financial adviser who calls you.

COOPER: That's a bad sign.

OTTER: My personal preference is for what's called fee only advisers, and they charge you a fee. That's how they get their name and it's going to sound expensive when you talk to them but I think ultimately in the long run, the money you save will make it worth it.

COOPER: Because they don't have a vested interest in making money from buying and selling?

OTTER: Exactly. They get no commission. They only make money that you pay them. There's an organization called the National Association of Personal Financial Advisers on the web. That's NAPFA. The name's too long but anyway the head of it is a guy named Gary Schatsky in New York and he has sort of a standard line but it makes a lot of sense. He says investors have lost more money through these subtle conflicts of interest than in all of the scandals that have made headlines and it's a good point. I mean I hate to pick on American Express, but those brokers are financially penalized if they sell a fund that's not in the American Express family.

LIN: Oh, OK.

OTTER: Now how can you expect them, I mean I wouldn't expect the guy to recommend a fund that he's going to get penalized for giving me.

LIN: Exactly, exactly, good point.

OTTER: So, go with the fee only people. You now pay them and I think in the long run you'll end up making a lot more money.

LIN: And, on that note, coming up in fact we're going to be talking about some common mistakes that people make.

COOPER: Which is about, I think I made just about all of them by the way.

LIN: But you learn from your mistakes and that's what's important.

COOPER: Yes, I don't know about that.

LIN: All right, well we're starting fresh in the New Year so we're going to have some of those tips for you when we're coming back in just a moment. We'll be right back.

(COMMERCIAL BREAK)

LIN: And Jack Otter is with us from "Smart Money" magazine. We're talking about dollar signs today and trying to get you off to a good start and we want to talk about common mistakes that people make with their investments, and all of us are feeling the pain from the last couple of years.

But some of the most common mistakes, Jack, that you've been talking about, for example you're saying that some people have too much money in a money market account for example, or too much in bond funds, or they're buying into T-Bills because they think it's safe but maybe they're overpriced.

OTTER: Right, exactly. Let's start with the money market. I mean anybody who has invested in the money market in 2002 is probably pretty happy right now. They made about one percent.

LIN: But they didn't lose anything.

OTTER: Everybody else is losing 20 percent so that's not bad but don't make the mistake of thinking so therefore for the rest of my life I'm going to leave it in a money market. At times, if inflation should pick up, you could actually slowly lose money. I mean supposedly money markets are going to keep up with inflation but just in case they don't, and you're certainly not going to get the kind of growth that you'd get in a broadly diversified portfolio.

Bond funds, the danger here is that people don't really realize bonds have been on about a 20 year bull market. Bonds have been doing great for decades because interest rates have slowly been coming down.

LIN: And when that happens the principal of your bond goes up.

OTTER: Exactly. It's not very -- it's hard to understand but as the more rates go down, the more your principal increases exactly, and they've gone, rates have gone down about as far as they're going to go at this point.

And so should rates go up even one percent, say the ten-year treasury bonds at four percent goes up to five, that's a 20 percent difference and you can lose that out of your principal.

LIN: Oh, OK.

OTTER: So, don't think that bond funds are super safe just because you've been in them. You want to take a look at corporate bonds and, again, you should do this through a mutual fund, not individual bonds in most cases.

But corporate bonds might be a place to go. Foreign bonds sound scary but the PIMCO Foreign Fund, Foreign Bond Fund, excuse me, hedges its bet so you don't have the currency dangers that you would by just investing overseas normally and interest rates abroad are higher and might have a little bit farther to go down, so you might sort of catch the tail end of that bull market.

LIN: But the higher the interest rate on a corporate bond, doesn't that mean that the company is in trouble, they have to pay out a little bit more to get you to invest your money with them?

OTTER: That's true and not true. I mean absolutely within the corporate world they charge higher rates for riskier companies, but even a really rock solid company is still giving you a better interest rate than you're getting on treasury bills right now.

LIN: But it's taxable.

OTTER: It is taxable, absolutely.

LIN: All right.

COOPER: We've been taking questions all this half hour. We've got Sandra on the line right now from deep in the heart of Texas. Sandra, what's your question?

SANDRA: I retire in about 13 months and part of my retirement is based on stock investments and with the way they're going down, I wonder if I should stay where I am or find a different investment for my money?

COOPER: All right, Jack what do you think?

OTTER: My recommendation would be to do what's called dollar cost averaging, so I would start selling your stocks but I wouldn't go tomorrow and dump them because let's hope the market goes up.

The reason you're selling is because the market might not go up. It might go down and as a retiree you're going to need that money so you can't leave it all tied up in risky stocks.

However, there's no reason to dump it all immediately. Figure out a plan. Now maybe you sell once, a little bit once a month, maybe it's every two months, every six months, and then you're going to start putting it into some probably corporate bond funds would be an excellent place to go and some in the money market if you're going to need it in the short term.

Or, another possibility is a short term government bond fund because at the shorter end there's a little bit less risk. Frankly, I'd probably go the short term corporate bond fund, again very safe.

LIN: A little less volatility and add some diversity.

OTTER: Very safe but less volatility.

LIN: Thank you so much, Jack, some great tips.

OTTER: Absolutely.

LIN: And I think some comforting advice for people that they can do something in this volatile market.

OTTER: I hope so.

COOPER: We're going to be here every Saturday at 4:30 p.m., Carol and I. I hope you join us. We'll always be taking your questions and your e-mails.

LIN: And it's good to be with you. I'm Carol Lin with Anderson Cooper. We've got a news alert, so stay right there.

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