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ADAM SMITH'S MONEY GAME Missed the show? Get a phone call half way through? Fail to catch the name of a stock in "Personal Best"? In case you did, we are happy to provide you with a transcript. If you would like a transcript from a previous season, please visit 800-All-News at www.800-all-news.com or call them at (800) All-News. ANNOUNCER: [voice over] This program is made possible by a grant from MetLife, helping people become financially secure for 130 years. Funding has also been provided by the Roy R. and Marie S. Neuberger Foundation. ADAM SMITH: [voice over] It's your money, you earned it. But what's your game plan? Meet Suze Orman and find out how to achieve financial freedom; and picking the best mutual funds, finding good financial advice and planning your retirement. Next, in a Money Game special.
Face to Face Back to top ADAM SMITH: Hello, I'm Adam Smith and welcome to this special edition of The Money Game. What do you think about more often -- sex or money? If your answer is sex, you're in the minority. According to a recent national Money magazine poll, we Americans think more often about money than sex by a margin of two to one. This week, a program to help improve those thoughts you can't stop having about your money. Joining me will be the reigning personal finance team at Bloomberg Personal magazine. They will lay out a game plan to help you think through which mutual funds to buy, how to retire well and where to turn for financial advice. But first, her book is a number one bestseller. It has touched people, made them feel they could empower themselves in the handling of money. It's not surprising she has a wide and enthusiastic following. She can mobilize people with her philosophy. Meet Suze Orman, face to face. SUZE ORMAN, ``The 9 Steps to Financial Freedom'': Those who do what feels powerful to them, not because somebody else has told them to do it, but because it feels right for them, they then know when to sell. They know when to buy because they're not operating out of fear. So for instance, as a stock broker when I would call a client and I would say buy IBM, if they didn't feel themselves like it was a good stock, if they didn't know about it themselves, if IBM went from 60 to 40, they would undoubtedly have sold at 40 because they would be afraid. But because they knew about IBM, they'd watch it go to 40 and they'd go, oh, it's all right, it will come back one day. Those people who weren't powerful and they did it because I was telling them to do it or they'd listen to everybody else when it comes to their money rather than knowing for themselves and trusting their own gut, they would buy something; it would start to go down rather than go up because you know, Adam, nobody buys it at the very bottom. You'll buy something and then it goes down. ADAM SMITH: Suze, what if your gut isn't trained? Suppose you have a gut that's new to the business? SUZE ORMAN: That's when you have to start to learn yourself. How much do you really know about yourself and how you feel about things? And then maybe truthfully, Adam, you shouldn't be doing certain things. I'll tell you, I know many people who are millionaires today by having their money in money market funds, by having treasury notes because that's what makes them feel powerful. ADAM SMITH: How do they get to be millionaires then? SUZE ORMAN: By working for it and saving it and consistently doing that. But that's what they like to do. ADAM SMITH: But how do you tune yourself psychologically to just the right thing, because you've said you can't be fearful. Well, I understand that. And you can't be greedy. Obviously, fear and greed are the two extremes of the market. But how do you know where you are yourself? Is there a simple test you can give yourself to see how fearful or how greedy you are? SUZE ORMAN: It's not so much a test, it's how much you know yourself. When you get this hit, you know, each and every one of us -- and I say this all the time -- has this little voice and it's right around here. It's not a little voice, it's a huge voice. I have to tell you, I think it's the voice of God telling each and every one of us what to do and what not to do. And if you could only learn to listen to that voice, Adam. Have you ever yourself had that little feeling not to do something? ADAM SMITH: Yes, but I don't know whether it's God or the devil. SUZE ORMAN: Well, it doesn't matter. You've had that little feeling not to do something. You've done it and then you go, why didn't I listen? I shouldn't have done it. If you can just listen to that first-- it's called a ``sponda'' -- to that first reaction-- ADAM SMITH: Who calls it the sponda? SUZE ORMAN: You know, in ancient Indian tradition and if you go back to the Scriptures, what happens first comes from here and it's called, they named it a sponda, which I think really, even though this isn't probably true, is where the word spontaneous came from. Remember Adam, your money and your life are one. We tend to take our money and push it away. Our money is over here. We work for it but everything, we push it away. We need to come together with our money as one. ADAM SMITH: Tell me about money and shame. SUZE ORMAN: Yes. ADAM SMITH: Why is it that people will go on television shows, reveal the most intimate parts of their sex lives but nobody talks about how much money they have or how much debt they have or anything else? SUZE ORMAN: Because I think that we are all pretending that we are far more than we are and we are defining ourselves by our money and what we have and what we do, rather than who we are inside really. When you meet somebody, you judge them immediately by the clothes they wear, the cars they drive, the schools they send their children to, the neighborhoods they live in -- everything about them. However, how often do you get to learn about who they really are inside? You know, a fascinating thing happens to us, Adam, as we get older. Now maybe we meet somebody and I'll say, ``Hi, I'm Suze, the author of The 9 Steps to Financial Freedom.'' Or you're Adam Smith, the television talk show host. Years from now, when we're 80 or 90 and somebody meets us, I'm simply going to say, ``Hi, I'm Suze.'' ``Hi, I'm Adam.'' We're not going to define ourselves by what we do and our job title. ADAM SMITH: So why do we wait until we're 80? We do it now? SUZE ORMAN: So why should we wait? Why not do it now? But we're all ashamed that maybe today we're not as much as we look like we are. ADAM SMITH: You say there is a right way, right action for money and if you do that, money will come to you. Now that sounds quite Buddhist to me or something like it. Where did you get that? I mean, tell me about that. Does money really come to you if you do the right thing? SUZE ORMAN: You know, money has an energy force all unto its own. It's alive. If I had a dollar bill right here in front of you and I were to rip it up, your entire viewing audience, including you, Adam, would go, oh, my God, what are you doing? But if you took a $3 magazine and threw it away that you never got around to reading, you wouldn't think twice about it. Or $20 worth of food that spoiled -- wouldn't think twice about it when you threw that away. But money in money's form has an energy to it. So, just like in life, when you feel powerful -- have you ever noticed all your friends call? Everybody wants to take you out to dinner and pay for it. Job interviews come. Everything comes your way. But as soon as you feel powerless, nobody's around and you're all by yourself. The same is true with money. When you're feeling powerful, money is attracted to you. When you're feeling powerless, money is repelled from you. Right action -- when you do things that are right, both for yourself and others when it comes to money, and you act from a place of powerlessness with respect, you feel this energy and money starts to come your way in all kinds of ways that you would never expect. ADAM SMITH: So the money goes to where it senses the power is? SUZE ORMAN: Where it senses respect and right action are; that's where money goes. That's true. ADAM SMITH: Why should you give money away when you've worked so hard to attract it to you? SUZE ORMAN: Because most of us go through life holding on so tightly to that little amount that we think we have, our hands literally aren't open to receive that which is meant to come our way. I have found that the only way to open the hands, is by giving money away. When you give money away to say thank you -- thank you for what you have and thank you for what you don't have. ADAM SMITH: Then again, when you're 80 years old, you won't care because you can't take it with you. SUZE ORMAN: I can tell you there's not one of us, Adam, including you, that when you're on your death bed you're going to wish that you bought IBM at 40 or that little red convertible that you never got around to buying. Did you ever want a red convertible? ADAM SMITH: I had a red convertible. SUZE ORMAN: Well, there you go. I had a feeling. But anyway, when you're on your death bed, that is not what you're going to be thinking about. So if we can get our thoughts straight; again, if we can get that our self worth and our net worth can be one, but our self worth can actually be more important to us than our net worth, boy, I can tell you when you know you're perfect with or without money, then you truly start to have financial freedom and a wealth that all the money in the world can never buy.
Game Plan - Choosing Mutual Funds Back to top ADAM SMITH: Most Americans are feeling pretty good about their personal finances. In the latest Gallop poll, 55 percent said they feel better off than a year ago. And even more, over 70 percent, said they expect to be even better off a year from now. One reason, of course, is the rise of the stock market. And for most people, stocks means mutual funds. There are now over 9,000 of them -- more funds than there are stocks quoted on the New York Stock Exchange. So how do you choose? And how do you filter out the salesman's hype? Bob Casey and Mary Rowland, Bloomberg Personal magazine, have a game plan. MARY ROWLAND, Bloomberg Personal Magazine: You have to have a portfolio of funds, which is-- sounds like a jargon term. ADAM SMITH: How many should be-- how many funds are a portfolio? MARY ROWLAND: A minimum of three. I think you need three for a portfolio and a maximum of 12. ADAM SMITH: All right. Bob, how do you do it? BOB CASEY, Bloomberg Personal Magazine: Well, you need to identify a core fund or two that will form the basis of the portfolio. And you want to have broad exposure to stocks. This is the engine of growth that's going to bring you enough money to retire with. And then you're going to have specialized funds around that and they may be there to enhance the return, they may be there to provide more diversification. Example, you might have a core fund that would be a growth and income fund and invest in large stocks. And maybe you would have-- around that you might have a bond fund, a foreign stock fund, a small stock fund. ADAM SMITH: All right. So the main one is the one you're comfortable with. BOB CASEY: Right. ADAM SMITH: And the satellite ones are your side dishes and your dessert and your appetizer and what have you. Still, how do you find the main fund that you're going to be comfortable with? BOB CASEY: Once you decide on what you want the fund-- what role it's going to play. Say it's going to be a core fund. That's going to be a fund that might be called a growth and income fund or maybe a large value fund. You can use a number of sources of information -- Morningstar, Valueline, references in the library, references that are online -- to look through the funds in that category. ADAM SMITH: Should you use, by the way, the stars in Morningstar? BOB CASEY: The star rating shows how the fund has done relative to all funds. If it has done best in the last year on the basis that Morningstar uses, it will get five stars. It doesn't show you how that fund has done in relation to the other funds in its categories. Our example -- growth and income funds. If growth and income funds have been lagging, none of them are going to have five stars. Maybe they'll have two or three stars or four stars, the better ones. If you want to pick a growth and income fund, then the star rating can be a little misleading. You want to go to what Morningstar calls its category rating. And there you're going to find a rating that just looks at the funds in the category that you're looking at. ADAM SMITH: What about just using index funds? MARY ROWLAND: I was going to say, I think that's an alternative. If you just wanted to use index funds, which is a very smart way to go, I think you could do it without educating yourself so much; without spending so much research time. ADAM SMITH: Are you saying that the rational reaction is to buy indexes? MARY ROWLAND: Yes, absolutely. That's absolutely right. That's absolutely right. ADAM SMITH: Wow. That's really interesting. MARY ROWLAND: And I think you'd see with finance professors, accountants, people who really look at the numbers, they're indexes. ADAM SMITH: What are the worst mistakes people make when they buy mutual funds for themselves? MARY ROWLAND: I think you just put your finger on one of them, is they can't wring the emotions out of it. They personalize it. They take a loss. They regret a loss and they sell when they lose. ADAM SMITH: They treat it just like a stock. MARY ROWLAND: They get all-- oh, absolutely. They get all wrapped up in the emotions of it. They read that a fund is about to close, so they run out and buy it. ADAM SMITH: Mary, tell me how often you should look up and see how your fund is doing? MARY ROWLAND: Well, I think people like to see what their fund is doing. I think probably if you looked every quarter, that would be plenty. But I don't think there's anything wrong with looking so long as you don't act on it. ADAM SMITH: What are some of the other things we should look for when we're looking up a fund? BOB CASEY: Expenses are really key. I think people, when they focus on performance, they figure, well, expenses come out of that, I want the best performance I can. Whatever the expenses are, it's all right if the performance is good. They don't realize that it's very hard to predict performance and expenses are a much more constant, ongoing thing. They compound. ADAM SMITH: What's a high expense and what's a low expense? BOB CASEY: The average expense for a stock fund is 1.4 percent of the amount of the account, the assets under management. ADAM SMITH: Every year. BOB CASEY: That's the average. Low is in the .75, three-quarters of a percent. ADAM SMITH: And what would an index fund be? BOB CASEY: I think the Vanguard-- MARY ROWLAND: .19. BOB CASEY: Yeah, .19 or .18. It's a tiny fraction. ADAM SMITH: I think you should say the disadvantage of the index fund then, because isn't it that if the index fund is always 100 percent invested, you're going to get the index. And if the index goes down, which hasn't happened in quite a while, it's not the same as a manager who held some cash. BOB CASEY: Managers can add value. The problem is identifying them. You want to look for a manager that has a disciplined investment process that can be articulated and followed consistently. You want to look for a manager who has experience -- the more years, the better. MARY ROWLAND: Consistency. I think consistency and tenure. You know, you look at a fund that has been doing the same thing for a long time and then you look to see has the same manager been doing it, because when-- ADAM SMITH: Where do you look, Mary, to find this out? I mean, of course, many prospectuses tell us, but is there a handy place to find out where all the managers are and how long they've been on the job? MARY ROWLAND: Certainly Morningstar and Valueline identify those things. And Morningstar will show the performance of the fund over the past 10 years. And it shows the performance year by year. And it also shows those specially marked where the manager leaves. I think if the manager-- ADAM SMITH: An arrow -- ``manager left.'' MARY ROWLAND: That's right. And I think when the manager leaves, you should leave. You know, all bets are off. [Graphic: Useful Mutual Fund Web Sites Morningstar - www.morningstar.net Valueline - www.valueline.com Mutual Funds Interactive - www.brill.com The Index Investor - www.indexinvestor.com]
Game Plan - Thinking About Retirement Back to top ADAM SMITH: What happens when you retire? Will you be able to afford to live well or at least fairly well? Forty percent of Americans said no, they did not think so in a Money magazine poll. And a third didn't think social security would be there any more by the time they might need it. Rightly or wrongly, retirement is probably the number one worry most people have. So what should you do, especially if you're like most people and didn't start planning your retirement and saving for it right out of high school. Here's Jill Fraser of Bloomberg Personal magazine with her game plan. JILL FRASER, Bloomberg Personal Magazine: I think the thing that all of us have to keep in mind is that retirement today is different from what it was for our parents and for people even 10 or 15 years ago. For many of us baby boomers, we're saving for retirement and yet we will also be facing things like the education-- the college education of our kids at the same time. ADAM SMITH: How is that different than before? JILL FRASER: Well, our parents, for example, would be-- would handle things like college costs and then maybe they had another 10 or 15 years to kind of max up their retirement savings. And, of course, they had more faith in the social security system than many of us do. ADAM SMITH: They were different because they had children earlier, is that what you're saying? JILL FRASER: They had children earlier. Many of us now have second marriages, children later in life. And so you could actually be in a position where you're 65 years old and you have kids who are entering college now. That means you have a lot of financial burdens that are going to hit all at the same time. ADAM SMITH: Well, what do you do other than-- obviously, you should start the first-- you should start now, right after this program. JILL FRASER: That's right. Absolutely. ADAM SMITH: Okay. Other than that, suppose you haven't? Suppose time has passed you by or suppose you haven't done it enough? What do you do? JILL FRASER: I think that the point is you do have to start as soon as you can. But you also have to be realistic. I mean, when you sit in a conversation with a financial planner or a stock broker, they'll scare you because, you know, you should be saving $1,000, $2,000, 10 percent of your salary for retirement at the same time that you're saving $1,000 a month for each of your kids for college. ADAM SMITH: That will be news to a lot of people who can't clear up their credit card debt. JILL FRASER: That's right. It's not a possibility really. ADAM SMITH: So what do you do? JILL FRASER: First of all, you have to kind of defuse some anxieties; realize this is important, set whatever goals are realistic and then stick to whatever plan is manageable. For many of us, even if you get an end of the year bonus and could put, say, half of that as well into a retirement account, anything that you can do, you're better off than not doing anything. ADAM SMITH: Okay. What's the first step? JILL FRASER: Well, find out what your company has to offer. I mean, those are the best plans that there are. If your company has a 401k plan or a simple 401k plan, then often you're in a situation, first of all, whatever you put in is going to be tax deferred. You won't have to pay taxes on it. The interest that you earn on that account is not going to be subject to taxes until you withdraw it. And many companies will match part or all of what you contribute. That's like giving yourself a raise really. ADAM SMITH: Okay. But now you just quoted the example a minute ago of somebody whose kids are going off to college and you don't have enough to send them to college. JILL FRASER: That's right. ADAM SMITH: Okay, then what do you do? JILL FRASER: Well, now Adam, this is where I'm offering-- all of the financial planners will pick up the phone and call your show and tell you that I'm crazy. But what I believe people should do is save through these retirement vehicles even if in the back of your mind you know that you might have to borrow from them or partially cash them in to pay for college because that is really a way of getting that tax advantage for saving for important goals. ADAM SMITH: You take it out of the 401k-- JILL FRASER: Well, if you borrow, you see-- ADAM SMITH: You borrow from the 401k and you send it to the college. JILL FRASER: Yes, and then pay it back it. ADAM SMITH: And you hope these ungrateful whelps will send the money home quickly. Get a job. JILL FRASER: Absolutely. But if they don't and you pay yourself back, well, you're paying interest-- the interest that you're paying is not going to a bank, it's going to your retirement savings also. That's a nice benefit. ADAM SMITH: That's clever. That's clever. Can you charge yourself any interest rate you want? JILL FRASER: No. Your company will have an interest rate preset, but it will be a relatively low interest rate. It's much better than even doing something like a home equity loan or, say, a personal line of credit. [Graphic: Borrowing from your 401k Borrowing cannot typically exceed $50,000. Loan must typically be paid within 5 years. Interest rates are typically lower than credit card rates.]
Game Plan - Using Financial Advisers Back to top ADAM SMITH: When asked by Money magazine how often they worry about money, nearly 60 percent said very or fairly often. If you have a toothache, you go and find a dentist. The equivalent in the money game may well be a financial adviser or planner. But can they relieve the pain? If you need one, then how do you sort out the good ones from the incompetent or even the crooks? Lynn Brenner from Bloomberg magazine has a game plan. LYNN BRENNER, Bloomberg Personal Magazine: I think probably most people at some point in their life could benefit from professional financial advice, either at a crisis point -- for example, your spouse dies, you have a large amount of life insurance. You don't know what to do with the money. You don't know how to invest it. One woman I know of was left in exactly that situation and went to a financial planner asking how to invest the money. And after the conversation, the financial planner said forget about how to invest it for the moment, nothing terrible will happen if it stays in the bank for three months. The first thing you have to do is draw up a will and name a guardian for your kids, because she didn't have that. So a financial planner can really help give you a sense of what your priorities ought to be; can look at the big picture. ADAM SMITH: Well, I can certainly understand the crisis. Who else needs a financial planner? LYNN BRENNER: I think everyone probably as they near retirement. When you are a few years from retirement, you have a good sense of what your nest egg is. You need to know how much money it needs to generate to pay your expenses. How you should invest to generate that amount of money. You need to know how long your money has to last, because even though you're going to be drawing out a certain amount every year, you want to keep some of it invested to grow to keep pace with inflation. If you go to a financial planner with good software, he can crunch those numbers for you, make different assumptions about interest rates, tax rates, your longevity and come up with a blueprint for you. Maybe that will show you that you'll need a 20 percent return on your money to get the income. Then you have to redesign your budget. ADAM SMITH: Where do I find one? How do I know who is a financial-- I mean, this is not like CPA. It's not something that's been stamped by the state that you live in. LYNN BRENNER: You're perfectly right. Anybody can call himself a financial planner. And these days, everybody who sells any kind of financial product does call himself a planner, an adviser, a consultant. I think there are some credentials that are very important to look for -- CFP, which is a Certified Financial Planner. It's a certification that comes from a professional organization, not from a government agency. But there are educational requirements. They have to pass a rather rigorous 10-hour exam. There's an ethical code they have to abide by. And the other one is PFS. ADAM SMITH: All right. And where do you get the list? There must be an 800 number. LYNN BRENNER: There are several, in fact. Toll-free numbers -- you can call the national organization. They will refer you to people in your area who are members. ADAM SMITH: What do you have to pay a financial planner? LYNN BRENNER: Their fees range-- hourly fees would range from perhaps $50 an hour all the way up to $200 an hour. And they also charge flat rates for a project. For example, if you wanted the numbers crunched for your retirement with several different scenarios and advice on those scenarios, that would cost maybe about $1,500 for the whole thing. ADAM SMITH: That much? What about people that take-- don't charge a fee but take commissions? LYNN BRENNER: I don't think you should go to commissioned advisers for advice because their commission is based on a sale. And they are naturally going to advise you to buy what they sell because if you don't they're not going to earn anything. [Graphic: To find a qualified (CFP) Certified Financial Planner in your area call 800-282-7526. To find a qualified PFS (Personal Finance Specialist) in your area call 800-862-4272.] ADAM SMITH: Get in touch at our e-mail address, letters@adamsmith.net. Or write to us the old-fashioned way at Adam Smith's Money Game, 885 Third Avenue, Suite 2800, New York, New York 10022. If your question gets chosen, I will be sending you a personally signed copy of my book, The Money Game. Next week, be sure not to miss a rare interview with hedge fund legend Julian Robertson of Tiger Management. And the outstanding Suze Orman will be back to address specific issues when she answers your viewer questions. I'm Adam Smith, see you next week as the money game continues. ANNOUNCER: For more of the Money Game, visit us in cyberspace at www.adamsmith.net. ANNOUNCER: This program is made possible by a grant from MetLife with over $330 billion in assets under management. Funding has also been provided by the Roy R. and Marie S. Neuberger Foundation. CREDITS Produced by ADAM SMITH EDUCATIONAL PRODUCTION Special thanks to: 3-D Models Provided in Part by 3-D CAFE For a VHS cassette send $19.95 or $5.00 for a printed transcript to: Copyright _ 1998 Adam Smith Educational Productions Ltd.
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