Investing Insights from and about Suze Orman

Here's a piece from Suze Orman that suggests how to keep your cool in a choppy market that offered several good insights on investing as well as a glimpse into why Suze invests the way she does.

I'll take them in order as they appear in the piece. First, she comments on what to do when the market declines rapidly (such as falling 400 points in a day like it did not too long ago):

My advice then and now is to stay focused on the long-term and do your best to ignore market volatility. I know it's not fun to watch your portfolio fall, and when the market shaves nearly 500 points in one day it's natural to feel concerned or even panicky.

This is what I do for the most part. I have a friend in the office who watches the market every day throughout the day. Often he'll ask, "Did you see what the market is doing today?" and I'll respond, "Nope." Why? I'm not really interested in day-to-day fluctuations in the market -- I'm in for the long-term and am a believer in stocks over the long haul. I simply buy more index funds every month as I add to my 401k and my personal portfolio. And when I do hear about a big drop in the market, I buy more -- I figure I'm getting a discount on something that will be worth a lot in 20 years. ;-)

Next Suze lists three ways to avoid the jitters. They are:

1. Stay focused on the long-term.
2. Avoid the timing bomb.
3. Stick with stocks.

Again, I'm right with her. It isn't the most glamorous advice out there, but what do you want, flashy or effective? If it's the latter, then these tips are for you.

Finally, Suze sheds some light on why she personally doesn't invest much in stocks (I talked about this in Suze Orman Knows Nothing About Investing):

You may have read that I currently have the bulk of my own money invested in zero coupon municipal bonds that earn about 5 percent tax-free, and a smaller portion of my assets invested in stocks. That doesn't mean I think everyone should load up on bonds.

In my earlier years, of course, I had the bulk of my money invested in the stock market because I needed it to grow as much as possible. But I'm in a different financial situation now and can afford to take less risk. I can meet my financial needs, take care of my loved ones, and focus on my philanthropic interests with lower-risk bonds.

Besides, that 5 percent tax-exempt yield is nothing to sneeze at. I would have to earn more than 7.5 percent in a taxable investment to match that. Anything that earns that much is going to carry a whole lot more risk than my municipal bonds.

Many people (me included) suspected that this was her rationale for keeping so much money in municipal bonds but this is the first I've seen her explain it publicly. I felt that since I said she "knew nothing about investing" (in jest, but still it was the headline) that I owed it to her to publish her reasoning. ;-)

Comments

[Chris]

Suze Orman's show is a little over the top sometimes, but I find some of her books enlightening. I think she has a solid financial plan. She's obviously well off, and if she's comfortable why have any risk in your money at all? No one can criticize her for having a plan that works well for her family.

A 5% tax free return doesn't sound too bad, either.

[Lord]

I think this is misinterpreting risk. Bonds are more risky than stocks long term. With 2.5-3% inflation the real return is only 2-2.5%. Unrealized capital gains are tax deferred at least. Must be nice to be so wealthy money no longer matters though.

[segfault]

Lord,

I don't think it's misinterpreting risk in her situation. She is probably in a situation where she is wealthy enough that zero real return for her remaining life expectancy wouldn't cause her to run out of money. She has little need to take risk, and the 5% tax-free return of muni bonds is much better than the 5% pre-tax return of a money market fund or CD.

[cory]

"Must be nice to be so wealthy money no longer matters though."

I think that's the point that Suze Orman gets and most finance-minded forget. There IS a such thing as enough money, and once you have it, you can stop chasing the almighty dollar and start doing all the things you've been saving for the whole time.