Suze Orman Knows Nothing About Investing

Here's a piece that's very interesting indeed. It's from Money Central and talks about a recent interview the New York Times did with Suze Orman. In particular, the article highlights details of Suze's personal financial situation and how she invests. Here are the specifics:

Orman estimated her liquid net worth at about $25 million, with an additional $7 million worth of houses. With just $1 million of that in stocks, it means that just 4% of her liquid net worth is in the stock market.

What does Orman do with the rest of her money? Solomon asked, and was told: "Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. I take a little lower interest rate to make sure my bonds are 100% safe and sound. "

As for playing the stock market, Orman said "I have a million dollars in the stock market, because if I lose a million dollars, I don't personally care."

From this, here's what the author concluded:

In short, the person being trusted as everyone's financial adviser has a portfolio that few people could live with.

This is backed up by a couple quotes in the piece as follows:

Says Debra Neiman of Neiman & Associates Financial Services in Arlington, Mass.: "A big premise of financial life planning is that you shouldn't go there with a client unless you have been there in your own shoes. You need to be comfortable living with the advice you give out, because you are making the same kind of decisions."

"Suze is investing as if she was a retired grandmother with no heirs," says Neiman, who is a founder of the Pride Planners group, which represents advisers who specialize in serving the gay and lesbian community. "That's not the description of the ordinary person who is out there taking her advice."

Hmmmmmmm.

And more:

"She scores very high on the personality index, but very low on the knowledge and understanding of the complex issues that face a lot of her audience. She's giving generic, simple solutions to people's most difficult problems, and judging from her portfolio, she's taking them on a path she really hasn't traveled herself."

Ok, let me give you a few thoughts on this:

1. Personally, I put Suze Orman in the "5-6" range on a scale of 1-10. On the basics like saving money, I think she's good and her overall philosophy is decent. Her personality is just "ok" for me, and thus the lower rating. That said, I'm certainly not a Suze basher.

2. Maybe Suze HAS BEEN where we all are and is just past that point now. Just because she's not in the market currently doesn't mean she's never been in the market.

3. And even more, lots of people are giving out advice (writers, columnists, TV personalities, bloggers, etc.) about what to do without ever having been in the situation themselves. For instance, I tell people how to get out of debt, but I've never been in really deep debt myself. Does that mean my advice isn't valid or useful? Yes, maybe I miss out a bit on the emotional part of the experience, but still, my thoughts on how to do it are still correct, aren't they?

4. There are two ways to look at the million dollars she has in the market. The first is: "It's a million dollars! That's a lot of money -- much more than most people have in the market!" The second is: "Sheesh! A paltry $1 million -- only 4% of her worth. That's not much at all."

My overall take on this is pretty neutral -- it doesn't make me like Suze more or dislike her less. If it was John Bogle and I found out he had 4% of his assets in index funds, that might be a different story. But I guess it has to do with expectations. I never expected Suze to be a great know-it-all, so I'm not impacted when I find out she isn't.

What do you think of the issue?

Comments

[hejustlaughs]

Suze has too much of a personality for me. I see her on a lot of talk shows like Larry King and I have to change the channel.

...oh and BTW, I finally decided to subscribe to your feed since I forgot how much I enjoy your posts and I've been forgetting to check back. I had a hell of a time looking for your RSS feed links. Maybe it's just me.

[Brett McKay]

I'm not too impressed with Suze. I think the article is right about Suze just dispensing generalized advice. I haven't been too impressed by the books I've read by her. But I guess she's good for people who are totally clueless about finances.

[Duane Gran]

Much of her advice is useful, but a real advisory relationship involves understanding the hopes and ambitions of the individual. Advice with a mass appeal is appropriate for starting out but anyone with a sizable amount to invest will often save more money (usually through optimal tax strategies) than they spend on personalized advice.

I'm a little dismayed at how she allocates her portfolio, but I don't know her hopes and ambitions. It is pretty evident that she is risk averse. She would do well to work with an adviser. ;)

[Madame X]

I'm not a particular fan of Suze, but I was a little surprised at her approach too... but I figured she has defined her goals in life and what she needs to achieve them-- and if a very conservative rate of return on her very large savings gets her there, why mess around with risk? She could put all her money in a savings account earning a tiny rate of interest and she'd still be making 10 times more money from that than the average person does from their salary, and she makes a ton of money from other things on top of what she earns from her investments. I think it's actually kind of refreshing that her attitude seems to be "I am making enough money, I don't need to risk a penny just to play the game of trying to make more and more."
The question is whether she would recommend that approach for someone else in a different situation, which, hopefully, she doesn't.

[Rocketc]

Madame X,
I think you are right. I'm not a huge fan of Suze, but it is obvious that she is pretty satisfied with a net worth of $25 million. She isn't trying to become Warren Buffet. I'm not naive enough to think that she is completely altruistic, but she obviously has a passion to help the small investor have success - even if it is only by saving $50 a week.

[Rich Schmidt]

Re: hejustlaughs - It looks like there's a link to "Subscribe to this feed" at the bottom of every post. Did that not work for you?

There's also a "Subscribe to FMF" section in the left sidebar... but it's so far down the page, that I almost didn't find it. Maybe it would be a good idea to move that to the top? Or at least put it above all the category-specific post lists...

[Nikos Sokiin]

Seems like it never occurred to the author that she might invest differently (ie more aggressively) if she had less money. She might even have more money than she ever cared to have, in which case, her goals would be quite different than those she is giving advice to.

[Jeremy]

I'm not a big suze fan myself. She should stick to giving advice to people who are struggling with debt and lifestyle choices, not with investing advice. That being said, for someone with that amount of wealth it does make sense to have a sizable amount in municipal bonds. The article doesn't allude to how much of that money is in bonds though.

But given her high tax rate she is likely earning a taxable equivalent yield of 6-7.5% on those municipal bonds, and this is guaranteed money. If you run the taxable equivalent yield calculation in reverse with an average return of 10-11% in stock market returns, in her tax bracket those returns end up being not much different, 6-8.5% (the difference comes from whether they are long-term or short-term capital gains).

So you do the math. Would you like to have a guaranteed 6.5-7% annual return or a 7-8% return that will fluctuate? Six of one, half a dozen of the other I think. But since we can't predict what long-term tax rates will be you can take the slightly more conservative route and stick with tax free investments and earn very close to the same return and it is guaranteed. I almost forgot as well, investing in individual bonds will be far less expensive when it comes to fees when compared to even very low index fund expense ratios that occur on an annual basis. This makes the edge on return in equities almost non-existent.

Her method isn't exactly what I would do if I had tens of millions of dollars, but the method also makes sense when you look at the risk/reward scenario and have that kind of money. It just isn't appropriate for the average investor.

[Kurt]

"But given her high tax rate she is likely earning a taxable equivalent yield of 6-7.5% on those municipal bonds, and this is guaranteed money. If you run the taxable equivalent yield calculation in reverse with an average return of 10-11% in stock market returns, in her tax bracket those returns end up being not much different, 6-8.5% (the difference comes from whether they are long-term or short-term capital gains)."
Wrong calculation. You can't gross one up and net the other one down. Either you are comparing pretax (your 6-7.5% [which I find suspect] and the 10-11%) or after tax (munibond rates and your 7-8%).
Please don't go spreading misinformation. Thank you.

[Jeremy]

How is that misinformation? Google a tax equivalent yield calculator. If a municipal bond is paying a 4% yield and she is for sake of easy computation at the 35% tax rate her taxable equivalent yield on those bonds are 6.15%.

Then let's say she earns a 10% taxable shot-term taxable gain, so again would be based on 35%. The effective return due to taxes are 6.5%. If it were a long-term gain it would be an effective 8.5% return.

Play with the numbers if you want
http://www.adviserview.com/calculators/invest/taxYield_default.asp

[Jeremy]

Sorry, I see what you are saying, and I apologize for my confusing information.

You're right, I was grossing and netting both. What you really have is a realized return of say 4% on the municipal bonds, and a net return after taxes of 6.5-8% on the taxable investment.

Please disregard my above information. The gap between the two is within a few % points instead of almost equal.

[Big Cajun Man]

I like Suze, and I like her personality too (guess I am in the minority there). I think she has "been there", didn't she basically go bankrupt at the beginning of things? Maybe I am confusing her with other folks.

I think her "get rid of debt" is spot on, and I wish I could figure out how to do that. Investing? I hear her words, but they don't resonate with me either. I can take the parts I like and leave the parts I think are incorrect, like I do with most advice.

She has really nice teeth too. I think I wouldn't take advice from someone with bad teeth. There is something to think about. --C8j

[Randy]

I can only guess her motivations, but I appreciate her being that up-front about her finances. Here are two considerations (call them guesses) as to why she is invested they way she is.

1. Cannot find good stock values. Warren Buffett and Charlie Munger have both been known to go for years sitting on cash and cash equivalents. They believe it is better to hold cash and wait for the right opportunity rather than hold "average" stocks and miss the big move. This has certainly worked well for them.

2. She stresses in the article how she has totally eliminated risk. Why stress that? Probably because for her, her primary increase in net worth every year is from her job income. That means she needs to be concentrating on that, and not get distracted if the market takes a 6-7% tumble like it did recently. I admire her if that is the case.

[Lazy Man and Money]

High on the personality index? I would rather spend an hour with a golf fish.

That said, I do agree with the financial planner to some degree. It's hard to tell your clients to take risk and put 50+% of their money in something that will lose value, when you are willing to only put in 4% of your own money there -- and you've got millions and millions in 100% safe stuff.

[Big Cajun Man]

You American Rich folk, you don't know taxes!

Actually in Canada the most hated taxes are the hidden ones in our gas prices, which are almost 30% of the price. Most folks don't even know they are there.

Property taxes are next, because they are based on how much the government THINKS your house is worth, so if you bought your house for $1 but the government thinks it is worth $1,000,000 you have to pay your taxes on the basis of that!!! --C8j

[Jay]

You also have to keep in mind that her career could go down the drain overnight. Much of her success is her personality, but personalities can just as quickly fall out of fashion. So I think being more conservative for her situation makes sense. Although 4% still seems awfully low even for the very conservative.

[Teri]

Just wanted to say - Love the site! (Came across your net worth measure of progress post - just what I had been looking for).

& um, well, let me put it this way. I like Suze. I don't think she always gived the BEST advice, but still thinks she does her job well and really gets to the root of people's money problems.

Anyway, I am an extremely conservative person. I play the stock market because I know it is the ONLY way I will retire comfortably, or ever have a shot at retiring early. I play it somewhat safe (diversified mutual funds), but I play it. I will my whole life probably.

But if I had Suze's net worth I would probably keep most of my money in cash or bonds or bills myself. I just have to assume she is quite risk-adverse and satisfied. Nothing wrong with that. I too admire someone who isn't just hoarding more and more. What's the point really, no heirs even, right?

[mysticaltyger]

I think Suze is somewhat overy-hyped and overrated but her basic advice is ok. I don't see anything wrong with her investing $24 million in municipal bonds. Even at a paltry 3% rate of interest, that means she has an annual income of over $700K a year (tax free!). How much more does she need? Her situation *IS* different from that of most Americans, so of course, she invests accordingly.

[moom]

Orman was a stockbroker - I think she knows a lot about investing. I find the reactions to this story very interesting and to me puzzling.