Suze Orman's Investing Advice: "Iffy" Indeed

The financial guru gives emergency recession advice on Oprah.

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I find Suze Orman fascinating, and there's no doubt that some of her advice is useful. But I agree with MarketWatch's Chuck Jaffe here when he says she has "always been iffy when it comes to investment advice."

Iffy how? In a recent column on Yahoo!, Orman writes about "Fighting the Financial Fear Factor":

If you have a well-diversified portfolio that's focused on building value over the next few decades, it doesn't make sense to overreact to a few months of volatility and bail out on stocks,... If you put all your money into super-low-risk investments such as money markets or stable value funds, you increase your risk, too—the risk that your portfolio won't grow enough over time to build a hefty retirement account.

Fair enough, but in a New York Times Sunday magazine story last year, Orman revealed that only 4 percent of her $25 million liquid net worth is invested in the stock market. Where's the rest of her money? Zero-coupon municipal bonds. Granted, I don't have $25 million that I'm worried about preserving. But given her ultraconservative investing strategy, I can't help but think she's asking readers to do as she says, not as she does. Yesterday, Orman was on Oprah, dispensing emergency recession advice. Here are the highlights:

  • In light of the Bear Stearns collapse, Orman advises people with more than $100,000 in one bank account to consider opening more accounts: "If you have money at a bank, banks are OK," she says. "There has never been a default where FDIC [Federal Deposit Insurance Corp.] did not come in and save you. But how much money do you have at a bank, people? The most that you are insured for is $100,000 in your name, usually at an account in a bank.... Diversify your banks and just spread your money."

Before you go spreading your money around, however, consider that individual retirement accounts are insured up to $250,000 per depositor, according to the FDIC. Plus, you may qualify for more than $100,000 in coverage if your accounts are in different ownership categories, such as joint accounts, certain retirement accounts, and revocable trust accounts. If your brokerage goes bust, any stocks and bonds registered in your name or in the process of being registered must be returned. If any securities are missing, the Securities Investor Protection Corp. steps in to satisfy all remaining claims, up to a maximum of $500,000 per customer (and no more than $100,000 for cash). If your account exceeds the SIPC's limit, many brokers have supplementary insurance that kicks in to make up the difference.

  • On withdrawing from a 401(k) during tough financial times: "If you take money out of a 401(k) to save yourself for a day, you are going to give up possibly a lot of money during your retirement life," she says. "When you take money out as a withdrawal, you will pay ordinary income taxes and a 10 percent penalty. On a $5,000 withdrawal, after taxes and penalties, that will leave you with approximately $3,000." But if you keep the $5,000 in a 401(k), she says, "it would be worth $35,000 in 25 years. In 35 years, it would be worth $81,000. In 45 years, it would be worth $181,000."

That's sensible, but I'm scratching my head over this: "You do what's called an IRA rollover," she says. "You take your money that's in the 401(k) and do a rollover [into] an IRA account. Then, once it's in that account, you can take out the money you need...as long as you put it back within 60 days.... So you now have this money, you can give yourself a short-term loan, and if you pay it back in 60 days, great. If you don't, you will owe ordinary income taxes on it and a 10 percent penalty."

Orman sounds somewhat nonchalant here. Before resorting to this strategy, take a hard look at your cash crunch, because the consequences of not returning that money amount to a large dent in your finances in the long run.

  • Now, Orman turns to a couple whose mutual fund has been losing money and who can't agree on whether to stay the course or cash out. She says they should consider selling half of their mutual fund: "Why do you have to be an all-or-nothing investor? Why is it that you always have to do 100 percent of everything with your money or do nothing with it?"

Taken alone, this piece of advice seems to advocate selling low. But earlier in the segment, she advises the couple to think about why they bought the fund in the first place: "Let's say you have $40,000 in cash right now," she says. "Would you right here and right now take that $40,000 and buy what you already have that money in? Would you buy that same mutual fund? Would you buy those same stocks? If the answer to that question is, 'No, I would not,' then you sell. If the answer to that question is, 'Yes, I would,' then you keep it."

Orman is an advocate of dollar-cost averaging. She says: "In markets that are in turmoil, you never, ever put 100 percent of your money in one lump sum. The correct thing that you should have done is you should have taken the money you put in—let's say it's $60,000—and you should have divided it by 12 and invested $5,000 every single month. That way, when the market went down, your money bought more shares. If the market went up, your money would have bought less shares. But the truth of the matter is, you would have averaged your dollars in the cost of it, and you wouldn't be down as much as you are right now."

Now, that's some sound advice.