What You Can Learn From Suze Orman’s Mistakes

This personal finance guru has recently suffered a series of financial missteps.

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It’s been a rough year for Suze Orman. First, she came under fire for endorsing a new prepaid debit card. Her claims that the card is “free” and can help improve your credit score have been questioned. There are also issues relating to additional fees and limits on how much money you can spend in a 24 hour period, even if the card is funded to cover those expenses.

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Next came criticism for changing her advice on paying off credit card debt. An article on MSN Money by Liz Weston noted that Orman advised her followers to “listen up” to her new views about paying off credit card debt. Orman now believes it is prudent to “only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can." Weston noted the potential risks of following this advice, which included paying unnecessary interest, risking damage to your credit score, and making yourself even more vulnerable to lenders’ whims. However, Weston also writes that delaying repayment of credit card debt might be good advice if you are in particularly dire financial straits and have no better options.

Perhaps most troubling is an article in The Wall Street Journal by respected financial journalist Jason Zweig. Zweig discussed glaring problems with a newsletter issued by Mark Grimaldi, an investment manager. Orman is a 50 percent owner of the newsletter, which costs $63 a year. She has given away more than 50,000 trial subscriptions. Issues of the newsletter contained a number of errors, which included providing returns for a fund managed by Grimaldi prior to the time the fund was in existence, and understating the performance of the S&P 500 in nine of the 10 years cited. The accurate returns of the S&P 500 meant that Grimaldi’s portfolio trailed—rather than beat—the performance of the index in 2009.

Never one to back down, Orman is sticking by her man. According to Zweig, Orman declined to address these specific issues, but noted that "Mark Grimaldi is my trusted partner in The Money Navigator…He is ethical, honest, and achieves stellar results that consistently outperform the market.”

[See The Best and Worst Sources of Financial Advice.]

Here are lessons you can learn from Orman’s travails:

Debit card fees matter. I recommend the use of a debit card instead of a credit card. Debit cards can make it easier for you to budget and keep you out of debt. But debit card fees can take a real bite out of your savings. Take the time to understand the fees charged by the issuer of your card and do some research to find a debit card with low fees. Here’s a good place to start.

Avoid credit card debt. Credit card debt can carry interest charges of 30 percent or more a year. The best practice is to avoid running up any credit card debt. If you are already in debt, pay it off as quickly as possible. Explore getting a loan by using your home equity (if you have any) or the cash value in a life insurance policy as collateral for a low interest rate loan. Use those proceeds to pay off the higher interest credit card debt.

Be suspicious of short term data. According to William Bernstein, author of The Intelligent Asset Allocator, you need 20 years or more of returns in order have a good guide to the future returns and risks of that asset. Short term data can be very unreliable and misleading.

[See 5 Lessons from Michael Lewis.]

Be especially suspicious of fund managers who claim to be able to beat the market. Many studies have shown that only a statistically insignificant number of active fund managers beat the market over the long term. Those who do are most likely lucky. Evidence of market beating skill is scant at best. Instead of relying on celebrity endorsements of active fund managers, consider the overwhelming research on the benefits of a globally diversified portfolio of low management fee stock and bond index funds, in an asset allocation appropriate for you. I summarize this research in my latest book, The Smartest Money Book You’ll Ever Read.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.