Suze Orman's Money ClassDoes More Harm Than Good

Suze Orman’s Book, The Money Class Gets A Failing Grade

                                                By: Brendan Magee

Suze Orman has a new book out entitled “The New American Dream.” It’s subtitled “Learn To Create Your New American Dream.” On a recent television appearance she spoke about how with this book she had written more about investing for retirement  than in any other book she had written. With that I thought I’d see for myself just how helpful it would be for investors.

On page 229 Suze gives her recommendations on how to invest and diversify a $250,000 dollar portfolio. In her opinion you would be properly diverisified if you took $125,000 invested in stocks and allocated it as follows:

85% should be invested in U.S. stock funds. 70% of that should go in large company stocks. 20% should go in medium sized companies and 10% should go in small company stocks, with a remaining 15% going in international stocks. The remaining 15% is to go into International stocks. The standard deviation or the measurement of risk on this portfolio would be 18.17% and the annualized return from 1973 through 2010 was 10.42%

I went back over a thirty seven year period and saw how $125,000 would have grown had I invested as Suze suggests.  My $125,000 would have grown to $5,406,250. Certainly an investor would be happy with that return, until you compared to portfolios with the same amount of risk.

A portfolio that invested fifty percent in U.S. Equities, forty five percent in International Equities , and five percent in cash and had a standard deviation of 19.45% and had an annualized rate of return of 13.16% from 1973 through 2010. That same $125,000 grow to $13,250,000. Suze’s recommendation cost the investor more in lost returns, $8,218,750, than she actually earned the investor.

Suze’s recommendations don’t look any better as we look at what she recommends for the other $125,000 portion of the portfolio. For that money she suggests we invest in cash and T-bills. Again, I used 1973 through 2010 to see how her investor would have done. In my comparison I took half the $125,000 ($62,500) and invested it in cash and the other half in T-bills. Suze’s recommendations generated  an annualized return of 6.05% (Inflation in that time grew 4.42% so my net return was only 1.6%). My $125,000 grew to $1,165,000. Again, let’s compare that to the portfolio above that grew to $13,250,000. Suze’s portfolio cost the investor $12,537,500.

If we were to keep score on the original $250,000, Suze’s portfolio of 50% in equites and 50% in cash/T-bills grew to a total of $6,571,250. In comparison to our portfolio of 50% in U.S. Stocks, 45% in International Stocks and 5% in cash which grew to $27,405,000. Suze’s portfolio cost the investor $20,803,750 in returns. Ouch!!

So why is Suze coming up so small here? The answer is, whenever someone violates any of the rules for successful investing there is a tremendous price to be paid. In this case, the $20,803,750 shortfall is due to Suze’s lack of understanding of diversification. If you read her book, on page 229 her stock recommendations include only four asset categories. There is no money going into value stocks and no money going into micro cap stocks for example.

Also, think about the years 2000-2002 as well as 2008. Those were horrific years for the U.S. economy. When 85% of our stock portfolio is in U.S. stocks there isn’t a whole lot left to offset those big losses. Her portfolio is completely out of balance.

I also mentioned the rules for successful investing in the previous paragraph. One of which is diversification. The two others are own equities and buy low/sell high. These rules are not mentioned at all in Suze’s Money Class. She also fails to grasp that the biggest risk factor in all of their investing is the investor themselves. How or what is she doing to prepare investors for the next bear market or financial crisis? How come she doesn’t let people know that what they do or don’t do or allow to happen to their money will have more of an impact than anything else? I guess it’s a whole lot easier to sell books recommending products rather than personal responsibility.

There is nothing in her latest book to help the investor fully comprehend this variable, nor is there anything in her book that aids the investor in continually following the rules for successful investing. As a result her book is filling investors heads with false and misleading information that as we have seen will take away any hope of attaining the American Dream.

For these reasons and a whole bunch of other reasons, I am going to have to give Suze Orman’s Money Class a failing grade.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments call 610-446-4322 or e-mail Brendan@coachgee.com.