Why Suze Orman Is Wrong
I find many of the financial suggestions and strategies offered by Suze Orman to be sound and sensible, especially her recommendations to eliminate credit card debt and bulk up savings. Her efforts to encourage thrift and common sense should be applauded.
That said, she has an article with which I disagree in the January issue of O, The Oprah Magazine entitled Suze Orman’s 10 Tips for a Fresh Financial Start. It’s when she gets to tip #7 and retirement plans that I think, whoa, not so fast.
Specifically, she says “the 2008 market slide is the tenth bear market (commonly accepted as a decline of at least 20 percent) since 1950. If you’d put your money in stocks in 1950 and stayed invested through the ups and downs, your average annual return through 2007 would have been more than 10 percent. That’s not to say you can count on an average of 10 percent over the next 50 or so years (7 to 8 percent is probably more realistic), but it illustrates how keeping focused on the long term pays off.”
What bothers me here? Three things in one paragraph — but they’re biggies.
First, defining a “bear market” as a 20 percent decline is simply an artificial construction.
Does anyone think a 19 percent loss is good news? However, the more important question is how how we measure average gains and losses over time. Did the market really fall 20 percent — or something different?
Second, you cannot find a consistent average rate of return over many years by looking at common indexes such as the Dow Jones Industrial Average or the Standard & Poors 500.
Why not? The indexes change. The same stocks are not being measured. (For the full story, see Do We Need A Dow 2.0?)
As I have said previously, stocks on both lists are constantly being replaced thus the results are not consistent. How can you have “average” index results when the stocks being compared are different?
“For instance, whatever happened to such DJIA stalwarts as U.S. Cordage (added in 1896), Standard Rope & Twine (1896), Federal Steel (1899), Central Leather (1912), Studebaker (1916), Corn Products (1920), Woolworth (1924), Paramount Famous Lasky (1925), Remington Typewriter (1925), Nash Motors (1928), Postum (1928), Victor Talking Machine (1928), and Hudson Motors (1930)? If we are to fully reflect the path of American commerce, then surely we must account for the direction, destiny, and descendants of these firms.” (For a look at the companies which have composed the DJIA over the years, see the Dow Jones Industrial Average History. For an example of an S&P change, press here.)
Since the composition of the indexes is constantly in flux, the idea that we can track “average” increases over many years is not logical. As an example, on September 22, 2008 Kraft Foods Inc. replaced American International Group Inc. on the Dow Jones Industrial Average. As of January 2, 2009, AIG was priced at $1.69, down from the 52-week high of $59.42. Kraft, meanwhile, was valued at $27.34 on January 2nd while its 52-week pricing ranged from $24.75 to $34.97.
Does anyone not think the Dow would have sunk further by year-end had AIG remained on the list? Or that the Dow would have closed higher at year end with the substitution of Kraft for AIG?
Third, and last, the future is unknown.
Orman says with regard to market returns “that’s not to say you can count on an average of 10 percent over the next 50 or so years (7 to 8 percent is probably more realistic), but it illustrates how keeping focused on the long term pays off.”
Huh?
Even Suze will tell you, I hope, that she is not a fortune-teller. There is no evidence whatsoever that future rates of return will “probably” be 7 to 8 percent, or 1 percent, or minus 2.8 percent, or whatever. Nobody knows. As those on Wall Street constantly say, past performance does not guarantee future results.
It’s one of the few ideas from Wall Street you can believe.
© Copyright 