Dan Solin

What You Can Learn From Suze Orman’s Mistakes

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.

[See The 10 Best Places to Retire in 2012.]

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.