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CNN Live At Daybreak

Author of 'The Road to Wealth' Discusses Investment Diversification

Aired August 13, 2001 - 08:42   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
COLLEEN MCEDWARDS, CNN ANCHOR: We've been talking about your 401(k) this morning; it might not be shrinking just as much as you fear, but unless you're living on a desert island somewhere you're probably keeping a wary eye on the economy.

That's where Suze Orman comes in, who we're chatting with right here, best-selling author of "The Road to Wealth," joining us right here in the studio.

Suze, thanks for being here.

(CROSSTALK)

MCEDWARDS: Maybe you've heard about this 401(k) report this morning saying that people didn't do as badly last year as maybe was originally thought, but I guess what's important about it is the reason they give, and that is that people were smart enough to diversify.

ORMAN: They were smart enough to diversify, but the truth of the matter is people still did not see their 401(k)s grow in the way that they wanted them to grow. Some of the reports are that 401(k)s are down 10 percent this year, including people's contributions, so people are stopping to contribute to 401(k) -- huge mistake.

The truth is people should want this market to stay flat if they're contributing to a 401(k) and they have 10, 15, 20 years ago. They're buying shares on sale. Don't let the market go up and just keep doing it every month.

MCEDWARDS: So keep putting that money in, don't get discouraged.

ORMAN: Yes. Don't get discouraged, this is a fabulous thing that's happening because the less, you know, the shares cost, the more shares you buy with your money, the more bang you get for your buck, so to speak. The more shares you have 10, 20, 30 years from now, when the market really is up again, you've accumulated extreme wealth. Who wants the market to go up? You don't.

MCEDWARDS: OK, we've got some e-mails for you. Let's get right to them.

ORMAN: All right, great. Yes. LIN: This is Marsha Meyer (ph) of Guilford, Connecticut: I have about $5 thousand I'd like to invest for my 26 year daughter. Are you still recommending Vanguard? And is a stock index fund still the best investment?

ORMAN: Yes, I have tell you if you are wanting to invest for your daughter, she's 26 years of age, the question is: Where to invest? Number one, should it be in her individual name? Maybe you want to open up a Roth IRA for her if she has earned income. And in my so -- recommending the Vanguard Total Stock Market Index Fund, I have to tell you, I am. But don't put all $5 thousand in it at once. If you have $5 thousand to invest, maybe take that $5 thousand and put $2 thousand or a thousand dollars to start, and then divide it up, maybe $200 a month for the next year or two, and you'll be just fine.

LIN: Dollar-cost averaging.

ORMAN: Absolutely.

MCEDWARDS: Here's a great question for tough times too from Dorothy (ph) in Pittsburgh: What percentage of a persons portfolio do you currently recommend be in cash accounts?

ORMAN: Well, I have to tell you, again, it depends on your age. Do you have debt? What else do you have going on in your life? You know, so many of you think that you have money, you need to invest it -- not necessarily true. You might have credit card debt, pay it off. You might have student loan debt, get rid of that. You might have a car loan debt. There's more to do with money than just simply investing in the stock market today. But with that said, depending on how much you have, you need to have at least have 5, 10, $15 thousand of an emergency account. you don't have at least that, take all of that and keep it in cash until you do.

If you already have your emergency and everything set up, I have to tell you, I would probably have about 30 percent of my money today of all money designated towards the stock market in cash.

LIN: All right. Speaking of, George McConners (ph), Georgia has a question: When can we expect the interest rates on CDs to improve? Where's the best place for someone who is already retired to put there money?

ORMAN: You're not going to expect interest rates on CDs to improve because with these decreases in the Fed movements -- and we're probably going to see one this week -- what you're going to see is that banks have a license to steal from you; it's costing them less to get their money, they're charging you more. Have you noticed your mortgages have gone up? Credit card interest rate hasn't come down, but interest on CD, when you're giving them the money too, has gone down as well. You're not going to see an increase in CDs, Treasuries, any of that for a good year or two or more in my opinion.

MCEDWARDS: Touchy subject here in our next one from Claire Mansfield (ph). She's asking: Getting married at 50, how much did you consolidate financial holdings, if at all? He has credit card debt, child support, college tuition. She has no debt or dependents.

ORMAN: All right, listen to me, you can consolidate if you want your future income, but bottom line: You are to have a prenuptial agreement, my friend. If you do not, it is possible after you are married, if he continues to accumulate debt, after you're married, guess what, you're going to be held responsible for that.

If you get a prenup that states that you are not going to be responsible for the debt that he incurs while you're married, and you file that with the different credit card companies, you won't be. So be very, careful. When you are marrying somebody who already has a lot of debt, and that's what they're bringing into a relationship, that is a key danger sign. One out of two people get married end up in divorce. Number one reason for divorce: argues over money. Learn about each other, practice financial intimacy. I call it, "practicing safe money," just so you know.

MCEDWARDS: Financial intimacy.

LIN: Yes.

MCEDWARDS: Thank you so much. Good luck with the book.

LIN: Nice to see you.

ORMAN: Thank you. Thanks you guys.

MCEDWARDS: Thanks so much for coming in.

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