There are millions of Americans out there who fail to pay their credit card in full each month despite the fact that they have money in the bank to do so. There are tens of millions who have stock-market investments in taxable accounts alongside large consumer debts. And there are probably a hundred million or more Americans who are simply having a huge amount of difficulty living within their means, especially after taking into account their financial burdens.
Orman provides hope for these people — an eminently sensible roadmap for the future — in a quintessentially American demotic as opposed to the arcane language of the financial press. Not everyone who buys her books will end up acting on her advice: the temptation to borrow and spend is all around us, after all. But from a financial-literacy perspective, Suze Orman has made America a much better place than any other individual alive. Long may she continue to do so.
I wouldn’t go quite that far. Suze does say silly things on occasion, as Scurlock documents. And I think any praise for Suze should be showered in at least equal measure upon her heartland counterpart Dave Ramsey, who in my experience is a bit more careful and reasoned in his advice than the Divine Ms. O. But there was one part of Scurlock’s screed that did get me almost as worked up as Felix:
But it is not Suze’s hypocrisy or even her intellectual laziness that really bothers me; no, that would be something Suze “loves” called “dollar cost averaging,” which involves buying the same stock over and over again as it falls. “It’s a great opportunity for you when the value of the shares drops,” claims Suze in the inaptly named The Road to Wealth, “because you can buy shares at ‘bargain’ prices and average down your cost per share.” Oh, where to begin? Maybe with the obvious: Since when does throwing good money after bad make you rich?
Well, “dollar cost averaging” (some freaks across the sea call it “pound cost averaging“) is also about continuing to buy stocks as their prices rise. It simply means investing bit by bit over time (as one does in a 401k), and it is basically the only rational approach for those who (a) think the stock market is a good long-run investment and (b) can’t reliably predict its short- or even its medium-term movements. Category (b) takes in the vast majority of investors. Category (a) has been losing a lot of adherents lately, but that’s sort of the point. Sticking to a regime of dollar cost averaging forces one to keep putting money into the market when it is most unfashionable, which happens to be exactly when one should be putting money into the market. Over time it may be even better to put money into the market only when it’s unfashionable, but that’s a mighty hard discipline for those of us who aren’t Warren Buffett to stick to.
Scurlock doesn’t offer an alternate investing approach, but he seems to be saying that one should stay away from the stock market at all costs. Because, you know, stock prices have gone down a lot lately. This is logically equivalent to saying in early 2000 that one should pile into the stock market because stock prices had gone up a lot. It was really bad advice then. I can’t be sure it’s bad advice now—the Dow could easily drop another couple thousand points. But it will be bad advice eventually, and dollar-cost averaging is the simplest way to make sure you don’t follow it.
Update: Money magazine’s Walter Updegrave, who thinks much harder about this kind of stuff than I ever will, makes the case against dollar-cost averaging. He’s not opposed to regularly putting money into the stock market as you earn it; he just thinks that, if you have a lump sum of money, you should go ahead and invest all of it rather than trickle it in to the market. But then he offers an out:
That said, I suppose there is one instance in which I could see dollar-cost averaging playing a role. If you’re so nervous about investing in stock and bond funds that you simply can’t do it without tiptoeing in, then you’re better off going in gradually than not investing at all.
I dunno, I think most people are nervous about investing—or at least about investing at the wrong time. Minimizing regret should be an important part of their investing strategy. And dollar-cost averaging definitely does that, even if it doesn’t always maximize returns.