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Suze Orman Money Matters

Suze Orman, Money Matters

Pre-Recession Thinking Could Put You in Financial Peril

by Suze Orman

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Posted on Friday, August 22, 2008, 12:00AM

I don't need an official government pronouncement to tell me that we're in a recession. Based on what I am hearing these days, I have all the evidence I need to know we're experiencing a serious downturn.

Past Masters

The most repeated phrase I'm hearing these days is "used to be." As in, "Suze, my investment used to be worth $20,000 and now it's worth $15,000, so I'm just waiting for it to get back to $20,000 before I sell." Or, "Suze, we want to sell our house, but our agent says its market value today is $250,000, but we know last year it used to be worth $300,000." Or, "Suze I was laid off four months ago and the only job I have been offered has a salary that's 15 percent below what my pay used to be."

Folks, what used to be is useless. I know it's hard to change your outlook and adjust to reality, but the former value of an investment, a home, or even your salary from the job you were just downsized out of doesn't really matter today.

When so many people are fixated on the past, I know we've got ourselves some serious economic problems. To survive today requires dealing with what's happening today, not what you remember from yesterday.

Anchor or Albatross?

Focusing on what used to be is part of a classic behavioral trait known as anchoring. We throw down an anchor at a reference point that's known to us -- the purchase price of a stock, say -- and won't budge one inch from that anchor point when evaluating its value.

What can happen is that someone who's bought a stock at $50 a share will decide that when that the stock trades at $40 a share they're going to hang on just until it gets back to $50. They're anchored on that price, and instead of looking at the fundamentals for that company they're absurdly basing their investment strategy on an arbitrary number.

Well, a stock has no idea what you personally paid for it. I know that sounds ridiculous, but it's basically what you're assuming if you find yourself holding onto an investment simply because you want to break even. Do you really think the stock knows what your break-even point is? If the investment no longer makes sense on the fundamentals, get out and put your money to work in an investment that does make sense.

Upside Anguish

The same flawed anchoring can even get you in trouble on the upside. Say you bought a stock and had it in your head that you would sell at a 20 percent profit. Everything is going great and you have an 18 percent gain when you start to see some deterioration in the fundamentals.

Instead of following the numbers you follow your artificial goal of netting 20 percent, so you don't sell. Three months later you're still waiting for the stock to reach your artificial 20 percent threshold, only it's fallen back to just a 5 percent gain. You could've taken your profits off the table when you had a good idea there was trouble ahead, but instead you got dragged down by your anchor.

Real Estate Reality

If you seriously want to sell your house right now, you need to get rid of your anchor mentality. The fact that you know the house next door sold two years ago for $150,000 more than your agent says you can get for your house today is irrelevant. The fact that Zillow.com indicates that your house was worth $80,000 more a year ago is beside the point -- you didn't put your house on the market two years ago, or a year ago. You're putting it on the market today.

Pricing correctly is the surest way to squeeze the most out of the sale. If you insist on overpricing, I promise you the house isn't going to sell. You can anchor all you want, but no buyer is going to pay you a price based on where the market was a year or two years ago. And while your house is languishing on the market, you're going to be stuck with the carrying costs.

Let's say your mortgage, tax, and insurance run you $4,000 a month: After four months of your house not selling, you're out $16,000 and you drop the price down to a competitive market price and the house sells. If you'd just done that when you first listed the house, you would've saved yourself $16,000 in carrying costs. That's one expensive anchor.

Competent Compensation Rules

If you find yourself out of work in this tough economy, it is vitally important to set a realistic price (salary) goal before you start your search. That means gathering market data on what the job you're interviewing for pays in today's open market. What you earned at your last job is a useless anchor -- that was a different company and a different job

In fact, if you've been with one company for a long time, you may have been highly compensated for all the internal knowledge you had about how that particular company ran. You had great company-specific value. Maybe some of that value is transferable to your next job, but maybe it isn't. You need to be open to the idea that all the value you had at your old job isn't necessarily going to be what prospective new employers need or want.

Ideally, you should always fall forward into a higher-paying job. But if you've been downsized and need to get back to work pronto, let go of your salary anchor and focus on what the going rate is for a job you can get hired for today.

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121 Comments

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  • Yahoo! Finance User - Sunday, August 31, 2008, 4:47AM ET  Report Abuse

    • Overall: 1/5

    Im so sick of these financial articles on how to become a millionaire. They say just save 3k a year when your 23 and by age 65 your a millionaire. You ever notice how they always use age 65. Let me tell you something people. A million dollars at age 65 does nothing for you. Your life is basically over, partying is over, boozing with the boys is over, getting the girls is done, the nice cars done because you'll probably be in a wheelchair, eating out at nice restaurants is done because youll probably have to watch your cholesterol and blood sugar, and all that fun stuff is basically done. By this time you'll start to have health problems and probably wont be able to do anything. Your wife will probably be an annoying hag who looks like Mrs. Fratelli from goonies. Most of the money will probably be spent on a granddaughers lavish wedding, lotto tickets, or a broken boiler. Another thing. Im 28 now. A million dollars when im 65 will basically be worth 80,000 in todays dollars so all this saving in a deferred compensation plan is the biggest scam.Inflation kills purchasing power to the point that making 8% in a retirement account compounded over 30 or 40 years just isnt enough. You have to make 13 or 14% and you can only do that if you learn to manage your own money. Most people make nothing in their 401k plans. They are either in a stable money market fund for 20 years without knowing or they sell out at market bottoms due to panicking then get back in when the market makes new highs. Out of 48 people at my office, I think 2 have positive returns over the past 10 years. 46 people have lost money. You cant build wealth with mutual funds. If you could, everyone would be rich. Stop listening to all these magazines and articles. If you are in your 20's and want to have a comfortable retirement, you better plan on having over 8 million by the time your 60.

  • Yahoo! Finance User - Saturday, August 30, 2008, 5:55PM ET  Report Abuse

    • Overall: 1/5

    This Orman is an evil person. NOW is THE time to BUY!

  • Yahoo! Finance User - Saturday, August 30, 2008, 2:53AM ET  Report Abuse

    • Overall: 1/5

    It's not just YOUR house that's not worth what it was 2 years ago, it's everyone's house. If you're selling so you can buy a different house, it's going to be priced proportionally less than if you had sold and tried to buy 2 years ago too. No sense waiting for the value of your cuurent home to recover when you can move to a new house and wait for the value of THAT home to recover.

  • Yahoo! Finance User - Saturday, August 30, 2008, 12:27AM ET  Report Abuse

    • Overall: 5/5

    Folks (including some here of course) are not going to like to adjust to reality. We are *all* of us less wealthy than we seemed to be 2 years ago. It's a permanent adjustment for the U.S., and will not reverse.

  • Yahoo! Finance User - Friday, August 29, 2008, 6:30PM ET  Report Abuse

    • Overall: 2/5

    I've never respected this woman for even 1 second. "Suze" used to tell people to buy into the tech bubble with outrageously overpriced p/e's saying: "We have to remember these are different times!" Not only does she give financial advice, but acts as a personal relationship therapist besides. Just another entertainer (like Cramer) brought to you by the scam artists of GE--owners of CNBC! Think about it.

  • Yahoo! Finance User - Friday, August 29, 2008, 3:46PM ET  Report Abuse

    • Overall: 2/5

    The post below made me laugh. This person is obviously measuring growth without taking into consideration inflation or the dollars slide relative to the Euro. According to this person's calcs., even Zimbabwe would have positive growth.

  • Yahoo! Finance User - Friday, August 29, 2008, 11:21AM ET  Report Abuse

    • Overall: 1/5

    We are NOT in a recession. Pundits have been assuring us that we have been in a recession since the beginning of the year. Definition of a recession: 2 consecutive quarters of negative growth. Since 2001 we have only had 1 negative quarter of growth (4th qtr 2007). The growth experienced in the 2d quarter of 2008 was recently revised up. Enough with the scare-mongering already. Then maybe we would actually get back to the incredible growth we experienced throughout most of the Bush years.

  • Yahoo! Finance User - Friday, August 29, 2008, 10:52AM ET  Report Abuse

    • Overall: 1/5

    You owe me 5 minutes of my life back.

  • Yahoo! Finance User - Thursday, August 28, 2008, 11:03PM ET  Report Abuse

    • Overall: 1/5

    Suzie was WRONG to have told people to remain in stocks several months ago because "stocks move in cycles" she said, "and historically prove to be a good investment." Please do not listen to this woman. She is a Wall Street Shill or she simply does not understand pure economics which says, an economy cannot survive when consumption exceeds production. Please, find a real economist to write this column and not someone who thinks she is an economist. KT

  • Yahoo! Finance User - Thursday, August 28, 2008, 11:07AM ET  Report Abuse

    • Overall: 5/5

    She is of course referring to anyone who has to, or really wants to sell. Today is today and yesterday was yesterday. This is differant from every other time in history. The easy mortgage deals are gone, it is harder to get and will be harder to get in the future. Sell now, get what you can and move on ! It could take 5 to 10 years before real estate appreciates. What people don't remember is that years ago it took 10 years for property to appreciate. Wake and get real before you lose even more money !

  • Yahoo! Finance User - Wednesday, August 27, 2008, 9:41PM ET  Report Abuse

    • Overall: 1/5

    Suze seems right, if you had sold your house 4 months ago AND MOVED IN WITH A RELATIVE you would have saved $16,000 in carrying costs.

  • Yahoo! Finance User - Wednesday, August 27, 2008, 12:56PM ET  Report Abuse

    • Overall: 1/5

    Yes, this is fantastic advice! Since we're in a recession (or downturn or whatever you wish to call it) you should sell everything you own at a loss and accept any job you can get no matter what it pays you because recessions never end. No investment anyone made before the recession will ever return to or surpass its pre-recession value, so you might as well sell it now becuase it'll only continue to lose value forever. Perhaps Ms. Orman doesn't have any financial education, so she is unaware the markets are CYCLICAL! Sometimes they go up and sometimes they go down, but neither cycle is eternal. This recession, like all the others that came before it will eventually come to an end. If you're suffering a financial hardship because of an investment you're in is losing money or you've found a better investment to put that money in, then by all means, sell. But selling simply because we're in a recession is extremely foolish. I can only hope that there are plenty of fools out there to take this sort of advice, as it opens up a slew of buying opportunities for those of us who can see past the constant bombardment of "doom-and-gloom" reporting by talking heads such as Ms. Orman. I honestly have to say that I haven't seen an article this bad on Yahoo! Finance since they kicked Penelope Trunk off of here. I can only wonder how long it will be before Suze Orman starts writing article about doing yoga in the bathroom at work.

  • Yahoo! Finance User - Tuesday, August 26, 2008, 9:23PM ET  Report Abuse

    • Overall: 1/5

    Anyone who buys stock with the intention of selling it at a 20% profit is not an investor but a fool, as is anyone who agrees with even half of what Orman espouses.

  • Yahoo! Finance User - Tuesday, August 26, 2008, 6:32PM ET  Report Abuse

    • Overall: 4/5

    Good article Suzie. Who wrote it?

  • Yahoo! Finance User - Tuesday, August 26, 2008, 4:58PM ET  Report Abuse

    • Overall: 4/5

    Must have been ghost written. First Suze article to (a) make sense and (b) convey useful information/suggestions to readers.

  • Yahoo! Finance User - Tuesday, August 26, 2008, 4:12PM ET  Report Abuse

    • Overall: 5/5

    To all the Suze bashers: How much money do you have? Is it more or less than Suze? Face it: You hate Suze because she is a rich WOMAN who has an extensive fanbase...Why does she have a large fanbase? Oh, I know: she gives practical advice to the average joe... Isn't it great that Suze pays no mind to all of the negativity directed at her???

  • Yahoo! Finance User - Tuesday, August 26, 2008, 3:50PM ET  Report Abuse

    • Overall: 1/5

    This article was chock full of very bad advice. Please, if you are reading Ms. Orman because you think she knows what she is talking about...stop...because she doesn't. Educate yourself. Visit a library or hit some websites from mutual fund families like American Funds, Fidelity, or Van Kampen and try the education offered on sites by rating services like Morningstar. Buy investment vehicles that match your goals and risk tolerances, stay the course, and use dollar cost averaging when possible. As for her blather on career advice...wow, what a load that is. Study!

  • Yahoo! Finance User - Tuesday, August 26, 2008, 2:49PM ET  Report Abuse

    • Overall: 5/5

    God I'm glad that I have so much money in my banks and retirement accounts so I can retire extra comfortable in 4 more years...... at age 45!!! Spending the last 8 years capitalizing on the misfortune of others, due mostly to the idiocy and herd mentality of the sheeple with their ignorant and greedy ways and wants, has been a sweet ride! Gonna have a fine time spending those housing profits and vehicle/boat repo dollars while playing in the sand and surf. See y'all on the islands!!

  • Yahoo! Finance User - Tuesday, August 26, 2008, 11:16AM ET  Report Abuse

    • Overall: 5/5

    To all those who are disappointed that Suze isn't giving you advice on what to buy to get rich: read "Random Walk Down Wall Street" and apply the central concepts to investments of all sorts. The value of Suze's advice is to help you shed attitudes that get in the way of making rational choices. Well done, Suze.

  • Yahoo! Finance User - Tuesday, August 26, 2008, 10:35AM ET  Report Abuse

    • Overall: 1/5

    I have a great idea, don't sell your house in a declining market! (DUH) Try buying more of the same stock at a lower price to dollar cost average lower. Take less money for your job (lol) you have to be kidding?!? Move on to a better employer who will pay you what your worth. We are in this situation right now because people are willing to settle for less than they are worth. If the sheeple didn't settle for less pay, wages would be higher. If people wouldn't sell their houses for such low prices property values wouldn't be dropping! If people would save their money they wouldn't be forced to make all these stupid descisions -THE VOICE OF REASON

  • Yahoo! Finance User - Tuesday, August 26, 2008, 10:28AM ET  Report Abuse

    • Overall: 1/5

    Suzy chicken little/or rooster......garbage, I only read this crap to get a chuckle. Tell it sister Suzy...I am making another fortune buying the few assets from the poor souls you give such terrible advice to. Good ol' "dig a hole in the ground and bury it" Suzy Dorkman.

  • Yahoo! Finance User - Tuesday, August 26, 2008, 9:54AM ET  Report Abuse

    • Overall: 5/5

    Well Suzie...Ready to start writing for Yahoo financial for a bunch less than you do today??

  • Yahoo! Finance User - Tuesday, August 26, 2008, 9:01AM ET  Report Abuse

    • Overall: 2/5

    Gosh ... you're right. Suze's a flip-flop just like all the politicians. I wonder what value does these experts that parrot the flavour of the month really value-add? Like duh, isn't all that she's saying common sense. What we need to really know is that NOW is the time to sell ALL the stocks and all the crumbling assets, convert to Gold and park them in a vault, wait 20 months and buy whole blocks of condos!!!

  • Yahoo! Finance User - Monday, August 25, 2008, 11:52PM ET  Report Abuse

    • Overall: 3/5

    Suze would have been better if she didn't tell people back in 2006 to "buy houses" and in 2007 to "buy stocks in this very good 2007." She has no clue about market fundamentals and the ability to recognize when an asset is truly overpriced (as housing was and still is).

  • Yahoo! Finance User - Monday, August 25, 2008, 11:34PM ET  Report Abuse

    • Overall: 1/5

    so basic as to make me sick to my stomach

  • Yahoo! Finance User - Monday, August 25, 2008, 11:20PM ET  Report Abuse

    • Overall: 3/5

    Suze, the financial markets are not a slot machine. Just because your house is now worth $250,000 instead of $300,000, it doesn't mean you should despair. Be happy if you bought it for under $250,000. Suze makes it sound horrible that paper gains have disappeared. She should preach that markets fluctuate and you should be happy you held a long term asset and still have a gain despite the correction. You can tell she's a huckster because she tries to be like one of us. Like she really feels the "pain" of the "recession". It's like listening to millionaire John Edwards trying to relate to the little guy.

  • Yahoo! Finance User - Monday, August 25, 2008, 11:07PM ET  Report Abuse

    • Overall: 1/5

    I get so tired of these shrill "experts". Perhaps if all of the "experts" would just shut up people could start thinking for themselves again and we wouldn't have to lower our expectations as Suze suggests in this article.

  • Yahoo! Finance User - Monday, August 25, 2008, 8:15PM ET  Report Abuse

    • Overall: 5/5

    Ms. Orman rules...pure and simple.

  • Yahoo! Finance User - Monday, August 25, 2008, 8:08PM ET  Report Abuse

    • Overall: 5/5

    Sell everything that is not nailed down first then take the nails out of everything else and sell. Depression is coming.

  • Yahoo! Finance User - Monday, August 25, 2008, 7:41PM ET  Report Abuse

    • Overall: 5/5

    Amen Suze!! When they said "dollar cost averaging" and "in for the long haul" the sleeze never mentioned the distinct possibility of extended losses as in "past performance" so often tossed about as bait on the hook. Well, the greed and leverage boys have all but brought this country to financial ruin this trip around. The only idiots who stand up and cheer are those who raked in the "profits" at the expense of the unknowing. Informing those who "still believe" waving their all but useless stock shares and vastly deminished 401K portfolios that the gravey train has left the station will only hang the local station master. The railroad barons sit tight with their fatcat foreign off shore accounts and grin from the deck of their sailboats after draining the lifeblood from our country. They should be hung drawn and quartered.

Showing comments 6-35 of 121<< PreviousNext >>
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