Suze Orman’s Top Investing Tip for Young People: There’s One Fund That Could Really Pay Off
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John Csiszar
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Gary Dudak
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Suze Orman is a bestselling author and one of the world’s most well-known financial personalities, thanks to her website, podcast and television appearances. Her advice is typically direct and easy-to-understand, and she tailors her recommendations based on the needs of specific audiences.
Orman particularly spends a lot of time offering advice for young people, as they are generally the least-informed about finances and stand the most to gain by beginning to save and invest early. If you’re young and just starting out, Orman recommends owning just a single mutual fund or ETF to get started — and here’s why.
What Is the One Fund Orman Recommends?
Particularly for young people who are just starting out, Orman recommends buying a low-cost index fund or ETF that tracks a broad-based U.S. benchmark, like the S&P 500.
One of the reasons for this is that instead of hitching your fortunes to an individual stock, you’ll instantly be diversified — at least among U.S. large-cap names — by owning 500 of them in one investment. As your portfolio builds, Orman suggests that at that point you can consider buying specific stocks. But for starters, it’s best to get immediately diversified with a single, easy-to-track investment.
Why Is It a Solid Investment?
The S&P 500 might seem like a basic investment to some, as “all it does” is track the general U.S. stock market. But the truth is that the return of the S&P 500 over the long run approximates 10% annually, enough to double your money every seven years. For an investment that has never lost money over any 20-year rolling period, that’s a pretty high return.
If you were to invest as little as $200 per month over 40 years at that return, you’d end up with a nest egg of over $1.2 million. With full retirement age at 67, that means even starting as late as age 27, just a modest investment could set you up with a sizable retirement account balance. If you could kick in more or start earlier, your savings could grow even more.
Can One Fund Really Be Enough?
Owning just one index fund or ETF might seem to go against the age-old advice that you should diversify your investments, especially when you are just starting out. However, the reality is that the S&P 500 index can be an appropriate investment in and of itself because it’s 500 different investments all at once. While the fund isn’t completely diversified — as there are no bonds, international stocks or alternative investments — it does cover all 11 basic industries in America, making it something of an “all-in-one” investment.
The idea of simply owning the S&P 500 index has been supported by numerous financial pundits, who correctly point out that it’s difficult to impossible to outperform the S&P 500 index over the long run, even for professional money managers. No less than Warren Buffett himself, the billionaire CEO of Berkshire Hathaway dubbed the “Oracle of Omaha” for his investing record, has said that for the average investor, owning the S&P 500 index “through thick and thin — and especially through thin” is a sound strategy.
What Other Advice Does Orman Have for Young People?
Suze Orman’s entire professional life is dedicated to dispensing financial advice, so she’s offered plenty of tips throughout her career to those looking for help. For young adults specifically, here are some of Orman’s most important tips.
Automate Your Emergency Fund Savings
Automation ensures that the first dollars of each paycheck go to your investments, without you having to remember doing it or talking yourself out of setting it aside.
Stay on Top of Your Student Loan Payments
A sure way to financial ruin is to fall behind on your debt payments. For younger people, this typically means student loan payments.
Spend Wisely on Your Needs
Everyone knows that you should prioritize needs over wants. But even when buying your needs, like a car for transportation or a home to live in, be judicious with how much you spend. Just because you’re approved for a $50,000 car loan, for example, doesn’t mean you should use all of it. Spend as little as possible to get what you need.
Only Use Stocks if You’re Saving for 10 or More Years in the Future
Stocks are one of the greatest wealth-builders in the world, but only if you have a long-term perspective. If you have a short-term need, use high-yield savings accounts or other more conservative options to avoid the risk that you invest right before a bear market strikes.
Open a Roth Account
Roth accounts are a great option for young people in particular because they can’t get the most benefit out of making tax-deductible contributions. As you’re not usually in a high tax bracket when you just start working, take advantage of the tax-free distributions you’ll enjoy in retirement from a Roth IRA instead.
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