Suze Orman says this is exactly where to invest your money right now

While the entire world battles a global health crisis, economies are also feeling the brutal affects of the coronavirus pandemic. Last month the stock market saw its 16th worst month for loss since 1915. As bad news about the coronavirus pandemic led investors to dump their stocks, the S&P 500 stock index reached its valley, 34% below its high from just a month earlier.

Many people on Wall Street believe that the stocks have “bottomed”, but no one knows for sure as the coronavirus pandemic, as well as its economic effects, remain unpredictable in the U.S.

As the country heads towards a recession or a period in which a country’s GDP drops for two successive quarters, many people are left wondering what they should be doing with their money right now. Suze Orman, the financial expert, and host of the Women + Money podcast, told Ladders exactly what money moves people should be taking.

What is the best thing you can do with your money right now?

“The best thing you can possibly do is the thing I’ve always told you to do is,” Orman said. “If your 401(k), 403(b), or Thrift Savings Plan (TSP) happens to offer a Roth retirement account and they match your contribution, you should absolutely be participating in that. You can also have a Roth IRA or a traditional IRA, in addition to a 401(k).”

According to Orman, the more money you get into a Roth retirement account, the better off you are going to be.

While some prefer putting their money in a traditional 401(k) or a traditional IRA because they enjoy the immediate tax deduction, Orman cautions people to think more long-term about this decision.

People will say to her, “But now if I put my money in a traditional 401(k) or a traditional IRA, Suze, I get a tax write-off for it and for sure I’m going to be in a lower income tax bracket when I retire, so why would I want to do that and pay taxes now and put money into a Roth retirement account?”

To those people, Orman responds, “Are any of you looking at the amount of money that the government has had to borrow right now? They’re taking out $2 trillion, another $2 trillion, who knows what this is going to leave us with. And how do you think that we are going to pay for that years from now? Do you think it’s possible that interest rates are going to have to increase to take care of the debt that the government created to pay you so that you could survive?”

So, Orman is cautioning people to invest in the known, which is what your tax bracket is today, rather than the unknown, which is what your tax bracket will be years from now when you need to withdraw your money. If you pay the taxes today, then years from now what you see in your retirement account is what you get.

“If you aren’t saving for your retirement in a Roth retirement vehicle, in my opinion, you are absolutely making one of the biggest mistakes out there,” Orman said. “Period.”

Should you switch to a Roth account right now if you do not have one already?

“You have to be very careful because when you switch the money you have into a Roth IRA you are going to pay ordinary income tax on that money,” Orman said.

You will have to cautiously decide whether or not you switch the money you have into a Roth IRA, but Orman urges that absolutely new contributions should be going into a Roth retirement vehicle.

For those that have lost their income or will be in a very low income tax bracket this year, Orman says that converting small amounts of money from a traditional 401(k), 403(b), or TSP to a Roth IRA could be worth looking into.

“I would probably wait to see if this market does another downturn, which it might,” Orman said. “It might not, but it might…so wait to convert because if we have another serious downturn, your stocks will be considerably less, so then when you convert, you won’t owe as much in income tax because the value of your 401(k), 403(b) or TSP will be significantly lower.”

If you have extra cash, should you invest it right now?

If you are recently unemployed due to the coronavirus crisis, Suze Orman has different financial pandemic advice for you.

If you are still employed, and have at least five years, preferably longer, until you need a certain amount of money, then Orman does not have any problems with you investing your money right now. But she does want you to make sure that you are dollar cost averaging into the stock market.

Dollar cost averaging is an investment strategy that aims to reduce the impact of volatility of stock or fund purchases by  buying at regular intervals and in equal amounts.

“This is not the time where you have $5,000 and you want to invest it and you invest all $5,000,” Orman said. “This is the time where you want to invest it in a Roth IRA, maybe you put in $500 a month, or whatever it would be, every single month into what you want to invest in.”

Orman stressed the importance of being diversified in your investments to minimize risk.

“If you don’t have the ability to purchase at least 25 individual stocks so that you can give yourself your own diversification, then you are far better off doing it via an Exchange Traded Fund so that at least you have your money spread everywhere,” Orman said.

One of Orman’s favorite ETFs is the Vanguard Total Stock Market Index ETF (VTI). She recommends that if you don’t need this money for five years or longer, you dollar cost average it into that fund every single month.

This fund “gives you a total diversification because it invests all across the board. We have to see what happens,” Orman said of the current economic situation. “Will airline stocks come back? Will oil come back? Will automobiles come back? Will real estate come back? Will Zoom and Amazon continue to go or will they pull back? It’s just a good diversification.”

Another one of her favorites is the Motley Fool 100 Index (TMFC) because they have diversification of large stocks.

“I think you would be very pleased with if you dollar cost average into that over time,” Orman said.