Dave Ramsey Defends His Investment Advice

[burnout454]

Dave Ramsey Defends His Investment Advice

First, I’m a big fan of Dave Ramsey. He has helped turn me away from financial ignorance and misbehavior. Not only is his overall message sound (live below your means, avoid debt, save & invest, etc.), I believe that he is honest and that his intentions are to help people. When you listen to his radio show regularly you get a sense of his character, especially because he talks about his own life candidly. Since it seems unlikely that his apparent genuineness is a ruse, I think the occasional person who depicts him as a charlatan or snake-oil salesman are incredibly misguided. In his view – and I agree – capitalism is at its best when businesses serve people well, whether it is something as mundane as fixing their car or as life changing as helping them turn around their financial world. So I see no conflict of interest that Dave’s business is to help people achieve financial success.

Nevertheless, I disagree with Dave that actively managed funds are preferable to index funds.

Yesterday, March 11, Dave spent an hour on his radio show defending his investment advice against criticism, specifically the idea (as Dave himself describes it) that he is “an expert at getting people out of debt and an absolute moron when it comes to investing” (1:05). I do not wish to defend each of his responses, but if anything his sincerity. He may be wrong about some things, but it seems to me he has good intentions.

I’d like to start a constructive conversation that could clarify the precise ways that Dave errs. I’m not optimistic that Dave would change his mind, but it would be nice to put together a concise statement for Ramsey followers who may want to understand where he and the Bogleheads differ.

Here is the audio:

http://a1611.g.akamai.net/f/1611/23422/9h/dramsey.download.akamai.com/23572/audio/mp3/itunes/03112013_the_dave_ramsey_show_itunes.mp3

(I do not claim 100% accuracy of my transcriptions below.)

Some summary and evaluation:

1. He spent much of the time on these areas: (a) defending stock market investing in general, primarily against those who are consumed by fear; (b) promoting a buy-and-hold strategy; and (c) criticizing market timing.

Apparently these are areas where some people fault him, but Bogleheads would find agreement.

2. Dave defended his knowledge of investing: “[Investing is] not where I spend the vast majority of my time advising people, because most people don’t have any money to invest, because they have a freakin car payment and a student loan that’s been around so long they think it’s a pet. So I spend most of my time there instead of investing. But it doesn’t mean I have no knowledge of [investing].” (11:10)

3. Against those who criticize him for citing average 12% returns, Dave cites the S&P 500, which “since the stock market began, has averaged a little over 11 percent” (14:30). He admits that past performance does not guarantee future results, but he sees no better way to forecast: “Yes, I understand that past performance does not guarantee future results. . . But if you’re not going to use that, what are you going to use, your wet finger in the air, which was just shortly before that in your ear? Is that your method for choosing your investing? . . . [Those of us who know investment analysis know that] the primary methodology for forecasting is to use past history, project it, extrapolate it into the future adjusting for whatever variables there are. It’s really not rocket science, folks.” (12:25) Later he claims that people are foolish to think they can predict the future better than the history can (39:00).

In context, it seems that Dave thinks those who challenge his 12% guidelines are the type of people who assume the worst for the economy (“only see a black cloud on the horizon”) and don’t believe that the market can repeat what it has averaged over many decades. For example: “When you quit believing in the market, you’ve quit believing in capitalism, believing in companies doing ok, and you’ve believed all the conspiracy theories, and really in essence you’ve quit believing in America. . . When you don’t believe that [] good quality companies in this country as a group, known as the stock market, are going to continue to make money going forward into the future and thereby yield their owners a rate of return, you have given up on what we call the American way of life.” (36:25) Later he adds: “I don’t think this country’s best days are over.”

4. Dave truly believes that actively managed funds will outperform indexes. He says: “There are many, many mutual funds that outperform the S&P [500]. Almost every mutual fund will give you as a part of their prospectus the S&P trendline and show you what they’ve done in comparison. And so if you’re looking at a mutual fund and it has not outperformed the S&P, then don’t buy it.”

How do you find the right one? This part will be like fingers on the chalkboard to Bogleheads: “I don’t understand why some of you that are supposedly trained or actually purport to your readership that you know something about investing, why you can’t find a mutual fund that has a 50-year or 70-year or 20-year track record of 12% average returns. They’re all over the place. Does every [fund] do that? No. . . but a simple subscription to Morning Star or calling virtually any broker that’s been out of school 30 minutes can find it. So why you [critics] can’t find it is beyond me.” (14:40)

Although I am optimistic that what the “the market” has done over decades gives us an idea of what it may do in the future over decades, Dave applies this principle to individual (actively managed) mutual funds, believing that the past performance of a mutual fund gives us a good idea of what it will do long term in the future. This is a fundamental mistake.

5. Dave is not absolutely against index funds. In one place he states that it’s “not a bad thing” to “dump all your money into an S&P index fund” to get (over the long haul) the historical returns of the stock market. In fact, I infer from another statement that the majority of his own assets outside of tax-advantaged accounts – which for someone as wealthy as him would be the majority of his assets – is in S&P 500 index funds: “I personally don’t buy only loaded funds. I buy some S&P 500 – because it’s got a low turnover ratio and there’s some tax advantages to that – in addition to my other investing, my Roth IRAs, my 401Ks, etc.” (28:14) But Dave does this for tax reasons, not because he believes the S&P will outperform his “good growth stock mutual funds.” On the simplicity of getting an index fund: “If you can buy a book on Amazon, you can buy an S&P 500 fund. It’s no more difficult than that” (14:10).

6. Dave believes in loaded funds with a clear conscious because he believes in the value of an advisor teaching you about investing and helping you find “good mutual funds.” In his words: “(Good advisors) do this with the heart of a teacher. Because they get paid a commission does not automatically mean they are evil. Everyone gets paid a commission for serving you. . . You [aren’t] mad about other [jobs] that get paid a commission, but now you’re worried about an investment advisor getting a commission when they give you investment advice. (Quoting his naysayers:) ‘Well it’s a conflict of interest.’ So is a real estate agent, but proof is in the pudding that a quality real estate agent will make you more on the sale of your real estate than they cost you. Tons of studies show that. Well, the investment community is no different.” (22:56)

In addition, Dave believes that another benefit of an advisor from a loaded fund is that most people need someone between them and their investments to keep them from selling in a down turn: “Here’s the big thing . . . a good investment advisor will talk you off the ledge. And there’s study after study done by the industry that shows that people who invest with a broker and the broker says, ‘calm down, don’t take your money out,’ [they make more money] versus having no one to coach you and you wake up in the middle of the night and you’re freaked out and you watched too much Fox or CNN . . . and so at 1:00 am you hit click on the web and take your money out of your no-load investment. You have no counsel; you have no one to teach you, no one to guide you, no one to talk to you. Consequently no-load investors without the benefit of a professional helping them cash out almost twice as often as loaded investors. So the commission that you pay is ‘ledge insurance.’ It talks you off the ledge. . . On average several different studies show that investors using an investment professional assist them in their purchase makes an average of 3% more on their money. They choose better funds [and] they stay in when the market turns down.” (24:53)

“These idiot advisors out there who are supposed consumer advocates who tell you that you should only buy no-loads, that anybody who’s charging you a commission is ripping you off, you have not read the studies. . . Investing is about behavior management as well as understanding the mathematics. And so I’m proud to endorse our ELPs [Endorsed Local Providers] . . . Yes, they pay us an endorsement fee and I’m proud to collect it because I did you a service by directing you to good people. And if you don’t want to use them, then that’s fine. But we’re not evil and we’re not taking advantage of anyone and we’re not scamming anyone.” (28:50)

To conclude, here is my take:

Dave needs to learn the reason that index funds are better than actively managed funds: fund managers cannot beat the index long term. In my opinion, he truly believes in the ability of these actively managed funds to outperform the market over time. That’s why in his mind promoting his ELPs is not immoral. They help investors find the best funds, thus providing a useful service. And like other services, they deserve a commission for doing so. If actively managed funds were better than index funds and if advisors could help novices find good funds, then Dave is right that paid advisors would be beneficial and worthwhile, not evil. So even though we may believe that Dave is wrong about actively managed funds, he promotes his ELPs believing that he is helping people with their investing.

Having an impression of Dave’s character, I give him the benefit of the doubt that he has noble intentions. And if he profits from helpful service, that is capitalism at its best.

Of course, there are other questionable aspects of his advice, including (a) 100% equities (which I suppose in his mind a broker protects you from cashing out); (b) deciphering his four recommended types of funds, and (c) his 8% withdrawal rate, based on the 12% expected return minus inflation. The 12% number may be fine as a teaching point or rhetorical tool to encourage people to invest, but it gets incredibly dangerous when used as a basis for withdrawal rate.

[The Wizard]

Dave probably is not asking bogleheads for help in fixing his misguided approach to investing.
It is hard to shovel help uphill.
I do not follow him, but it could be he has ties to commercial investment firms, from which his managed fund advice flows?
If I was Edward Jones, I'd certainly want him on my team...

[bottlecap]

His advice is contradictory. If he believes that that the S&P returns 12% on average, why recommend active investing? There's not any active funds with a long term record like that.

No advisor is going to recommend 100% stocks, either. So if he thinks investors need to be managed by advisors that won't recommend what he espouses, why does he recommend advisors?

Dave's just plain wrong about load funds as well.

I like his show, but he hasn't done the research and seems to have turned off his brain with respect to investing. If he was to have an authority on his show, he would look foolish making these claims.

JT

[Trev H]

My wife is a radiation therapist and one of their department doctors invited their staff and spouses to a Christmas dinner/party at their house (up in Franklin TN...)..

It was back in a very nice hilly area... and the Dr's house was in the 10,000 sf range size wise and on the top level he had a observation deck/room complete with telescopes and spotting scopes... you could see the Franklin TN area and even all they way to Nashville (the Batman tower)..

And right across the hollow on the next hill top was Daves Mansion... and man it was a big fancy looking place, all lit up - just georgous...

Those 12% returns... can sure build a nice house

Trev H

[Call_Me_Op]

4. Dave truly believes that actively managed funds will outperform indexes. He says: “There are many, many mutual funds that outperform the S&P [500]. Almost every mutual fund will give you as a part of their prospectus the S&P trendline and show you what they’ve done in comparison. And so if you’re looking at a mutual fund and it has not outperformed the S&P, then don’t buy it.”

Yes, there are many active funds that beat the S&P 500 because the S&P 500 is the wrong index against which to compare these funds, which typically hold lots of small-cap stocks.

[happymob]

His advice is contradictory. If he believes that that the S&P returns 12% on average, why recommend active investing? There's not any active funds with a long term record like that.

No advisor is going to recommend 100% stocks, either. So if he thinks investors need to be managed by advisors that won't recommend what he espouses, why does he recommend advisors?

Dave's just plain wrong about load funds as well.

I like his show, but he hasn't done the research and seems to have turned off his brain with respect to investing. If he was to have an authority on his show, he would look foolish making these claims.

JT

What part of 70-year track record don't you understand? I mean 70 years!

(For the record, even I might consider an actively managed fund with that track record)

[awval999]

What part of 70-year track record don't you understand? I mean 70 years!

(For the record, even I might consider an actively managed fund with that track record)

Fidelity Magellan - FMAGX (05/02/1963) Since Inception 16.01

http://investing.schwab.com/public/schw ... =#DataView

Fidelity Contrafund- FCNTX (05/17/1967) Since Inception 12.24

http://markets.on.nytimes.com/research/ ... mbol=FCNTX

[RadAudit]

I believe the root of Dave's problem concerning some mutual funds was identified by Upton Sinclair prior to 1932:

"On his writing of The Jungle, in American Outpost: A Book of Reminiscences (1932)
I used to say to our audiences: 'It is difficult to get a man to understand something, when his salary depends upon his not understanding it!' "

Dave's salary and his personal sense of integrity depend on his belief that his advertisers are delivering a superior product.

[B. Wellington]

I enjoy listening to Dave on my drive home. However his advice on investing does concern me. Dave has "deep pockets" and can afford to be 100% in stocks. Many people can not take that kind of risk, especially those in or close to retirement. Dave also has cash flow from his business(s), a huge market decline makes little difference to his overall lifestyle.

I found it interesting toward the end of his show where he mentioned the funds came with loads, the first time I heard him say that even though I knew that was the case.

[NateH]

It could be that because Dave is not legally qualified to offer investment advice, his lawyers encourage him to set up this ELP system to funnel any specific investment advice to another party. The ELPs willingly takes the new customers and the risk of advising them on investments. I always doubted that Ramsey even cared about this topic, instead focusing on what he is really good at: getting people out of debt. But now that he has addressed it on his show, maybe he does.

[hlfo718]

He can't promote index funds since his network of advisers use active funds, probably loaded active funds. So for him to promote index funds or low cost investing is like cutting off his air supply (money).

[bengal22]

I would say that the OP did a great job of summarizing the Pros and Cons of Dave Ramsey. I would highly recommend the Financial Peace course to any one who needs the motivation and a system to live within their means and get in the habit of no debt/regular savings. I would not recommend financial peace as an investment advice course. But the hard part is developing the habit of no debt/regular savings and you have 90% of financial issues licked.

[nisiprius]

3. Against those who criticize him for citing average 12% returns, Dave cites the S&P 500, which “since the stock market began, has averaged a little over 11 percent” (14:30).

But that's not true. It's only 10% for the S&P index. And more like 8.5% for "since the stock market began" although the old data is shaky.

11% is the number they used to use circa 1999 and 2000, at the end of the great bull market of the 1990s, which was so large that it was able to bend the 80 years of data before it.

12% is crazy. Nobody ever said it was 12% except maybe him.

To say in effect "It was OK for me to say 12% because it was 11%" when it was really 10% is pretty bad, and a 2% error isn't trivial.

The stock market began in 1792, the S&P began in 1923, and the S&P 500 began in 1957. Usually, the period used for the "historical return of the stock market" is either the S&P (1923-date) or the CRSP starting date (1926-date).

From year-end 1923 through 2009, the 2010 Ibbotson Classic Yearbook, p. 147, shows total return for the whole period of 3,099,269.73/736.34. Our Wiki shows increases of values of 15.05%, 2.11%, and 16.00% for 2010, 2011, and 2012, boosting the end number of 3,099,269.73 to 4223497.71. (42223497.71/736.34)^(1/90) = 1.102. It's only 10.2%. Less if you start in 1926, because 1924 and 1925 were barnbusters.

For "the beginning of the stock market," I don't want to spend much time on this but my Ibbotson volume has total return numbers from 1825 through 2009, and for that period the compound average annual total return is 8.46%. However, data before the 1920s is shaky.

[hsv_climber]

Is it another one of "Dave Ramsey threads" ( http://lmgtfy.com/?q=Dave+Ramsey+site%3Abogleheads.org ) where reasonable people are trying to convince other people not to take investment advice from TV/Radio commentators whose salaries are depended on providing you with the bad advice?

[ObliviousInvestor]

3. Against those who criticize him for citing average 12% returns, Dave cites the S&P 500, which “since the stock market began, has averaged a little over 11 percent” (14:30).

But that's not true. It's only 10% for the S&P index.

I brought this up once in a discussion on GetRichSlowly. I was chided by a Ramsey supporter that, "When referring to returns in general financial terms we dont talk about CAGR returns and only take average returns into consideration."

Your mistake is obviously that you're not using arithmetic averages.

[MathWizard]

One other issue with returns is that they are not in real dollars, so even with the correct
"averaging" CAGR, years of high inflation weigh in more heavily. Using real dollars would
give a better sense of actual returns after inflation. Returns which account
for inflation and fees would be even more accurate. Then we would not be talking
about 8 or 9 or 12% return, but instead something in the range of 5 to 9% real returns.


This is one reason why I liked the link to portfolio solutions that Rick Ferri posted in

viewtopic.php?f=10&t=87662&p=1258501&hilit=Portfolio+forecast#p1258501

This gives a look at various investment classes, and understanding of the risk/reward, and
gives a forecast for both nominal and real return. (I actually think that the real return is more
stable than nominal returns, so forecasting them is easier than forecasting both real returns
and inflation to get the nominal returns.)

[Random Musings]

On the site Dave specifically said that he has no problem in taking a cut of those fees since he is doing a "service" and helping people out. However, what he doesn't say is that it can be done more cost effectively through other FA's.

His "help" is why he can afford to buy a new lakeside property, large diamond rings for wife and other stuff he mentions on his show.....

Why wouldn't he paint a rosy picture of his investment beliefs and returns in general. That's how AUM is generated and he gets his cut.

What do you think he makes more money on - debt reduction advise or skimming AUM $ ??

RM

[FrugalInvestor]

Deleted

[JPH]

OP, you did a great job of presenting your question. I like to listen to Dave once in a while. I try to get my wife to listen. I've benefited attitudinally from his philosophy. I wish every other word out of his mouth wasn't "frickin."

[tadamsmar]

Ramsey says:

"The biggest mistake people make is putting too much emphasis on expenses as a criterion"

http://books.google.com/books?id=3BhiXc ... 22&f=false

[Hub]

I enjoy Dave's show in general and particularly like his advice on family finances and family business and inheritance and the like.

I have come to believe Dave's advice on buying his sponsored loaded actively managed funds to be less dubious than I used to. I think he's ignorant to mutual fund investing (as evidenced by the 4 categories he says to buy: Growth, Aggressive Growth, Growth & Income, International). With that ignorance as a basis then the rest of his advice starts to make more sense:

He says to buy 100% stocks. The math supports this, but Bogleheads know this isn't appropriate advice for the risk tolerance of the masses. So what does Dave use to mitigate this risk? 1-5% load fees on funds. Dave honestly believes that the load fee serves the benefit of keeping you from selling when the funds are down or on a whim. That and the expensive adviser serving as an intermediary between you and the sell button.

[tadamsmar]

One thing he is clearly wrong about is the 8% is a safe withdrawal rate. That has a 50% failure rate in retirement.

[Easy Rhino]

Thansk for the summary OP, I didn't listen to the audio, just read your precis.

It seems like Dave's investing education stopped in the 1990's. He's kind of fixated on the S&P thinking it's the only index in town, and that stocks are the only game in town. And his 12% return suggestions seem out of the 90's as well.

And of course his knowledge of the old days of the S&P 500, the stock market in general, and mutual funds, appears murky, but it is for most people.

If you took the performance of the S&P 500 since inception, accepted inflated numbers, and added in dividend performance, and ignore taxes, would you get around 12%?

[Random Musings]

He says to buy 100% stocks. The math supports this, but Bogleheads know this isn't appropriate advice for the risk tolerance of the masses. So what does Dave use to mitigate this risk? 1-5% load fees on funds. Dave honestly believes that the load fee serves the benefit of keeping you from selling when the funds are down or on a whim.

Dave can believe whatever he wants, but load fees will not stop nervous investors from trying to dump funds - perhaps a good FA can educate their client and stop, but perhaps not. Human nature.

With respect to 100% stocks that makes the incorrect assumptions that investors need that risk or are even able to tolerate that risk. Dave's advice doesn't take into consideration the clients needs.

Anyway, even though he says he buys loaded funds, has Dave ever disclosed if he currently pays any load the loaded funds he buys? Me thinks he has enough $ invested that probably waives some front-end load fees - like when purchasing American Funds. Also, has he ever mentioned to his flock (for those who don't benefit from the tiered structure) that they can reduce front-end fees (for example, purchasing American Funds) by first conduiting the money through a bond fund (2.5% load) and then moving to the higher equity load funds?

If he has, bully for him. If not, he's a frickin' huckster.

RM

[FinancialDave]

Dave Ramsey Defends His Investment Advice
To conclude, here is my take:

Dave needs to learn the reason that index funds are better than actively managed funds: fund managers cannot beat the index long term. In my opinion, he truly believes in the ability of these actively managed funds to outperform the market over time. That’s why in his mind promoting his ELPs is not immoral. They help investors find the best funds, thus providing a useful service. And like other services, they deserve a commission for doing so. If actively managed funds were better than index funds and if advisors could help novices find good funds, then Dave is right that paid advisors would be beneficial and worthwhile, not evil. So even though we may believe that Dave is wrong about actively managed funds, he promotes his ELPs believing that he is helping people with their investing.

Having an impression of Dave’s character, I give him the benefit of the doubt that he has noble intentions. And if he profits from helpful service, that is capitalism at its best.

Of course, there are other questionable aspects of his advice, including (a) 100% equities (which I suppose in his mind a broker protects you from cashing out); (b) deciphering his four recommended types of funds, and (c) his 8% withdrawal rate, based on the 12% expected return minus inflation. The 12% number may be fine as a teaching point or rhetorical tool to encourage people to invest, but it gets incredibly dangerous when used as a basis for withdrawal rate.

I am a huge fan of Dave as well and blog on his site on a daily basis, but I agree with your assessment almost completely, and hope that my realism (IMO) has done something to bring him around at least in some areas. I have never really been in debt, nor have I ever invested in anything but 100% equities, and still do even in retirement, because frankly my 30 years of doing this has not shown me that bonds will improve my returns - because of that I have roughly 50% more than I need in retirement, so my 2% withdrawal rate is not in trouble, and in this interest rate environment, it doesn't really matter right now anyway because bonds would not help me (IMO.)

I did like his reference to "old socks" (2:08) and suggested I could present him with some of mine, the next time we should meet!

Seriously, though, what I have learned is that most of Dave's followers, are in fact very similar to Bogleheads, at least in one aspect. They can think for themselves and when presented with facts -- such as even Dave's favorite funds have not returned 12% in recent history and almost every year their historical average is on a downtrend they can absorb the facts from the fiction. So I just try to stick to the facts and not get too emotional about it.

I also think that in the last two years I have "turned" a number of them into index investors -- surely not because I have a better "stage presence" than Dave, but on the merits of index investing itself.


fd

[Hub]

For the record, "Read Bogleheads Guide to Investing" is the most common advice you would hear for investment questions on a Dave Ramsey themed forum I was on before coming here. I think most people that get to the point of saving 15% for retirement in stocks and bonds (Baby Step 4?) end up seeking out more information on the subject than is available from Dave Ramsey. Not that this excuses his poor advice on the matter.

[FinancialDave]

It could be that because Dave is not legally qualified to offer investment advice, his lawyers encourage him to set up this ELP system to funnel any specific investment advice to another party. The ELPs willingly takes the new customers and the risk of advising them on investments. I always doubted that Ramsey even cared about this topic, instead focusing on what he is really good at: getting people out of debt. But now that he has addressed it on his show, maybe he does.

I believe you are exactly correct.

The good news about this is that because of the fiduciary requirement of the ELP's they DO NOT, as far as I can tell quote the 12% returns. In fact many investors come back from their first meeting asking on the boards why their ELP told them that 12% is just not possible - which of course by the responses indicate that most that have been around awhile don't believe the hype.

What is a little quizzical to me is Dave says he has an ELP that advises him -- for which I can only think that this ELP truly is a good listener and not a big talker when it comes to trying to give Dave investment advice or he just knows not to answer questions that are not asked.

fd

[downshiftme]

I think Dave's investment advice is poisonously bad and he sets people up with absurdly unrealistic expectations (12% returns, 8% SWR, 100% Growth Stock portfolio). But his basic get out of debt advice and LBYM advice is sound and delivered colorfully enough that he's entertaining and gets people to listed. Even his sometimes heavy handed religious reasoning may be helpful for some people.

I have talked to quite a few people about Boglehead ideas and some of them really light up and take it to heart. But sadly many do not, or still want to chase alpha so much they cannot LBYM or tolerate the idea of indexing. I reluctantly have come to believe that for at least some of these people, Dave's advice is better than what they would do on their own. I am baffled by this, but see where it sometimes is useful, or might even be a stepping stone to better ideas.

[EmergDoc]

I'm one of those "blogger" critics he complains about at the beginning: http://whitecoatinvestor.com/how-dave-r ... ou-astray/

[Toons]

Ramsey's debt free mantra is on the money,keep up the good work

[SC Hoosier]

I think Dave's investment advice is poisonously bad and he sets people up with absurdly unrealistic expectations (12% returns, 8% SWR, 100% Growth Stock portfolio). But his basic get out of debt advice and LBYM advice is sound and delivered colorfully enough that he's entertaining and gets people to listed. Even his sometimes heavy handed religious reasoning may be helpful for some people.

I have talked to quite a few people about Boglehead ideas and some of them really light up and take it to heart. But sadly many do not, or still want to chase alpha so much they cannot LBYM or tolerate the idea of indexing. I reluctantly have come to believe that for at least some of these people, Dave's advice is better than what they would do on their own. I am baffled by this, but see where it sometimes is useful, or might even be a stepping stone to better ideas.

You all have to understand something. WE ARE NOT NORMAL PEOPLE! We are people that care about and can understand the concepts and math of investing. WE ARE THE MINORITY! Dave is trying to find a one size fits all system for the masses because on a radio show, you can't get into all the specifics to tailor advice to each situation. We don't need hand holding, but one could argue that most do. (See Jason Zweig, "Your money and your brain.")

So I agree with post above. We should take the attitude that yes, our way is better, but Dave's network of ELP's can really help educate people and get them excited about saving for retirement. We should count ourselves lucky to be one of the Bogleheads. We have a leg up financially. When I was on baby step 2 I didn't care at all about investing. I was trying to get out of debt. Now that I am, I found the best way to do it. Others like me will find us.

Lets not burn the forest because a few trees are bad. A bad tree will still heat my house.

[avalpert]

I think Dave's investment advice is poisonously bad and he sets people up with absurdly unrealistic expectations (12% returns, 8% SWR, 100% Growth Stock portfolio). But his basic get out of debt advice and LBYM advice is sound and delivered colorfully enough that he's entertaining and gets people to listed. Even his sometimes heavy handed religious reasoning may be helpful for some people.

I have talked to quite a few people about Boglehead ideas and some of them really light up and take it to heart. But sadly many do not, or still want to chase alpha so much they cannot LBYM or tolerate the idea of indexing. I reluctantly have come to believe that for at least some of these people, Dave's advice is better than what they would do on their own. I am baffled by this, but see where it sometimes is useful, or might even be a stepping stone to better ideas.

You all have to understand something. WE ARE NOT NORMAL PEOPLE! We are people that care about and can understand the concepts and math of investing. WE ARE THE MINORITY! Dave is trying to find a one size fits all system for the masses because on a radio show, you can't get into all the specifics to tailor advice to each situation. We don't need hand holding, but one could argue that most do. (See Jason Zweig, "Your money and your brain.")

So I agree with post above. We should take the attitude that yes, our way is better, but Dave's network of ELP's can really help educate people and get them excited about saving for retirement. We should count ourselves lucky to be one of the Bogleheads. We have a leg up financially. When I was on baby step 2 I didn't care at all about investing. I was trying to get out of debt. Now that I am, I found the best way to do it. Others like me will find us.

Lets not burn the forest because a few trees are bad. A bad tree will still heat my house.

But see it is precicesly because we are in the minority and Dave is targeting the majority that his advice is poor, dangerous bordering on immoral. Recommend to the masses that an 8% withdrawal rate is safe isn't helpful or providing them with baby steps it is pushing them over a cliff. And what's worse is that, based on this particular defense of his, he actually believes his advice is good advice - he doesn't even realize in what ways he is wrong and thus misleading others and is so confident in his own intelligence that rather than learn from his critics he doubles down on bad ideas. That lack of self-awareness if dangerous in anyone, it is very dangerous in someone that other trust for financial (including investment) advice.

[lawman3966]

Having an impression of Dave’s character, I give him the benefit of the doubt that he has noble intentions. And if he profits from helpful service, that is capitalism at its best.

Of course, there are other questionable aspects of his advice, including (a) 100% equities (which I suppose in his mind a broker protects you from cashing out); (b) deciphering his four recommended types of funds, and (c) his 8% withdrawal rate, based on the 12% expected return minus inflation. The 12% number may be fine as a teaching point or rhetorical tool to encourage people to invest, but it gets incredibly dangerous when used as a basis for withdrawal rate.

I could not disagree more. People with "noble intentions" don't direct investors toward investments with fee levels that diminish the value of their life savings to the benefit of the director/advisor. This board routinely (and correctly) pans the large brand-name wealth management firms for charging high fees. I see no reason why Ramsey would get a pass for doing the same thing.

But Ramsey has done more harm than some of those large firms have. The advice provided to colleagues of mine who've invested with big firms is frequently sound, though in my opinion is fairly obvious and delivered at too high a price (such as charging 2% of AUM in fees, but reminding their clients to rebalance when the market dove in 2009). As bad as the fees are, I've never heard of an advisor at those firms giving advice as dangerous and irresponsible as suggesting that an 8% withdrawal rate in retirement is sustainable. I can only assume that someone living under a bridge some day is going to curse Ramsey for giving that advice and himself or herself for believing it.

Much of the retirement finance community and many on this forum now view the once vaunted 4% SWR in retirement as unsustainable and potentially dangerous. In suggesting that 8% is safe, Ramsey is so far off the mark, that his advice prompts the question whether he's read one book or one article on the subject of the SWR in retirement. If he has, and disagrees with it, many here would love to see his reasoning, as it would be great news indeed (as it would reduce the nest egg needed for retirement by over 50%). If, as I suspect, he has not read any such material (and might even have trouble spelling "SWR"), he owes it to his loyal audience to admit that he doesn't understand the mathematics of decumulation and to refer them to a good book on the subject or an advisor who does understand the concept.

To reiterate my thesis, I think it's immoral to give dangerous advice, even if it's free. To do so for profit is beyond the pale. I thank you for the above information though. I now have even more reason to avoid listening to even one minute of his radio program.

[SC Hoosier]

I think Dave's investment advice is poisonously bad and he sets people up with absurdly unrealistic expectations (12% returns, 8% SWR, 100% Growth Stock portfolio). But his basic get out of debt advice and LBYM advice is sound and delivered colorfully enough that he's entertaining and gets people to listed. Even his sometimes heavy handed religious reasoning may be helpful for some people.

I have talked to quite a few people about Boglehead ideas and some of them really light up and take it to heart. But sadly many do not, or still want to chase alpha so much they cannot LBYM or tolerate the idea of indexing. I reluctantly have come to believe that for at least some of these people, Dave's advice is better than what they would do on their own. I am baffled by this, but see where it sometimes is useful, or might even be a stepping stone to better ideas.

You all have to understand something. WE ARE NOT NORMAL PEOPLE! We are people that care about and can understand the concepts and math of investing. WE ARE THE MINORITY! Dave is trying to find a one size fits all system for the masses because on a radio show, you can't get into all the specifics to tailor advice to each situation. We don't need hand holding, but one could argue that most do. (See Jason Zweig, "Your money and your brain.")

So I agree with post above. We should take the attitude that yes, our way is better, but Dave's network of ELP's can really help educate people and get them excited about saving for retirement. We should count ourselves lucky to be one of the Bogleheads. We have a leg up financially. When I was on baby step 2 I didn't care at all about investing. I was trying to get out of debt. Now that I am, I found the best way to do it. Others like me will find us.

Lets not burn the forest because a few trees are bad. A bad tree will still heat my house.

But see it is precicesly because we are in the minority and Dave is targeting the majority that his advice is poor, dangerous bordering on immoral. Recommend to the masses that an 8% withdrawal rate is safe isn't helpful or providing them with baby steps it is pushing them over a cliff. And what's worse is that, based on this particular defense of his, he actually believes his advice is good advice - he doesn't even realize in what ways he is wrong and thus misleading others and is so confident in his own intelligence that rather than learn from his critics he doubles down on bad ideas. That lack of self-awareness if dangerous in anyone, it is very dangerous in someone that other trust for financial (including investment) advice.

Immoral? Come on! Theft is immoral. 8% withdrawal rate is not immoral, nor is it dangerous. Guns are dangerous. Calm down. Reread my post. If 100% of Americans do exactly what he says then 90% of them would be better off than they are today. That, sir, is a home run.

[TN_INVEST]

it would be nice to put together a concise statement for Ramsey followers who may want to understand where he and the Bogleheads differ.

Dave Ramsey thinks you ought to take your car to the dealership for service.
Bogleheads would rather go to AutoZone.

[Hub]

it would be nice to put together a concise statement for Ramsey followers who may want to understand where he and the Bogleheads differ.

"Dave Ramsey's investment advice is poor and dated. Once you get to Baby Step 4 read Bogleheads Guide to Investing for modern frugal investing concepts to live by."

[Random Musings]

Immoral? Come on! Theft is immoral. 8% withdrawal rate is not immoral, nor is it dangerous. Guns are dangerous. Calm down. Reread my post. If 100% of Americans do exactly what he says then 90% of them would be better off than they are today. That, sir, is a home run.

8% withdrawal rate is not immoral, but it's poor advice. With respect to his show talking about debt reduction, I have no major qualms about that.

With respect to his investment advice or going through his network of advisors after debt reduction is completed , there are far more worthy low-cost ethical advisors that use low-cost, no-load funds/ETFs. For a DIY with education and the ability to stay the course, utilizing information and advice on this board would also be better than going the Ramsey route. If 100% of Americans would go this route, rather than the Dave Ramsey route of investing, more than 90% would be better off doing that. That sir, is a grand slam in the bottom of the ninth that ends the game.

Just because it's better than bad doesn't mean it's the right way to go.

RM

[hsv_climber]

After reading this thread, Dave Ramsey reminds me of a shepherd who is leading sheep through green pastures (reducing debt) to a slaughter house (high fees, ELPs, 100% stocks, 8% withdrawal, etc.).

[burnout454]

Having an impression of Dave’s character, I give him the benefit of the doubt that he has noble intentions. And if he profits from helpful service, that is capitalism at its best.

I could not disagree more. People with "noble intentions" don't direct investors toward investments with fee levels that diminish the value of their life savings to the benefit of the director/advisor. . . .
To reiterate my thesis, I think it's immoral to give dangerous advice, even if it's free. To do so for profit is beyond the pale. I thank you for the above information though. I now have even more reason to avoid listening to even one minute of his radio program.

OP here. It seems like you missed my point. Dave may be wrong, but that's different than being dishonest. He believes he is providing a needed service.

[burnout454]

You all have to understand something. WE ARE NOT NORMAL PEOPLE! We are people that care about and can understand the concepts and math of investing. WE ARE THE MINORITY! Dave is trying to find a one size fits all system for the masses because on a radio show, you can't get into all the specifics to tailor advice to each situation. We don't need hand holding, but one could argue that most do. (See Jason Zweig, "Your money and your brain.")

Agreed. I've always had the impression that many on this board who have their act together forget that most of our friends, family, and neighbors are living beyond their means, not saving, out of control, etc. Many of them probably want or need an advisor, not a go-it-alone approach. Granted, it would be better a low/no-cost advisor and low-cost index funds.

[brisni]

Many people cannot grasp the concept of comparing a fund only to its appropriate benchmark. To them,
if it beat the S&P 500 over the past X years, it's good enough, nevermind the volitility during that time.
Ironically, the extended market -- ie. everything BUT the S&P 500 --- has also killed the S&P 500 over last 10 years.
Maybe we should only invest in that!!

- Brian

[lawman3966]

Having an impression of Dave’s character, I give him the benefit of the doubt that he has noble intentions. And if he profits from helpful service, that is capitalism at its best.

I could not disagree more. People with "noble intentions" don't direct investors toward investments with fee levels that diminish the value of their life savings to the benefit of the director/advisor. . . .
To reiterate my thesis, I think it's immoral to give dangerous advice, even if it's free. To do so for profit is beyond the pale. I thank you for the above information though. I now have even more reason to avoid listening to even one minute of his radio program.

OP here. It seems like you missed my point. Dave may be wrong, but that's different than being dishonest. He believes he is providing a needed service.

A couple of points. First, none of us knows what he believes. Moreover, whether dishonest or merely misinformed, it is wrong to give advice if you're not qualified to do so (bear in mind the quote from Will Rogers to the effect that it's not what we don't know that causes problems, it's what we know that just ain't so). Imagine the consequences of a doctor or lawyer giving incorrect advice on a highly important matter.

Aside from the issue of Ramsey's sincerity, is what I detect as premise that getting wrong but well-intentioned advice is better than getting no advice at all. And again, I disagree. A novice investor (and novice decumulator) who knows that he is ignorant of decumulation strategies is better off continuing to search for sound advice on the subject (i.e. to know that he doesn't know the answer) than to be guided toward an unsustainable strategy and to falsely believe that he has achieved financial stability and security.

[ruralavalon]

OP, thanks for the summary.

Honesty, noble intentions, good character, his believing in what he is saying, and the like only make his investing ideas more dangerous, when he gives plausible-sounding excuses for very bad advice to people who have come to rely on him. Just my $0.02.

[Nahum]

Just like other active managers maybe Dave believes in his investment philosophy so much because it has worked for him all these years. If someone were to start investing his way now well it might not be a good idea (1980's compared to the 2000's 2 different worlds in my opinion)

Maybe I'll send him the Bogleheads Guide to Investing and The Little Book of Common Sense Investing. Just maybe he'll see the light.

[burnout454]

A couple of points. First, none of us knows what he believes. Moreover, whether dishonest or merely misinformed, it is wrong to give advice if you're not qualified to do so (bear in mind the quote from Will Rogers to the effect that it's not what we don't know that causes problems, it's what we know that just ain't so). Imagine the consequences of a doctor or lawyer giving incorrect advice on a highly important matter.

Aside from the issue of Ramsey's sincerity, is what I detect as premise that getting wrong but well-intentioned advice is better than getting no advice at all. And again, I disagree. A novice investor (and novice decumulator) who knows that he is ignorant of decumulation strategies is better off continuing to search for sound advice on the subject (i.e. to know that he doesn't know the answer) than to be guided toward an unsustainable strategy and to falsely believe that he has achieved financial stability and security.

I don't think the doctor/lawyer analogy works. Nobody's life is in danger. If someone follows Dave's advice they might not do quite as well in the stock market after fees, but they'll still be investing in the stock market. Dave is the best motivator with the largest audience in the country.
So I disagree that people would be better off without him. Most of his audience wouldn't be saving or investing as much or at all without him.

[ObliviousInvestor]

It would be nice to put together a concise statement for Ramsey followers who may want to understand where he and the Bogleheads differ.

How about something like this?
-----
From the Boglehead perspective, Ramsey's investing advice ranges from very good to very bad.

The very good:
Ramsey suggests that you not try to time the market. Most Bogleheads agree.

Ramsey suggests that you not try to outperform the market by picking individual stocks. Most Bogleheads agree.

The not-so-good:
Ramsey recommends using commission-paid advisors to buy actively managed mutual funds. Bogleheads would suggest using no-load, low-cost, passively managed mutual funds (e.g., index funds) instead. And, in the cases in which it makes sense to use an advisor, most Bogleheads prefer to use a fee-only advisor so as to reduce conflicts of interest.

The bad:
Ramsey recommends a portfolio entirely of stocks -- that is, no bonds or CDs. For most investors, this will simply not be an appropriate level of risk.

Ramsey quotes a 12% annual return as what you can expect from stocks. This is higher than historical figures support. For example, according to the 2012 Ibbotson SBBI Classic Yearbook, from 1926-2011, U.S. stocks (as measured by the S&P 500 while it has existed, and the S&P 90 prior to that) have averaged a 9.8% return. When you adjust for inflation, that figure is just 6.6%. When you account for investment costs or taxes, it's even lower.

To make matters worse, some Bogleheads suspect that the future may look worse than the past century of U.S. results. So, depending on who you ask, even the 6-7% historical after-inflation figure may be too optimistic a projection.

The very bad:
Ramsey recommends using an inflation-adjusted 8% withdrawal rate in retirement, suggesting that doing so would allow your level of spending to keep up with inflation while keeping your nest egg intact. This is a serious problem. An 8% withdrawal rate presents a very significant possibility of portfolio depletion. For example, according to the updated "Trinity Study," such a withdrawal rate (with the 100%-stock portfolio Ramsey recommends) would only have a 44% chance of lasting 30 years. (And again, some Bogleheads would argue that historical figures are too optimistic to use for planning purposes.)

[EmergDoc]

I listened to the whole thing in the car and found his defense of 12% returns from "good growth mutual funds" and loaded mutual funds particularly weak.

Apparently some people on the internet are accusing him of directing people into the stock market when he shouldn't or using a buy and hold approach. I found his defense on those charges just fine.

I don't even have much of a problem with his whole business structure to refer to his ELPs. Most people do need investment advice unfortunately. Most people who need it don't have the assets necessary to hire a fee-only adviser. Nobody is going to work for 1% of a $10K portfolio. Hourly advisors are some solution, but they're still fairly rare out there. The advisors have to get paid, so they take loads. That's fine with me as long as people understand what they're doing. But to think the mutual fund salesman/advisor can pick funds that will beat the S&P 500 over the long run shows a serious ignorance of the academic literature he seems fond of citing.

[brick-house]

emerg doc wrote:

I don't even have much of a problem with his whole business structure to refer to his ELPs. Most people do need investment advice unfortunately. Most people who need it don't have the assets necessary to hire a fee-only adviser. Nobody is going to work for 1% of a $10K portfolio. Hourly advisors are some solution, but they're still fairly rare out there. The advisors have to get paid, so they take loads. That's fine with me as long as people understand what they're doing. But to think the mutual fund salesman/advisor can pick funds that will beat the S&P 500 over the long run shows a serious ignorance of the academic literature he seems fond of citing.

I wonder what old Dave thinks of Wealthfront? Advisory fee waived on first $10,000 then .25% management fee on an index portfolio. Burton Malkiel for much cheaper than the local Edward Jones Door knocker...

https://www.wealthfront.com/

[rustymutt]

It could be that because Dave is not legally qualified to offer investment advice, his lawyers encourage him to set up this ELP system to funnel any specific investment advice to another party. The ELPs willingly takes the new customers and the risk of advising them on investments. I always doubted that Ramsey even cared about this topic, instead focusing on what he is really good at: getting people out of debt. But now that he has addressed it on his show, maybe he does.

Bingo! We've a winner. It's not in Dave's best interest to argue with passive vs. active. Dave watches out for Dave. He's human, and influenced by this co-habitation with others in his business. He's a part to play, and does play it wonderfully.

[stemikger]

My wife is a radiation therapist and one of their department doctors invited their staff and spouses to a Christmas dinner/party at their house (up in Franklin TN...)..

It was back in a very nice hilly area... and the Dr's house was in the 10,000 sf range size wise and on the top level he had a observation deck/room complete with telescopes and spotting scopes... you could see the Franklin TN area and even all they way to Nashville (the Batman tower)..

And right across the hollow on the next hill top was Daves Mansion... and man it was a big fancy looking place, all lit up - just georgous...

Those 12% returns... can sure build a nice house

Trev H

You aren’t kidding. Here is his humble little abode.

http://www.google.com/search?hl=en&site ... B500%3B304