Dave Ramsey Defends His Investment Advice

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Re: Dave Ramsey Defends His Investment Advice

Postby tadamsmar » Fri Mar 15, 2013 9:51 am

ObliviousInvestor wrote:
tadamsmar wrote:
ObliviousInvestor wrote: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.


Just to be the devil's advocate...

What's wrong with 100% stocks? Using the Trinity Study that you cite later in your post, 100% stocks do well, at least as good as 50% stocks. (75% stocks does a little better, but not much).

One could argue that a investor would be better off paying an adviser 1.5% assuming the adviser could give the investor the backbone to stay in 100% stock rather than 50% stocks. A 100% stock portfolio has about the same safe withdrawal rate and about a 2% higher expected return, so the investor (or his heirs, since it's really the terminal value and not the withdrawal rate that improves) would come out ahead by paying the adviser.

First a brief note of explanation in case it wasn't clear: In my prior post, rather than presenting my personal views, I was trying to present as close as I could to a Boglehead consensus -- in case somebody wanted to start a wiki article regarding Ramsey and his investing advice for instance.

Same thing applies here.

Two points:

One: Paying the advisor doesn't necessarily guarantee that an investor will refrain from bailing out during a market decline.

Two: Probability of portfolio success is only one measure of risk. Another relevant measure is when the failure scenarios occur (e.g., one year into retirement or 25 years into retirement). From what I've seen, for withdrawal rates in the range most Bogleheads would use, early-in-retirement failure scenarios are more likely with a high stock allocation than they are with a lower stock allocation. See "Figure 7" in this article from Wade Pfau for an example of such an analysis.


Thinking about your original post on the Boglehead view: "For most investors, this will simply not be an appropriate level of risk."

Bogleheads seem to be assuming:

1. Risk is somehow a subjective thing, an attribute of the investor like shoe size.
2. It's a fixed value, unchanging
3. Like everything else in investing, the investor must determine this value in a DYI process, some sort of navel gazing exercise.

But what if the truth is:

1. Risk is objective
2. This psychological thing that Bogleheads have confuse with risk is not fixed.
3. An investment advisor can change the psychological thing, providing value for a fee.
Last edited by tadamsmar on Fri Mar 15, 2013 12:36 pm, edited 1 time in total.
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Re: Dave Ramsey Defends His Investment Advice

Postby ivesjl » Fri Mar 15, 2013 10:07 am

LRDave wrote:Count me in the 100% charlatan category.

Please consider that Dave Ramsey has helped many people straighten up their finances. After his program my wife and I learned how to work together and we no longer fight over finances because we speak the same language with money. We execute his plan with a few different techniques but this does not change the value of his plan; for example, we budget using YNAB not the Dave Ramsey Method, and we invest using a Boglehead approach.

I know the Bogleheads' to be reasonable, and I think don't think Dave's plan excludes a Boglehead investment strategy. My understanding of the matter is that Dave Ramsey's biggest goal is to get families to save for the future.

The original intent of the OP was to put together a letter to explain the Boglehead philosophy to Mr. Ramsey. Personally, I would very much like to hear his response to a few things, especially the 8% withdrawal rate, 100% stock asset allocation, and fund selection.
"Successful investing is all about common sense." | ~ John Bogle.
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Re: Dave Ramsey Defends His Investment Advice

Postby tadamsmar » Fri Mar 15, 2013 10:17 am

ivesjl wrote:
LRDave wrote:Count me in the 100% charlatan category.

Please consider that Dave Ramsey has helped many people straighten up their finances. After his program my wife and I learned how to work together and we no longer fight over finances because we speak the same language with money. We execute his plan with a few different techniques but this does not change the value of his plan; for example, we budget using YNAB not the Dave Ramsey Method, and we invest using a Boglehead approach.

I know the Bogleheads' to be reasonable, and I think don't think Dave's plan excludes a Boglehead investment strategy. My understanding of the matter is that Dave Ramsey's biggest goal is to get families to save for the future.

The original intent of the OP was to put together a letter to explain the Boglehead philosophy to Mr. Ramsey. Personally, I would very much like to hear his response to a few things, especially the 8% withdrawal rate, 100% stock asset allocation, and fund selection.


Dave Ramsey has already responded to all those who criticize something he has written:

After selling over three million books, I’ve decided if you criticize something I’ve written, you are the moron (laughing and giggling). I mean, what have you done?


http://www.kahlerfinancial.com/financia ... rs-ego?a=1
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Re: Dave Ramsey Defends His Investment Advice

Postby FinancialDave » Fri Mar 15, 2013 10:20 am

[quote="tadamsmar

I am assuming everything is about future decisions.[/quote]

I'll leaving the assuming to someone else.

:happy

As I said, I make no predictions about the future. I was merely trying to develop some possible facts based on history. DR has been investing for roughly 20 years. Many people are quite emotional about his bad investing advice - so emotional that they can't see the facts sitting in front of them -- mainly that his returns (mostly because he is a no bond sort of risk taker) are most likely probably better than the average Boglehead who might have been investing over the same time period.

Ok, I can't resist - I will make one prediction. DR's returns will further leave others behind if they continue to rely on back-testing to prove that they need some bond exposure in their portfolios --- how is that for a controversial prediction, which can certainly be revisited in 5 years and I will lay out the latest version of the facts.

However, don't read things in here that are not there --- such that just because DR does it, it is good for you.

fd
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Re: Dave Ramsey Defends His Investment Advice

Postby tadamsmar » Fri Mar 15, 2013 10:32 am

ivesjl wrote:The original intent of the OP was to put together a letter to explain the Boglehead philosophy to Mr. Ramsey. Personally, I would very much like to hear his response to a few things, especially the 8% withdrawal rate, 100% stock asset allocation, and fund selection.


He's been criticized for writing these things for years. His responses are posted on this thread. He calls his critics morons and has his lawyers threaten them.
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Re: Dave Ramsey Defends His Investment Advice

Postby LRDave » Fri Mar 15, 2013 10:38 am

[personal remark deleted by admin alex]
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Re: Dave Ramsey Defends His Investment Advice

Postby chasely » Fri Mar 15, 2013 11:02 am

tadamsmar wrote:
Dave Ramsey has already responded to all those who criticize something he has written:

After selling over three million books, I’ve decided if you criticize something I’ve written, you are the moron (laughing and giggling). I mean, what have you done?


http://www.kahlerfinancial.com/financia ... rs-ego?a=1


This quote is pretty much why I stopped listening to his show. He can be very condescending to his listenership and those that don't agree with him.

By his metric we shouldn't criticize any popular music since it sells so well.

Edit: I hate that I keep coming back to this thread... I believe there is something wrong with me.
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Re: Dave Ramsey Defends His Investment Advice

Postby canga » Fri Mar 15, 2013 11:04 am

Regarding Dave's 100% stock portfolio, for someone that abhors debt it would seem hypocritical to invest in a debt instrument. His fixed income comes from debt free real estate, which most on this forum discourage as a viable investment.

The 8% withdrawal rate is inexcusable, but then again, so is blindly following advice without exercising independent thought.
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Re: Dave Ramsey Defends His Investment Advice

Postby swaption » Fri Mar 15, 2013 11:07 am

tadamsmar wrote:What's wrong with 100% stocks? Using the Trinity Study that you cite later in your post, 100% stocks do well, at least as good as 50% stocks. (75% stocks does a little better, but not much).

One could argue that a investor would be better off paying an adviser 1.5% assuming the adviser could give the investor the backbone to stay in 100% stock rather than 50% stocks. A 100% stock portfolio has about the same safe withdrawal rate and about a 2% higher expected return, so the investor (or his heirs, since it's really the terminal value and not the withdrawal rate that improves) would come out ahead by paying the adviser.


Bold emphasis is mine in the above quote. I think this encapsulates the biggest misperceptions about risk and reward. It's kind of like a no pain/no gain approach. What is implied is that there is some expected monetary benefit to said backbone. Risk is risk. If you pay someone 1.5% per annum in the hope they provide the fortitude to stay the course at 100%, then there is a risk you do worse, and that is true over any time frame. For that matter, that is true even if you don't pay the 1.5%, just use low cost index funds, and your own discipline to stay the course.

Equities represent the residual interest in a bunch of assets. Money in equities is at risk. I'm all for investing in equities, but I genuinely think one of the unforunate by products of mutual fund investing (and even more so passive index fund investing) is that it anesthisizes retail investors from understanding the true nature of what they are investing in. The risk is real.
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Re: Dave Ramsey Defends His Investment Advice

Postby tadamsmar » Fri Mar 15, 2013 11:44 am

swaption wrote:
tadamsmar wrote:What's wrong with 100% stocks? Using the Trinity Study that you cite later in your post, 100% stocks do well, at least as good as 50% stocks. (75% stocks does a little better, but not much).

One could argue that a investor would be better off paying an adviser 1.5% assuming the adviser could give the investor the backbone to stay in 100% stock rather than 50% stocks. A 100% stock portfolio has about the same safe withdrawal rate and about a 2% higher expected return, so the investor (or his heirs, since it's really the terminal value and not the withdrawal rate that improves) would come out ahead by paying the adviser.


Bold emphasis is mine in the above quote. I think this encapsulates the biggest misperceptions about risk and reward. It's kind of like a no pain/no gain approach. What is implied is that there is some expected monetary benefit to said backbone. Risk is risk. If you pay someone 1.5% per annum in the hope they provide the fortitude to stay the course at 100%, then there is a risk you do worse, and that is true over any time frame. For that matter, that is true even if you don't pay the 1.5%, just use low cost index funds, and your own discipline to stay the course.

Equities represent the residual interest in a bunch of assets. Money in equities is at risk. I'm all for investing in equities, but I genuinely think one of the unforunate by products of mutual fund investing (and even more so passive index fund investing) is that it anesthisizes retail investors from understanding the true nature of what they are investing in. The risk is real.


I think you are correct. Interestingly, the example I gave indicates that your heirs can get all the added risk (with no added reward) and your advisor can get all the added reward (with no added risk). You essentially break even with no additional reward and no additional risk of running out of money during retirement. This might be part of the dynamic that allows investment advisors to thrive.

We already know that safe self-funding of retirement security has large expected value of the bequest as side effect. Advisors could be viewed as profiting merely by increasing the variance of the size of the bequest.
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Re: Dave Ramsey Defends His Investment Advice

Postby avalpert » Fri Mar 15, 2013 12:05 pm

canga wrote:Regarding Dave's 100% stock portfolio, for someone that abhors debt it would seem hypocritical to invest in a debt instrument. His fixed income comes from debt free real estate, which most on this forum discourage as a viable investment.

The 8% withdrawal rate is inexcusable, but then again, so is blindly following advice without exercising independent thought.


Wait, so he is opposed to government and corporate debt at all times as well? while investing in 100% equities does he also make sure those companies don't have any debt or is it okay to invest in others who take out debt but not to loan to the same issuers? Is that less hypocritical? Is none of it hypocritical? Does he think the risk of investing in equities is always less than the risk of using leverage to raise capital?
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Re: Great is the enemy of good in this case.

Postby TN_INVEST » Fri Mar 15, 2013 12:06 pm

1210sda wrote:
TN_INVEST wrote:
tadamsmar wrote:
FinancialDave wrote:Next for the actual DR 100% equity portfolio I decided to go with 2 of Dave's favorite funds AIVSX and AGTHX, which he has tweeted about in the past, to that I added an SP500 index VFINX, and an American small cap World Fund SMCWX - all four of these in a 25/25/25/25 Asset Allocation.
.
.
.
PS. no external fees or loads are assumed, as Bogleheads would not need to pay any nor would DR most likely.


I just Googled AIVSX, and the result says it has a 5.75% load.

So, why would you say we would not have to pay the load?


At some point, loads are waived. Usually it is for large account balances ($500,000 to $1,000,000 range). The fees can also be waived if the client is working with certain fee based advisors.


Do you happen to know if the "waived load " is offset by adding a 12b1 fee ?


I don't think so. Usually the load waived type funds are for folks that have substantial amounts to invest or are working with a financial advisor. I suspect Dave Ramsey probably meets both requirements.
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Re: Dave Ramsey Defends His Investment Advice

Postby ivesjl » Fri Mar 15, 2013 2:08 pm

tadamsmar wrote:Dave Ramsey has already responded to all those who criticize something he has written:
After selling over three million books, I’ve decided if you criticize something I’ve written, you are the moron (laughing and giggling). I mean, what have you done?

http://www.kahlerfinancial.com/financia ... rs-ego?a=1


I do not deny that Dave can come on strong, and I certainly don't agree with everything he says. The show that started this thread sounds like it was similar to the one in the link, but I'm not criticizing him or his program. I would just like to demonstrate some of the evidence for Passive Fund management to him, such as in this thread: http://www.bogleheads.org/forum/viewtopic.php?t=173). Facts are a stubborn thing.

My personal opinion, based on listening to his show every day, is that Dave is not twisting his mustache and trying to squeeze every last drop out of people when they start investing. If Dave never mentioned investing, his books his book sales wouldn't drop at all. He helps people organize their finances and start planning for the future, and he does it in a practical and realistic way. In fact, his plan recommends waiting to invest until you have an emergency fund of 3-6 months and have eliminated all debt (except for a mortgage).
"Successful investing is all about common sense." | ~ John Bogle.
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Re: Dave Ramsey Defends His Investment Advice

Postby avalpert » Fri Mar 15, 2013 2:23 pm

ivesjl wrote:If Dave never mentioned investing, his books his book sales wouldn't drop at all.


See, and I think that just makes his wrongheaded stubbornness here so much worse - it isn't his area of expertise, he doesn't need to pretend it is to retain his customer base so pretending he is an expert in it is wholly unnecessary. There is a reason Pride was traditionally considered the worst of the deadly sins and it shouldn't be so easily excused.
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Re: Dave Ramsey Defends His Investment Advice

Postby pennstater2005 » Fri Mar 15, 2013 2:35 pm

Default User BR wrote:
TN_INVEST wrote:Dave Ramsey thinks you ought to take your car to the dealership for service.
Bogleheads would rather go to AutoZone.

I do very little work on my vehicle these days. I don't have the time, so the neighborhood garage gets the work.


Brian


Same here. I don't even change my oil anymore. A few times a year my local Honda garage runs a $20 oil change special that includes a car wash, multipoint inspection, and all fluids topped off. I spend that, or even a little more, just buying the oil and filter. Of course they always come back with about $600 worth of work that needs done. I just politely say no thanks, and then take the list of things they found "wrong" to my actual mechanic and let him make the decision. Rarely does he ever do any of it.
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Re: Dave Ramsey Defends His Investment Advice

Postby porcupine » Fri Mar 15, 2013 3:49 pm

pennstater2005 wrote:[...]Same here. I don't even change my oil anymore. A few times a year my local Honda garage runs a $20 oil change special that includes a car wash, multipoint inspection, and all fluids topped off. I spend that, or even a little more, just buying the oil and filter. Of course they always come back with about $600 worth of work that needs done. I just politely say no thanks, and then take the list of things they found "wrong" to my actual mechanic and let him make the decision. Rarely does he ever do any of it.

Most other things, I try to be as frugal as the next immigrant ;-). Not on this one.

I pay my mechanic $35 for an oil change (yes, I could've gotten it done at the dealership for $20) but I think my mechanic earned that extra money (once every three months or so) for saving me the $2000 that the dealership originally wanted to extract from me (about four years ago) based on their laundry list of things supposedly wrong with my car.

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Re: Dave Ramsey Defends His Investment Advice

Postby SeattleCPA » Fri Mar 15, 2013 6:37 pm

After selling over three million books, I’ve decided if you criticize something I’ve written, you are the moron (laughing and giggling). I mean, what have you done?


Geez, did he really say this? BTW, I bet his books have sole more than three million. In English, my books have sold about five million copies... and then I had lots of translations.

BTW, when someone criticizes something I've written, I consider it valuable feedback.
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Re: Dave Ramsey Defends His Investment Advice

Postby Random Musings » Fri Mar 15, 2013 6:59 pm

SeattleCPA wrote:
After selling over three million books, I’ve decided if you criticize something I’ve written, you are the moron (laughing and giggling). I mean, what have you done?


Geez, did he really say this? BTW, I bet his books have sole more than three million. In English, my books have sold about five million copies... and then I had lots of translations.

BTW, when someone criticizes something I've written, I consider it valuable feedback.


Perhaps you are humble. Dave Ramsey isn't. Perhaps he has a touch of pride in him - wasn't pride the only one that made it on both seven deadly sins lists?

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Re: Dave Ramsey Defends His Investment Advice

Postby tadamsmar » Sat Mar 16, 2013 8:55 am

I can say something good about Ramsey, he does not censor critics on his blog. The second comment calls him a crook for using the 12% return claim:

http://www.daveramsey.com/article/the-1 ... investing/

And, its the second highest rated comment to boot. So, readers can get a range of opinions there just as they can in this thread.

Notice that in the blog he turns the criticism into a plug for using an ELP:

It’s not difficult to find several mutual funds that average or exceed 12% long-term growth, even in today’s market. An experienced investing professional can help you find good mutual funds in each of the four categories Dave recommends.
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Re: Dave Ramsey Defends His Investment Advice

Postby brick-house » Sat Mar 16, 2013 10:03 am

Dave Ramsey's advice helps people clean up debt and get organized. This allows a household to have a clean balance sheet, strong savings rate, and an increasing net worth. This leads to healthy functional financial households. Thus, I understand his following...

What I don't understand is that after all of the heavy lifting involved in cleaning up a dysfunctional financial household (bad debt, negative cash flow, decreasing net worth), why send someone to the Dogbert Mutual fund? :confused

http://www.bylo.org/dilbert.html
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Re: Dave Ramsey Defends His Investment Advice

Postby sommerfeld » Sat Mar 16, 2013 4:25 pm

ObliviousInvestor wrote:
burnout454 wrote: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.


I think it will be a better "hook" for Ramsey fans if you expand the scope to include praise for Ramsey's getting-out-of-debt advice. We argue amongst ourselves about the little things (like the optimal order to pay off your consumer debt) but not so much about the big things (getting your financial house in order, keeping expenses under control, avoiding unsecured debt, having a high savings rate, etc.).
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