Ramsey Reforming?

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Ramsey Reforming?

Postby IlliniDave » Sat Jul 27, 2013 5:17 am

First off, sorry I don't have a link for this. I saw something come across Facebook yesterday from his page that I couldn't find again this morning. I'm clumsy in jockeying Facebook.

It seems Dave Ramsey is listening and engaging his brain (he's generally a pretty astute guy financially).

In a recent blurb on his recommendations for selecting mutual funds I noted the following.

-Gone was the infamous 12%, the advice appears to have been modified to ~"select funds that have good performance relative to others in their category."

-He added a caution that any fund with ERs of 1% or higher were "expensive" (an implicit caution about selecting them)

-He added a suggestion to stay away from funds with a portfolio turnover rate greater than 50% (which excludes a heck of a lot of funds, but I think 20% would be a better number)

-He still recommends front-load (over other load options)

-No discussion about retirement spending rates in this blurb

Ramsey is apparently a true passive investor (when it comes to his financial investments) who's relied on the "advice industry" and seems to recommend what he feels has worked out well for him over the years. Unfortunately, he's probably been pretty well fleeced over those years. But he seems to be sharpening his pencil.

Hopefully he'll sharpen that pencil a little more and become sold on the true no-load option (sans the "hidden" 12b-1 load which I think he associates with all no-loads) and even lower ERs and turnover and finally indexing for a portfolio core. He has his quirks for sure but his audience is appreciable in size. His improved message is better in that it at least gets listeners/readers thinking about the negative impact of fees and excessive portfolio turnover. If the audience picks up the hints and follows the concepts to the logical conclusions: Boglehead-ism is the potential end result.

Using his term, I'll give him credit for taking a "baby step".
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Re: Ramsey Reforming?

Postby JoMoney » Sat Jul 27, 2013 5:26 am

I've heard him recommend low turn-over index funds for people investing outside of retirement accounts, but it's rare.
I don't think he'll ever get away from advocating loaded mutual funds because of his "Endorsed Local Provider" ("ELP") program where we he steers people to mutual fund sales people. He never says "loaded funds", and often dances around the subject, but is very direct in telling people to consult with someone on his "ELP" list.
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Re: Ramsey Reforming?

Postby IlliniDave » Sat Jul 27, 2013 7:51 am

Lately I've seen a couple things we're he's explicitly added front-load to his advice, more-or-less to get the load out of they way and let your investment grow uninhibited (after ER). He's aware that many "no-load" funds add 12b-1 fees so I think he's skeptical of no-loads as a whole, which is unfortunate because there are true no-load options out there. I've also noticed his internet presence of late has been referring listeners to professionals (including his ELPs) more. That may be some CYA since his own "advice" has been drawing criticism. What's interesting is I'm pretty sure in his books he recommends people avoid buying investments through people who work on commission (maybe I'll check that someday). I'm not familiar with any of his investment ELPs, but until recently would have positively expected them to be fee-only advisers. Now I'm not sure (again, no first-hand knowledge one way or the other).

Still, the good news is a wider audience is at least gaining awareness of ERs and the downside of excessive turnover.
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Re: Ramsey Reforming?

Postby mickeyd » Sat Jul 27, 2013 12:49 pm

I wonder how much the recent financial problems of fellow radio-guy Ray Lucia have affected Dave's new outlook on mutual fund advice? I agree that as long as he has his ELP gang paying to be in his network, he will alway be conflicted.
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Re: Ramsey Reforming?

Postby nisiprius » Sat Jul 27, 2013 1:15 pm

IlliniDave wrote:...I think he's skeptical of no-loads as a whole, which is unfortunate because there are true no-load options out there....
There is no acceptable reason for anyone to recommend load funds. The whole argument should have been considered settled by the 1980s. The only reason for someone to recommend a load fund is to line their own pocket.

In 1972, in New York magazine, Charles and Susan Ellis wrote:
Conventional mutual funds may be the only firms in town which, if they raised the price of their merchandise, would sell more of it. The reason is that built into the price of each share is a hefty sales commission that has proved, over the years, to be a powerful incentive to a legion of hard-selling salesmen….

No-load funds in general are no better than load funds in general, but the point is—as proved year after year by Forbes magazine and others—that they are no worse either. Why anyone would want to invest $1,000, say, in a load fund, knowing that only $920 of it will go to work for him, when he could invest the same amount in a no-load and see the whole $1,000 invested, is beyond us.
Andrew Tobias wrote, also in the 1970s,
The first step in choosing among mutual funds is about the only one that is at all clear-cut. There are funds that charge individual sales fees of 3% or more, known as the “load”; and there are others that charge no load. Choose a no-load fund. To do otherwise is to throw money out the window.
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Re: Ramsey Reforming?

Postby Cuzz35 » Sat Jul 27, 2013 2:11 pm

I have always heard from people who push load funds is that they are better off in the long run paying a one time commission than a percentage of assets and that load funds themselves have lower ERs. While this could be the case under certain situations this is never a reality. Its really just a load of baloney.
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Re: Ramsey Reforming?

Postby JoMoney » Sat Jul 27, 2013 2:26 pm

Cuzz35 wrote:I have always heard from people who push load funds is that they are better off in the long run paying a one time commission than a percentage of assets and that load funds themselves have lower ERs. While this could be the case under certain situations this is never a reality. Its really just a load of baloney.


I'm constantly searching for ANY stock funds with lower expenses then the "Vanguard 500 Index Admiral Shares" , so far I haven't come up with much. There are several Institutional class funds but these are generally only available to huge retirement plans/group plans. I've also found a few ETF's that have .04 expense ratios but there are costs with bid-ask spreads, potential commissions, and liquidity concerns. The Vanguard Total Stock Market has the same ER, and the internal trading/brokerage expense are only negligibly more than the 500 fund...
Anyone know of a stock fund with an ER lower than .05% that is available to regular investors?
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Re: Ramsey Reforming?

Postby gvsucavie03 » Sat Jul 27, 2013 3:04 pm

I've listened to DR for quite a while and I've only been on the Boglehead train of thought for about a year. I just carve out DR's investing advice outside of the good fundamentals - long-term mind-set, DCA, have an emergency fund first, don't react to market noise, etc. After that, he's really out of touch with helping the consumer.

I also think the show-down with the Motley Fool columnist has made him really watch what he says.
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Re: Ramsey Reforming?

Postby ThePrune » Sat Jul 27, 2013 3:33 pm

Dave has just released videos for an entirely new teaching series - The Legacy Journey. This series will begin to be used publicly this fall. His organization gave me an Internet link and password to watch them for free this summer.

Video # 2 (The Pinnacle Point) focuses on investing. Fundamentally it contained the same advice he's always handed out, but with a few nuances.
Same old stuff:
100% stock mutual funds for personal investments. He very specifically spoke against bond investments.
25% in "Growth & Income", 25% in "Growth", 25% in "Aggressive Growth" and 25% in "International"
You can either pay the front load, or end up with higher 12-b-1 fees. But either way you are going to be paying the advisor.
The advisor "earns" these fees when they keep you from panicing during stock bear markets.

Nuances:
The "12% return" expectation is only stated once or twice rather than being repeatedly emphasized.
He mentions that index mutual funds can be considered as a complement to actively managed mutual funds.

I like his debt elimination system, but forget about the investing advice!
Investment skill is often just luck in sheep's clothing.
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Re: Ramsey Reforming?

Postby IlliniDave » Sat Jul 27, 2013 5:06 pm

ThePrune wrote:You can either pay the front load, or end up with higher 12-b-1 fees. But either way you are going to be paying the advisor.
The advisor "earns" these fees when they keep you from panicing during stock bear markets.

I like his debt elimination system, but forget about the investing advice!


Unless, of course, you invest at Vanguard! (There may be others out there that don't slip in the 12b-1s in lieu of a front load). I would never buy a load fund myself but there's a lot of them out there, even at some pretty good companies. I'll pay myself not to panic, thanks anyway though, haha.

Agree with your last statement. He's got a few of the broad-brush things right: invest early, aggressively, and continuously; stick with your plan through think and thin, etc. Slowly seems to be coming around on some other issues. But as far as investing goes he's sort of a hardhead caught up in the conventional wisdom of a few decades ago. Fighting the last war, as it were.
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Re: Ramsey Reforming?

Postby IlliniDave » Sat Jul 27, 2013 5:12 pm

Cuzz35 wrote:I have always heard from people who push load funds is that they are better off in the long run paying a one time commission than a percentage of assets and that load funds themselves have lower ERs. While this could be the case under certain situations this is never a reality. Its really just a load of baloney.


It's 12b-1 fees (marketing fees) that go up in lieu of the load, I believe. ERs go to the fund manager. 12b-1s are paid out to accumulate more AUM through ads, commissions, purchase of shelf space, etc. Presumably they might be lower for a loaded fund than a no-load fund. Vanguard charges no 12b-1 fees on anything as far as I know, despite being no-load.
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Re: Ramsey Reforming?

Postby nisiprius » Sat Jul 27, 2013 8:52 pm

Yes, Vanguard has no loads and no 12b-1 fees, but I don't think they are alone. I believe there are PLENTY of no-load funds without 12b-1 fees.

Just for laughs, let's look at FIdelity and Schwab's Total Stock Market index funds:

Schwab Total Stock Market Index Fund SWTSX--no loads, no 12b-1 fees.
Fidelity Spartan Total Stock Market Index Fund FTSMX--no loads, no 12b-1 fees.
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Re: Ramsey Reforming?

Postby Epsilon Delta » Sat Jul 27, 2013 9:37 pm

It's ancient history now, but Vanguard was a key player in the introduction of 12b-1 fees.

www.ici.org/pdf/rpt_07_12b-1.pdf

Vanguard Exemptive Application
During this time period, The Vanguard Group was in the process of internalizing the management of
the Vanguard funds, which effectively would result in the funds owning their manager. If an internalized
fund was a no-load fund, the fund’s assets would be the only potential source of the payment of the fund’s
distribution costs. In a 1978 hearing on a Vanguard exemptive application, an administrative law judge
described the question of the use of fund assets for distribution as “still under consideration”44 and “under
re-examination.”45
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Re: Ramsey Reforming?

Postby Cuzz35 » Sun Jul 28, 2013 12:36 am

IlliniDave wrote:
Cuzz35 wrote:I have always heard from people who push load funds is that they are better off in the long run paying a one time commission than a percentage of assets and that load funds themselves have lower ERs. While this could be the case under certain situations this is never a reality. Its really just a load of baloney.


It's 12b-1 fees (marketing fees) that go up in lieu of the load, I believe. ERs go to the fund manager. 12b-1s are paid out to accumulate more AUM through ads, commissions, purchase of shelf space, etc. Presumably they might be lower for a loaded fund than a no-load fund. Vanguard charges no 12b-1 fees on anything as far as I know, despite being no-load.


My point was that advisors and guys like Dave believe this because they are comparing paying a load and getting somewhat of a lower ER compared to other active fund to 1-2% AUM fees and high ER funds. All of us here know there are much better options than the two listed above but in a world like Ramsey's, buying and holding a load fund versus paying 1-2% a year would be better in the long run. It would just take a while for the load fund to catch up. The reality is, even in a scenario above there is chance someone would be paying loads and AUM fees, that a fund would never be held long enough for the load to be made up, there would probably be to much account churning, and the load funds are just as expensive as other active funds.

This is where they are coming from. Mostly just more of believing what's best is what also gets them paid.
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Re: Ramsey Reforming?

Postby IlliniDave » Sun Jul 28, 2013 8:12 am

nisiprius wrote:Yes, Vanguard has no loads and no 12b-1 fees, but I don't think they are alone. I believe there are PLENTY of no-load funds without 12b-1 fees.

Just for laughs, let's look at FIdelity and Schwab's Total Stock Market index funds:

Schwab Total Stock Market Index Fund SWTSX--no loads, no 12b-1 fees.
Fidelity Spartan Total Stock Market Index Fund FTSMX--no loads, no 12b-1 fees.


Never implied Vanguard was alone, they're just the firm I am familiar with. I suspect no-load, no-12b-1 funds do not comprise the majority of the equity mutual fund universe, however, especially when you exclude funds that are attempting to compete with Vanguard in the low-cost index fund market. But I could be wrong. I think we in the Boglehead illuminati have a tendency to forget just how difficult it can be for a random person with some money to invest to find their way to our corner of the universe. The fact that there may be even a couple hundred truly low cost, no hidden gotcha, funds out there among the thousands on the market doesn't change the fact that it's a daunting task.

I'm not inclined to sneer at the rest of the investing world as though it were uniformly nefarious. It took me more than two decades to reach the Boglehead epiphany and I paid above average attention to investing. Eighteen months ago I'd never heard of John Bogle. I have no doubt there are many "professionals" out there that steer people to other than low-cost index funds who truly believe they are doing the right thing for the advised (be they client, friend, family, or general listener). Tradition and the anti-index propaganda are powerful things. That said, there are certainly people out there who truly know better and still steer investors to suboptimal traditional investments. Those actually in the fund business per se, are the worst offenders, caveat emptor aside.
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Re: Ramsey Reforming?

Postby mickeyd » Sun Jul 28, 2013 3:06 pm

It's 12b-1 fees (marketing fees) that go up in lieu of the load


I believe that they are often paid in addition to a load. A bit of a double dig opportunity for the salesman.
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