Dave Ramsey Only Invests in Mutual Funds that Beat the S&P

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lawlord
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Dave Ramsey Only Invests in Mutual Funds that Beat the S&P

Post by lawlord » Fri Dec 05, 2014 1:36 pm

The below post ended up getting buried in a related thread: https://www.bogleheads.org/forum/viewtopic.php?f=2&t=151879. So that others can behold the investment yarns that Dave Ramsey spins on his daily radio show, I'm re-posting here...

In case you didn’t catch Dave Ramsey’s show on Wednesday, December 3, you missed hearing him tie himself in knots defending his ELP (“Endorsed Local Provider”) brokers who have a reputation for selling expensive “growth-stock” mutual funds with high commissions to Ramsey’s listening audience. The below excerpt — the audio for which is on Ramsey’s website at http://www.daveramsey.com/show/archives/?snid=show.archives (see —29:03- 35:50) -- contains a number of gems.

Some of my favorites...
(1) Ramsey does not know what companies make up the S&P 500. This is not the first time he has mistakenly claimed that the S&P 500 consists of "the 500 largest public companies in America." Ramsey confuses the S&P 500 — which, among its criteria, requires companies to have a market capitalization of at least $4 billion — with the Fortune 500, which is a list of the 500 largest public and private companies in the United States ordered by gross revenue. Ramsey also claims -- again, incorrectly -- that S&P companies trade only on the NYSE. In fact, the companies that make up the S&P 500 may be listed on either the NYSE or NASDAQ.

(2) Dave Ramsey would never buy mutual funds that underperform the S&P 500. And he chides any listener who would be so silly to do so. (“Duh! . . . It makes no sense at all. It’s a silly, silly idea.") According to Ramsey, he buys only two things: (1) index funds; and (2) "mutual funds that outperform the indexes." Given that index funds are such a “vanilla” way of investing and only capture “average” returns, you have to wonder why Ramsey messes with index funds at all. Why not invest exclusively in "mutual funds that outperform the indexes”?

(3) Ramsey went through the list of things that his ELP brokers provide — i.e.., the things you get for a commission. Ready? "You get a broker to help you. And somebody to walk you through it. And that’s what our ELPs are.” Compelling, really.

(4) Ramsey gives a ringing endorsement for his ELPs: " just because somebody receives a commission does not mean they have your worst interest at heart and they’re trying to rip you off.” Oh good. So Ramsey’s ELPs will not necessarily rip you off or have your worst interests at heart. That’s reassuring.

By the way, this is a classic example of Ramsey's rhetorical style: He creates a straw man by suggesting that critics of his self-interested ELP endorsements contend that financial advisers are never appropriate for anyone, that all financial advisors, his ELPs included, are "rip off" artists, and that they only have his listener's "worst interests at heart." To get away with this mischaracterization of his critics' positions, Ramsey must assume that his audience is ignorant or uninformed re the actual criticisms of his ELPs. Among these, the ELPs often pimp expensive funds so that they can earn their own profits; most investors would do better by purchasing low-cost funds without commissions; and Dave's non-stop referrals to the ELP brokers represents a significant conflict of interest. Dave Ramsey could never adopt a Boglehead approach to investing while still generating revenues from his ELPs.

(5) Picking mutual funds that outperform the market really is “not that hard.” According to Ramsey, all you have to do is go on Morningstar and identify which funds outperformed the market historically. As everyone knows, past performance is necessarily indicative of future results! If only investing were so easy: just don’t pick the historically underperforming funds. Guess nobody would need an ELP. But then again, maybe they could help you AND walk you through it.

(6) Dave Ramsey is not selling out for his ELPs, “duper!” No, absolutely not. Even though Ramsey admits that he is really looking out for his own interest first and foremost — "The first consumer I advocate for is me!” — Ramsey assumes that his audience is brainwashed enough to actually believe that his self-interested ELP promotions do not present a conflict of interest and that they really are in the consumer’s interest.

(7) Those that disagree with Ramsey are “dupers,” “cynical,” “silly,” “high and mighty,” and “don’t know what the flip they’re talking about.” If you ever listen to his show, you'll know that this sort of name calling is routine for Ramsey -- this is just what he managed to get out in several minutes in response to one question.

Take away: Although Ramsey generally provides good advice to those looking to get out of debt, he’s out of his league when he preaches investing. Ramsey’s insistence that listeners can easily beat the indices, his refrain that investors should plan on earning 12% annual returns, and his unwillingness to meaningfully consider or respond to criticism without ad hominem attacks should give his listeners pause.

Vincent follows me on Twitter @DaveRamsey, you can too. "What are your thoughts on index funds vs. regular mutual funds?"

Index funds — the primary index fund that people are talking about would be the S&P 500. If you don’t know what that is, it stands for Standard & Poor 500. Standard & Poor is a rating company that rates things on the stock market. And just like Dow Jones does as well, you have the Dow Jones Industrial Average, you’ve probably heard of that, the S&P 500 is the 500 largest stocks traded on the New York Stock Exchange, which is the largest stock exchange. So 500 of America’s largest companies that are publicly traded - that you can buy stock in, in other words.

And um, so whatever that index does, is what an S&P Index fund would do. They try to mirror that.Uh, the industry — me included — considers that to be the baseline of what the stock market is doing.So if the S&P goes up or down, it’s what the stock market is doing in general, because it’s a large sample size of 500 largest stocks, largest companies. And so, um, you know, they represent what the stock market is doing most accurately, So we consider that the baseline of what the market is doing.

So, you can invest in an S&P 500 fund, it’s a no-load, no-commission, mutual fund.They’re generally low-expense funds; not always, but they should be a low-expense fund. So it’s a very, uh . . . “vanilla” way to do investing.And I have a good deal of money in S&P 500s. You’re, you’re not going to do any better than the stock market. But you’re not going to do any worse than the stock market. And so, what you’re guaranteed is average — average of the stock market, in other words.Um, it’s going to mirror whatever the market does — up or down.

And, um, you know, and a percentage of the growth stock mutual funds that is out there underperform that. And you would never buy those.But there’s a percentage of the funds that over-perform. I own many, many, many mutual funds that do a whole lot better than the S&P 500 does. They outperform the average. Well, “duh.” That’s the whole concept of average, right? And so, you know, um, if a fund does not outperform an index fund you would never buy it. It makes no sense at all. It’s a silly, silly idea. But I own several growth-stock-type mutual funds, aggressive-growth funds, international funds, and growth and income funds that outperform the S&P 500. They do better than the S&P does.

And so, in those funds, a lot of those funds I buy are “loaded” funds, which means I pay a commission when I buy them. Many of them have very very low expense ratios, or maintenance fees. And so the total expenses on those funds could be lower than other types of no-load funds. No-load does not always mean cheaper. It just means, no commission.Some no-load funds — not index funds, but some no-load funds — charge such a high maintenance charge — annual maintenance fee — that you’ll wish you paid a commission after five years.

And so, I would rather, I, I don’t mind either fund. I like no-loads for some things, and I like — uh, you know — commissioned, loaded funds. I personally buy those. I don’t recommend you do things that I don’t do. Now people don’t agree with that. Some people think that you ought to only buy no-loads because they think that anybody that’s charging a commission is ripping you off, and that’s just not true.It’s just not true. You get things for that commission. You get a broker to help you. And somebody to walk you through it. And that’s what our ELPs are. And I — you know — just because somebody receives a commission does not mean they have your worst interest at heart and they’re trying to rip you off. That’s a bunch of crap That’s just cynicism. And it’s not true. Now do some people do that? Yeah, some people do it, but not all of them.

And so, we’re not going to throw the baby out with the bathwater on any of this. I never tell you to only do no-loads, and I never tell you to only do loaded, regular funds. But, um, there’s some stuff bumping around the internet these days — and, a few articles I’ve seen that “no mutual funds outperform the index funds,” and that’s just simply not true. It’s really not that hard. I mean, jump on Morningstar. Um, Morningstar’s an independent rating service that tracks the returns of mutual funds; publishes them. And you can look at it. And, by the way, you can look at any mutual fund. You can go to Fidelity’s website. You can go to Vanguard’s website. You could go to, um, American Funds’ website. Um, you could go to Templeton’s website and look at some of the funds. Look at their track records, and they always have — everyone of them have, in the examples listed in the fund, the published materials listed with the fund, they are highly regulated, they always have what the S&P did. And so you can look at what an index fund would have done versus that fund. And if it’s underperforming, that fund’s underperforming the index line — the average of the mutual fund, of the stock market — then don’t do that.

But to say that “always buy index funds because you can never beat them" is absolutely ridiculous and wrong. It’s just not true. I mean, I personally own these funds that do beat it. And beat the crap out of it, by the way, hello! I mean, they don’t just beat it a little bit, they stomp it. And so, it’s silly. You know, I’m not going to accept the criticism that you should always, “Dave, you’re selling out for your ELPs.” No! It’s a better rate of return, duper! Uh, you know, after expenses, it’s a better rate of return than the no-load index fund.

There’s these people that claim to be consumer advocates. That I guess what that means sometimes is you just don’t know what the flip you’re talking about. Um,, because you have to get all high and mighty, and, you know, no one is allowed to charge a commission for you to be a consumer advocate. Well I’ve got news for you . . . I’m a consumer advocate. The first consumer I advocate for is me! And so, I don’t ever ask you — I don’t ever suggest to you to do something that I’m not doing.

So, I buy index funds. And I buy regular mutual funds that outperform the indexes. That’s the two things I buy. Commission and non-commission. Load and no-load. There. That’s it. Thanks for the question on Twitter.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by WallyBird » Fri Dec 05, 2014 2:49 pm

Give Mr. Ramsey some credit here. He's really just borrowing a page from the time-tested investment approach of Will Rogers:

"Don't gamble. Take all your savings and buy some good stock and hold it till it goes up then sell it. If it don't go up, don't buy it."
"Look, sir, we can't just do nothing." | "Why not? It's usually best."

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by abuss368 » Fri Dec 05, 2014 2:52 pm

Incredible. I will continue to follow the investment advice from experts such as Jack Bogle, David Swensen, Warren Buffett, and Rick Ferri.

Best.
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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by mickeyd » Fri Dec 05, 2014 4:51 pm

Dave is in business to make money for himself and his family. Never forget this. 8-)
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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by jon7417 » Fri Dec 05, 2014 5:59 pm

I have happily deleted Dave from my iphone podcasts/etc. He was helpful for motivation to get out of debt.... but now I have no use for him.

Thankfully I didn't follow his advice of not contributing to 401k's and IRA's while getting out of debt.

Sure there are several funds that beat the index funds from year to year... but over time the vast majority will not continue to do so.
And taking into account loaded funds and high exp ratios/fees, the "average" returns of the index will win the marathon.

Is there a chance an actively managed fund could win long term?? yes. but I'm not smart enough or lucky enough to pick the right one. neither are the so-called financial experts who have to pick the right buys/sells throughout the year, always selling high and buying low. Add 2 or more active funds? I even have LESS of a chance of winning long term.

instead I settle for his so-called "vanilla" and take the returns of the market with low expense ratios.

Good-bye Dave. It's been fun. Would like to say I won't see you again, but I'm sure I will run into your signs/advertising in my local church every week. Great marketing plan by the way.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by jdb » Fri Dec 05, 2014 6:10 pm

Why not just follow a simpler formula, don't waste your time listening to Dave Ramsey. And I take my own advice.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by tainted-meat » Fri Dec 05, 2014 6:40 pm

He advocated for the lady to roll over her pension to an ELP, without asking what the pension would be. Then he started talking about 11-12% growth mutual funds that could be bought through his ELPs. His investing advice sucks.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by Hub » Fri Dec 05, 2014 6:43 pm

I have appreciated watching him dig in on his investing ignorance over the past couple years. It's obvious that nobody past "Baby Step 2" is in need of his services.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by jimb_fromATL » Fri Dec 05, 2014 6:47 pm

lawlord wrote: In case you didn’t catch Dave Ramsey’s show on Wednesday, December 3,

etc, etc, etc


Now you've gone and done it. You've blasphemed Dave Ramsey. Now when Dave implements his next baby step, which will probably involve asking his most avid cult followers to give him all their worldly possessions and meet in the middle of the desert to board the spaceship to take them to the debt-free planet, you won't be allowed on it. :(

jimb

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by ryuns » Fri Dec 05, 2014 6:55 pm

He seems like a smart guy. I have to assume that to have such a massive blind spot in his thinking, he has to be "stupid like a fox". The idea that you should just buy the funds that return above average because "duh, they do better than average", is one of those statements that leaves you breathless with its stupidity. Yes, Dave, you've figured out the secret to consistently great returns. All you have to do is look at 10-year returns and buy the good ones.
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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by mhalley » Fri Dec 05, 2014 7:15 pm

I seem to recall listening to Dave's show when he talked about when he puts money in the S&P 500. He puts money there when he is planning on buying something like some new real estate soon, but not in the very immediate future. He doesn't want to pay the load on one of his regular mutual funds because he is going to sell it pretty soon and doesn't want to lose the 5%. So he parks it in the S&P while he looks into his next real estate investment. Since he doesn't do bonds, and he believes in the stock market, he takes the chance that the money might go down. Since he is Dave, this is probably not chump change.
Speaking of not buying the "bad" mutual funds, wasn't there a strategy of looking at the worst performing funds and investing in them, because they are likely to outperform the best performing funds? Can't seem to find this strategy with a quick google search.
Mike

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by LadyGeek » Fri Dec 05, 2014 8:20 pm

This thread is now in the Investing - Theory, News & General forum (general investing).
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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by lawlord » Fri Dec 05, 2014 10:00 pm

mhalley wrote: Speaking of not buying the "bad" mutual funds, wasn't there a strategy of looking at the worst performing funds and investing in them, because they are likely to outperform the best performing funds? Can't seem to find this strategy with a quick google search.
Mike


In his book, The Four Pillars of Investing, William J. Bernstein writes about how picking mutual funds can be a "highly seductive activity because it's easy to find ones that have outperformed for several years or more by dumb luck alone." He goes on to explain that selecting funds on the basis of past performance has been demonstrated to be of "no value." This strategy, which is typically employed by "naive investors" is "usually a prescription for disaster." "Not only does past performance not predict future manager performance, but excellent performance leads to the rapid accumulation of assets, which increases impacts costs and reduces future return."

"Of the dozens of studies done on mutual fund performance persistence, the most optimistic found that if you invested in the top 10% of last year’s funds, you would match, but not exceed, the performance of an index fund with low expenses. This “strategy” requires a near-total fund turnover each year. This is the best-case scenario for actively managed mutual funds—turn your portfolio over once a year, and you might—just might—match the index. And that’s before taxes. In a taxable account, this strategy would eat you alive with short-term capital gains, which are penalized at your full marginal federal and state rates."

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by hornet96 » Fri Dec 05, 2014 10:15 pm

Dave Ramsey wrote: But to say that “always buy index funds because you can never beat them" is absolutely ridiculous and wrong. It’s just not true. I mean, I personally own these funds that do beat it. And beat the crap out of it, by the way, hello! I mean, they don’t just beat it a little bit, they stomp it. And so, it’s silly. You know, I’m not going to accept the criticism that you should always, “Dave, you’re selling out for your ELPs.” No! It’s a better rate of return, duper! Uh, you know, after expenses, it’s a better rate of return than the no-load index fund.


I still don't understand how he hasn't landed himself in jail yet, with such blatant misrepresentation of the composition, risk, and performance characteristics of the securities markets and his implied "guarantees" of persistent outperformance if you "just listen to his advice." Surely there is a safe-harbor statement made somewhere throughout all of this garbage, but at some point I honestly believe his gross negligence is going to earn him the privilege of appearing in federal court.

Dave Ramsey is the living embodiment of overconfidence, representativeness, and confirmation biases all wrapped up in one irritating example.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by LittleD » Sat Dec 06, 2014 6:50 am

Dave Ramsey's investing advise is just like Adam Bold's Mutual Fund Store investing advice. It's designed to get them rich and you poorer.
They have figured out that most people are easily duped and will gladly give over their money to anyone who has
the appearance of knowledge. There are countless millions of people wildly searching for the "holy grail" of investing
advise in the desert and these shills provide the water.

Now if all the folks would take just an hour and spend it on this website alone, they would be set for life and tons of money richer.
Sadly, most will remain in the investing wilderness skinned by these "non-fiduciary" charletans.


Good Luck with your investments.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by mptfan » Sat Dec 06, 2014 8:55 am

It is difficult to convince a man of something when his livelihood depends on not being convinced.
I eat risk for breakfast. :)

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by pkcrafter » Sat Dec 06, 2014 9:30 am

lawford, it sounds like Dave has picked up on the last BH discussion about him and this is a response. The feud is on. I had a fairly high regard for Dave until a lot was revealed in the last discussion, and now I don't pay any more attention to him. He's telling his followers they an get a 12% return and he thinks his critics are uninformed?

[off topic comment deleted by admin alex]


Paul
Last edited by pkcrafter on Sat Dec 06, 2014 9:39 am, edited 1 time in total.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by LittleD » Sat Dec 06, 2014 9:38 am

Be Resolved: To purge the names of Dave Ramsey, Adam Bold and other so called investment shills from this place of higher learning...And,
To call out & expose those RIA's who visit this site or prey on the net and charge AUM fees in excess of .6% per annum as NON-fiduciary's who by practice cannot be
looking out for the long-term wellfare of their investing clients.

Right from John Bogle's "Cost Matters Hypothesis" guidelines.

Good Luck with your investments!

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by stemikger » Sat Dec 06, 2014 10:07 am

Bravo Lawlord! I was on Dave's show many years ago, there wasn't much he could tell me. I also contacted one of his ELPs and he recommended Index funds. LOL

I agree about Dave's arrogance. It seems to be getting worse the minute someone questions him.

Not that Dave is even close to John Bogle and Warren Buffett but could you imagine either one of those giants talking to people like that. John Bogle and Warren Buffett are class acts and always treat people with respect.
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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by ikubak » Sat Dec 06, 2014 12:06 pm

Like a lot of other posts, I agree that Dave's advice is generally good as it relates to debt and building a cushion. He also seems knowledgeable about real estate and owning a business. When it comes to investing and safe withdrawal rates, I wouldn't follow his advice. He won't admit it, but his focus in this area is supporting his ELPs, not in giving the best advice on the radio.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by basspond » Sat Dec 06, 2014 3:46 pm

His advice is still a heck of a lot better than our government's.
[OT comments removed by admin LadyGeek]

Even if you don't make a 12% return you would be way better off following his plan verses the government's. If you think I am wrong, let me know where I miscalculated because using the yearly S&P 500 return for the last 30+ years I would be so much more ahead with more options.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by edge » Sat Dec 06, 2014 4:05 pm

I don't get it. One is advice, the other is non-discretionary. There is no choice in the matter so the utility of comparison is zero.

The only valid comparison is Ramsey's poor advice vs other poor investment advice or good investment advice.

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by LadyGeek » Sat Dec 06, 2014 4:17 pm

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Re: Dave Ramsey Only Invests in Mutual Funds that Beat the S

Post by jimb_fromATL » Sat Dec 06, 2014 4:22 pm

basspond wrote:His advice is still a heck of a lot better than our government's.
[OT comments removed by admin LadyGeek]

Even if you don't make a 12% return you would be way better off following his plan verses the government's. If you think I am wrong, let me know where I miscalculated because using the yearly S&P 500 return for the last 30+ years I would be so much more ahead with more options.


You're comparing apples to oranges. Social security is a tax, not an investment. Any comparison of SS to an investment for retirement is incorrect because the tax also includes the equivalent of life insurance to protect your survivors, and disability insurance to protect you and your family ... as well as contributing to the equivalent of an insurance pool that provides for others.

It is true that the payout at retirement time is not comparable for everybody either. Since it is a tax intended to keep people from being destitute, not an investment, it gives a more favorable payout -- the equivalent of a higher return on the investment-- to people who have lower income and made lower contributions to the plan.

Then --unlike any investment-- at retirement time it may give your spouse up to an additional 50% of your monthly payout even if he or she never contributed a nickel to the account.

Unlike a personal investment, SS contributions are shared 50/50 by your employer. Then unlike your S&P investment fund, SS gives you a guaranteed-for-life monthly payout with cost of living increases regardless of how much you contributed. It also adjusts all of your previous "contributions" in terms of today's dollars to compute the payout instead of your actual contributions that would usually be a lot less. Depending on your total retirement income from other sources, you may not pay any tax at all on your social security payments, and will never pay tax on more than 80% of the money you receive from it.

There ain't no such animal that does all these things in the investment or insurance world.

jimb

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