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.