GRS Home  Forum Home
Bank Rates Center
   Savings Account Rates
   Money Market Rates
   Highest CD Rates
Insurance Rates Center
  Auto           Health
   Life              Home
Mortgage Rates Center
  Mortgage Rates
  Mortgage Quotes

Last visit was:
A place for Get Rich Slowly readers to ask questions
and exchange ideas
It is currently Tue Sep 02, 2014 2:32 pm




Post new topic Reply to topic  [ 85 posts ]  Go to page 1, 2, 3, 4, 5, 6  Next
Author Message
 Post subject: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 7:08 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1721
Location: Ottawa, Canada
Just to be clear, this thread is aimed strictly at Dave's absurd investment advice - not his debt, taxes, or other advice. Some of Dave's investment advice is just so terrible that I thought it might be handy to have a prominent thread dedicated to "debunking" his tidbits of idiocy.

From the January 28, 2010 podcast, Celia from Panama City asked, "Do I have enough to retire?" She's 59 years old, her husband is 62 and disabled. Her 83 year old mother lives nearby. Both her mother and her husband have failing health, and Celia wants to know if she can afford to retire and care for them.

She has a 6 month emergency fund, they're debt free and own their own home, mortgage-free. They have about $600,000 in 401(k) savings. Celia currently earns $22,000/year.

Dave says she has more than enough to retire.

Now the problem I have with this one isn't necessarily with Dave's conclusion (I agree, she has enough to replace her income). My problem is with two things Dave says:

1. That she should have 100% of her money invested in the stock market (via mutual funds); and
2. That she can expect her savings to continue to grow while she's withdrawing 4%.

Dave perpetuates the myth that it's reasonable to expect to earn a 10-12% return on your investments. Specifically, he says:

"If you have that money invested in a series of good, growth-stock mutual funds, [...] over time you're going to average between 10-12%. That's what the market has averaged since it began."

With this single statement, Dave has committed several huge mistakes. First, he makes the classic mistake of assuming past performance is an indicator of future returns. In fact, it is not. Secondly, he completely neglects to consider the performance-eroding effect of expenses. Those mutual funds he's recommending come at a cost of around 2%/year (note that he's specifically recommending actively managed funds, not passively managed index funds). Thirdly, he's advising that the caller invest her entire retirement nest egg in the stock market, whereas conventional wisdom would dictate that at her age, she should have a huge chunk (at least 40%) invested in fixed-income vehicles like bonds, cash, money markets, CD's, and treasury bills. The caller even asks Dave directly about this:

Celia: "So your advice would be to stay in mutual funds?"

Dave: "Yeah!"

Celia: "There's no kind of annuity that would make any sense at our ages?"

Dave: "Noooooo! No, I wouldn't fool with an annuity."

For the uninitiated, the problem with Dave's advice comes down to volatility. What if Celia retired right before a year like 2001, or even worse, 2008? She starts with $600,000, pulls out $24,000 (the $2,000/month Dave advised), leaving her with $576,000. Then the market drops 35%. She'd be down to $374,400. The market would have to rise 60% to get her back to $600,000.

Maybe Celia would have the backbone to remain 100% invested in stocks, even after suffering a crushing loss like that. Maybe the market would reward her patience (it's 2010 and we're still more than 25% below the Dow's 2007 high). But do you really need that kind of additional worry when you're 60+ years old, and you're trying to care for your disabled husband and elderly mother?

I agree that Celia can retire. She has enough to withdraw 4% and replace her current income. Her low expenses, combined with social security benefits and a presumed inheritance from her 83-year old mother with failing health, I think she'll be just fine. However, if she follows Dave's advice, she'll be exposing herself to far more risk than she should be. She should move at least 40% of her money into bonds, and put the rest in an diversified series of index funds with negligible management expenses. Further, while she can indeed safely withdraw 4% per year (and increase that amount each year by inflation), she should not expect her money to continue growing. She will in fact be depleting it, but that's OK. The Monte Carlo models the 4% rule is built upon predict that a 4% withdrawal rate, with inflation adjustments, should last roughly 30 years. At Celia's age, she has nothing to worry about (unless she follows Dave's advice).

The problem I have with Dave's advice is that I fear that any young, naive listeners might take his comments and build their retirement plan around an expectation of consistent 10-12% returns on their investments, after expenses, taxes, and whatever else. This would result in them under-saving for retirement, and ending up with much less savings than they need/expected when they turn 65.

I don't get it. When it comes to his debt advice, Dave is completely risk-averse and super-conservative. But when doling out investment advice, he's downright reckless. Is it hypocrisy or simple ignorance? Surely someone as intelligent as Dave is aware of the conventional wisdom regarding expected investment returns, the dangers of expenses, the benefits of indexing, and everything else? Or is he just so full of himself that he doesn't feel the need to "pollute" his opinion with the readings of other experts? Did his self-righteous attitude toward debt simply bleed over into his investing mindset, without a commensurate dose of experience and study?


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 7:41 am 

Joined: Mon May 12, 2008 6:37 pm
Posts: 368
I'm not sure what Dave did to you as a child, but I'm sure with some therapy and strong support from your family and friends you'll get through it. Good luck my friend. ;)

kombat wrote:
Just to be clear, this thread is aimed strictly at Dave's absurd investment advice - not his debt, taxes, or other advice. Some of Dave's investment advice is just so terrible that I thought it might be handy to have a prominent thread dedicated to "debunking" his tidbits of idiocy.

From the January 28, 2010 podcast, Celia from Panama City asked, "Do I have enough to retire?" She's 59 years old, her husband is 62 and disabled. Her 83 year old mother lives nearby. Both her mother and her husband have failing health, and Celia wants to know if she can afford to retire and care for them.

She has a 6 month emergency fund, they're debt free and own their own home, mortgage-free. They have about $600,000 in 401(k) savings. Celia currently earns $22,000/year.

Dave says she has more than enough to retire.

Now the problem I have with this one isn't necessarily with Dave's conclusion (I agree, she has enough to replace her income). My problem is with two things Dave says:

1. That she should have 100% of her money invested in the stock market (via mutual funds); and
2. That she can expect her savings to continue to grow while she's withdrawing 4%.

Dave perpetuates the myth that it's reasonable to expect to earn a 10-12% return on your investments. Specifically, he says:

"If you have that money invested in a series of good, growth-stock mutual funds, [...] over time you're going to average between 10-12%. That's what the market has averaged since it began."

With this single statement, Dave has committed several huge mistakes. First, he makes the classic mistake of assuming past performance is an indicator of future returns. In fact, it is not. Secondly, he completely neglects to consider the performance-eroding effect of expenses. Those mutual funds he's recommending come at a cost of around 2%/year (note that he's specifically recommending actively managed funds, not passively managed index funds). Thirdly, he's advising that the caller invest her entire retirement nest egg in the stock market, whereas conventional wisdom would dictate that at her age, she should have a huge chunk (at least 40%) invested in fixed-income vehicles like bonds, cash, money markets, CD's, and treasury bills. The caller even asks Dave directly about this:

Celia: "So your advice would be to stay in mutual funds?"

Dave: "Yeah!"

Celia: "There's no kind of annuity that would make any sense at our ages?"

Dave: "Noooooo! No, I wouldn't fool with an annuity."

For the uninitiated, the problem with Dave's advice comes down to volatility. What if Celia retired right before a year like 2001, or even worse, 2008? She starts with $600,000, pulls out $24,000 (the $2,000/month Dave advised), leaving her with $576,000. Then the market drops 35%. She'd be down to $374,400. The market would have to rise 60% to get her back to $600,000.

Maybe Celia would have the backbone to remain 100% invested in stocks, even after suffering a crushing loss like that. Maybe the market would reward her patience (it's 2010 and we're still more than 25% below the Dow's 2007 high). But do you really need that kind of additional worry when you're 60+ years old, and you're trying to care for your disabled husband and elderly mother?

I agree that Celia can retire. She has enough to withdraw 4% and replace her current income. Her low expenses, combined with social security benefits and a presumed inheritance from her 83-year old mother with failing health, I think she'll be just fine. However, if she follows Dave's advice, she'll be exposing herself to far more risk than she should be. She should move at least 40% of her money into bonds, and put the rest in an diversified series of index funds with negligible management expenses. Further, while she can indeed safely withdraw 4% per year (and increase that amount each year by inflation), she should not expect her money to continue growing. She will in fact be depleting it, but that's OK. The Monte Carlo models the 4% rule is built upon predict that a 4% withdrawal rate, with inflation adjustments, should last roughly 30 years. At Celia's age, she has nothing to worry about (unless she follows Dave's advice).

The problem I have with Dave's advice is that I fear that any young, naive listeners might take his comments and build their retirement plan around an expectation of consistent 10-12% returns on their investments, after expenses, taxes, and whatever else. This would result in them under-saving for retirement, and ending up with much less savings than they need/expected when they turn 65.

I don't get it. When it comes to his debt advice, Dave is completely risk-averse and super-conservative. But when doling out investment advice, he's downright reckless. Is it hypocrisy or simple ignorance? Surely someone as intelligent as Dave is aware of the conventional wisdom regarding expected investment returns, the dangers of expenses, the benefits of indexing, and everything else? Or is he just so full of himself that he doesn't feel the need to "pollute" his opinion with the readings of other experts? Did his self-righteous attitude toward debt simply bleed over into his investing mindset, without a commensurate dose of experience and study?

_________________
Live Like No One Else!!


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 8:00 am 
User avatar

Joined: Mon Jun 23, 2008 6:54 am
Posts: 636
debtfree wrote:
I'm not sure what Dave did to you as a child, but I'm sure with some therapy and strong support from your family and friends you'll get through it. Good luck my friend. ;)


Why do you think this is anything personal? Everything that kombat mentioned is grounded in pure fact. He made no assertion about Dave's character.

Ramsey reaches millions of people and gives out some spectacularly ruinous advice on investing. I think we're doing people a service by setting a few things straight.

Tim


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 8:05 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1721
Location: Ottawa, Canada
timwalsh300 wrote:
Why do you think this is anything personal? Everything that kombat mentioned is grounded in pure fact. He made no assertion about Dave's character.

Ramsey reaches millions of people and gives out some spectacularly ruinous advice on investing. I think we're doing people a service by setting a few things straight.


LOL, thanks Tim, I think debtfree was just joking around, I don't think he meant anything insulting by it. :)

You're 100% right, this thread is about dispelling the investing myths Dave spouts on his top-5, syndicated radio show that is heard by millions. Although I must admit, I'd love to hear any theories related to the point I made in my last paragraph:

"When it comes to his debt advice, Dave is completely risk-averse and super-conservative. But when doling out investment advice, he's downright reckless. Is it hypocrisy or simple ignorance?"


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 8:30 am 
User avatar

Joined: Mon Jun 23, 2008 6:54 am
Posts: 636
Besides the ones you've already mentioned, I'll add these...

1. Quoting a 10-12% return on stocks WITHOUT making any mention of inflation. He leads people to believe that by investing just $100/month for the next 40 years they could potentially retire with $1,000,000 and be set for life. The all-time worst was when he criticized the way Social Security is managed by saying [and I'm paraphrasing] that if our FICA taxes were invested in "good, growth stock mutual funds" we would all be able to live extravagantly in retirement while still leaving millions of dollars (a large sum because, remember, no inflation) to our heirs when we die.

2. Constantly mentioning "good, growth stock mutual funds" as the only worthwhile investment. As you already mentioned, his aversion to quality fixed-income products is completely ridiculous. But he also doesn't seem to understand that "growth stocks" are a particular subset of the market that regularly under-performs. For example, since 1959, Vanguard's US Growth fund has returned 9.76% whereas the Windsor fund (which invests in "value stocks") has returned 11.16%.

3. On the issue of telling people when they can retire and how much they can withdraw, two weeks ago I heard Dave tell a caller that he could withdraw 8% of his savings in perpetuity since his portfolio of 100% "good, growth stock mutual funds" should return 12% (presumably leaving the extra 4% for inflation, but he didn't say). Good luck with that.

Tim


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 9:07 am 

Joined: Mon Jan 25, 2010 10:54 am
Posts: 146
When it comes to his debt advice, Dave is completely risk-averse and super-conservative. But when doling out investment advice, he's downright reckless.

Thanks for saying that Kombat.

Ramsey has helped millions of people on the saving side. He is wonderful.

But you are 100 percent right in what you say about what he says on the investing side. His advice on the investing side is reckless beyond belief (he is worse than the Buy-and-Holders that I have become so famous (infamous!) for criticizing!).

I hesitated to say anything about Ramsey's investing advice because I think he has done so much good on the saving side. But I reached a point where I felt that it just was not right to continue to fault the Buy-and-Holders and not also fault Ramsey, who really is worse. So I ended up recording an entire podcast on this theme.

We have to speak out about this sort of thing. We need to be charitable in our comments, I believe. We shouldn't assume bad motive. But the advice is dangerous. There's just no getting around it.

And enough people have said this at this point that it is a little hard for me to imagine that Ramsey is not at least somewhat aware of the criticisms. What a mess!

Rob


Top
Offline Profile E-mail   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 11:56 am 

Joined: Mon Feb 01, 2010 4:39 pm
Posts: 12
Wow, I don't pay much attention to Dave since I already have the basics down. But I agree that that is exceedingly BAD advice. I would like to add that those returns, even with his erroneous assumptions, are AVERAGE, not TYPICAL. If you are drawing the account down by definition you don't have a horizon to allow for that. Yeah, some people make the mistake of thinking they need all the money *right now* and invest too conservatively in retirement (not realizing a large chunk of it won't be drawn down for 20+). But it sounds like Dave is making the opposite assumption. She will need a guaranteed income from that money for at least 5 years to ride out the roller coaster of the market.


Top
Offline Profile E-mail   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 1:26 pm 

Joined: Mon May 12, 2008 6:37 pm
Posts: 368
LOL, yes, just a little humor. I'm a big Dave fan, but his investing advice is whacked. Much like his other advice, it's aimed at the masses and not helpful for those looking to really attack the market and gain an edge.......his use of managed funds (why pay those fees and commissions!!?!?) alone was enough for me to focus elsewhere when it comes to investing.

kombat wrote:
timwalsh300 wrote:
Why do you think this is anything personal? Everything that kombat mentioned is grounded in pure fact. He made no assertion about Dave's character.

Ramsey reaches millions of people and gives out some spectacularly ruinous advice on investing. I think we're doing people a service by setting a few things straight.


LOL, thanks Tim, I think debtfree was just joking around, I don't think he meant anything insulting by it. :)

You're 100% right, this thread is about dispelling the investing myths Dave spouts on his top-5, syndicated radio show that is heard by millions. Although I must admit, I'd love to hear any theories related to the point I made in my last paragraph:

"When it comes to his debt advice, Dave is completely risk-averse and super-conservative. But when doling out investment advice, he's downright reckless. Is it hypocrisy or simple ignorance?"

_________________
Live Like No One Else!!


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 5:16 pm 

Joined: Thu Jan 14, 2010 10:20 am
Posts: 49
If it sounds too good to be true, it usually is.

Thats what I think of his investing advice. I got into listening to him, and even attended a seminar at church (for a while)... but after about 5 classes... i just couldn't take his ego.

Granted, I definately listen to his podcast occasionally... but mostly just to hear people happy from being debt free... its motivating for people making effort to get out.

He is a good speaker, but I take everything he says with a grain of salt. He's too cultish for me.


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Thu Feb 04, 2010 10:59 pm 

Joined: Tue Oct 27, 2009 10:51 pm
Posts: 40
Location: Your computer
You DARE talk about God like that!!! This is blasphemy and you will all be doomed!!! You will all worship the DAVE at the alter of the GREAT DAVE!!!! Now NEAL and pay you respects to the GREAT DAVE and hope he allows you to continue to breathe the same air as he. DAMN YOU ALL!!!!

:lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol: :lol:

:clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap: :clap:

:rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl: :rofl:


Top
Offline Profile E-mail   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Fri Feb 05, 2010 8:03 am 

Joined: Sun Apr 29, 2007 8:11 am
Posts: 1088
Location: Sunny Florida
I'm a big fan of Dave's advice on debt, living debt-free and used cars. I think his advice on budgeting, being different from others (not keeping up with the Joneses) is super great.

And I credit Dave with motivating us to pay off $55,500 in debt in 12 and 1/2 months. But I totally agree with Kombat that his investment assumptions of 10-12% return and his investment advice in general leaves a lot to be desired.

_________________
Sam

http://adventures-of-sam.blogspot.com
(Follow Sam's financial and real estate adventures.)


Top
Offline Profile E-mail   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Fri Feb 05, 2010 9:57 am 
Moderator

Joined: Wed Sep 23, 2009 9:01 am
Posts: 5357
debtfree wrote:
I'm not sure what Dave did to you as a child, but I'm sure with some therapy and strong support from your family and friends you'll get through it. Good luck my friend. ;)


What Kombat said is very sound, well analyzed, and well stated.

Giving the advice Dave did shows he is either reckless or an idiot. That kind of advice can ruin people's lives. It might make for entertaining radio but it is completely inappropriate to spew out that kind of talk to naive and ignorant people.


Top
Offline Profile E-mail   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Fri Feb 05, 2010 12:50 pm 

Joined: Tue Feb 10, 2009 10:17 am
Posts: 123
Location: SC
I listen to the first hour of his podcast each weekday. Its like GoingGreen said, its a way to motivate myself a little more and make me think about my spending habits. I don't necessarily follow his advice to the letter.


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Sun Feb 07, 2010 3:04 pm 

Joined: Sun Feb 17, 2008 4:39 am
Posts: 322
Location: Woodstock, CT
I understand that his advices are not sound but as a person who is an investor and a teacher, do you think he's giving false advise

_________________
When you're good to others, you're best to yourself - B. Franklin


Top
Offline Profile   
 Post subject: Re: The Official "Dave Ramsey's Dumb Investment Advice" Thread
PostPosted: Sun Feb 07, 2010 4:11 pm 
User avatar

Joined: Mon Jun 23, 2008 6:54 am
Posts: 636
DebtFreeCrusader wrote:
I understand that his advices are not sound but as a person who is an investor and a teacher, do you think he's giving false advise


What exactly do you mean by "false?"

Some of the advice appears to be disingenuous. Ramsey says not to worry about loads or expenses, and then he refers listeners to his Endorsed Local Providers, some (most?) of whom "earn" commissions by selling/trading expensive, loaded mutual funds. In return, ELP's pay a fee to Ramsey. Given that fact, I'm actually surprised that he isn't also pushing whole life insurance and variable annuities through his ELP's.

Here are a couple articles with the details...

http://badmoneyadvice.com/2009/04/ramsey-step-7-build-wealth-and-give.html
http://www.erictyson.com/articles/20090313

Tim


Top
Offline Profile   
Display posts from previous:  Sort by  
Post new topic Reply to topic  [ 85 posts ]  Moderators: bpgui, JerichoHill Go to page 1, 2, 3, 4, 5, 6  Next


Who is online

Users browsing this forum: Google Adsense [Bot], Lis, Tax-Volunteer-Mike, Yahoo [Bot] and 18 guests


You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot post attachments in this forum

Search for:
Jump to:  
Powered by phpBB © 2000, 2002, 2005, 2007 phpBB Group
Theme created StylerBB.net & kodeki