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?
