Author Topic: Dave Ramsey's Investing Advice  (Read 17504 times)

socal0218

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Dave Ramsey's Investing Advice
« on: May 20, 2015, 11:02:58 AM »
Hey does anyone have any insight to why Dave Ramsey suggests a 12% average return on mutual fund investing? Is that accurate? I have read countless criticisms against it and only he seems to be advocating his position.  I am relatively new, so I was just curious to see what the forum had to say.

frugalnacho

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Re: Dave Ramsey's Investing Advice
« Reply #1 on: May 20, 2015, 11:10:48 AM »
It doesn't account for inflation.

Eric

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Re: Dave Ramsey's Investing Advice
« Reply #2 on: May 20, 2015, 11:20:12 AM »
There's a lot of bad investing advice out there, no matter the source.

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Re: Dave Ramsey's Investing Advice
« Reply #3 on: May 20, 2015, 11:26:50 AM »
Does he really refer to it as "mutual fund investing?" If so, wow.

skyrefuge

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Re: Dave Ramsey's Investing Advice
« Reply #4 on: May 20, 2015, 11:27:52 AM »
I have no idea why he uses that number (and continues to use it after it's repeatedly pointed out how wrong it is), but my guess is it's some combination of:

1) Wanting to give his audience powerful encouragement to save rather than spend, and the encouragement becomes more powerful when your assumed return rate on savings gets bumped higher.
2) Mistakenly grabbing that 12% figure early on and then being stubbornly unwilling to admit his mistake.

If we assume the number isn't just pulled out of his ass, and really reflects his research into S&P 500 history, he is "correct" that it does have an 11.84% "average" return between 1926-2011. But then we have to point out that "average return" is a useless figure, and everyone hearing that assumes he means a CAGR, which is 9.8% over that same period. And then if we adjust for inflation, it gets dropped further to 6.61%.

Either way, 12% is a bullshit number, and don't use it for anything. And subsequently, don't give any credence to people who spew bullshit.

socal0218

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Re: Dave Ramsey's Investing Advice
« Reply #5 on: May 20, 2015, 11:37:08 AM »
So all the people that follow him just blindly assume that advice? I understand it's the average rate of return, roughly, but it seems like poor advice given to poor, desperate people that call into his show.  I mean it's pretty common sense to live off of less than you make and save the rest for the future, but it baffles me how he has profited from simple advice.

skyrefuge

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Re: Dave Ramsey's Investing Advice
« Reply #6 on: May 20, 2015, 11:55:56 AM »
So all the people that follow him just blindly assume that advice?

I dunno, probably not. Or if they do, it doesn't really matter. I've never actually listened to Dave Ramsey, but I've read a lot of people complaining about him on the Internet, and my impression is that the majority of his audience (and thus, the majority of his message) has nothing to do with investing. "Getting out of debt" is the main issue, with the investing side just being a minor appendix for those rare few who reach the point of having money to invest. If it took the comforting myth of a 12% return to get them to that point where they actually have money to invest, he probably sees it as an "ends justifies the means" sort of thing. Because even when they only get that 6% real return rather than the mythical 12%, that's still a better return on their money than almost anything else.

hodedofome

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Re: Dave Ramsey's Investing Advice
« Reply #7 on: May 20, 2015, 11:56:11 AM »
It's because he started out in the 90s during a great bull market and had a few mutual funds that returned 12% for the past 10 years or so. So he just keeps saying that even though he didn't do good research initially. Dave is good at real estate and debt elimination, not good at stock and bond investing. That's really it.


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socal0218

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Re: Dave Ramsey's Investing Advice
« Reply #8 on: May 20, 2015, 11:58:48 AM »
Duly noted, thank you everyone.

Isriam

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Re: Dave Ramsey's Investing Advice
« Reply #9 on: May 20, 2015, 12:48:25 PM »
I'd say by the time you're educated enough about investing to see the error in his statement, you'll be beyond the debt snowball anyway.  I too listen to Dave and find most of it is common sense, with a lot of motivation.  It really does help people so I never cared that 12% is impossible to meet.

socal0218

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Re: Dave Ramsey's Investing Advice
« Reply #10 on: May 20, 2015, 01:42:02 PM »
Yeah, I am still in the debt snowball phase. I listen his full show everyday via podcast for motivation, but it's very difficult to hear his generic response is always, "Save 15% of your income in good growth stock mutual funds and you'll be x amount of millionaire by the time you're 65".

Now that I have woken up about my personal finances I'm contently consuming advice anywhere I can get it.

Frugal_NYC

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Re: Dave Ramsey's Investing Advice
« Reply #11 on: May 20, 2015, 02:37:20 PM »
I listen to Dave regularly, I don't have any debt and have a better understanding of finances then most of his listeners but I find his show motivating.

12% is BS but he does often do examples where you get 8% over 20 years or w/e...his main point is just freakin invest

Also he could have some rockstar funds that may get 12% but he may not be netting out all the fees associated with them, who knows/who cares.

forummm

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Re: Dave Ramsey's Investing Advice
« Reply #12 on: May 20, 2015, 02:38:24 PM »
Yeah, I am still in the debt snowball phase. I listen his full show everyday via podcast for motivation, but it's very difficult to hear his generic response is always, "Save 15% of your income in good growth stock mutual funds and you'll be x amount of millionaire by the time you're 65".

Now that I have woken up about my personal finances I'm contently consuming advice anywhere I can get it.

<eyebrow raised>

socal0218

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Re: Dave Ramsey's Investing Advice
« Reply #13 on: May 20, 2015, 03:14:05 PM »
I listen to Dave regularly, I don't have any debt and have a better understanding of finances then most of his listeners but I find his show motivating.

12% is BS but he does often do examples where you get 8% over 20 years or w/e...his main point is just freakin invest

Also he could have some rockstar funds that may get 12% but he may not be netting out all the fees associated with them, who knows/who cares.

I care a little bit.  I mean everyone should do their due diligence when it comes to investing. Trust no one is my motto. What I am learning through this journey is spend as little money on anything as you possibly can and spend nothing extra.  Which is like what, less than 1% of the population that does that?

One Noisy Cat

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Re: Dave Ramsey's Investing Advice
« Reply #14 on: May 20, 2015, 03:42:34 PM »
   Using the IndexView calculator, I got an 11.84% annual return from 1982 to 2015. That is a period which is recent and long but also just happens to be at the beginning of long term bull market after a decade of a flat one.
    I have never listened to Ramsey so I don't know if he gives the "past performance is no guarantee of future".  I wouldn't use 12% if I had a radio show. But I wouldn't call it a big, out and out, lie.

mtn

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Re: Dave Ramsey's Investing Advice
« Reply #15 on: May 20, 2015, 03:48:15 PM »
Meh, Ramsey isn't for folks who are good at math. He says it himself with his snowball method--something to the effect of "But why wouldn't I pay off the highest interest first? That is just bad math" and he replies with "Yes, but if you were good at math you wouldn't be in this situation in the first place"--he is going after the pyschological motivations, and he is good at it. I for one think that he is a good thing for the average, and below average American.

Bob W

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Re: Dave Ramsey's Investing Advice
« Reply #16 on: May 20, 2015, 03:50:12 PM »
Not to be overly cynical but please realize that Dave makes a good portion of his income from selling mutual funds via his network of mutual fund salesmen. 

He is not a licensed broker so he can make outlandish claims and refer you to the licensed brokers.  They in turn pay him a very nice referral fee. 

I don't know the specifics but I'm betting he makes 2% on every mutual fund sold through his ELP network.    So let's say  that 50 people each with 300K apiece do business with an ELP Mutual fund salesman.  That would equate to 300K in Dave's pocket.     That is a hell of a lot of incentive for Dave to say  "12%."

It sounds a lot worse if he says  "Probably a 6% return on a diversified portfolio with a significant chance that the portfolio could be down for 5-10 years and that most people buying mutual funds don't have the stomach for it and end up selling at the bottom and would be better off buying US Treasuries."

Dave is to investment advice as Christians are to Christ. 

hodedofome

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Re: Dave Ramsey's Investing Advice
« Reply #17 on: May 20, 2015, 03:52:20 PM »

Yeah, I am still in the debt snowball phase. I listen his full show everyday via podcast for motivation, but it's very difficult to hear his generic response is always, "Save 15% of your income in good growth stock mutual funds and you'll be x amount of millionaire by the time you're 65".

Now that I have woken up about my personal finances I'm contently consuming advice anywhere I can get it.

<eyebrow raised>

Once again, you gotta go back to when Dave got started. It was in the 90s. Index funds weren't popular or widespread in 401k's at the time (still aren't available in most 401k's. Dave is just going off of what he's always said. I don't know why he's not willing to say 'I was wrong, new information has shown me that my assumptions were a little off.' I feel he's pretty arrogant and feels like he has to save face, but then again someone admitting mistakes has never bothered me. It bothers a lot of guys on TV and the radio however.


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ender

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Re: Dave Ramsey's Investing Advice
« Reply #18 on: May 20, 2015, 03:56:12 PM »
Meh, Ramsey isn't for folks who are good at math. He says it himself with his snowball method--something to the effect of "But why wouldn't I pay off the highest interest first? That is just bad math" and he replies with "Yes, but if you were good at math you wouldn't be in this situation in the first place"--he is going after the pyschological motivations, and he is good at it. I for one think that he is a good thing for the average, and below average American.

Yeah. People get boggly eyed over larger numbers easier which causes them to be more motivated.

I don't understand why people are surprised to see DR say stuff based on psychological motivation. It's like me going to a BMW dealership and being surprised they have BMWs and not lots of Ford trucks.

socal0218

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Re: Dave Ramsey's Investing Advice
« Reply #19 on: May 20, 2015, 04:07:44 PM »
Yeah I don't know, I just have a problem with downtrodden people not being fully disclosed all the information.  I guess it comes with the guru territory.

forummm

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Re: Dave Ramsey's Investing Advice
« Reply #20 on: May 20, 2015, 04:54:09 PM »
Dave is to investment advice as Christians are to Christ.

<scratches head>

They aren't accurate about the subject matter?

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Re: Dave Ramsey's Investing Advice
« Reply #21 on: May 20, 2015, 06:04:54 PM »
He always talks about the 4 types of mutual funds he wants your money in…growth and income, international, aggressive growth and something else…what exactly do those all mean?  Are they just mixes of US stocks and bonds (other than international)?

forummm

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Re: Dave Ramsey's Investing Advice
« Reply #22 on: May 20, 2015, 06:12:29 PM »
He always talks about the 4 types of mutual funds he wants your money in…growth and income, international, aggressive growth and something else…what exactly do those all mean?  Are they just mixes of US stocks and bonds (other than international)?

Income funds don't make any sense. I have no idea what aggressive growth means.

Wolf359

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Re: Dave Ramsey's Investing Advice
« Reply #23 on: May 20, 2015, 06:15:43 PM »
His advice is to buy mutual funds and diversify.  His definition of diversification is to put 25 percent in each of four types of mutual funds: growth, growth and income, aggressive growth, and international.  He is so anti-debt that he advises against buying bonds, including savings bonds.

For retirement accounts, he recommends 15% of your salary in 401-ks or other retirement accounts, and to select the mutual funds by picking the fund with the best past performance.  It's best to use funds with at least 5 years, and better 10-15 years of good performance history.

Source: Dave Ramsey's Complete Guide to Money. (The Handbook of Financial Peace University, a financial course he teaches at churches.)  It is copyright 2011, and his information about Roth limits and other recent tax code changes are accurate (so he updates and reviews the material periodically.)

Growth is a mutual fund made up of growth stocks.  Aggressive growth are midcap growth stocks.  Growth and Income is what we would call a blend of growth stocks and dividend stocks.  International is self-explanatory. 

So he recommends 75% US and 25% international, at 100% stocks for all ages (provided you have no debt including no mortgage, and a 3-6 month emergency fund.)


PharmaStache

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Re: Dave Ramsey's Investing Advice
« Reply #24 on: May 20, 2015, 06:16:44 PM »
His advice is to buy mutual funds and diversify.  His definition of diversification is to put 25 percent in each of four types of mutual funds: growth, growth and income, aggressive growth, and international.  He is so anti-debt that he advises against buying bonds, including savings bonds.

For retirement accounts, he recommends 15% of your salary in 401-ks or other retirement accounts, and to select the mutual funds by picking the fund with the best past performance.  It's best to use funds with at least 5 years, and better 10-15 years of good performance history.

Source: Dave Ramsey's Complete Guide to Money. (The Handbook of Financial Peace University, a financial course he teaches at churches.)  It is copyright 2011, and his information about Roth limits and other recent tax code changes are accurate (so he updates and reviews the material periodically.)

Growth is a mutual fund made up of growth stocks.  Aggressive growth are midcap growth stocks.  Growth and Income is what we would call a blend of growth stocks and dividend stocks.  International is self-explanatory. 

So he recommends 75% US and 25% international, at 100% stocks for all ages (provided you have no debt including no mortgage, and a 3-6 month emergency fund.)

Wow, 100% stocks!  Thanks.  Now I can stop wondering every time he mentions it.

Isriam

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Re: Dave Ramsey's Investing Advice
« Reply #25 on: May 20, 2015, 07:08:54 PM »
Keep in mind, people on this forum are really into investing, with long term goals.  I'd say 95% or more aren't in debt.  Most have an emergency fund, and some even have homes paid off.  Dave isn't really targeting those viewers.

People are on MMM and this investment forum because they are way beyond the debt snowball principals, so you will probably get more detailed, sound advice here.

Once you're on baby step 4-6, you should really be doing good investments like vanguard index funds :)

forummm

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Re: Dave Ramsey's Investing Advice
« Reply #26 on: May 20, 2015, 07:37:22 PM »
His advice is to buy mutual funds and diversify.  His definition of diversification is to put 25 percent in each of four types of mutual funds: growth, growth and income, aggressive growth, and international.  He is so anti-debt that he advises against buying bonds, including savings bonds.

Diversify by buying 3 kinds of growth funds? I guess it's better than single stocks. But more volatile (and historically lower returns) than a regular index fund.

Wolf359

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Re: Dave Ramsey's Investing Advice
« Reply #27 on: May 26, 2015, 03:16:01 PM »
Growth is a mutual fund made up of growth stocks.  Aggressive growth are midcap growth stocks.  Growth and Income is what we would call a blend of growth stocks and dividend stocks.  International is self-explanatory. 
Correction: I found a statement where he clarifies: growth stocks are mid-cap stocks.  Growth and income are large-cap stocks.  Aggressive growth are small-cap stocks.  International is international stocks.

He recommends actively managed funds, where those labels tend to be on the fund names to indicate how aggressive the fund management is.  He is not using traditional definitions of growth vs. value.  To him, mid-cap stocks have more room to grow than large-cap stocks, ergo, mid-cap stocks are growth stocks.

forummm

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Re: Dave Ramsey's Investing Advice
« Reply #28 on: May 26, 2015, 04:03:02 PM »
Growth is a mutual fund made up of growth stocks.  Aggressive growth are midcap growth stocks.  Growth and Income is what we would call a blend of growth stocks and dividend stocks.  International is self-explanatory. 
Correction: I found a statement where he clarifies: growth stocks are mid-cap stocks.  Growth and income are large-cap stocks.  Aggressive growth are small-cap stocks.  International is international stocks.

He recommends actively managed funds, where those labels tend to be on the fund names to indicate how aggressive the fund management is.  He is not using traditional definitions of growth vs. value.  To him, mid-cap stocks have more room to grow than large-cap stocks, ergo, mid-cap stocks are growth stocks.

Um,...OK. Good that a 'personal finance guru' doesn't know what growth stocks are.

BuzzardsBay

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Re: Dave Ramsey's Investing Advice
« Reply #29 on: May 28, 2015, 11:08:03 AM »

All he gets is the referral fee.  He doesn't make any money on what is sold.

Don't forget - most people who follow his advice have very little knowledge of personal finance and have school loans, credit card debt, car loans, and whatever else they could sign up for.  They're living pay check to pay check.  At least he tries to teach them something and pushes them in the right direction.   Anyone who wants to change has to start somewhere.  There are a lot worse places they could do it.

Jags4186

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Re: Dave Ramsey's Investing Advice
« Reply #30 on: May 28, 2015, 11:38:32 AM »
What's annoying about his investing advice, and advice in general, is his willingness to say "the math doesn't matter" on some subjects and "if you do the math on that you'll see I'm right" on other subjects.  Yesterday's show he was speaking about mutual funds to a guy who called in asking why he would pay for loaded funds.

Dave's answer was that "well you can buy a no load fund...and one I was looking at yesterday had a 3% expense ratio...every year 3% taken out of your returns.  Or you could buy a loaded fund which takes 5.25% upfront but then charges you .7% a year in expenses".  Never does he mention that you can buy no load funds with .05% fees.

Everyone always thinks whenever someone has anything negative to say about Dave Ramsey people go "he's doing more good than you are, etc. etc."  I have no problem with Dave Ramsey--he is a simple PF guru who legitimately speaks to the masses.  But his investing advice sucks--plain and simple.  Of course, it is better than having money underneath the mattress or sitting in a .05% savings account.  So if it gets people to pour money into the market driving up prices, well, thank you Mr. Ramsey!

mizzourah2006

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Re: Dave Ramsey's Investing Advice
« Reply #31 on: May 28, 2015, 12:17:38 PM »
Does he really refer to it as "mutual fund investing?" If so, wow.

He actually recommends actively managed mutual funds. No clue why, but he does.

forummm

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Re: Dave Ramsey's Investing Advice
« Reply #32 on: May 28, 2015, 12:36:32 PM »
Does he really refer to it as "mutual fund investing?" If so, wow.

He actually recommends actively managed mutual funds. No clue why, but he does.

Maybe he gets a cut (as posters above have said)?

Troppo presto

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Re: Dave Ramsey's Investing Advice
« Reply #33 on: May 28, 2015, 01:13:18 PM »
If it sounds too good to be true it.................

ender

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Re: Dave Ramsey's Investing Advice
« Reply #34 on: May 28, 2015, 03:29:13 PM »
Does he really refer to it as "mutual fund investing?" If so, wow.

He actually recommends actively managed mutual funds. No clue why, but he does.

He talked about this the other day on the radio (specifically load vs noload funds).

His perspective was that the largest risk/cost most investors face isn't the load fees but rather stupid decisions (buy high sell low) brought about by self-management. So even though loads are expensive they are much less damage than what people would do to themselves via mismanagement, because they will have a person between them and financial irresponsibility.

I largely agree with this. For many people, load funds that are "hard[er] to make dumb decisions with" will probably have better overall outcomes than very low-cost Vanguard funds.

forummm

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Re: Dave Ramsey's Investing Advice
« Reply #35 on: May 28, 2015, 04:51:15 PM »
Does he really refer to it as "mutual fund investing?" If so, wow.

He actually recommends actively managed mutual funds. No clue why, but he does.

He talked about this the other day on the radio (specifically load vs noload funds).

His perspective was that the largest risk/cost most investors face isn't the load fees but rather stupid decisions (buy high sell low) brought about by self-management. So even though loads are expensive they are much less damage than what people would do to themselves via mismanagement, because they will have a person between them and financial irresponsibility.

I largely agree with this. For many people, load funds that are "hard[er] to make dumb decisions with" will probably have better overall outcomes than very low-cost Vanguard funds.

Another way of looking at it is that you are guaranteeing you get screwed and still maintaining the right to screw yourself further. If the market tanks and you call up the big-load fund and want your money back, they'll give it to you.

hodedofome

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Re: Dave Ramsey's Investing Advice
« Reply #36 on: May 28, 2015, 08:15:20 PM »
I think what Dave is really saying is that it's better for most people to work with a financial advisor that will keep you from selling than trying to do it yourself. Most people have no idea just how difficult it is to hold through 2008. The people on this site are not the normal folks of the general population. We are do-it-yourselfers. The general population will never read an investing book and will never care to. Putting them in charge of their own account is hazardous.


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skyrefuge

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Re: Dave Ramsey's Investing Advice
« Reply #37 on: May 28, 2015, 09:43:08 PM »
For many people, load funds that are "hard[er] to make dumb decisions with" will probably have better overall outcomes than very low-cost Vanguard funds.
The general population will never read an investing book and will never care to. Putting them in charge of their own account is hazardous.

Here is a thread where I laid out some actual data for Vanguard's 401(k) investors:

Between September 2007 and December 2009:

3% completely abandoned equities
5% decreased their equity allocation by 10 or more points

Are these rates higher than they were for investors in loaded funds with commission-based advisers? That would seem tough, since those rates weren't very high. But I certainly welcome any data that supports the above assertions!

(the low rates of investor panic were a surprise to me too when I first saw the Vanguard data, as the investing opinionsphere had led me to believe that panicking was much more common than it apparently is.)

surfhb

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Re: Dave Ramsey's Investing Advice
« Reply #38 on: May 28, 2015, 11:15:00 PM »
I think what Dave is really saying is that it's better for most people to work with a financial advisor that will keep you from selling than trying to do it yourself. Most people have no idea just how difficult it is to hold through 2008. The people on this site are not the normal folks of the general population. We are do-it-yourselfers. The general population will never read an investing book and will never care to. Putting them in charge of their own account is hazardous.


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As much as a I hate DR I have to agree.    Bottom line is that no one in history has done more to get more people out of the debt trap than Dave.    He deserves credit for that.

YoungInvestor

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Re: Dave Ramsey's Investing Advice
« Reply #39 on: May 29, 2015, 06:42:58 AM »
For many people, load funds that are "hard[er] to make dumb decisions with" will probably have better overall outcomes than very low-cost Vanguard funds.
The general population will never read an investing book and will never care to. Putting them in charge of their own account is hazardous.

Here is a thread where I laid out some actual data for Vanguard's 401(k) investors:

Between September 2007 and December 2009:

3% completely abandoned equities
5% decreased their equity allocation by 10 or more points

Are these rates higher than they were for investors in loaded funds with commission-based advisers? That would seem tough, since those rates weren't very high. But I certainly welcome any data that supports the above assertions!

(the low rates of investor panic were a surprise to me too when I first saw the Vanguard data, as the investing opinionsphere had led me to believe that panicking was much more common than it apparently is.)

I tend to agree with you there, but is Vanguard's client base representative of the population as a whole?

skyrefuge

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Re: Dave Ramsey's Investing Advice
« Reply #40 on: May 29, 2015, 08:51:12 AM »
I tend to agree with you there, but is Vanguard's client base representative of the population as a whole?

Vanguard's entire client base? No, probably not. But the referenced data was solely from Vanguard's 401(k) plans. Since employees generally don't pick their 401(k) provider (or choose their employer based on the 401(k) provider), I don't think there is any self-selection going on that differentiates those investors from "the average American investor".

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Re: Dave Ramsey's Investing Advice
« Reply #41 on: May 29, 2015, 08:59:44 AM »
I don't think there is any self-selection going on that differentiates those investors from "the average American investor".
Perhaps, "employed in a job with a retirement fund option".

Many of Dave Ramsey's followers prefer to self-employ, or work jobs that may not have retirement benefits.

skyrefuge

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Re: Dave Ramsey's Investing Advice
« Reply #42 on: May 29, 2015, 09:25:05 AM »
Perhaps, "employed in a job with a retirement fund option".

Many of Dave Ramsey's followers prefer to self-employ, or work jobs that may not have retirement benefits.

Presuming that's true (that a disproportionate number of Ramsey's followers are among the 6.6% self-employed, or the 22% full-time employed without access to an employer retirement plan), are you saying that such people are constitutionally more prone to panic than people covered by 401(k) plans? Why would that be the case?

Then, presuming there is some logical explanation that correlates "panicability" with "lack of 401(k)", are you suggesting that Ramsey has performed this detailed statistical analysis of his audience and of investor psychology, is aware of the Vanguard (and Fidelity) data, and understands why it does not apply to his audience, and that's why he recommends loaded funds? It's a good thing beards are trendy these days, since poor Occam's razor seems to have gone missing...

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Re: Dave Ramsey's Investing Advice
« Reply #43 on: May 29, 2015, 09:28:12 AM »
Vanguard's entire client base? No, probably not. But the referenced data was solely from Vanguard's 401(k) plans. Since employees generally don't pick their 401(k) provider (or choose their employer based on the 401(k) provider), I don't think there is any self-selection going on that differentiates those investors from "the average American investor".

I think the self-selection is the fact that the data is limited to investments in 401(k) plans in the first place, which people are probably less inclined to fiddle with because they generally view those funds as untouchable until traditional retirement age.  So that data is not necessarily representative of the behavior of "the average American investor" with respect to investments in taxable accounts.  But, as you pointed out in the linked thread, given that most Americans' investments are held in their 401(k) plans, this data probably is pretty representative of the behavior of "the average American investor" with respect to their investments in general.

I'm a red panda

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Re: Dave Ramsey's Investing Advice
« Reply #44 on: May 29, 2015, 09:42:59 AM »
are you saying that such people

The only thing I was saying is that by only studying 401ks there IS selection bias.  You are only studying people employed in jobs with access to a 401k.

skyrefuge

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Re: Dave Ramsey's Investing Advice
« Reply #45 on: May 29, 2015, 10:11:52 AM »
The only thing I was saying is that by only studying 401ks there IS selection bias.  You are only studying people employed in jobs with access to a 401k.

Well yeah, of course the data isn't an exact match. I figured it was obvious that I was aware of that, but I guess I should have stated it explicitly in my post. Unfortunately I'm not aware of any research on "panic rates of Dave Ramsey followers", so I was forced to reference a data set that's not a perfect fit. The question is, is that imperfect fit material when using the data to address the hypothesis "Dave Ramsey recommends commission-based funds because they prevent investors from panicking more than investors who self-direct"?

My assumption was that the difference is not material, but to truly know, we need comparable data on panic-rates for commission-based fund investors. Ramsey says it exists ("Statistics show that "do-it-yourselfers" are quick to jump out of funds when they begin to underperform.") but he doesn't reference his source and I haven't been able to turn up anything on my own. Anyone else know his source? And to address brooklynguy's point, it would also be nice to have data for Vanguard investors in non-retirement accounts, to see if the Vanguard 401(k) data under-reports panicking due to the relative inaccessibility of retirement-plan assets. But in the absence of all that data, you'll have to forgive me if I occasionally falter and resort to Occam's razor when drawing a conclusion about something.
« Last Edit: May 29, 2015, 10:14:09 AM by skyrefuge »

jengod

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Re: Dave Ramsey's Investing Advice
« Reply #46 on: May 29, 2015, 10:30:43 PM »
Growth is a mutual fund made up of growth stocks.  Aggressive growth are midcap growth stocks.  Growth and Income is what we would call a blend of growth stocks and dividend stocks.  International is self-explanatory. 
Correction: I found a statement where he clarifies: growth stocks are mid-cap stocks.  Growth and income are large-cap stocks.  Aggressive growth are small-cap stocks.  International is international stocks.

Thank you for translating this in a way that make sense to me. I have always found these terms somewhat bewildering.

He uses 12% rate of return as a motivator to convince people to invest in retirement funds at all, which some people seem bound and determined to avoid, but is probably the laymen's most straightforward path to wealth.
« Last Edit: May 29, 2015, 10:40:43 PM by jengod »

YoungInvestor

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Re: Dave Ramsey's Investing Advice
« Reply #47 on: May 30, 2015, 05:49:32 AM »
I tend to agree with you there, but is Vanguard's client base representative of the population as a whole?

Vanguard's entire client base? No, probably not. But the referenced data was solely from Vanguard's 401(k) plans. Since employees generally don't pick their 401(k) provider (or choose their employer based on the 401(k) provider), I don't think there is any self-selection going on that differentiates those investors from "the average American investor".
Exactly, I know a few people who did pull out all of their self-managed equity investments in 08-09. Nobody I know did anything with their employer's plan. I think people treat those differently, even if there is no rational reason to.

ender

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Re: Dave Ramsey's Investing Advice
« Reply #48 on: May 30, 2015, 11:16:52 AM »
I tend to agree with you there, but is Vanguard's client base representative of the population as a whole?

Vanguard's entire client base? No, probably not. But the referenced data was solely from Vanguard's 401(k) plans. Since employees generally don't pick their 401(k) provider (or choose their employer based on the 401(k) provider), I don't think there is any self-selection going on that differentiates those investors from "the average American investor".
Exactly, I know a few people who did pull out all of their self-managed equity investments in 08-09. Nobody I know did anything with their employer's plan. I think people treat those differently, even if there is no rational reason to.

Some 401ks provide less options to do that with too.

Mine would be hard to screw myself over with. Plus, a lot of people might have the target date funds in their 401ks where they "dont have to think about it" the same way.

KC1983

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Re: Dave Ramsey's Investing Advice
« Reply #49 on: May 31, 2015, 02:26:24 PM »
Growth is a mutual fund made up of growth stocks.  Aggressive growth are midcap growth stocks.  Growth and Income is what we would call a blend of growth stocks and dividend stocks.  International is self-explanatory. 
Correction: I found a statement where he clarifies: growth stocks are mid-cap stocks.  Growth and income are large-cap stocks.  Aggressive growth are small-cap stocks.  International is international stocks.

Thank you for translating this in a way that make sense to me. I have always found these terms somewhat bewildering.

He uses 12% rate of return as a motivator to convince people to invest in retirement funds at all, which some people seem bound and determined to avoid, but is probably the laymen's most straightforward path to wealth.

I think much of the above definitions are incorrect. 'Growth' means stocks that are expected to have high capital appreciation. It has little to do with size. They generally are considered higher quality companies, and therefore have higher P/E rations. A simple explanation is that growth stocks are more highly-priced 'glamor' stocks, and value stocks are the 'dogs' that no one wants, and therefore might be undervalued (but also more likely to fail). Small, medium, and large refers to the relative capitalization of the company, and nothing more. There are small value stocks, and small growth stocks. There is no such thing that I know of as an 'income stock fund.' There are dividend stock funds, and many of the stocks in that fund will be value stocks. Value stocks are more likely to pay dividends, but not all do. An income fund is focused on current income, and so will have a lot of instruments that are not stocks, like bonds and debt instruments, as well as dividend-paying stocks.

Here's a good place to start learning: http://www.bogleheads.org/wiki/Stock_basics

In general, most people make a mistake trying to 'slice and dice' the market by picking 'tilts' towards different sectors or stock classes. Realize it is mostly noise, and it's a great way to screw yourself. Over time any given sector is likely to revert to the mean (i.e., end up with the same return as the whole market together). The average investor reads that, for example, that large cap growth stocks have done well, and invests in such a fund just when that sector starts to under perform the rest of the market. That's how I invested for years, looking at the past 3-5 years return to pick what fund to get into. I always underperformed the market.  I finally wised up and just put my money into Vanguards total stock market index.

Just admit you're not smarter about this than the rest of the world of investors, invest in the entire market, and stay the course.