Dave Ramsey unrealistic investment expectations

[Dezrah]

DR doesn't get paid by any mutual fund companies.  His ELPs pay him to be in his network...DR doesn't get any kickbacks on what the client buys from the ELP.

DR's advice is simply to start investing...the Rate of Return is irrelevant.  90% of the people who need DR never even consider investing...investing is like a foreign language.  Dave constantly tells people to learn for them self and not to do it because he says so.  He tries to get people to wake up and plan for the future. 

I personally follow his plan but my wife does the bogelhead Vanguard 3-Fund Index Portfolio and I do Large, Mid, Small and an institutional index of Vanguard funds.

His get out of debt advice is spot on and it works.   I followed it to a tee and paid off 288K in 19 months. (sold a rental and a car)

People need to remember he is a radio show host (entertainer).  He is not a CFP and doesn't hold any financial licenses.  His advice is just that...advice.  You dont need to follow it.

If rate of return doesn't matter then why does he keep using outdated numbers despite the mounting evidence that it is unrealistic? To keep people entertained? That's a poor excuse. There are countless entertaining financial blogs and even shows that don't need to lie about this number to get people excited.

Furthermore, if his audience is as ignorant about investing as you suggest (a point I agree with) it's all the more reason he should stear them to cheaper, fool-proof index funds.

He's definitely one of those people that you have to discretize all of his suggestions, take the good and leave the bad.

[JZinCO]

I'm a little tired of hearing apologists of his

DR's advice is simply to start investing...the Rate of Return is irrelevant.

What are the ramifications of setting expectations so high though? DR doesn't provide any evidence so once people start getting returns on par with the market they have little to hold on to and might press the eject button or they might overexpose themselves on equities in general or in too few individual stocks. It's dangerous to set folks up for failure chasing crazy returns.

From: http://www.fool.com/investing/general/2013/06/03/dangerous-retirement-planning-advice-from-financia.aspx
If that investor assumes he'll make a 12% return per year on his investments, he'll need to save $97 per month. If, however, he assumes his return will be 6.7% -- the S&P 500's CAGR while factoring in inflation, which Ramsey claims to do -- that number jumps to $422 per month.

Think about that: $97 per month versus $422.  That's an enormous difference!

For the hapless investor who saved $97 per month but experienced a more-normal 6.7% return per year, he will be over $770,000 -- or 77% -- short of his investment goal.

His get out of debt advice is spot on and it works.   I followed it to a tee and paid off 288K in 19 months. (sold a rental and a car)

For the sake of this argument, I don't care if he helps people with other aspects of personal finance. Just because he does this does not mean his piss poor investment advice is excusable and there is nothing wrong with holding two truths concurrently. DR is good on debt advice and bad on investment advice. period.

JMS maybe you can give some clarification. Why doesn't Dave Ramsey suggest looking for low fee funds? Why is he against ETFs which tend to have lower ERs than similar funds.  Why does he prefer front-load funds over no-load funds? Why no bonds? Why just 4 fund types with overlapping underlying securities? Three of four of his investment picks are just overlaps of the S&P500. Wouldn't it be easier to get ONE 0.05% ER index instead of saying, buy four funds with 2-5% fees and 1%ERs?

[dandarc]

What are the ramifications of setting expectations so high though? DR doesn't provide any evidence so once people start getting returns on par with the market they have little to hold on to and might press the eject button or they might overexpose themselves on equities in general or in too few individual stocks. It's dangerous to set folks up for failure chasing crazy returns.

From: http://www.fool.com/investing/general/2013/06/03/dangerous-retirement-planning-advice-from-financia.aspx
If that investor assumes he'll make a 12% return per year on his investments, he'll need to save $97 per month. If, however, he assumes his return will be 6.7% -- the S&P 500's CAGR while factoring in inflation, which Ramsey claims to do -- that number jumps to $422 per month.

Think about that: $97 per month versus $422.  That's an enormous difference!

For the hapless investor who saved $97 per month but experienced a more-normal 6.7% return per year, he will be over $770,000 -- or 77% -- short of his investment goal.

Of course, if the investor is REALLY following DR's plan, he's not figuring the amount needed to get to a certain end number.  That investor is investing 15% to retirement - in addition to any match that might be received (baby step 4), then funding college funds for the kids (step 5), then paying off the mortgage (step 6) then saving/spending/giving like never before (step 7).

[Smokystache]

As much as I hate to say it, I think I am wrong. 

I have no skin in this conversation but I just wanted to say, this is really big of you, an a great reason why I love this community so much. I haven't found anything quite like it anywhere else on the internet.

I'm late to the game, but just wanted to reinforce this. Your [2buttons] ability to take a new perspective on this topic, in spite of your initial stance, is very, very commendable. If more people were as willing to be open to new information they would save themselves a lot of frustration (not to mention money). And the opportunity to have a challenging, but respectful discussion about a tricky topic using evidence and reasoning is one of the top reasons I love this entire forum.

[Petunia 100]

DR doesn't get paid by any mutual fund companies.  His ELPs pay him to be in his network...DR doesn't get any kickbacks on what the client buys from the ELP.

DR's advice is simply to start investing...the Rate of Return is irrelevant.  90% of the people who need DR never even consider investing...investing is like a foreign language.  Dave constantly tells people to learn for them self and not to do it because he says so.  He tries to get people to wake up and plan for the future. 

I personally follow his plan but my wife does the bogelhead Vanguard 3-Fund Index Portfolio and I do Large, Mid, Small and an institutional index of Vanguard funds.

His get out of debt advice is spot on and it works.   I followed it to a tee and paid off 288K in 19 months. (sold a rental and a car)

People need to remember he is a radio show host (entertainer).  He is not a CFP and doesn't hold any financial licenses.  His advice is just that...advice.  You dont need to follow it.

If rate of return doesn't matter then why does he keep using outdated numbers despite the mounting evidence that it is unrealistic? To keep people entertained? That's a poor excuse. There are countless entertaining financial blogs and even shows that don't need to lie about this number to get people excited.

I am going to guess that it is because he also claims you can withdraw 8% per year for the rest of your life and still leave the principal behind as a "legacy" to your family.

[jms493]

TBH...at this point I think he keeps saying 12% because he gets a ton of free marketing and publicly from it.  There are so many articles written about this on financial websites everywhere...mean while his radio empire keeps growing.

[JZinCO]

What are the ramifications of setting expectations so high though? DR doesn't provide any evidence so once people start getting returns on par with the market they have little to hold on to and might press the eject button or they might overexpose themselves on equities in general or in too few individual stocks. It's dangerous to set folks up for failure chasing crazy returns.

From: http://www.fool.com/investing/general/2013/06/03/dangerous-retirement-planning-advice-from-financia.aspx
If that investor assumes he'll make a 12% return per year on his investments, he'll need to save $97 per month. If, however, he assumes his return will be 6.7% -- the S&P 500's CAGR while factoring in inflation, which Ramsey claims to do -- that number jumps to $422 per month.

Think about that: $97 per month versus $422.  That's an enormous difference!

For the hapless investor who saved $97 per month but experienced a more-normal 6.7% return per year, he will be over $770,000 -- or 77% -- short of his investment goal.

Of course, if the investor is REALLY following DR's plan, he's not figuring the amount needed to get to a certain end number.  That investor is investing 15% to retirement - in addition to any match that might be received (baby step 4), then funding college funds for the kids (step 5), then paying off the mortgage (step 6) then saving/spending/giving like never before (step 7).

Good point.
I think 15 is too low but I do see how that negates the article I quoted.

[iamlindoro]

TBH...at this point I think he keeps saying 12% because he gets a ton of free marketing and publicly from it.  There are so many articles written about this on financial websites everywhere...mean while his radio empire keeps growing.

If that were true, how would that not be deeply troubling ethically? The entire point of the thread is that Ramsey puts his own enrichment above the investing wellbeing of his listeners and readers.

[Telecaster]

I think Dave's teachings are great, and he uses the K.I.S.S. method when it comes to investing which could be a little dumb for folks around here, but is it really THAT bad to have have a simple investment stategy?

That's the thing, if you really want to KISS then buy VASGX and never do anything ever again. 

I will throw out a bone here.  Some people do manage to beat the market.  But none of them are mutual fund managers.*  And there are good reasons why you might want to say, diversify into REITs or maybe overweight in small caps. But managed funds are for chumps. 




*there may be a small few who did beat the market over some long period of time.  But how do you know who these guys are before you start? 

[ender]

If rate of return doesn't matter then why does he keep using outdated numbers despite the mounting evidence that it is unrealistic? To keep people entertained? That's a poor excuse. There are countless entertaining financial blogs and even shows that don't need to lie about this number to get people excited.

Furthermore, if his audience is as ignorant about investing as you suggest (a point I agree with) it's all the more reason he should stear them to cheaper, fool-proof index funds.

He's definitely one of those people that you have to discretize all of his suggestions, take the good and leave the bad.

Well if the options are:

• Cheap index funds and buy/hold by self
• Expensive index funds with advisor and buy/hold

I'd agree, but for many people, the first option can easily become "buy and hold... except when the market goes down, or I want a loan from myself, or need to withdraw money for a down payment, or I think the market is going to crash, or do other dumb stuff" and make poor choices.

Buying low-cost funds is only cost effective if you are diligent and disciplined enough to actually keep them that way. For many people, paying 1-2% to an advisor to talk them off a cliff periodically and/or encourage them to invest is a hugely beneficial overall impact on their financial lives, in spite of the cost. An advisor preventing a few dumb decisions can net people far more positive benefit than the cost incurred by their considerably higher fees.

As a point, I basically "lost" 5% on my 401k during the rollover time last month being out of the market for only 3 weeks (thanks Fidelity/Vanguard and bad timing for my new job...). How many people do you think sold their investments during that down time? Perhaps some of them are not even back now. Enough people here have anxiety about market crashes and are effectively timing the market, imagine what poor Joe or Susie who have no financial knowledge must think. Or in 2009, I am sure plenty of people sabotaged themselves by selling low and buying high considerably more than an advisor would have cost them.

Of course, bad advisors give you have the worst of both worlds. But Dave Ramsey definitely advocates buy-hold strategies and presumably to get his endorsement, the ELP crowd does too.

[JZinCO]

It appears Dezrah was only discussing fund expenses in that post; you set up a red herring to argue against. Please tell us why front-load active funds are better to hold than no-load index funds. One can buy front-load funds or no-load funds with or without an advisor so please don't consider the impact of advisors in your response.

One can argue that holding a front-load fund versus a no-load fund does not heavily influence the decision to exit the market or sell fund shares because the front-load is a sunk cost. If one needs to liquidate they will do so regardless. I do suppose that having a fee on the back end may make one pause. But still, do you think it is wise to set up a strategy where you penalize yourself ahead of time to stave off undesirable behaviors that may or may not occur? It seems foolish and to be honest, the undesirable behavior already comes with enough implied cost so why would you want to add even more costs to it? Very masochistic...

[GrowingTheGreen]

   I support much of what DR says and believe he is helpful to many people.  However, I don't like his assumptions that it is easy to find mutual funds that will outperform basic index funds.  He basically says that its pretty easy to find these funds with some basic research, and I would argue that one would have about as much likelihood to find funds that will underperform as overperform going forward.  The very nature of index funds is their averageness, so non-index funds will have some above average and some below average performers, and I don't believe its that easy to figure out which ones will be which in the future.

Isn't he endorsed by some of these mutual funds?  If so, talk about a conflict of interest...

The dude screams "conflict of interest" to me.  He preaches a good message when people call in, but it's his voice pushing for the products and services that advertise with him.  How can you preach and push for people to save money then turn around and endorse a home remodeling company?  My only guess: money.

[HPstache]

   I support much of what DR says and believe he is helpful to many people.  However, I don't like his assumptions that it is easy to find mutual funds that will outperform basic index funds.  He basically says that its pretty easy to find these funds with some basic research, and I would argue that one would have about as much likelihood to find funds that will underperform as overperform going forward.  The very nature of index funds is their averageness, so non-index funds will have some above average and some below average performers, and I don't believe its that easy to figure out which ones will be which in the future.

Isn't he endorsed by some of these mutual funds?  If so, talk about a conflict of interest...

The dude screams "conflict of interest" to me.  He preaches a good message when people call in, but it's his voice pushing for the products and services that advertise with him.  How can you preach and push for people to save money then turn around and endorse a home remodeling company?  My only guess: money.

You have to make money somehow to stay on the air... DR is not trying to hide the fact that he is running a business.  MMM even has his "MMM Recommends" section and plugs some of these in his blog and we all don't consider that to be a conflict of interest.


And on another note, Dave Ramsey would never say, "don't remodel your house".  That's not his message.  His message is, get out of debt, save for emergencies and retirement, and live and give like no one else.  If you want to re-model your house, and you're in the position in his "plan" to do that.... that's great... just save up for it and don't use debt to do it.

[ender]

It appears Dezrah was only discussing fund expenses in that post; you set up a red herring to argue against. Please tell us why front-load active funds are better to hold than no-load index funds. One can buy front-load funds or no-load funds with or without an advisor so please don't consider the impact of advisors in your response.

One can argue that holding a front-load fund versus a no-load fund does not heavily influence the decision to exit the market or sell fund shares because the front-load is a sunk cost. If one needs to liquidate they will do so regardless. I do suppose that having a fee on the back end may make one pause. But still, do you think it is wise to set up a strategy where you penalize yourself ahead of time to stave off undesirable behaviors that may or may not occur? It seems foolish and to be honest, the undesirable behavior already comes with enough implied cost so why would you want to add even more costs to it? Very masochistic...

I would much rather someone who will not invest and wastes all their money on a yearly basis invest that money in funds they pay a front-load fee in while still paying a fund advisor 1% a year....