I've written about Dave Ramsey before on this site, including this article about how his Baby Steps are too rigid and this one about some of the things I think he gets wrong. He appropriately receives a great deal of criticism from the investing blog community about his investing advice, including that he sends people to commissioned mutual fund salesmen for investing advice, encourages 100% stock portfolios, and believes actively managed mutual funds are superior to index funds. However, in response to this criticism, rather than softening his tone, he seems to be doubling down on his bad advice while lashing out at his well-intentioned critics. A rant from the first hour of his September 18th show starting at 10:45 and going for about 9 minutes is a good example.
The Call
A caller, Neil, calls in noting that he has been reading some of what Bogle has written and is curious about why Dave advocates he pay 5.75% loads to a mutual fund salesman. Here are some quotes from the rant along with my comments.
Jack and I don't agree about a lot of things…and I really don't agree with some of those people who take some of his stuff to extremes. The stance he has made is that you should only buy no-loads and that you should only buy S&P index funds. There is plenty of mathematical evidence to counter that….I get so wired up about Bogle and those guys because they cause people to get paralysis by analysis.
In case you can't read between the lines, “those people who take his stuff to extremes” are the Bogleheads, including me. Jack is right that you should always buy no-loads and Dave is wrong that Jack's stance is that you should only buy S&P index funds. In fact, Jack's favorite fund is the Total Stock Market fund, not the 500 Index Fund. And if we're going to talk about “mathematical evidence,” the evidence is quite clear about the superiority of the passive investing approach.
Dave On Active Management
It really doesn't take a rocket scientist to find a mutual fund that outperforms the S&P….You should be selecting funds that over time outperform the S&P….I find evidence contrary to this idea that you should be a passive investor and just buy index funds.
Please share the evidence Dave, because when you really look at it objectively, the evidence is overwhelming in demonstrating the superiority of the passive investing approach, especially when the alternative is choosing a loaded, high expense ratio, actively managed mutual fund expected to beat an appropriate index fund over the long term.
Speaking Out of Both Sides of His Mouth
I do buy some index funds, some no-load index funds, but not in my retirement account.
Okay Dave, which is it? You (or your commissioned broker) can pick funds that outperform index funds or you can't. If you can, then why settle for the measly market return? If you can't, then why have any actively managed funds? His “retirement account” comment suggests he feels he can do it in a tax-protected environment (where it is admittedly slightly more likely) but not in a taxable one. The truth is it is unlikely, although not impossible, to pick a single actively managed fund that will outperform its index over the long run, and even more difficult to pick a bunch of them.
Defending Loads and Commissioned Salesmen
5 and 3/4 is a standard brokerage fee on a standard mutual fund that has commission on it, that is a loaded fund. And so why does Dave Ramsey, that knows a lot about this stuff, personally use and pay 5 and 3/4 percent to a mutual fund broker. That's a good question.
Yes, yes it is Dave. There are two options, and neither of them makes you look good. Either you've got a conflict of interest or you're ignorant on the subject. Let's see which one you pick.
I don't look at mutual funds 24 hours a day, 7 days a week. I look at mutual funds probably 2 hours to 5 hours a year….[My broker] bathes in this stuff every day. He eats, lives, and breathes this stuff every day so when I go to select some funds, I don't have to go through 8,000 funds, I can go to an expert and he throws 3 or 4 funds on the table I can choose from….I talk them through with him, I pick one and I go. It saves me time.
Looks like he's going for the ignorant argument. I've got news for you Dave. Brokers don't spend their time looking at mutual funds. They spend most of their time prospecting for clients and selling them products they shouldn't buy. And 2 hours a year is way more time than you need to spend looking at them once you realize the futility of the exercise (i.e. divining which will outperform its index in the next year.)
And so the individual funds, I am not an expert on.
You've got that right. Not sure why that would cause you to lash out at those who are the real experts on them though.
I don't need a [broker] to hold my hand in market volatility, but most people do.
Perhaps one of the best reasons to hire an advisor is to help you avoid bad behavior. But if that's not an issue for you, the only reason you're hiring one is to pick winning funds, a futile exercise. Seems dumb to give up 6% (and that's just the initial load, and doesn't count the ongoing higher expenses, taxes, and underperformance of that loaded fund) of your eventual nest egg to me.
It's not you, it's just that we get hammered by Bogleites and all these other people that are out there…I get insulted frankly. The insult is that the only reason Dave Ramsey endorses this stuff is because of his ELPs. No Darling, the only reason there are ELPs is because I endorse this stuff. But you're questioning my integrity then. Like I'm a sell-out or something. Not you Neil, but these people that are hammering me. And so I'm a little sensitive about it these days. I'm a little bit fired up about it.
Well Dave, it's one or the other. Either you're a sell-out or you're ignorant on the subject. But what you aren't, is right. The reason you're getting hammered by people without a conflict of interest on the subject is because you're wrong. You're recommending bad products sold by bad advisors. Quit doing that and you'll get a lot less flak. You should have built an army of ELPs that works on an hourly rate and recommends the best products for your listeners.
Stock Market Returns
I'm very comfortable with my knowledge base of the history of the stock market…[The stock market has] always made really good returns, from 11 to 12% and I can generally beat 12% on a portfolio just by selecting well.
Why he feels a need to exaggerate the data by using average returns instead of annualized returns is beyond me. The data is very clear. Our best database starts in 1926. From 1926 to 2014, the US stock market averaged 12.14% and the annualized return was 10.14%. If you go back to 1871, those drop to 10.77% and 9.11%. While we're on the subject, I hate how he never adjusts for inflation when he does calculations on air and makes listeners think their castles are going to grow to the sky. For example, those stock market numbers, when adjusted for inflation, drop to an annualized return of about 7%. If you're going to rely on historical numbers when doing calculations (and many would argue you should expect less going forward,) that's the one to use. For example, if a listener is making $5,500 Roth IRA contributions for 30 years and thinks he'll get 12%, he assumes he'll end up with $1.5M. Whereas if he only gets 7% real, what he really ends up with is $556K, about a third as much. Kind of an important difference in my view, but apparently not Dave's.
Doesn't Account for Churn
You don't pay 5 and 3/4 percent every year, only when you're putting the money in. So if I put a million dollars in, it's $57,000 dollars. If I leave that there for ten years, then that's less than half a percent a year.
That math stuff is tough, isn't it. Actually, 5.75% divided by ten is 0.575%, or more than half a percent a year. But even if we round it down to “half a percent a year”, what does that really mean? Well, let's say you're investing $50K a year. Instead of getting 8% on it, you get 7.5%. After 10 years, you have $22K (about 3%) less. Incidentally, that's about what you paid as loads over the years. But what Dave doesn't account for here is the churn. You see, that broker only gets paid when you change portfolios. The average equity mutual fund purchaser changes funds every 3.3 years. And you can bet those advised by commissioned salesmen are below average on that statistic. Paying 5 and 3/4 percent every 2 or 3 years really decreases returns by 2-3% a year, not 0.5% a year, with devastating consequences to a portfolio.
To make matters worse, many investors, especially those who work with brokers, seem to become investment collectors. Every year when they go to invest, the broker recommends some funds. Every year, it is a different group of funds based on recent past performance. After a few years, they own 20 or 30 different funds, all of which own the same stocks. I really get the impression listening to Dave that this is what HIS portfolio looks like, without an underlying coherent asset allocation or strategy.
Expenses Don't Matter
I want to throw one more log on this fire. There was a piece of research done by the ASPPA…which demonstrated that [expenses accounted for very little when it comes to retirement success] and return was a small percentage of it. The primary driver, 74%, was….savings rate.
Just because savings rate matters more than anything else (especially in the beginning) is hardly a reason to ignore expenses. In fact, expenses are the best predictor of future returns when it comes to mutual funds.
The Summit of Perla's Ridge, Little Cottonwood Canyon
Dave Doesn't Get That No Loads Aren't C Shares
His guest Chris Hogan, says:
I love the front load option…
And Dave Responds:
A no-load fund actually has an ongoing, higher, maintenance fee than a loaded fund does.
No, it doesn't Dave. That's a C share, another type of loaded mutual fund. In the long run, a C share may be worse than an A (front-loaded) share, but both are inferior to a true no-load mutual fund. Those who are confused by this should read this post.
What Dave Got Right In This Call
All of Dave's advice isn't bad, and in fact, he generally gets the most important things right.
I don't look at the market every day. I don't care what the market did. I'm investing from now until I'm 65 or 75. I'm thinking long term…
I have my thing on autopilot…
There's tons of research that says that if you have someone walking with you that is an investment professional [increases] your tendency to stay in the market in a downturn…and quit trying to time the market
Just invest….Invest, invest, invest. Compound interest doesn't work unless there is something to compound.
I suppose it is entirely possible to retire comfortably while getting advice from a commissioned salesman and buying loaded mutual funds. But why do things the hard way? There are many roads to Dublin, but I'd rather take the highway. Dave needs to acknowledge that recommending commissioned salesmen as advisors is a mistake, that recommending loaded mutual funds is a mistake, and that it is entirely possible for a reasonably informed DIY investor to be successful without an advisor at all. Although many of his listeners are not particularly knowledgeable, it is condescending to recommend a less than ideal approach because it is better than nothing. You've got three hours every night. That is plenty of time to educate people sufficiently that they can just learn to do things the right way. If nothing else, referring people to a few good books (such as those by Bogle) to help them learn about this stuff is never a bad idea.
What do you think? What will it take for Dave to quit giving this terrible advice? What do you think is the likelihood of being financially successful is by getting advice from brokers and buying commissioned products? Comment below!
When folks complained about his monstrous home, he said that in the past he used to say “why do people need ====, whatever it was. But I was immature. God wants me to have this wealth.” And so on. Yeah right. God also wants the Dallas Cowboys to win again someday.
Does anyone know, beyond a heck of an annual fee, what it takes to be an ELP? The absolute worst CPA (and financial “adviser”) within 50 miles of my office is an ELP. The CPA community knows he is both a shyster and incompetent. He charges 1.75% AUM fee + a tax prep fee on top. I’ve never received a correct return from his office, yet the ELP gives him a ton of credibility with people who don’t know better.
Dave is at his best in getting people out of debt Beyond that, he’s dangerous.. He turned me off about 10 years ago when I heard him lambaste CPAs when a caller said his CPA had made an error on his tax return. Dave said that he should demand the CPA pay all additional taxes due. I’m sorry to let the world down, but we double-review all tax returns and still haven’t figured out how to walk on water. A good CPA will apologize profusely and reimburse all penalties and interest on an error, but mistakes will happen. If they happen regularly, you simply need to find a better CPA. Sorry for going OT.
I don’t know for CPAs, but I read a mutual fund salesman who pays Dave $80 a lead.
Is it a product of the audience as a whole he might be trying to reach? For someone that understands how the markets work and is a Boglehead, a lot of the investing commentary Ramsey advocates is counter productive and costly. That said, someone who has never invested before, is horrible at managing money, and is in serious debt might benefit more from Ramsey’s recommendation. Just the understanding that someone is guiding you through and is making the decisions for you must be quite relieving for someone in that particular situation. I have to agree with Meg, there are plenty of people who can benefit from financial advice. How much of Ramsey’s audience fits that mold I’m not really sure. Ramsey could improve his position by advocating that once his audience gets out of their particular situation and once they learn a foundation to investing (which should be ongoing from the moment they realize it), then he can advocate a more appropriate Bogle model.
I understand where your coming from , but for all practical purposes , investing isn’t rocket science – Read a few books , watch some of the financial channels and you get the fundamentals – Instead of lining his own pockets with referrals to shady people , why doesn’t he recommend a few books to read to learn how to invest properly (preferably something he hasn’t written) .
Part of the reason we got into the recent financial troubles , wasn’t all the banks’ fault – It was people buying more house than they could afford , and doing it using faulty products – ie, variable loans , interest only loans . Then when the housing market boomed , they were using their homes as ATM’s so they could buy more stuff they couldn’t afford . Yes, the financial institutions dangled these products in front of eager buyers , but if they were educated they could have (no-should have said no) There was a certain amount of greed on both sides of all those transactions.
I saw a disturbing , but probably all to often occurrence , on a nightly news show several years back . It was when the “Cash for Cars” (?) program was in effect – They interviewed a couple outside a dealership and asked them if they were going to buy a new car . Their response was ” We want to – we’re waiting for the salesman to tell us if we can afford it or not “. Now let’s see – The person they were depending on to let them know information they should have known before they even went shopping for a car , was the same person (and his employer ) who would be reaping the benefits of the sale . What do you think? Think they qualified for that car ? Absolutely . The same scenario played itself out thousands of times for cars and homes .
I talk to my daughters about their finances , and the answer i get is “I don’t have time for that ” and myanswer to them is , “You better make the time – Nobody else is going to take care of you as well as you take care of yourself ”
Sorry for the rant ……
I don’t think variable loans contributed much. In fact, anyone who has taken out a variable loan in the last decade or two has made out like a bandit, no?
I couldn’t agree more Bob. I am just giving people the benefit of the doubt. We see it as pretty straightforward and even entertaining, but reflecting on peoples’ financial insight; there are a lot of black holes out there. And that’s a part of the problem too. How did we let ourselves get this complacent when it comes to our personal finance? A number of my peers just ignore it. They are probably smart enough to learn and could probably find the time. They simply ignore it.
I think I agree with Scott, above. I am addicted to the Dave Ramsey podcast and I like the energy and enthusiasm he brings to helping people get out of debt and make smart everyday money decisions, and the simple strategy (the baby steps) he provides so that people can know that they are basically on a good path. I do not agree with his politics, or some of his rants, or 100% of his principles (I’m perfectly capable of managing credit cards without carrying balances, etc.). I am comfortable doing my own investing and would not consider paying commissions and AUM fees to an ELP or other advisor.
However, some people–even some doctors–are so paralyzed/intimidated by investing and other financial decisions that a financial advisor may, in fact, be worth their fee because the person otherwise would never manage to invest at all, or would do dumb things with their money even worse than paying 5 and 3/4% to an ELP. I am related to some of these people, and they will not “read a few books” or watch the financial channels or anything else, regardless of encouragement and convincing they receive. Having someone to hold their hand makes a big difference for them, as much as those fees make me cringe.
As for WCI’s comment above about Dave “talking out of both sides of his mouth” regarding buying some index funds and some actively managed funds, here’s Dave’s explanation for that. He says that he parks money in index funds that he plans on keeping for just a short term while he is saving to buy another piece of real estate, or do some project, or whatever. Since that money is sitting short term in taxable accounts, he acknowledges that lower turnover is better (and he doesn’t say this, but he might also admit that a “front-load” also makes even less sense here than in a buy and hold strategy). He says he does actively managed funds for his tax protected accounts and presumably long term investments.
I don’t think I’d ever use a financial advisor ELP, and I certainly don’t count on a 12% return on my investments, but I’m still a Dave fan. He helps a lot of people, and it looks to me like the level of help is far greater than the level of harm from recommending expensive ELPs or giving rosy annual return projections, so I’ll keep listening for the entertainment and daily pep talks–but I’m more likely to come to WCI for any actual investment strategy advice. 🙂
I find the “a commissioned salesman is better than no advisor for a complete financial idiot” argument to be a little weak. Dave could be using hourly ELPs who can give unbiased advice and recommend low-cost index mutual funds.
I also find the idea of putting “short term money” into stocks, whether index or loaded actively managed funds, a bad idea.
I’m also a Dave fan. Maybe that’s why I’m so hard on him when he gives bad advice.
Good article. To Dave’s defense, he ultimately says the only factor for long term investment is consistently putting money in. Loads, index vs active, return, broker… are all minor compared to consistency.
I agree with him on that point. Doesn’t mean you should ignore the other things though.
I am a big fan of index investing. Most of my holdings are in the Vanguard index 500 and I will continue to increase those holdings. However, I don’t believe that individual stock have uncompensated risk, which you have stated on numerous occasions, implying that ordinary investors can’t match the pros who do extensive research. First, I believe that the average investor has an advantage due to the fact that mutual fund managers are all judged on short term performance. If they don’t perform in the short term they are fired. Short term is not the way to invest. The average active mutual fund has a 80 to 100% turnover. Not good. Second, the average MF investor can hold his stocks 20 to 30 years or longer if he wishes. As an example I have 3 individual stocks, Walmart, Amazon, and Apple that I have held for the last 15 years. I would certainly not agree that these stocks have uncompensated risk although Walmart has not exactly set the world on fire.
The pros underperform the market so I don’t think trying to match them is a good idea.
Professional stock pickers are also taking on uncompensated risk, just like you.
I agree that a long term mindset helps, but I don’t think it is enough to overcome the other issues with stock picking. Nevertheless, I wish you the best of luck.
If you can diversify away a risk, it is by definition uncompensated.