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Dave Ramsey Gives Bad Investment Advice

Dave Ramsey has helped many people get out of debt. And for that, he’s (rightfully) earned those people’s trust.

After somebody digs his/her way out of debt, the next step is often to start investing. And it’s only natural that people who have come to see Dave as a financial mentor turn to him for investment advice.

That’s unfortunate though, because Dave’s investment advice leaves much to be desired.

Dave Ramsey on Asset Allocation

Ramsey provides the following advice on asset allocation:

“I do not own any bonds and do not suggest them as part of your investment plan.”

He also recommends against CDs, fixed annuities, and REITs. In other words, Dave’s suggesting a portfolio that’s almost 100% stocks, regardless of your age.

He never even mentions the fact that such a portfolio would expose most retired (or soon-to-be-retired) investors to a meaningful risk of running out of money as a result of a poorly timed bear market.

Dave Ramsey on Roth IRAs

In several places on his website, Ramsey makes statements to this effect:

“The best way to start investing is with a Roth IRA.”

There’s no discussion of how to choose between a Roth or traditional IRA. Not even the briefest mention that, for many investors, going the tax-deferred route would be better.

Dave on Financial Advisors

Dave has the following to say about brokers (commission-paid salespeople who sell front-load mutual funds) as opposed to fee-only advisors:

“I do not personally choose fee based planning. (paying 1% to 2.5% annual fees for a brokerage account). With an A share mutual fund, I pay an upfront load of 5% to 6% once. But with a fee based account, also known as a wrap account, you agree to pay a 1% to 2.5% fee every year – forever. As your account grows, the 1% to 2.5% fee will really add up.”

Unfortunately, this is a grossly inaccurate comparison.

First, he ignores the additional ongoing costs of actively managed funds. Typical front-loaded funds (like those Dave recommends) include operating expenses in the range of 0.75-1% per year. In contrast, with a fee-only advisor, you’d have access to index funds and ETFs, which charge in the range of 0.2% per year.

Second, he overstates the cost of a typical fee-only investment advisor. The median fee for registered investment advisors is barely 1%. If you shop around, you can find advisors who charge significantly below that rate.

Dave Ramsey’s Endorsed Local Providers

Many people I’ve spoken with think that Dave’s recommendation of brokers over fee-only investment advisors has more to do with his business model than it does with giving good advice.

If you go to Ramsey’s website, you’ll see that most of his investing articles end with the suggestion to meet with an “Endorsed Local Provider” of investment services. If you fill out the form, your contact info is sent to a broker in your area, and Dave gets a fee for providing that broker with a prospective client.

But why does Dave recommend commission-paid advisors rather than fee-only advisors? Why send people to a broker–where there’s an inherent conflict of interest between the advisor and the client–rather than to an advisor who charges, say, a flat hourly or annual fee?

Best-selling author Eric Tyson puts it this way:

“By referring people to commissioned-based brokers, the referral fees don’t have to be disclosed as they would be with a fee-based advisor. A registered investment advisor would be required to disclose to the client that Ramsey’s company was acting as a solicitor and would have to disclose the fee being paid to Ramsey as the solicitor.”

Why give bad advice?

If I had to guess, I’d say that Ramsey doesn’t find investing to be as interesting or important as the get-out-of-debt side of personal finance. And as a result, he doesn’t spend much time learning about it. And for the record, I don’t think there’s anything inherently wrong with that.

I do think, however, that he does his readers/listeners/followers a disservice by discussing investing without taking the time to learn more about it.

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Comments

  1. Dave Ramsey is a get-out-of-debt evangelist. Anyone who takes investment advice from him gets what they deserve. The Goldman Sachs Senate testimony highlights the difference between a broker and an advisor. The broker has no fiduciary duty to their clients, while the advisor does. For the average know-nothing investor to go to a broker is just asking to get ripped off. The vast majority of people would be better off taking generalized investment advice from Jack Bogle, William Bernstein or Berton Malkiel.

  2. I agree wholeheartedly with everything in the post and with The Biz of Life. The importance of those close to retirement and in retirement understanding the role of bonds in their portfolios cannot be over emphasized. It’s on the same plane. in my opinion, as the employees at Enron should have understood diversification before it was too late.

  3. Ditto when it comes to retirement portfolio advice. In Ramsey’s “New Money Makeover” book, he suggests that an 8% withdrawal rate is sustainable. That is foolishness even with a well-diversified portfolio but is total folly for someone with a very equity heavy asset allocation as he suggests. He should stick with budgeting and debt advice.

  4. Bad Money Advice sums up pretty well his bad investing advice.

    http://badmoneyadvice.com/category/dave-ramsey

    (read all of the articles he discusses specifically about Dave Ramsey)

    Most people assume since he’s great to help get out of debt (which IMHO also debatable), he’s great to discuss investing.

  5. I hadn’t come across his suggested 8% withdrawal rate yet. It sounded too outlandish to be true, so I had to go see for myself.

    You’re right. From page 156: “You are secure and will leave a nice inheritance when you can live off 8 percent of your nest egg per year.”

    Wow.

  6. Too many people just blindly follow the advice of “gurus”. Sure, Dave Ramsey can be inspiring, and he has a program that helps people get out of debt (although I disagree that you should treat credit cards themselves as evil). But once they get out of debt, it is clear that they should look elsewhere for investment tips. Yikes.

  7. All I can say is “shame on him.”
    When we talk about his debt snowball, and how it loses money compared to ‘high interest first’ it sparks debate about motivation, psychology, etc. Fine.
    The 100% stocks and 8% withdrawal are not just poor advice, they are dangerous. I’d like to see how anyone would have done this past decade based on such advice. I suspect they’d be close to wiped out.
    Studies showing a 4% withdrawal rate at retirement still don’t call it a 100% guarantee. There’s still the chance, however slight, to outlive your savings.
    Dave should stick to what he’s good at, whatever that is.

  8. “Dave should stick to what he’s good at, whatever that is.”. He is marketing himself. This is no different than any other “guru” like Suze Ormann or Richard Kiyosaki.

  9. Amen, Mike! I’ve often been frustrated with Dave’s advice, but because he’s done such a good job helping people get out of debt people ignore the stupidity of his investment (and some other) advice and accept it as truth.

    I have been equally put off by his “Endorsed Local Providers” for the exact reasons you highlight in this post. Why does no one else pick up on this? It’s basically a system for stock brokers or insurance agents to get a rubber stamp from Ramsey – transferring the trust he has built up with people over to the ELPs. Dangerous situation…

  10. WOW…thanks for bringing this up. I only thought about Dave as a get -out-of-debt guy. I am really disappointed by this. He’s a bad pilgrim….

  11. Who’s this Dave Ramsey guy anyway…? Living a nice 3% withdrawl rate/diversified portfolio lifestyle, thank you for asking!

  12. Even for a rookie like me, his advice doesnt sound like a good one…
    I guess the problem is when someone is new to the world of investing one could get carried away by the advice of “experts”. (no offense)
    For example in my scenario,
    I recently started investing in VTSMX (index fund) and when I shared that with my Financial advisor (friend) he pulled up the morning star performance and put an other large blend (eg:FAIRX) for comparison and showed me this chart below, saying even though the expense ratio is 1.0 % for FAIRX (vs .18 % for VTSMX), based on this morningstar chart (which I am not sure if it is after fees/any loads) he says according to morningstar, today my money would have been – Vanguard Total Stock Mkt Idx:11,002.27 Fairholme:39,138.36 (assuming you started with $10K 10 year ago).

    I was thinking in my head but doesn’t my dollar cost averaging, low expenses, buy and hold, reinvesting dividends doesn’t count at all? Als0, arent these returns average annual ones’ anyways?

    History (4/30/10) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD
    VTSMX -10.57 -10.97 -20.96 31.35 12.52 5.98 15.51 5.49 -37.04 28.70 8.30
    FAIRX 46.54 6.18 -1.58 23.96 24.93 13.74 16.72 12.35 -29.70 39.01 16.98

    I dont want to come up like a looser 10/15 years from now just coz I invested in index funds, I dont think I would but what am I missing here in my interpretation from these morningstar charts(although I know that is past performance). He basically showed me a bunch of other funds in each segment beating index funds by almost double average returns when I shared with him that I am investing in all index funds in my 401k.

  13. SJ, your adviser is either taking advantage of you or he is woefully misinformed. Keep reading this blog and also pick up John Bogle’s Common Sense Investing book. In a nutshell, performance has no persistence, costs do. There are many documented cases of people winning the lottery 2, 3, and even 4 times but we know better than to pay them to pick numbers for us! There will always be funds (with hindsight) that outperformed in the past but that says nothing about their future prospects.

  14. Morningstar quotes performance after fees. So yes, if you’d invested in Fairholme, you’d have trounced the heck out of an index fund.

    There will always be funds that outperform their respective benchmarks. And there will usually be funds that wildly outperform their respective benchmarks.

    The question to answer (and to ask your friend) is this: What is the most reliable predictor (or set of predictors) of fund performance?

    If his answer is anything other than “expense ratio,” ask to see his source. (And please share it!)

  15. SJ – hindsight is always 20/20
    I have an account that has had a return -
    12/1998 – $13,177
    12/2009 – $74,990
    This is a 469% return over 11 years, hmmm. That annualized to 17.1% /yr average. Still not bad. But – in ’99, it was up huge, ending at $51K, so my return since has been under 4%/yr.
    One can always look at a couple hundred funds and find that in hindsight a few have had a mix that beat the market during the period observed. My wife and I have multiple accounts, and I can do the same. In the crash years, the bond heavy accounts likely shined. Sorry, I don’t like your financial guy.

  16. Anybody can pick winners from past performance. If that’s what you want I recommend gold. Seriously though the two funds are apples and oranges. Fairx holds big cash positions and big bond positions from time-to-time. VTSMX is total stock.
    Ask your friend about the Janus funds. They may have been what he was recommending 10 years ago. Then maybe buy some popcorn and watch this video together
    http://www.fundadvice.com/sound-investing-tv/episodes/sitv-3.9.10.html
    You are on the right track with low cost index funds – keep with them.

  17. I don’t know much about Dave Ramsey, but he is a public figure on TV. Thus, he is as much an entertainer as he is a financial expert, adviser, or guru. I would imagine that his wisdom touches some people in very good ways and this same wisdom is totally useless to others. Besides, most things in personal finance are a matter of opinion because we have to work with imperfect models and with psychology.

  18. First of all, sorry for the confusion. (Edit option doesnt work here anymore for some reason). I meant to say he is my friend and a financial advisor. I was planning on eventually hiring him as one, nevertheless with his and most of all your feedback I will not go with him anyways. I will stick to my instincts.

    Yes, Mike, next time I see him I will certainly pose that question to him and thanks for the heads up on the morning star charts.
    Joe, thanks for those numbers, that did help clear up my mind. Yes, alos year 2008 did hit the VTSMX fund performance numbers like most others.
    Robert @ DIY… you are right that fund FAIRX is not similar to VTSMX

    @John…”There will always be funds (with hindsight) that outperformed in the past but that says nothing about their future prospects.” – well said…and right now I am following oblivious investor and reading “the intelligent investor” book, once Iam done with the book , I will move on to your suggestion..and Investing made simple book.

    After coming across this blog, I basically rebalanced my 401k to index funds. I like the way information is laid out, plain and simple.

    Again, thank you Gentlemen for your time.

  19. Getting back to Dave Ramsey, last year I saw him doing a townhall type format on PBS. The presentation was good, but I thought his comments to the media after the presentation were more than a little over the top.

    He spoke like a cheerleader for growth mutual funds as if they’re for everyone. That sounded like a dangerous position to advocate for a guy who helps people get out of debt.

    A debt junkie, or recovering junkie, has no business investing in anything speculative, in addition to the fact that the basic position was overly optimistic.

    It may be that he’s looking to branch out into the full financial spectrum, but he probably should stick to what he knows best.

  20. The problem with Dave Ramsey and other big-name financial gurus is that they have talked themselves into a belief in their own omniscience. It’s not that they don’t find investing interesting or don’t want to learn about it; it’s that once the guru decides what The Truth is, any dissent is treated as an expression of malice or envy (even though each guru’s advice may be wildly at variance with their fellow gurus). And the guru’s loyal followers will not tolerate any hint that their idol may have feet of clay.

    I don’t get Ramsey’s show on TV in my area, but I do get Suze Orman and watch her regularly. Suze’s big thing these days is having an 8-month emergency fund. That’s even more important than paying off high-interest credit card debt, and it can’t be 3 months or 6 months, it has to be 8 (because all emergencies obviously last no fewer than 8 months), and it has to be in FDIC-insured cash. I have tried to argue against this point of view on other forums, but Suze’s loyal followers (whom I call the “Suzettes”) won’t hear of it. Why 8 months? because Suze Sez.

    Suze also has some nutty ideas about investments, such as investing only in individual bonds rather than bond funds, but she’s a bit more rational on the subject than Dave Ramsey.

    But the only “guru” I have any respect for is Liz Pulliam Weston. Liz (who has attacked Orman for advocating an 8-month emergency fund for people with high credit card debt) does not pontificate; instead, she lays out the pros and cons of various approaches to finance and lets readers make up their own minds. Now that’s a guru worth listening to.

  21. 8% a year as a safe withdrawal rate in retirement? Eek!

    Does he want people who have got out of debt to get back into debt so they can buy more Get Out Of Debt books? ;)

  22. Monevator – BRILLIANT point!

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