With his recent rise in popularity, it's becoming more and more difficult to find folks without an opinion on Dave Ramsey. And being well versed in his positives, I do enjoy reading the occasional critique. While reading the Festival of Frugality last week, I saw one such article by Mike at Four Pillars: "Is Dave Ramsey a Financial Expert?".
I though it was an interesting choice of words, seeing as Dave's own website lists him not as a 'financial expert' or even a 'personal finance expert', but as a 'personal money management expert'. Still an interesting word choice.
Here is the basis for why Mike thinks Dave Ramsey is not a 'Financial Expert' with my comments in red:
- Right off the bat, Mike calls out that being a 'Financial Expert' (thus implying a high level of knowledge in all things finance) is "pretty much impossible for one person". [NtJS - I don't think this could be more bogus. Dave has been financially successful both ways, with and without debt. He's bought and sold thousands of pieces of real estate, worked as a salesman in various industries including insurance, he started his own very successful business and continues to run it to this day, and he's been a financial counselor for 20+ years. Not that he puts much emphasis on it, but Dave also has a degree in finance. He's made millions, gone broke, and made millions again - he's been on every side of this coin. There is a reason he can answer all of these questions live on the air about finance. The details of various financial transactions that Dave knows blows me away, and best of all, he knows when to tell folks to go talk to a professional. So I'm going to disagree here.]
- Next comes the typical critique of Dave's debt snowball methodology - smallest to largest. While he doesn't agree with the method, it's difficult to deny the results. [NtJS - So while #1 was all about financial knowledge, this is where I feel that Dave separates himself from the rest and moves into the 'expert' range. It's not all about numbers. There's human beings involved here and some of them are in relationships. Nearly all of them have these things called families. During a recent radio show, a caller was asking about she and her husband having separate checking accounts. I loved Dave's answer - "you need marriage counseling". Instead of looking for some mechanical, mathematical fix to your problems, you need to first address the real issue that is your relationship.]
- Then a short bit about Gazelle intensity. I was surprised to see this, but Mike was surprised to find out that gazelles were intense. He's apparently not seen the gazelle outrunning a cheetah video. Again, the results of this method are too good to deny. [NtJS - This is just a silly discussion - see video.]
- Now it starts to get serious. After reading the Baby steps, Mike realized that Dave wants you to pay off your debt and then invest. Even going so far as to not contribute to a 401k. Again, while criticizing Dave, it almost reads like he agrees with him. [NtJS - A lot of 'numbers' people struggle with this point and I usually find that, like gazelle intensity, they don't understand it. First, Dave is telling you to stop contributing to your 401k while doing the debt snowball and building up and emergency fund. Not cashing it out. Not unplugging the investments. But to temporarily stop contributing. This not only frees up more cash to get you through steps 2 and 3 faster, but also motivates you to get them done so that you can get back on the horse of investing. Dave wants you to invest as badly as anyone, but continuing to contribute while in debt means that you are essentially borrowing to invest, which is a terrible idea btw.]
- Last, Mike thinks that Dave has little to no investing knowledge, saying that investments should return 12% when Mike expects something more like 7%. [NtJS - Are you kidding me? I have funds returning 12% YTD.... in 2009.... while the news is still talking doom and gloom. I have funds that have averaged 15%+ over the past 40 years. 12% is not hard to find. The real key is to look at the long haul. Most of my funds were down 40% last year. But in 2015, when you look back at the 10yr returns of those funds, 2008 will be a blip. An anomaly. If your view of mutual funds is limited to one or two years, then you are in the wrong investment. Dave's overall investing advice is very simple, but that doesn't make it incorrect. Investing doesn't have to be complicated to be successful.]
'Financial expert', 'personal finance expert', or 'personal money management expert'? I'd say all of the above.
What say you?
8 comments:
Lovely! I think it is hilarious when people try to talk smack about Dave because it really can't stand up to what he teaches and the results that come from it! LOL
Could you name the fund that has returned 15%+ a year over the past 40 years?
I forgot to sign up for the follow up email alerts, I'm interested in hearing the response.
Julie -
It is entertaining. Everyone's entitled to an opinion, and I'm certainly not mad at Mike - I enjoy the debate. Definitely entertaining.
Jordan -
Glad you signed up as you won't want to miss this. No, I can't name "the fund that has returned 15%+ a year over the past 40 years". I doubt anyone can. That's also not what I said --> "averaged 15%+ over the past 40 years" There is a big difference between those two statements.
Also, I hate to disappoint you, but the fund I had in mind is currently showing ~10% returns since inception in the mid 1960's. Terrible, I know. The last couple of years have not been kind, and when I first bought it before that 40% hit the returns since inception were much better. 15%? Maybe. Maybe not. Still beats the crap out that paltry 7%.
Giving a fund's averaged return doesn't mean much. A fund that makes a 100% return the first year, and losses everything the next year has "averaged" a 50% annual return.
Could you tell me the fund that has a ~10% annualized return over the past 40 years?
Also recognize from Mike's post that he is predicting a 7% real return (after inflation) going forward, that is a huge difference from the nominal returns shown in a fund prospectus.
Also past performance doesn't indicate future returns. A lot of highly respected investors agree with a similar lower return going forward.
I think if you make your financial plans based on expecting 10-15% per year you're setting yourself up for failure.
You're right, Jordan. Averaged returns over 2 years doesn't mean much. In fact, it doesn't mean squat. A fund with a two year track record is one that I'll pass over every time. Average annual returns over 40 years - now that means something.
And no, I'm not quoting annualized returns - you seem to be the only one who is. That looks like a great measure of a fund without a long-term track record. Again, not interested. Average returns is a better measure over long periods of time.
Also recognize that while Mike may state his numbers as inflation adjusted elsewhere, he doesn't give any nod to that in his post. (Mike:"I assume 7% for long term equity returns"). And yes, inflation adjusted is a huge difference, but it would be quite the error to to assume that and not state your assumption.
I agree, Mike didn't really backup his argument in the post about expected returns. He would have been better if he went into more detail of the issues he has with Dave Ramsey's investment advice.
After reading Stocks for the Long Run I'm convinced Annualized returns (Geometric Returns) are a better indicator of performance then annual averages (arithmetic return), we'll just have to agree to disagree.
But with that said I'm still itching to see the fund with a 40 year track record of ~10% returns?
I'm curious about these funds too. I know it can't be hard to look through the list of funds that have been open for 40 years but since I don't look at many funds at all I wouldn't know where to start. If you don't want to disclose the annualized returns (it's a nice measure for me because I like compounding rather than withdrawing gains every year), how much would it outperform the stock market if you invested at the start of your career and worked for the last 40 years? (that sounds like a pretty balanced way to compare options to me) Is the one that's up 15% to date something you had more than 15% of your investments in?
Since Stocks for the Long Run shows a real return of around 6.5% for US stocks over very long periods and many sub-periods with varying events, I don't think it's that bad of an estimate. If you plan for returns like that and things go better than your only problem is what to do with the extra money. It's better than planning for 15-20% returns, house prices always going up, and never losing your job.
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