Dave Ramsey Is Misleading The Public

108 Replies

I wanted to address this to educate people who have been mislead by the financial services industry...not just Dave Ramsey 


Step 7 - Build wealth and give. This is where he want's you to "invest in mutual funds," and to be fair real estate (all cash and 5% of your investments). So let's assume the other 90-95% goes into mutual funds. Just go to his website and it's obvious he's drank the mutual fund koolaid. Again, not sure whether he knows how bad his advice is and is lying or is completely ignorant. My guess is it's the former because of the mental gymnastics required for articles like this from his blog.


And if you read the blog post it becomes obvious why I tend to believe he's blatantly lying to his audience and his whole schtick is a rouse. see below

Notice he brushes off the lost decade by saying you have to look at the bigger picture and you can't cherry pick time frames. But that's exactly what he does to make his claim about the 12% average returns. The whole basis for for the blog post and a big part of what he sells to his audience.

But it goes from a subtle white lie to blatant fraud when you look at how he's selling a "12%" return.

Meaning, most of his listeners are unsophisticated, they don't know a 12% drop one year and a 12% gain the next doesn't put you back at zero. They think that their money will just compound at a 12% clip annually. Let's look at reality.

If we took what DR says at face value, the market goes up on average of 12% a year going back to 1923, we should be able to type the value of the 1923 S&P into a compound interest calculator, input 12%, and we should have roughly 3000 (where the S&P is today). I only have data from 1928 on, but I think you'll still get my point. The S&P was 17 in 1928. Let's see what happens...

If what DR says is true, the way he sells it to his audience, if S&P would have to be at 512,000 right now!!! It's at 3000!!!

And I'm not even adjusting for inflation. Adjusted for inflation (meaning 12% annual increases in purchasing power) the S&P would be at over 7,500,000!!! YES, 7.5 MILLION.

You maybe saying to yourself, "what George is saying can't be true" DR would never get away with that much of a lie. Here's why DR can get away with his claims. They're true in literal terms but they're wildly false in the way he presents it to his audience and how his audience perceives what he's saying.

DR presents this 12% claim as though, over the long haul, your money will grow by 12% a year. FALSE! Why? Because when a number is reduced by 10% and then increased by 10% you're not left with the same number...it's lower.

As an example. Take $1000 and decrease it by 50%, you now have $500. Increase that $500 the next year by 60% and you now have a total of $800. A $200 (20%) loss but a 5% average return (-50 + 60 = 10/2 = 5%).

This becomes very clear when we look at graph of annual S&P returns.


Or better yet, look at an inflation adjusted chart. Please notice how much you'd make if you invested in 1928 and left your money in for 52 years, until 1980.

You would've made zero (adjusted for inflation). Dave Ramsey what happened to 12% per year??

What infuriates me the most is he targets people in the south and people who go to church, in other words people with traditional values who are more susceptible to his "be prudent, save money, no debt, invest in mutual fund" snake oil.

To be clear, 10% of what he says is spot on, have a rainy day fund and don't take on consumer debt, but the other 90% is so bad it's completely inexcusable.

If you're one of the millions of Americans, not just DR fans, who have drank the koolaid of the financial services industry and invested into the "safety" of mutual funds, I apologize, I don't relish being the bearer of bad news. But as I said in my first post on this thread, I feel a moral obligation to set the record straight.

Please note: I didn't even hit the tip of the iceberg of why mutual funds are quite possibly the worst investments on a risk/reward basis. I understand I exclusively focused on S&P and mutual funds typically contain bonds. I did this because interest rates have been driven down so low by the Fed, mutual funds no have to overweight equities because they can't get a return from bonds. This problem will be exacerbated if/when US bonds go into a negative yield like Europe and Japan.

I realize this is complex stuff. It's why DR can dupe so many, including maybe himself. I'd like to point out I learned none of the above in college. ;)

If you have any questions don't hesitate to reach out, all my contact info is on my profile.

Good luck,

I am a huge fan of Dave Ramsey.  He has definitely helped me and a bunch of other people.  I have struggled with which way to go since I will soon enter the "build wealth and give" phase.  I completely understand how using debt can be good but of course DR is against it.  I have a sizable mutual fund account, mainly due to the long bull market, and was wondering whether or not to leverage it.  This simple math you provided really changes the projected "gains" I could have had in the stock market.  Thanks.

I watched one of DR's YouTube videos several months back and all I could do is shake my head. People don't realize it's about what you earn and the buying power that you have to earn even more. So many people all across the country are brainwashed into the mentality of a penny earned is a penny saved bull @#$%. 

People who "save" money to just let it sit in the bank until retirement are doing it completely wrong. The money you have in the bank should be for expenses and immediate purchases. The rest needs to be invested to grow it. 

Debt to grow your income is good debt. Debt that doesn't make you money is stupid and that is where a large percentage of people in our country do. 

The DR types make a living off of lecturing the financial stupidly of people. 

I see Dave's advice as being good for those who have problems balancing their checkbooks and generally accumulating money. For those of us who are taking more control of our financial situations, we need to massively upgrade our knowledge and our level of thinking.

Originally posted by @Mike Dymski :

Prudent/intentional spending, saving money, and investing in index funds is a wise strategy for most people (7% inflation adjusted).

along with managing your debt and keep those credit cards paid off always.

 

He can say anything he wants if he is not securities licensed. Once he gets the license it's all over.  He's agreed to be regulated.BtW the prospectus describies the goal of the fund.  You can't say most mutual funds contain bonds.  A lot do, but you can't say "most" because it depends on the legal goal set forth in the prospectus for a particular fund.  

Dave is doing a service and pointing people in the right direction in a general sense. Often he gets people who are in debt and who are depressed headed in the right direction.  In that sense he does a service and he has many thankful listeners.  His pogram is national and also on youtube. I don't know why you think he only talks to southern church goers.   You sound like someone who looks down on southerners and Christians.   I don't think I want to be your friend.

Why does the OP sound like an infomercial? 

Being from Vegas, how did that turn out for real estate investors 10 years or so ago in your neck of the woods?

@Craig McLaughlin hey Craig thx for your reply.  Just wanted to show you a calculator that actually calculates returns as defined by average Joes.  In other words, how much money have I made or lost.  

You can find it at moneychimp.com, (I'm in no way affiliated) I included the websites description because I think it does a better job than I did of explaining the average return fallacy.  Hope that helps.  

@Mike Dymski Hey Mike, yes looks like the returns as defined by normal people are around 7% 1923-2016.  I agree with you mostly, but I just can't recommend index funds.  P/E ratios are extremely high (see chart) 


Interest rates have been in a 40 year bear market, which is highly cyclical.  How do index funds perform if we go back to 18% rates in the next 40 years?  And let's not forget the yield curve is inverted.  My advice is to buy things when they're cheap and sell them when they're expensive.  Nothing about any asset in the US is cheap except 30 year fixed rate debt (which I consider an asset)

As long as people understand the risk, but IMO they don't because they're sold index funds as low risk. The set it and forget it index fund has only worked because of a 40 year interest rate bull market and other market influences that most likely won't be there for the next 40 years.  Look at the S&P returns 1923 - 1980 adjusted for inflation less dividends.  Basically flat.  

@George Gammon Dave Ramsey has done a lot of good for people getting out of debt, my family included. With that said, his final steps are really for people who want security for retirement. His program is designed for the vast majority of people who need to have money grow on its own. RE investing allows money to grow fast but it needs someone to facilitate that growth continually like adding to rental portfolios. Most people can’t fathom that. Dave is an RE agent and investor and knows RE is where the money is. Most people can’t wrap their minds around it though and need their money to grow passively sight unseen.

I’m not sure how Dave gets 12% annually. I would imagine he is pretty hands-on when dealing with his mutual fund investments. I had a friend who did 20% last year but he likes to check and changes things weekly. I don’t see why this is strange to people.

I read the OP and couldn’t tell where he was quoting Ramsey, where he was making his own points or what his point is other than Ramsey sucks. Too confusing the way it’s written to this old guy. Jus’ sayin’.

I only got thru with some of your original post due to it being somewhat hard to follow. Dave has helped folks get out of CC debt and has a ton of admirers for that. I just sold another house and will pay off my credit cards yet again. To the most part few people are are cut out to be active investors, maybe that is why he steers them to what he considers simple. If that is his real agenda then, maybe he is looking out out for the less savvy income earners. 

@Craig McLaughlin check out options trading. I’ve been trading options for a few months now and it’s pretty powerful. You’re able to profit no matter which direction the underlying stock moves. Optionalpha.com is a great resource to learn about it. They have a free course that has everything you need to get started and excellent paid material/membership as well.

Originally posted by @Daniel Townsend :

@George Gammon Dave Ramsey has done a lot of good for people getting out of debt, my family included. With that said, his final steps are really for people who want security for retirement. His program is designed for the vast majority of people who need to have money grow on its own. RE investing allows money to grow fast but it needs someone to facilitate that growth continually like adding to rental portfolios. Most people can’t fathom that. Dave is an RE agent and investor and knows RE is where the money is. Most people can’t wrap their minds around it though and need their money to grow passively sight unseen.

I’m not sure how Dave gets 12% annually. I would imagine he is pretty hands-on when dealing with his mutual fund investments. I had a friend who did 20% last year but he likes to check and changes things weekly. I don’t see why this is strange to people.

Dave Ramsey gets it by looking at the annualized return of one of the largest mutual funds in the US, the Investment Company of America, since inception. DR is not an active mutual fund investor, he's a buy and hold and occasionally adjust kind of guy. There's a spirited discussion on the thread below that goes on for about three pages:

https://www.biggerpockets.com/...

Full disclosure: I'm a former stockbroker. I believe a person should get through DR's third baby step before even considering real estate investing. I know a lot about selling investments. I know enough about real estate to be dangerous to myself (that's why I'm here and mostly listen and learn). I own mutual funds and will continue to do so. My mutual fund investment philosophy isn't much different than Dave's (even though I'm more of a Nick Murray guy). @George Gammon and I don't agree re mutual funds or Dave Ramsey.  

 

Originally posted by @George Gammon :

@Craig McLaughlin hey Craig thx for your reply.  Just wanted to show you a calculator that actually calculates returns as defined by average Joes.  In other words, how much money have I made or lost.  

You can find it at moneychimp.com, (I'm in no way affiliated) I included the websites description because I think it does a better job than I did of explaining the average return fallacy.  Hope that helps.  

@Mike Dymski Dymski Hey Mike, yes looks like the returns as defined by normal people are around 7% 1923-2016.  I agree with you mostly, but I just can't recommend index funds.  P/E ratios are extremely high (see chart) 

Interest rates have been in a 40 year bear market, which is highly cyclical.  How do index funds perform if we go back to 18% rates in the next 40 years?  And let's not forget the yield curve is inverted.  My advice is to buy things when they're cheap and sell them when they're expensive.  Nothing about any asset in the US is cheap except 30 year fixed rate debt (which I consider an asset)

As long as people understand the risk, but IMO they don't because they're sold index funds as low risk. The set it and forget it index fund has only worked because of a 40 year interest rate bull market and other market influences that most likely won't be there for the next 40 years.  Look at the S&P returns 1923 - 1980 adjusted for inflation less dividends.  Basically flat.  

Hands down investing index funds and paying off those pesky credit cards would result in a better outcome for the vast majority of people as @Mike Dymski and @Jay Hinrichs have pointed out. 

I do agree that the 12% calculation is completely made up but his advice on getting out of debt and on sound financial footing is solid. I don't believe in the "no debt ever" policy but do believe that a significant portion of the populace would be way better if they followed Dave's tough love advice. 

Originally posted by @Guy-mario Vilsaint :

@Mac F. Not totally he said some truth too

IMHO DR sometimes overstates reasonable returns from the market-- I'd be more comfortable with 8-10% over the long term. And, full disclosure, I'm a value investor at heart who doesn't understand tech. My mutual fund returns have reflected this. 

However, I can't really disagree with any of his advise up to baby step three. His advice and methods on getting on the same page as your spouse, living on a budget, and having the proper amount and types of insurance are the best I've seen on those subjects-- those should be foundational IMHO. 

 

There is nothing wrong with mutual funds. Less risk than single stocks. I have a lot of money in mutual funds and they have done well for me. Dave Ramsey is a super conservative plan that helps a lot of people get control of their finances. I don’t agree with everything he says but I am also more educated in finance, leverage, good and bad debt etc than the average joe. I dont agree that Dave is misleading the public. I think his plan helps a lot of people especially learn to budget and get out of debt.

Dave Ramsey is great when it comes to financial defense (getting out of debt, staying out of consumer debt, budgeting, getting a couple on the same page financially, living below one’s means, etc) but he is not good when it comes to financial offense (how to grow one’s earning capacity and maximize investment returns) and he is not good at explaining the playing field of money (understanding money conceptually, how we are on a debt monetary system rather than an asset monetary system, and what the financial matrix is and how it effects us, and so forth).

I think Dave Ramsey is helpful to those who don’t have a clue about money and who don’t really want to learn about money but who just don’t want to be destroyed financially by debt. But I don’t think he is helpful when it comes to people who what to do what to understand money and how to maximize investment returns. (Disclaimer - I have read pretty much all of Dave Ramsey’s books (some a few times) and an additional 20 to 30 other books on personal finances and I teach financial literacy classes).

I see as DR as a reasonable answer to most people who are dumb with money. People are doing a lot stupider things that what DR preaches. 

Most of America doesn’t save anything. Too many middle/high income earners spend too much. They can barely save/invest. His main message is stop spending like an idiot and get out of debt. 

Now if you are someone who actually knows what he's doing, obviously you can do better. If I listened to DR I would have significantly less net worth. But I do agree most people investing in equities are better off in index funds than trying to pick stocks themselves or listening to most of the regular FAs.

Dave actually suggests to start investing in MFs for retirement and kids college in step 4, not just step 7.  I guess I don't get the harm in that.  Individual stocks or insurance products are far less attractive alternatives for most, especially if they are new to investing in anything because they've recently got hold of their spending. 

He is right for his core audience.  A plan to stop making impulsive purchases and get out from under crushing consumer debt.  Don't forget who his core audience is.

This is the 2nd time I've seen you rant against Dave, George, and I don't pay that much attention anymore. For what?  You selling whole life insurance or something?  What's your angle? We all have inflation to deal with.  A big reason why most of us have real estate here on BP. 

To get caught up on whether his mutual funds have averaged 11.9% per year (not compounded) since the 1920s or not isn't his core message.  He often says 'even if I'm half wrong, you'll still have $7M by age 65'. Meaning even if you only earn 6% gross annually. His core message is to stop paying the banks, cc co's, car lenders, etc to build something for yourself.  

In the end, the amount you have in savings and investments isn't determined as much by loads or fees or annual return as it is by saving in the first place.  Your future wealth is based more on your savings rate than anything else and DR says as much.  You can't save if you over-spend. Remember, core audience.

None of this deep in the weeds annual return and inflation stuff matters if 40% of American adults can't afford a $1000 'emergency'.  Dave is trying to help that 40%. (It may be more than 40% but you get my point.)  What's so wrong with DR helping people up the 1st or 2nd rung of the broke to wealthier ladder?

@George Gammon I agree that using average returns appears deceptive, but it is mostly because people lack basic mathematical understanding. But that is true of real estate investors too. How many times to people say "mortgages are front end loaded with interest" or some other nonsense that displays their lack of understanding of how percentages work?

The stock market is not a bad investment historically. Not for the average person looking for passive investments. The problem with mutual funds is the heavy fees and poor management. The average mutual fund manager is just not very good at beating the market. That is why people advocate index funds. Look at what the stock market represents. You are buying tiny pieces of companies. If you can't own your own company, this is really the best option out there.

I know we all love real estate, but look at historic housing charts. Look at housing prices adjusted for inflation and there is little value gain over time. So if we are going to run historic numbers, we need to be real about how real estate stacks up. Of course if you buy the right property, in the right market at the right time, rent it out or rehab it, then yes you can see a great return. But that is also true of stock investing! Pick the right stock and buy it at the right time and your results can grossly beat the average. In any investment there are winners and losers. The average person is usually on the losing end, which is why averaging strategies exist. 

I disagree when you say Dave Ramsey is 10% right. For the average person, Dave Ramsey is more like 90% right. I am not sure you have actually read his entire program. Having a budget is one of the main things he advocates. Honestly, whether you are in debt or a wealthy business owner, you NEED a budget to control finances. It ensures you don't overspend, which allows you to pay down debt or accumulate wealth. That one bit of advice is what most people lack - even high wage earners and yes many investors.

Dave Ramsey also advocates not using credit cards and not accumulating debt. This is where real estate investors take issue with Dave Ramsey. But to be fair, his advice is for the masses. Most people are just not capable of handling debt. Is it better advice to tell people to pay down debt or get into debt? There is the old saying, how many houses owned free and clear get foreclosed on? See the point? No doubt being debt free is a very conservative approach, but hardly a risky thing he is advocating.

Like any people giving advice, Dave Ramsey has good and bad. Overall, I would argue he has helped considerably more people than he has harmed. 

I had trouble following what you thought was better advice. What (low risk) strategy do you advocate for the average person?

Dave preaching getting out of debt is always sound advice, his target audience is folks who do not understand basic fundamentals of managing/investing money.

Then comes the part where Dave falls short, he uses fee-based advisors who pay Dave fees to be part of his program. He does basic back ground checks on them from what I gather.

His advisors use heavy based fee mutual funds so you have fees on top of fees over the long haul that will be a big chunk of money.

His return of investments is wrong too he never shows you this mutual fund that beats the world. I read where he grabs numbers of benchmarks returns to get his 12%

The issue is it would have to be an index fund mirroring the benchmark. Dave uses mutual funds heavy with fees that will not make that return after you do the correct math subtracting fees.

Dave ego will not let him change the part of his program where he is just wrong.

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