Dave Ramsey Investing Advice

I'm a pretty big fan of Dave Ramsey.  He preaches (and I mean preaches) debt elimination more vehemently and consistently than any other advisor or radio personality I have ever seen.  His baby steps plan is sound and should work for most people.

However, once you have paid off your debt and fully funded your emergency fund, I think Dave Ramsey's usefulness effectively ends right there.  I was listening this morning and I hear the following call:

Dave:  Robert in Memphis Tennessee, welcome to the Dave Ramsey show.  How can I help?

Caller (not really Robert, just using a name): Hi Dave, thanks for taking my call.  My Dad is one of these guys who saves up some money and once he has enough goes to the bank and buys another CD.  I hear you talking about these... mutual funds?  Can you tell me what's involved, the pros and cons?

Now, I'm assuming here, but the caller sounded like he was clearly an adult, like thirty plus.  So, that makes his dad likely fifty plus.  Maybe sixty plus.

Dave:  Well Robert, I call CDs Certificates of Depression.  You see, how much do you get for a CD?  4%?  Well, inflation is running at 4%.  Before you get the money home, you have to give up almost half in taxes.  So, you're really losing money in CDs.  Yea, it's safe in that you're not going to lose the money, but you're going to get tackled from behind by inflation because you're walking too slowly.

Caller:  Oh man.  I see.  So, that's why you like mutual funds?

Dave:  Well sure.  You get yourself a good growth and income mutual fund that averages about 10%.  What this means is that it's invested in big old boring companies.  It's not exciting and not aggressive.  If you hear that the market's up 28%, you'll probably be up 16%.  But if the market's down 28% you'll probably be up 3-4%.

Is that so Dave?  Like I said, Dave is as good as anyone out there for helping you get out of debt.  But based on this one conversation, I wouldn't consider discussing investing with him.

First of all, CDs with rates over 5% can easily be found.  Some approaching 6%.  Just check in with
Bank Deals' Blog.  If Dave doesn't know this, I would be very cautious.

Second, Dave is quick to factor the impact of taxes on CDs, but apparently not mutual funds.

Third, do I really even need to say it?  When the market is down 28%, growth and income funds will be up three to four percent?  Let's take a look at examples of a few of the biggest growth and income funds around. 

Note:  This is not a recommendation or advice.  The funds named are purley for demonstration purposes.  You may and will likely lose money by investing in anything you read about on any blog.  Do your own research or hire an advisor who understands your specific needs.

Fidelity Growth and Income fund (FGRIX)

1999, S&P 500 up 21.04%, FGRIX is up 10.42%.  So far it's more or less in line with Dave's description.
2000, S&P 500 down 9.10%, FGRIX is down 1.98%.  It's not down nearly as much as the market, but that doesn't sound like a positive number.  Hmmm....
2001, S&P 500 down 11.89%, FGRIX is down 9.35%.  Well, that doesn't sound right.
2002, S&P 500 down 22.10%, FGRIX is down 18.08%.  Whoa!  No one said anything about losing close to 30% in three years!  I thought this goes up 3-4% in down markets!

Well, maybe I picked a bad Growth and Income fund.  Let's try another:

The Investment Company of America (AIVSX)

1999, S&P 500 up 21.04%, AIVSX up 16.6%.  Sounds just like what Dave told me.
2000, S&P 500 down 9.10%, AIVSX  up 3.8%.  Bingo!  Dave is right on the money!
2001, S&P 500 down 11.89%, AIVSX down 4.6%.  Well, I didn't count on losing money, but I guess it's not too bad.
2002, S&P 500 down 22.10, AIVSX down 14.5%.  Yikes!  I thought this fund makes a little money when the market is down twenty something.

Well, the second fund obviously has provided better downside protection in that past (remember past performance is not a guarantee or indicator of future returns).  And yes, you would have outperformed CDs in the AIVSX over the last three, five, seven, ten years or more.  The problem I have is with so many advisors and personal finance writers who do not make the downside risks clear to their readers/listeners.  Think Robert Kiyosaki and skipping college to start your own business.  Think David Bach and buying a house.  Or two.

By the way the Investment Company of America is part of the American Funds family, and is a load fund.  The above numbers do not include sales charges.

And most importantly, read my disclaimer:  This is general advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio.  You, alone, are responsible for any losses or damages that may and will likely result from your financial decisions.  The specific investments named here are for demonstration purposes only, not a recommendation of any kind.

Comments

[D]

Thanks for the eye opener. Heck, we can't all be good at everything. Although, this one was pretty much common sense - right?

[Drew]

Yeah I'm all about this guy getting people out of debt, the people in over thier heads but if my mortgage rate is 4.75% and I can get 6% in a CD, after the tax deduction on my mortgage and even factoring the taxes on the CD (it's not half dave, nobody pays 50
% taxes in the US) I still am ahead, instead of paying my mortgage. Get out of debt, yes but someone teach this guy math when you're in the black...

[Nigel Swaby]

I have the same problem with Dave Ramsey as you do. I think he's coming from the right place...getting out of debt, not being a slave...but some of his advice is impractical. I've emailed him before about some of his advice I found to be questionable, but got no response. Oh well.

Salt Lake Real Estate Blog

[Jeremy]

I too think Dave is great at helping people get out of debt and also agree that is where his advice should stop if he is telling people the best thing to do would be just to buy a mutual fund instead of a CD without knowing more about the situation.

I also have to partially agree to some extent though, in that doing all of your "investing" via CDs is probably not the best idea either. If the caller's father in this example was say in their 50's, then either option is a bad one. All of your investments in CDs, you are struggling to beat inflation. All of your money in equity funds, you are risking too much so close to retirement.

As a past financial advisor, and actually spending some time in the retail bank channel I have seen the CD buyers all too often. I've encountered many who were in their 50's and virtually their whole nest-egg was in CDs at the bank. Sometimes upwards of a million dollars. They have been in CDs for decades. They will come in when a CD matures, and just renew it for another one. Well, many of them were buying 5-year term CDs, so for the past 5 years they may have been earning only 1-2% the whole time. At the time, sure a great rate for a safe place to put money, but look at how much money was left on the table. A great example of interest rate risk.

That's not to say buying CDs is bad, because it is certainly not. Especially with cash paying so well right now. The problem is people who essentially only invest in CDs over the course of 20 years when that conservative of an allocation is not right for them, because over time you will be lucky to keep up with inflation with that allocation.

But I digress, back to what Dave Ramsey was saying. I didn't hear the broadcast so I can only go by what was said above, but calling a CD a certificate of depression is inappropriate, just as recommending someone to just invest in funds and throw numbers out like 28% and making 3-4% in a down market is inappropriate advice. The key is a balanced asset allocation that is suitable for someone's goals and timeframe, neither of which Dave could determine.

[Andrew]

If what you wrote was exactly what Dave Ramsey said in his program then Ramsey needs to think before he speaks. Ramsey is well respected and trusted for good reason but if he is giving numbers like you wrote then he is endangering many people's futures.

On the other hand how many people are going to go and buy a mutual fund instead of a CD without doing any kind of research or trying to understand mutual funds better based on what Ramsey said? No one knows for sure but my guess is very few people. Regardless Ramsey needs to fully explain the positives and negatives of CD's and MF's before he throws numbers around like he did.

[Michael Dawson]

I wouldn't give Ramsey too much credit on the debt reduction side eithier. Here is a post that I wrote back in August on my blog.

http://www.thetimeandmoneygroup.com/blog/2006/08/15/debt-reduction-the-weed-out-course-on-the-road-to-financial-freedom/

[fin_indie]

Amazing to see someone basically saying that you can't lose money in a mutual fund! Market up 28%, you up 16%, Market down 28%, you up 3-4%. What the flip??

[Undertrader]

First of all, Dave Ramsey is right up until the mutual fund thing. Secondly, the person who said, "If my mortgage is 4% and I make 6% in a CD, I'm ahead is wrong. Use a calculator. Your 'tax writeoff' for a mortgage is really next to nothing and if you don't itemize your deductions, you don't even get a deduction for your mortgage. You also have to factor in risk. By holding a mortgage you risk losing your house. Is that worth it? Don't think so.

Onto mutual funds, mutual funds suck rocks. If you don't want to manage your money yourself, buy SPY and MDY, they are ETFs that return better than mutual funds with less fees and you don't have to worry about them, nor do you have to worry about paying taxes on the trades within them like you do mutual funds.

I wrote all about this stuff over at www.undertrader.com. Mutual Funds suck. Plain as day, but so do CD's.

It's also rediculous to brag that the 'market is up 28% and your mutual fund is up 16%.' Well, you should have been in the market index shouldn't you? You lost a 12% gain, but on top of that you lost the 12% gain compounded over your lifetime.

Invest in peace...

[Meaghan]

I agree 100% about Dave Ramsey's investment advice. The thing that bothers me most about his investment advice is that he always advises callers to go through a broker to buy mutual funds. But not just any broker- one of the brokers in his network of brokers that he endorses. And since he endorses specific brokers to go to... Whom he presumably gets a commission and some kind of fee off of to be in his network of "ELP"s... It just seems like a conflict of interest.

I mean, would he be making so much money off those brokers if he advised people to buy low-fee, no-load mutual funds? I don't think so. Even if that is the right thing for many investors.

[Chris Brooks]

I've listened to Dave quite a bit and I think you are being a bit harsh. Some reasons include:

* Dave is generally very honest that he doesn't give investment advice and keeps things on the abstract side.
* He talks about 10 year investment horizon, not 3-4 years. Do you disagree with his advice that you would (in general!) be better off in a diversified set of mutual funds vs. a fixed rate CD (whether it be 4% or 6%)?
* In this context of the conversation he may have missed a mention on taxes for mutual funds, but I've heard him mention MFs vs CDs many times and he is generally forthcoming about tax implications for all investments.
* He is generally very clear about risk in MFs but give the guy a break if he missed in this one conversation.

[lamoneyguy]

Hi Chris, thanks for your comments. Respectfully, I disagree. I was not being too harsh on Dave. In response to your points:

1. I don't listen to Dave very much, so I can't speak to what he generally says, only what he said on this particular call.
2. If he talked about a 10 year horizon, I missed it. The 3-4 years that I gave were an example of how a "growth and income" fund certainly can and often will lose money in a down market. I might agree that you would generally be better off in MFs than CDs, but it would depend on your goals. I was making an assumption about the caller's Dad's age, but for all we know he could be in his 70s. Investing advice without at least basic understanding of the investor's financial situation/goals/age is not a good idea.
3 and 4. He may discuss taxes and risks in other conversations but he missed it in this one. I would like to give him a break, but if you walked into a Merrill Lynch office and asked for advice, the broker can't miss just one. If he forgets to talk about risk, time horizon, goals, etc. just once, he can end up in arbitration, fined, and losing his licenses. Dave should be held to at least the same standard as your average schmoe broker in your local Merrill Lynch office.

I would like to think that the caller should exercise some common sense and understand that there are risks involved. However, "I hear you talking about these... mutual funds?" told me otherwise. Outside of Dave he didn't sound like he had ever heard those words.

[Chris Brooks]

Well, I hope you hold yourself to the same standard, ensuring that you qualify every bit of advice you ever give on your website for financial matters. At least on a weekly basis I hear Dave mention the points I raised, and I think you caught him in a moment of weakness and seized an unfair opportunity to criticize.

Saying that Dave is held to the same standard as a fee-based or commission-based advisor isn't fair. If that's the case, then you should be held to that same bar.

[lamoneyguy]

Chris, perhaps I am being unfair. In all liklihood I caught him at a momentary slip up. However, I do try to hold myself to the same standards of risk disclosure, reminding readers of risks involved with any investment discussed. But also, I avoid discussion of specific investments. If I were to slip up and miss it on one occasion, I would hope that someone would call me out. Truly, I mean that.

[Nathan]

I've heard Dave say many times you need to look at the long term track record of funds. He recommends you invest in funds with 10+ years of history and to look at the % since inception. His point is that you should keep MFs for many years. So while the early 2000s were bad examples for the stock market. There are funds that still have 10 years overall history that is better than 4-6% of CDs. If you only had the MFs during those bad years, you're screwed, but these are meant to be long term investments and over time are generally better overall. So invest in funds that have done well even considering the bad times.
As far as ELPs, my understanding is that they agree to help you following Dave's principles so you can trust them. Supposedly the people who are ELPs are willing to help you learn about what you are doing. Dave says that you shouldn't invest in anything you don't understand, so if your person can't help you understand, work with someone else. I wouldn't be surprised if he gets some little kick back, but I've heard him tell people to call one of the ELPs for advice or help on something for free (and the ELP should, hoping to have them as a customer in the future.) Dave seems to genuinely want the best for people so I’m pretty sure the point of ELPs isn’t to screw you over and make more money for himself.

To cover his butt, the radio program does say something to the affect that advice is fact dependant and they should additionally seek the advice of a licensed so and so .... etc.
He helps a lot of people by pointing them in the right direction. They then need to learn more about what he tells them to do so they can make an informed decision. He can't tell them everything completely in a two minute call. If you keep listening you'll learn more bits and peaces. If you want to learn his whole plan you can get a book (buy or library), take Financial Peace University, or go to a live event.

That said, some of his examples do seem a bit too good to be true, or using higher interest rates than you expect to get, but that doesn't mean they aren't still better options. He tends to use more on the best case senario side of things, but that doesn't make his points invalid. If you average 8% instead of 12%, isn't that still better than 4-6%?
Whatever, there's no simple answer. There is still risk involved in MFs. Basically learn as much as you can about your options and decides what is best for you and whether the risk is worth it.

~I've never been on this webpage before. I hope its OK to comment on something that's been idle for a while. Found you through a search engine.

[Wii Games]

Thanks for the input. I got to your page searching for FGRIX, don't know if I should add this to my Roth IRA portfolio.

[Walter]

I figure Dave is talking about his investments.

Individuals prospective on how the market handles in downtimes, often depends upon their own stock performance when following their own advise.

In addition, given the short time he seems to have on a radio call, he does better staying on target with all his radio listeners than anyone else.

Unlike many that act like they know everything while leading you down a path of destruction with their hands in your pockets, his radio advise is free.

He often tell listenters to learn and understand before blindly following advise, including his.

Lastly, you only need to listen to the number of callers that call in thanking him for changing their lifes, to have his show in the right prospective.

Walter

[Ken]

I think Dave is a great person, you have to meet him sometime and then you will know what he is all about. How many people out her have 401k's? This is a mutual fund so what is wrong with them! Dave says look at mutual funds with a 10-15 year track record and the ones that will AVERAGE 10-12% a year.
If you use a calculator you will see that buying real estate and mutual funds, you could live like no one else so later you can live like no one else.

[gazelleintense.com]

good posts, info here. thanks. :)

[Rob]

LOL, yall need to listen better.. If I recall he does tell everyone BEFORE you go invest, you need to do your research. Find out EVERYTHING you possibly can before you proceed with dropping your money into investments. Maybe I just listen more than the average person. Remember theres aways risk, like your company "say GM" packs up and moves to Mexico or China and decide not to leave any money to the workers they just laidoff. You and 10,000 coworkers are now fighting for what little jobs are left in your town and your wondering how your gonna pay for that $400,000 house along with the two brand new $45000 caddies sitting in your driveway and private school tution for your 3 kids. Oh yea food, credit cards, and utils bills. It pays to be debt free including the house (limiting your financial risk greatly) because you would be able to afford to deliver pizza as a job and not worry about if you'll have the money to pay the bills at the end of the month. I see this coming, the US transportation sector within 10 yrs is gonna collapse and I'm gonna be ready for it. I still wonder which funds he has?

[brian]

why would anyone invest in a CD, ever? I have an ING account that is right under 5%, its a simple savinsg account, I can take all teh money out tommorow.

If you are knocking Dave for simplifying the mutual fund investment strategy, than your credibility drops for even infering that a CD is a solid investment.

Of course there is risk in some mutual funds, but the way he discusses them involves researching the ones with a solid 10 year history. The risk of some of the better mutual funds is very limited. Speaking of risk, arent you irreponsible for not discussing the risk of CDs - the potential loss of earnings from barely beating inflation. Now I know you are more criticizing his tactics rather than supporting CD investmnets but I thought I would share my two cents.

[RobertK]

Dave Ramsey's teachings are for poor and middle income families to help them get o0ut of debt and build a nest egg.

In reality, what Dave doesn't tell you is how he makes his money is more consistant with what Robert Kiyosaki teaches in his Cashflow games and Rich Dad, Poor Dad book.

The reason that Dave recommends many of the things that Robert Kiyosaki tells people not to do if they want to be rich is because Dave's program is catered to the general population. And why is that? Because it's hard enough to get 90% of the population to stay out fo debt and save money much less teach them the extremes that Kiyosaki does.

In the eyes of the rich, CDs and Mutual funds are great investments for the middle class.

[Joshua Sturdavant]

ok guys i'm 18 and I am taking one of Dave's classes. What he says about the cds is correct even if u do find one with 6% interest rate there still useless. Cause with taxes and inflation on the rise that leaves you like 1% interest...you can get that much out of a money market account. If you find a good mutual fund such as fcntx that makes at lease 15% a year and put that under a roth ira were its tax free after the initial purchase than your money is free to grow! Just imagine 15% for 40 years thats a lot of cash guys. That makes reaching a million an easy step. Like dave says you just have to be disciplined about it and done take any money out.

[Michael H]

Just got a CD Audio series of Dave Ramsey’s for Christmas and find him overly aggressive in his methods.
Personally I think you should have 1 credit card that you manage properly. I agree that Dave’s methods will keep you out of trouble because he makes it so hard to buy anything.
I’m keeping my credit cards, but with a ZERO balance.

Tampa Bay, Florida

[John]

Please I work in finance and CD's are a complete and utter waste of time. Dave is right a CD at 4% is really a certificate of depreciation considering inflation and taxes.

If I have an older client I usually suggest a fixed or variable annuity. They are tax deferred so its triple compounding interest plus they have more liquidity then a damn CD.
Furthermore they do not have to go through probate and you may have as many beneficiaries at you like.
Also you are done playing the rate game which CD's are.

For the record my IRA is a mutual fund and I would stick with it.
Screw Cd's

[Greg]

The previous poster said:

"If I have an older client I usually suggest a fixed or variable annuity."

Dave Ramsey would tell that older client to run away from any annuity product. In fact, he would suggest a CD over an annuity. I would tend to favor a 7.5% preferred stock issue over either.

I do not totally agree with DR's advice, but it is good advice for the majority of people. Debt is a great financial tool, but also a back breaking burden for most Americans. In the right hands debt can be a wealth builder, but very few people know how to use debt effectively and responsibly.

Dave Ramsey's advice offers the masses a path from negative net worth, to debt-free status, and finally onto wealth. Knowledgable individuals can make better financial decisions using more complex strategies, but for the average person, Ramsey's methods are sound and a rather simple path to a better financial future.