You probably wouldn’t know it from reading this blog.
I’m a huge fan of Dave Ramsey. However, every time I write about him, it is to critique something he says (like his stance on credit scores). I have, however, shared three things I really like about Dave Ramsey, and I’m sure there are more.
Still, I tend to critique him more than I praise him. The reason is this: because he is so popular, so likeable, so magnetic, and right in so many ways, people just accept everything he has to say as if it were gospel truth.
Here’s an important thing to remember with Ramsey. He does one thing really, really, really, well – help people get out of debt. That is his mission in life.
However, I believe that there is a time when we should graduate beyond his advice. There will come a day when Ramsey’s advice just doesn’t cut it any more. I think that day is the day you start investing. I know when I started to closely evaluate my own investing, I thought his advice was missing something. Once I started to subscribe to the Sound Mind Investing Newsletter, I learned a lot about investing.
What’s Wrong With Dave Ramsey’s Investing Advice?
Perhaps nothing, but at least here are some reasons why I disagree with Ramsey’s investing advice.
Investing Advice: Invest 15% Percent of Your Income in Retirement
When my wife and I first started saving for retirement, we took Ramsey’s advice and saved 15% starting with our very first paycheck as a married couple. At the time, that was probably really good advice. However, our financial situation has changed, our financial theology has changed, and our mindset regarding retirement has changed. As a result, we no longer fit in the box where saving 15% is right for us. We’d rather do other things with our money.
As Paul Williams says, “The save 10% for retirement rule is stupid.”
I Say: The right amount to save for retirement must be personalized according to your needs.
Investing Advice: Your Tool is Mutual Funds
Mutual Funds are certainly an investing option. They can even be a good investing option. However, it is not the sole investing option, and there are some other very good investments that investors should consider. For example, you can build A Low-Cost, Diversified Investment Portfolio with Only Three Funds.
I remember the olden days when I did invest in mutual funds (and still do). But, I remember the dreaded feeling when it was time to add a fund or consider removing a fund. I’d get a list of 4-5 suggestions from my financial advisor and I’d have to look at information I knew little about and make a decision. Then, as a reward for making this stressful decision, I’d pay the mutual fund company 5% up front in fees on my investment.
After 5-6 years, I decided that was crazy. So I fired my financial advisor and started investing in no-load mutual funds. I replaced Dave Ramsey as my investing resource with the sound investing teachings of Sound Mind Investing.
Recently, I’ve started buying some index fund ETFs. ETFs come with very low fees, and there are even a lot of places you can buy them without any transaction fees. Every investor should consider the value of index fund investing as compared to mutual fund investing.
I Say: There are many other good investing options so you should consider the value of each option according to your investing strategy.
Investing Advice: Spread Retirement Funds Even Across Four Types of Funds
Your asset allocation (the types of funds you invest in) is the most important decision any investor will make. It has the greatest impact on your returns.
- 25% Growth and Income
- 25% Growth
- 25% Mid Cap
- 25% International Funds
Is that bad advice? It totally depends on your age, risk tolerance, and financial goals. The older you get, the more bonds you should be adding to the mix, but bonds are absent. The younger you are, the more risk you can take.
Basically, Ramsey gives us a cardboard box and tells us to fit inside. I’d rather have a customized asset allocation.
Moreover, it is possible that shifts in the economy impact how and where you should be investing.
I Say: Your age, risk tolerance, and financial goals will determine the best asset allocation.
Investing Advice: You Can Retire When You Can Live Off 8% of Your Nest Egg
In the Total Money Makeover he writes, “You are secure and will leave a nice inheritance when you can live off 8 percent of your nest egg per year.”
Ramsey says this is true because he thinks you can expect to get a 12% rate of return from the market with 4% being used up by the cost of living increase. Interestingly, he never comes out and puts into print HOW you can expect to get a 12% rate of return, but he says it all the time on the radio.
Here’s what I find most interesting. For a guy who is so optimistic about our expected rate of return from the market, I don’t know why Ramsey doesn’t push index funds more. If he thinks the average will be 12%, then using an index fund would be a great way to be sure you don’t do something dumb by picking the wrong mutual fund.
In the end, I guess I’m just more conservative than Ramsey. Or perhaps I’m more skeptical. Will the market perform better if I say, “I think I can, I think I can, I think I can?”
By the time you retire, you probably won’t have your investments in a risky portfolio, so getting 12% through retirement sounds pretty unreasonable to me.
Well, there you have it. A full post criticizing a man whose accomplishments I respect. A man whose advice I usually agree with. But, a man who has a different idea about investing than I do.
Photo by epicharmus.
What do you think about Dave Ramsey’s investing advice?