Dave Ramsey Doesn't Work

[jpg7n16]

Originally Posted by clintdavis

Several of you stated disagreement with Dave Ramsey's investment advice. What specifically do you disagree with, why, and what would you do differently and why?

Dave Ramsey only recommends growth stock mutual funds - regardless of investor risk tolerance, or time horizon.

A portfolio of 100% growth stock mutual funds is not correct for every single investor out there. Maybe he (and I) could tolerate the risk, but it's not in the best interest of everyone to blindly follow that advice.

The SEC would say this: Suitability


Other things I disagree with DR about: paying down by balance regardless of interest rate, paying off low interest rate debt to become completely debt free before investing (0-5% interest), preparing your will from a cheap online site - rather than having it prepared by a lawyer, that no partnership structure for a business will ever work out, the tax deduction on student loan interest is worthless and a stupid reason for postponing SL debt... that's all I can think of off the top of my head.

What would I do instead? Assess risk tolerance before selecting investment recommendations, pay down by tax-adjusted interest rate, if risk tolerance is high enough - begin investing before paying extra on a 0-5% loan, get your will prepared by an estate attorney in your state, form a partnership if there are equal owners in the business - and you determine that ownership structure best suits your needs, evaluate the after-tax cost of debt to see if there is a better allocation of your capital...


As far as the OP's issue was concerned, I agree with Dave. Cut expenses to a 'beans and rice' budget, sell the expensive car if you're stuggling to pay off debt, raise income by taking more jobs if you can, and pay a whole lot of money towards your high interest rate debt to get the balances down as quickly as possible.

If you're looking to get out of debt, DR is your man!

If you're looking to create a portfolio designed to meet your goals and account for your risk tolerance.... maybe you should look elsewhere.

[disneysteve]

Originally Posted by clintdavis

Several of you stated disagreement with Dave Ramsey's investment advice. What specifically do you disagree with, why, and what would you do differently and why?

Originally Posted by jpg7n16

Dave Ramsey only recommends growth stock mutual funds - regardless of investor risk tolerance, or time horizon.

A portfolio of 100% growth stock mutual funds is not correct for every single investor out there. Maybe he (and I) could tolerate the risk, but it's not in the best interest of everyone to blindly follow that advice.

Exactly. He recommends people invest in 4 types of funds, but all 4 are growth stock mutual funds. No value funds. No bond funds. No sector investing (he specifically warns against this). And he gives the same advice to everyone whether they are single or married, 20 or 50. That just isn't good or appropriate advice. People who blindly follow his advice could get themselves into a lot of trouble.

[tan fish]

I'm not a huge Dave fan, but I have listened to his show before, agree with his overall philosophy, and believe his personal finance concepts are very sound. I would recommend him to others. The only thing that can turn me off a little about Dave is his personality. He gets a little didactic at times (same with Suzie Orman and all the other personal finance personalities out there).

In the last/current episode of The Motley Fool podcast (great podcast by the way) they had Dave on. It was refreshing to hear about his life story in a nutshell. Hadn't heard it before, nor have I read any of his books. I'd recommend it as a listen:

Motley Fool Money Radio Show - Wiki

[My English Castle]

May I just say you don't need a class or a cent to do the Dave Ramsey plan? The books are available at most libraries. And I heartily agree that you've had a run of bad luck, but are better off than if you hadn't done it.
I wish you the best.

[FrugalGirl321]

I also want to add that when people start Dave's plan, they start with varying amounts of debt. There are too many factors involved to say his program doesn't work, because it has worked for many. Some people are so financially burdened from the start that digging out takes a lot longer. I know families who have done his plan, but still make little headway because their housing costs, or other fixed costs, are really just too high for their income. Even once they're debt free, when the slightest financial setback occurs, it's nearly impossible to get ahead.

[maat55]

Originally Posted by FrugalGirl321

I also want to add that when people start Dave's plan, they start with varying amounts of debt. There are too many factors involved to say his program doesn't work, because it has worked for many. Some people are so financially burdened from the start that digging out takes a lot longer. I know families who have done his plan, but still make little headway because their housing costs, or other fixed costs, are really just too high for their income. Even once they're debt free, when the slightest financial setback occurs, it's nearly impossible to get ahead.

This is why he reccomends that no one have a house payment more than 25% of their take home pay. IMO, many allow housing to eat up too much of their incomes, which detours investing and promotes debt through lack of funds for saving and emergencies.

[disneysteve]

Originally Posted by FrugalGirl321

I know families who have done his plan, but still make little headway because their housing costs, or other fixed costs, are really just too high for their income. Even once they're debt free, when the slightest financial setback occurs, it's nearly impossible to get ahead.

Very true. I listen to the podcast regularly and a lot of the callers are in virtually impossible situations. No matter what Dave tells them, their housing costs are too high, sometimes as much as 50% of income or even more. That just isn't sustainable.

[dczech09]

I certainly do not agree with DR on 100% of things, but I do enjoy his radio program and his general advice. IMO he is the best "financial guru" at this current time. All of the others offer advice that is far more destructive.

He has helped a lot of people get on track with finances. As far as people saying that he charges too much for his education stuff: who are you to make that judgement? Have you created a financial education program comparable to his and market it effectively? Didn't think so. The fact of the matter is that his materials cost what they cost because people are willing to pay the price. His materials have been valued based on the future value; it is essentially an investment. Believe it or not, common sense is marketable today.

As for his program not working: his program works as long as you work. You have to put in the effort; you cannot listen/read his advice and expect things to change automatically.

Again, I do not agree with him 100% but I do see his GENERAL advice as being valid to the extent that it points people down the right road.

[wincrasher]

I never understood the cult of personality that surrounds these gurus. You need to listen to lots of "experts" and take what you can from them.

The following will sound harsh and is definately rude - but here goes anyways.

Boo hoo!

Life is hard. You take years screwing up your financial life and make poor choices and you have kids you can't afford. Then you expect it all to magically get better after a few months of hardship. Boo hoo! Suck it up dude. It takes twice as long to work out of a hole than it takes to dig it. It's too bad you are tired and austerity sucks. Hunker down and do what you have to do. You don't need Dave to tell you that - it's free advice!

If your kid can't go to an event because of the situation you are in, that is essentially an opportunity for a life lession. Our choices have consequences. Life is often not fair. Often the innocent ones pays for our mistakes. It surely sucks, but that's life, ain't it.

Hope it works out for you, really do. But you gotta find a way to keep up your motivation if you are going to pull thru.

[Petunia 100]

Clint, I will be happy to share what I find objectionable about Dave Ramsey's investment advice.

Dave Ramsey's advice to keep 100% of one's nest egg in stocks during retirement while withdrawing 8% per year (because you can count on 12% each year, leaving 4% to cover inflation) is absolutely terrible advice. Run some monte carlo simulations for yourself and see what the statistically likely outcome of 100% stocks, 8% withdrawal per year would be. I can tell you, it is highly likely that doing so will leave a person penniless in 10 to 15 years. Check and see if it isn't true.

The vast majority of financial experts say that it is safe to withdraw 4% minus investment expenses, so if one is wisely using low cost investment vehicles, that is a withdrawal rate of 3.5 - 3.75%. If one is not paying attention to investment expenses and paying the industry average of 1.3% for stock mutual funds, that leaves only 2.7% which can safely be withdrawn. Note that 8% is more than three times the amount which can actually be safely withdrawn for a person paying the average expenses!

A handful of experts do say a person can go as high as 5% (before expenses). And sometimes there is no mention of "before expenses" at all. (I have noticed this advice is more prevalent during down markets, then tends to be not mentioned during up markets.)

Don't take my word for what the experts say. Check out MorningStar.com, Kiplinger.com, CNNMoney.com, Vanguard.com. For that matter, just Google "safe withdrawal rate" and see what pops up. Many articles and studies are published on just this topic.

Also, while the long term return of small cap stocks is approximately 12%, the standard deviation is more than 20%. This means it is extremely volatile. There are few years with returns close to 12%, there are many years with much higher returns and many years with much, much lower returns. Don't take my word for that either, look up historical returns for small cap stocks for yourself. There have been many, many years with double digit losses. Withdrawing a whopping 8% during loss years nearly guarantees the portfolio will never recover.

Dave Ramsey does not specifically say one should be 100% in small cap stocks, but small caps are the only asset class which have a long-term average of 12%. Large caps have a long-term average of a bit less than 11%. While that may not sound like a big difference, it is.

And the elephant in the room of course, is that long-term averages are calculated from 1926 to present, a period of 85 years. However, none of us will have a retirement lasting 85 years. Our retirements will be more in the neighborhood of 20 years. There are many rolling 20 year periods which fall short of the long-term average, balanced by rolling 20 year periods which exceed the long-term average. If a person happens to retire during years of below average market performance, they will still need to eat every month, pay the electric bill every month, pay for their prescriptions every month, etc. In short, they will need to make withdrawals every month irrespective of what the markets are doing. They cannot simply say, well, I will stop eating, stop using electricity, and stop taking my prescriptions for 5 or 10 years while the markets outperform to get back to their long-term averages, then I can begin making withdrawals again.

The key to making a portfolio last during the person's lifetime is minimizing volatility while still seeking some growth. This is accomplished by diversifying amongst stocks, bonds, and cash at a minimum, possibly including other assets such as TIPS, real estate, and commodities as well. Recommendations vary, but typical advice for a newly retired person is to keep no more than 50% - 60% of retirement monies in stocks and other growth assets, 40% - 50% in bonds and cash. Such a portfolio would be far less volatile and far more likely to last the person's lifetime. (Note, it is not guaranteed, it is only likely.) A decade or so later, that person would be down to 30% - 40% in stocks, 60% - 70% in bonds and cash.

Not one reputable source of financial infomation recommends a portfolio of 100% stocks for a retiree. Few recommend it for people 20 years away from retirement, though there are some.

Clearly, Dave Ramsey has done no research whatsoever on this very important topic, but gives advice anyway.

[Shewillbemine]

Dave Ramsey should be used by people in financial trouble, not those who want to grow extra money.

People in debt trouble should only blame the face in the mirror, not the guy on the radio.

Also, many people are on this forum because they seek financial advice and/or need to improve their financial situations. I'm pretty sure Dave is better off than 99% of the members on this forum.

[KiwiJo09]

Perhaps, Dave Ramsey's advice doesn't work for everyone. But it works for a lot of people. You had an emergency fund in place when your wife needed emergency surgery, but maybe you didn't have enough set in place? Also, you need to take a look at your budget. Because it would seem that you're priorities are out of place. Don't confuse luxuries with necessities. And financial freedom is a process. Good luck.

[puck36]

Originally Posted by questions

So Dave, would you be willing to help a person out with your enormous wealth?????? You'd probably just tell me to sell both my cars and ride a bike to work, continue to eat sandwiches with nothing but a little ketchup on it and continue to wear my hole-filled clothes and shoes for another few years so I don't get into further debt.

Ramsey has no real plan for when life hits you with constant financial hay makers. Just so tired of trying to do what is right for more than 16 years with very little to show for it and no closer to being out of debt than ever.

If you can't follow Dave's Plan then there is no hope for you. I was making $25,000 - $30,000 with $16,000 in debt. Then I got laid off and thats when I started Dave's plan. For the next two years I paid off $16,000 in debt, making $18,000 - $20,000. I was able to still go on vacations and pay for them. I still had to pay rent, all the utilities, food. Dave's plan works if you follow it.

[LivingAlmostLarge]

Definitely Dave ramsey teaches you to live on a budget. Something a lot of people cannot DO! but other than that? Nah his advice is not really good enough to follow.