Dave Ramsey prefers a commission-based planner?

[littleroc02us]

Warren Buffet was just ranked the 3rd richest man in the World. Bill gates #2. Go America!

[jpg7n16]

So what is the risk % I should calculate with then? Is there one? I've never heard it from anybody on this forum.

I don't think you understand what you're asking for. 8% is the risk adjusted expected return.

If I told you there was a 20% chance of losing 7%, a 30% chance of making 6%, a 30% chance of making 10%, and a 20% chance of making 15% - the expected return would be 6.4%.

Even though 50% of the time, you'd expect to make either 10 or 15%. By using the expected return, you already adjust down for the risk.

I'll just repeat what I said above. Not everyone is as smart as the posters in this forum, they make mistakes and pull their money out because they get scared, it just happened in the Great Recession.

if you were to have put your money in some Vanguard funds from 2007 to 2009 and got scared when everything tanked like so many Americans did and you pulled it out and you missed the huge rebound. You would have blown a ton of money. It happened. All I'm saying is that there is a huge risk, unless you ride it out for 20 years or longer.

In this situation you would have lost your butt correct?

Did you read the part of my post that you quoted? I still have the same answer.


It's like you're saying that cars are dangerous, because if you drive drunk you could crash and die. And we're saying, that's not a problem with the car, it's a problem with the driver. Don't boycott cars, boycott drinking and driving.

The risk in your situation wasn't with the stocks, it was with an investor who made a stupid decision. (like driving drunk is a stupid decision) Don't boycott stocks, boycott cashing out in the market lows because you're afraid.

[disneysteve]

I guess your not getting my point, if you were to have put your money in some Vanguard funds from 2007 to 2009 and got scared when everything tanked like so many Americans did and you pulled it out and you missed the huge rebound. You would have blown a ton of money. It happened. All I'm saying is that there is a huge risk, unless you ride it out for 20 years or longer.

I'm not really sure what your point is here. Yes, investing in stocks involves a higher level of principal risk than putting your money in CDs or using it to prepay your mortgage. I don't think anyone would debate that.

But your example of someone using the stock market for a short-term investment of 2 years and then pulling the money out doesn't correlate with what any adviser I can think of recommends. The stock market isn't for short-term investing. It also isn't for people who are risk-averse. If you need the money in less than 5-10 years, it shouldn't be in the market. If you can't tolerate significant swings in the value of your investment, you shouldn't be in the market.

it seems like most of us invest thinking that nothing could ever happen to them, I could never fail.

I disagree. I don't think any of us think that. I certainly don't. I have had stock investments lose money in the past and I'm quite certain I will have stock investments lose money in the future. That is the nature of investing in stocks. But OVERALL and LONG TERM, nothing outperforms stock investments.

[littleroc02us]

I'm not really sure what your point is here. Yes, investing in stocks involves a higher level of principal risk than putting your money in CDs or using it to prepay your mortgage. I don't think anyone would debate that.

But your example of someone using the stock market for a short-term investment of 2 years and then pulling the money out doesn't correlate with what any adviser I can think of recommends. The stock market isn't for short-term investing. It also isn't for people who are risk-averse. If you need the money in less than 5-10 years, it shouldn't be in the market. If you can't tolerate significant swings in the value of your investment, you shouldn't be in the market.

So what your saying for example is that no one had money in the stock market from say 1997 to 2008, got scared and pulled it out because the market had tanked and they ended up losing a ton of money. The point is that they were long term and then got scared and pulled out. Just read Money magazine from I think it's the December issue, where they reported on 5 different couples that got scared and pulled everything out and are worried about investing again.

[littleroc02us]

I don't think you understand what you're asking for. 8% is the risk adjusted expected return.

What I mean by that is say you decide to take your extra disposable cash each month and instead of putting it towards your mortgage, you invest it, now how do you forecast calculated risk. If the market suddenly crashes, but you projected 8% return for the year, but instead it's like -19% return, then you have just lost time and compound interest, but the guy who threw it at his mortgage has less years to pay on it.

Did you read the part of my post that you quoted? I still have the same answer.


It's like you're saying that cars are dangerous, because if you drive drunk you could crash and die. And we're saying, that's not a problem with the car, it's a problem with the driver. Don't boycott cars, boycott drinking and driving.

The risk in your situation wasn't with the stocks, it was with an investor who made a stupid decision. (like driving drunk is a stupid decision) Don't boycott stocks, boycott cashing out in the market lows because you're afraid.[/QUOTE]

And my point again is that there are tons of people who had money in the stock market for years or maybe not to many years, they got scared during the crash, pulled out and lost a ton of money. I really can't explain it better then that. Yes they are stupid, but I'm just making a point that it happens.

[BuckyBadger]

I there any way you can add quotes to your posts? Or use the multi quote function? I can't figure out what you're saying or to whom you are responding...

[BuckyBadger]

Is your point that some people are stupid? Because, yes, that's definitely true. But as others have said, it's not the stock market's fault that some people are stupid.

[jpg7n16]

So what your saying for example is that no one had money in the stock market from say 1997 to 2008, got scared and pulled it out because the market had tanked and they ended up losing a ton of money. The point is that they were long term and then got scared and pulled out. Just read Money magazine from I think it's the December issue, where they reported on 5 different couples that got scared and pulled everything out and are worried about investing again.

5 couples huh? Oh I didn't know that the effects were so widespread. Then everything we just said is meaningless. No one should be in stocks ever again, because it's too scary.

5 couples drove home drunk and died too. So therefore, no one should ever drive cars again. Right?

What I mean by that is say you decide to take your extra disposable cash each month and instead of putting it towards your mortgage, you invest it, now how do you forecast calculated risk. If the market suddenly crashes, but you projected 8% return for the year, but instead it's like -19% return, then you have just lost time and compound interest, but the guy who threw it at his mortgage has less years to pay on it.

You do realize that the 8% market average already accounts for having -19% years right? Those types of years are already factored in - and the market still compounds to 8% on average.

You can't compare long-term returns to short term risk.

An investor who would invest rather than pay down low interest rate debt (as I have suggested in other threads), would be doing so for a long period of time, not just for a year. Like mortgages for 30 years. They wouldn't quit investing because they happened to lose 19% in any one specific year, but on average they would still expect to earn 8% compounded over 30 years. That -19% year is already factored in.

And my point again is that there are tons of people who had money in the stock market for years or maybe not to many years, they got scared during the crash, pulled out and lost a ton of money. I really can't explain it better then that. Yes they are stupid, but I'm just making a point that it happens.

And all the mothers of the world said: 'so if all your friends jumped off a bridge, would you do it?'

We all agree that it happens, but you're basing your recommendations off of it.

We all agree that drunk driving happens, but why would your recommendations for whether or not to buy a car be affected because some people drive drunk? You still need a vehicle to get you where you want to go.

So I get that some people freaked out and sold out, but why should that change what I recommend people to do?

[disneysteve]

So what your saying for example is that no one had money in the stock market from say 1997 to 2008, got scared and pulled it out because the market had tanked and they ended up losing a ton of money. The point is that they were long term and then got scared and pulled out.

No, I'm not saying that at all. Certainly there were people who got scared and pulled out their money. What I'm saying is that those people were wrong to do that. You can't say you are investing for the long term and then pull the money out the instant your balance drops. If you aren't prepared to ride out the ups and downs that are natural and expected in the market, then you shouldn't be in the market.

People say stocks are "too risky" but that isn't really true. What is true is that stocks carry a certain amount of risk and you need to understand and accept that risk when you invest in stocks. If you don't understand what you are investing in, don't invest.

I've also read the recent articles about folks, especially 20-somethings, who are afraid to get involved in the stock market due to the past few years. These people are going to have some serious problems down the line if they continue to avoid stocks as they will never accumulate a large enough nest egg to retire if they keep all of their money in CDs and MMAs.

[littleroc02us]

couples huh? Oh I didn't know that the effects were so widespread. Then everything we just said is meaningless. No one should be in stocks ever again, because it's too scary.

When have I ever given that advice, I'm a longterm investor and have always recommended it, but I am against leveraged investing 99% of the time.

[gambler2075]

As a die-hard contrarian, it is really amazing to me that people would panic at the bottom and pull out all of their investments, at the worst possible time. People need to step back, think about things a bit, and realize that the more people are panicking and capitulating their positions, the more people should be stepping in to buy. Conversely, the more bullish and loudly people are screaming that the Dow is going to 30,000, then the more wary one should be.

I think people who sold out at the bottom should read "The Art of Contrarian Trading" by Carl Futia. If they really took those lessons to heart, then they would realize that the worst thing that you can do (if people are panicking or getting overly greedy) is to go along with the crowd.

However, becoming a contrarian is one of the most difficult things anyone can do, because it is human nature to look to others for reassurance as to what to do (herd mentality). Fortunately for me, there seems to be a near-endless supply of people trading with the herd and doing absolutely the worst thing at the worst possible time, thereby allowing me to make a killing trading contrarian to the masses

g

p.s. What is even more interesting is that now that people who were scared out at THE BOTTOM (almost 2 years ago, to the day, March 9, 2009) are starting to ask if they can get back into the market, or get 'more aggressive' with their portfolios. Which means that we are probably close to the market top, and those people will get burned again

[disneysteve]

What is even more interesting is that now that people who were scared out at THE BOTTOM (almost 2 years ago, to the day, March 9, 2009) are starting to ask if they can get back into the market, or get 'more aggressive' with their portfolios.

Yep, happens every time there is a correction. People simply don't think about what they are saying or doing. They will come right out and tell you that they are waiting for prices to rise before they buy stocks again. It is insane but that's how many people think.

I always use the analogy of a sale at the store. How many people walk in and see something on sale and say, "No thanks. I'm going to wait until it is full price again before I buy it." Nobody does that when shopping for groceries or electronics or clothing but lots of people do it when shopping for investments.

[gambler2075]

Yep, happens every time there is a correction. People simply don't think about what they are saying or doing. They will come right out and tell you that they are waiting for prices to rise before they buy stocks again. It is insane but that's how many people think.

I always use the analogy of a sale at the store. How many people walk in and see something on sale and say, "No thanks. I'm going to wait until it is full price again before I buy it." Nobody does that when shopping for groceries or electronics or clothing but lots of people do it when shopping for investments.

Investing is such an interesting area in that people look to others for confirmation that something is good or bad... and that 'confirmation' is reflected in higher prices. Whereas when people are shopping for clothes, the 'confirmation' they get is compliments/good reviews from other people, which does not affect the price. I guess the analogous situation to buying at the bottom would be to walk into a second-hand clothing store and buy a bunch of retro clothes and torn jeans, expecting them to become the next fad

g
p.s. Looked at my portfolio from Sep 2010 until now, and with trades in CHTP (bought at 3, sold at 4), SPEX (bought at ~1.5, sold at 2.3 ish), AVNR (bought at 2.49 ave, sold at ~5) and AFFY (bought and sold multiple times since 5$), my portfolio is up 162% over the past 6 months (i.e. my portfolio is more than 2.5 times what it was worth in Sep '10)

[littleroc02us]

Those who are still wondering when to get back into the market have definetly missed the bargains sales! It's hard for people to change, I should know that I work in the IT field.

[DebbieL]

I am not sure what he means by commissions.

If he means commissions via loaded funds and annunities, then Dave has officially lost a screw.

If he means a percentage of your portfolio agreement, Dave and I are definitely on the same page adn something I have been saying for years here.

If a planner gets a 1% commission per year on your portfolio let's say. . .and he has 100 clients. . .and let's say he has $10,000,000 in assets he is managing among those clients.

So, he makes 100K per year, wears a suit and tie, feels all important.

So, let's say every client he has is a 50 year old woman with 3 kids who is divorced.

If the suit and tie go to his head and he gets all hotshottey with the money under his watch and takes inappropriate risks, his $10,000,000 he is managing could go down to $5,000,000 overnight.

All of the sudden, he is making $50,000/year.

It also prevents all kinds of trading (another form of commissions) and making a portfolio overly complex and "over-diversified." This "business arrangement" allows simplicity, along with what I think is a fair exchange for work done.

Not much work is needed on a portfolio with 10K in it. Much more I do think is needed with 100K and much more with 1,000,000 in it.

When we hear commission based planner, it isn't usually the one who takes 1% for actively managing your portfolio (and I agree that these are great - since they have the incentive to make you do well so they do well), and if that's what Dave really means, then he should clarify the point. Most planners are (unfortunately) commissioned based - meaning they are being paid to put you into certain investments. They are glorified sales people, and most people could probably do better on their own than using someone who just wants to put them into the portfolio that earns them (the planner) the most commission. I personally find Dave's advice really screwy on many levels though, and I am not a fan. Knowing how messed up a lot of his other advice is, it wouldn't surprise me in the least if he's recommending people park their cash with commissioned, mutual fund salespeople.