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Dave Ramsey Is Not A Moron

I didn’t think it was personal, until last week.

Driving to an appointment, I was listening to Dave Ramsey’s radio talk show. He began talking about people who criticize him and how that used to bother him, but no more. He said, “After selling over three million books, I’ve decided if you criticize something I’ve written, you are the moron (laughing and giggling). I mean, what have you done?”

I almost drove off the road.

Most of Ramsey’s advice on cash flow and debt reduction is very good and extremely helpful to those that follow it. Unfortunately, following his advice on investments and withdrawal rates could be very harmful financially. In the past few years I’ve pointed that out more than once.

On May 9th I published a column showing Dave Ramsey’s assertion that a person can earn 12% compounded annually in “good growth mutual funds” is inaccurate. As a fellow financial planner, Thomas De Jong, clearly showed, Ramsey bases his 12% compounded return on a misunderstanding of the difference between an arithmetic mean return and a compounded return.

The New York Times picked up the story and ran it on May 13th on its Bucks blog. The Times tried to contact Ramsey for comment, and his team said he was unavailable because he was working on a new book.

As usual, I received some criticism from Ramsey followers about my article.
Regarding Ramsey’s claim of 12% returns, one person wrote, “He doesn’t teach that anymore. You need to go to his 13 week course and get your facts straight.”

Two days later, one of my readers sent me an email citing a new blog post where Ramsey said if a person invested $144,000 in growth mutual funds it would grow to $1,000,000 in 17 years. While he didn’t specify a rate of return, some simple math shows he used 12%. So much for the belief that he isn’t teaching the 12% return myth anymore.

There are two reasons Ramsey’s 12% figure is dangerous. One is that even getting close to a 12% compounded annual return would require having everything invested in stocks. Most professionals would consider that allocation far too risky for most investors. They also know that over a long period of time (80 years) stocks have returned closer to a 9% compounded return.

The second dangerous assumption based on a 12% return is that a person can expect to withdraw 8% of an investment portfolio every year without ever spending the principal. Since a realistic long-term return for a properly diversified portfolio is 6% to 7%, withdrawing 8% means you will eventually run out of money.

Until now, I thought those of us who challenged Ramsey’s investment advice were trying to help educate a fellow professional. Financial planners who focus on their clients’ best interests are always learning and refining their knowledge and strategies.

Ramsey’s remark on his show made it clear that for him, this is a personal attack. Apparently he isn’t secure enough to admit that he has been using inaccurate information. He seems to care more about being seen as “right” than about whether his advice is in the best interests of his followers.

That’s sad. It’s discouraging that someone who holds the trust and respect of a great many people isn’t willing to keep learning and to correct his own mistakes.

If you have a financial advisor who refuses to consider new ideas or take in new information, it may be wise to look for someone else. Don’t trust your retirement security to any advisor whose ego is more important than your financial well-being.

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8 Responses to Dave Ramsey Is Not A Moron

  1. Dan Schweihs June 13, 2011 at 6:44 am #

    No question that Ramsey’s narcissistic tendencies are obvious. In his first book, he recommended “buy term and invest the difference.” It doesn’t make sense to “invest the difference” unless you can tell people they are going to get a high return. That theme seems to be in his bone marrow.
    Investment advisors have always driven their car by looking in the rear view mirrors and talking about the historic rates of return behind them. And then included the disclaimer: “past returns do not forecast future returns.”
    Look for 3% to 5% returns on equities in the future, not 12%, not 9%, and not 7%:
    1) The baby boomers are becoming investors so there will be a glut of investors. This competition will drive down returns.
    2) The Internet continues to eliminate barriers to entry (and therefore profits) from every industry. Firms rush to Washington seeking government barriers to entry in their industry to “protect the consumer.” But these artificial barriers only last a short time. Competition eventually removes profits.
    A glut of investors and limited opportunities for profit: 3% TO 5% MIGHT BE HIGH.
    I like Dave but he doesn’t need to embellish to sell his basic story of spend less than you earn.

  2. Janet Tyler Johnson June 13, 2011 at 6:47 am #

    Rick: All excellent points. If we, as advisors, are not life-long learners, we need to get out of the business. I’d sure hate to go to a physician who was licensed 30 years ago who relied on only the information he received in medical school to treat patients for the next 30 years.

  3. Thomas De Jong June 13, 2011 at 11:11 am #

    Rick,
    I figured it was only a matter of time before we were called morons. 🙂 Also, apparently having a book on the NY Times bestseller list means you are a genius. Keep up the great work on bringing proper perspective to the world of finances!
    –Tom

  4. Bill Mullen June 13, 2011 at 1:49 pm #

    Anyone who follows DR as to how get out of debt is well served. Anyone who follows his investment advice is il served.

  5. Bobbie Munroe June 16, 2011 at 11:49 am #

    Keep telling it like it is my friend. The more I know the more realize how much I don’t know. Lot’s to learn out there and an open mind is the major prerequisite.

  6. Rick Kahler June 16, 2011 at 11:52 am #

    Bobbie,

    It’s always easier to “tell it like it is” when I have wonderful souls like you telling me when “it isn’t!”

  7. Scott June 20, 2011 at 6:05 am #

    I heard Dave espouse this investment return information just a couple of weeks ago on his radio show. It seems to be an automatic canned response complete with the claim that he has achieved these results with his personal invesments, and that it is not only possible but should be expected. With 12% returns I would think he could do better as an invesment advisor. Where do I sign up!

  8. Dale June 26, 2011 at 7:59 am #

    Rick,

    Great article, I do know that the people I shared this article with will agree with you. Maybe Mr. Ramsey should step back and give a little consideration that he may not be 100% right all the time. Ego sometimes is pretty hard to overcome unfortunately. Keep up the good work.