What's Wrong with Dave Ramsey's Advice?


What is missing in Dave Ramsey’s advice? It’s independent of what we really need to retire: a comprehensive financial plan. At Lord and Richards, we call that process of creating that plan a financial independence review. All of us need a plan in order to retire securely.


Do you have a written risk management plan? Do you know what you’ll do when the market drops again? Do you have a written tax reduction plan to make sure you don’t overpay taxes? Do you have a written health care plan to make sure you don’t go bankrupt if you or a spouse gets sick? And of course, do you have a plan for when you pass on?


And circling back, here is an issue I have with Dave’s advice: first, he’s not licensed to offer legitimate financial advice. I genuinely don’t understand how he avoids prosecution by the SEC, but I know he calls it an opinion. He’s just offering an opinion, not official advice. Because his background is in real estate, he gives people investment advice, often telling them what to put their money into, which usually involves the stock market.


Second, he thinks the S&P will net you 12% over the long term. Why does he think that? He goes all the back from 1926 to 2019. When he calculates that rate, he’s not using real compounding investing, which would show you 10.2% in that period.


|| "Save like Dave Ramsey, just don't invest like him."


Here’s the reality: we don’t live 100-year long retirements. We live in market phases. Some phases are exciting with high returns, and others are low. If I go back to the S&P over the past 22 years, it has averages less than 4.5% compound growth when looking at the index and not including the dividends. I’m telling you, you can’t beat 4.5%. But Dave Ramsey will give you false hope about a high growth expectation.


He also believes mutual funds will beat ETFs, or Exchange-Traded Funds and are more long-term. You can certainly hold an ETF for as long as you want. He says mutual funds are more personal because somebody’s actually managing it. The rules on mutual funds are so strict though that there’s very little a fund manager can do for most of the funds I see people owning.


I see people diversifying, having a collection of mutual funds that often overlap. Dave’s recommendations on the other hand, are to invest almost solely in stocks. If you invest in mutual funds versus ETFs, ETFs will cost you less and they’re more tax efficient. If you allow yourself the right kind of tax advice, then you can save a tremendous amount on fees.


|| "He’s just offering an opinion, not official advice."


If you add typical mutual fund fees to that long term return that Dave talked about in the S&P, then you’re not getting anywhere near 10.2%. Some of the wealthiest people who are in the business world making money have said that it’s a great idea to grab some ETFs that track a stock market index, since there’s a place for a passive investment style.


At Lord and Richards, we believe you need to be more than passive because it’s not just about growth. Passive growth is great of course but passive risk management won’t help you. What we do for our clients at Lord and Richards is build a written risk management plan that actively takes a role in making sure you don’t take on more risk than you’re comfortable with.


If I were to summarize my view on Dave Ramsey, I would agree with the Money.com headline that said “Save like Dave Ramsey, just don’t invest like him.”


You may be thinking “well that’s great, but where do I from here? I’m working to get out of debt. I’ve built up an emergency fund. I’ve been saving towards my retirement and now have a nest egg. And I need to know how to use that so I can retire financially independent.”


That’s where our team comes in. We’re helping folks just like you every single day to achieve and maintain financial independence throughout retirement.

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