- If you don't know who Dave Ramsey is, he is an American personal finance radio show host and author. His radio show runs on more
than 500 radio stations. He also has a YouTube channel with well over 1 million subscribers. Dave is reaching a huge audience not just in the United
States, but around the world. Dave Ramsey's advice on
investing is not very good. The things that Dave
Ramsey tells you to do with your investments are at odds with both the current academic literature and the empirical evidence. I don't doubt that Dave has helped lots of people
get into debt, start saving, and feel more confident about their money, which are all good things. But his advice on investing
should be avoided at all costs. I'm Ben Felix, portfolio
manager at PWL Capital. In this episode of
"Common Sense Investing" I'm going to tell you why
I fundamentally disagree with Dave Ramsey's advice on investing. (upbeat music) I see no better way to approach this video than discussing the many flawed statements that Dave Ramsey has made about investing. I wanna be clear that this
is in no way commentary on Dave Ramsey's character. It seems like he is genuinely dedicated to helping his audience. My intention here is to educate you on the
factually incorrect statements that Dave Ramsey consistently
makes about investing and why those statements could result in bad
investment outcomes for you. Dave Ramsey promotes the use of actively managed mutual funds. He does this on the basis that strong returns are
more important than fees. According to Dave, you
should worry less about fees and more about returns. - Here's the thing, listen to this. If your expenses are up 1% higher average over a 10-year period of time, but you make 4% more rate
of return, you came out. (laughing)
- [Man] I can do that, I can do that. - That's why return is your
primary measure of which you... Of how you pick a fund. That's your primary measure. The last thing I look at is expenses, and very seldom do I find
expenses being the deal breaker. And that's the reality. - This is true, assuming
that you can find a fund that will have strong future returns. The problem is that contrary to what Dave Ramsey will tell you, a fund with strong past
returns is no more likely to have strong future returns. Let's talk about the real reality. In a 1991 paper titled "The Arithmetic of Active Management," Nobel Laureate William Sharpe explained, "If active and passive management styles are defined in sensible ways,
it must be the case that, one, before costs the
return on the average actively managed dollar will equal the return on the average
possibly managed dollar. And two, after costs, the return on the average
actively managed dollar will be less than the return on the average passively managed dollar." Basically due to the higher average costs, active funds on average must underperform passive funds like index funds. Morningstar, an investment
research company, has repeatedly studied
the usefulness of fees as a predictor of future performance. They have always found the same result. On average, funds with lower
fees have better performance. In a 2010 paper on this topic, Russell Kinnel, Morningstar's
director of research wrote the following. "If there's anything in the
whole world of mutual funds that you can take to the bank, it's that expense ratios help
you make a better decision. In every single time period
and a data point tested, low cost funds beat high cost funds. Expense ratios are strong
predictors of performance. In every asset class
over every time period, the cheapest quintile
produced higher total returns than the most expensive quintile." In a followup to this report in 2016, after rerunning the data on fund returns, Kinnel wrote, "The expense ratio is
the most proven predictor of future fund returns. I find that it is a dependable predictor when we run the data. That's also what academics fund companies and of course, Jack Bogle
find when they run the data." Vanguard has done similar
analysis with similar results. In their 2010 paper, "Luck Versus Skill and
Mutual Fund Returns," Eugene Fama and Ken French point out, "The aggregate portfolio
of actively managed U.S equity mutual funds is
close to the market portfolio but the high costs of active management show up intact as lower
returns to investors." There is no question
that fees are important despite what Dave says. In fact, on average, they are one of the most important factors in choosing an investment. But Dave Ramsey does not want
you to pick average funds. - And my mutual fund groupings
have beat the market. You just pick mutual funds
that have outperformed the S&P it's really not rocket science. Not all of them have outperformed the S&P. A lot of them haven't, over half haven't, but don't pick one that
didn't, you would be better. That's all you're doing when
you're picking a mutual fund, did it beat the market? If it didn't beat the market, then don't pick that mutual fund. That's not rocket science
that horse hadn't won a race. - On average, shouldn't matter if you pick above average
funds, that seems easy enough. If you pick funds that
have beaten the index, maybe the data don't apply to you. It's not rocket surgery,
as Dave might say, as with many of Dave's claims, this one does not stand up to the data. Let's start with the SPIVA
Persistence Score card. A report prepared by S&P each year, which takes the set of funds with the best five-year track records and then watches them
for the next five years. If as Dave says, it is
as easy as picking funds with good past performance, then we would expect good
funds over one time period to continue to be good funds
in a future time period. The Persistence Score card
takes the top quartile funds for the period ending March, 2015 and ranks them through March, 2019 to see how many of
those top quartile funds remain the top quartile for
the full five-year period. The results are fascinating. 0.7% of the top quartile
funds remain the top quartile. That is four of the starting
569 top quartile funds that remained the top
quartile over five years. It would appear based on this that picking a fund that beat
its benchmark in the past, does not help in finding
a fund that will continue to do well in the future. The conclusion that we
might start to draw here, is that strong past fund returns might just be due to luck as
opposed to manager's skill. In the previously mentioned
paper by Fama and French, they examined this exact issue. Do funds that succeed do well
because the manager was lucky or because they were skilled? They found that few funds have
enough skill to cover costs. Similarly, in a 1997 study titled, "On Persistence in
Mutual Fund Performance," Mark Carhart found that
the results do not support the existence of skilled or informed mutual fund
portfolio managers. In both cases, the research was examining the ability of managers to
add value to fund returns in excess of the returns
that a passive index investor could have gotten by
passively maintaining exposure to the same types of stocks. For example, if an active manager had persistent long-term out-performance relative to the S&P 500, because 50% of their portfolio was in small cap value stocks, then they weren't skilled or lucky. They were just taking more risk. This is highly relevant
to the end investor because instead of paying
2% for an active manager, you could have owned a
small cap value index fund for 0.2% or less. I don't know exactly what is in Dave's portfolio mutual funds, but it would be interesting
to look under the hood. - The mutual funds I'm
personally invested in, the four types I talk about
over the last 40 years have averaged 13.04%. You can't get 12% on your money. I know, I got 13%, okay? The S&P during that time averaged 11.81% which is real close to 12%, stupid people. 30 year, my investments
have averaged 11.3%, the S&P has averaged 10.89%. So I've outperformed the
S&P on the 30 and on the 40, outperformed the S&P on the 20, on the 10-year outperformed the S&P. - Sorry Dave, but U.S
small cap value stocks have beaten the pants off of the S&P 500 and your funds for the past
30 and 40 year periods. For the 40 year period ending April, 2018, when that video was published, U.S small cap value stocks
returned 15.89% annualized. And for the 30-year period,
they returned 13.95%. Index funds in their current
easily accessible form were not accessible 40 years ago. But today it is very easy
for any investor to seek higher expected returns in a way that is evidence-based as opposed to anti-evidence. Okay, so fees matter a lot and flashing the market
beating performance of actively managed mutual funds tells you very little
about how those funds will do in the future. More than likely, if an active fund has beaten the market over the longterm, it is done so by maintaining
consistent exposure to stocks with no one characteristics that explain differences in stock returns like smaller companies
and cheaper companies, which you can do using small
cap and value index funds at a much lower cost than a
traditional active manager. One of the things that Dave says to argue against these realities is that if you look at the actual data on mutual fund performance, about 40% to 50% of active
funds beat the market over long periods of time. So you have a pretty good chance
of picking a winning fund. The problem with this information and the problem with mutual
fund data in general, is that it is skewed by survivorship bias. Funds that do well, whether
by luck or skill stay alive. Funds that do poorly close down. When you look at the
available universe of funds at any given time, you were only seeing the
ones that have survived. The Standard and Poor's SPIVA scorecard looks at the survivorship
bias corrected performance of mutual funds. For U.S mutual funds going back 15 years, which is as far back as this report goes, we see that 89% of actively managed funds have failed to beat their benchmark index, when we correct for survivorship bias. Ouch! Survivorship bias is a big deal and ignoring it leads to
extremely misleading results. Only 43% of US mutual funds survived for that full 15-year period. It should not come as a surprise that when you look at the
funds currently in existence at any point in time, they
will all look pretty good. However, this is misleading. Correcting for survivorship
bias reveals the ugly but expected truth that active mutual funds
rarely beat the index over long periods of time. I am all for financial
education and empowerment. And I think that on a lot of topics, Dave Ramsey's advice can be very useful. Unfortunately, Dave's advice on investing could not be further off the mark. There are no good arguments, other than wishful thinking, that investing in high fee
actively managed mutual funds regardless of their past performance, will give you a better expected outcome. In fact, the evidence
suggests the exact opposite. Low cost total market index funds are the best investment for most people. Thanks for watching. My name is Ben Felix of PWL Capital and this is "Common Sense Investing." If you enjoyed this video, please share it with someone who you think could benefit
from the information. Don't forget, if you've run out of "Common Sense Investing" videos to watch, you can tune in to weekly episodes of the "Rational Reminder" podcast wherever you get your podcasts. (upbeat music)
What's with all the Dave Ramsey stuff on here today? I agree with you, but I think everyone on this sub does..why is it being posted so much? Is he in the news for something?
Dave Ramsey gives solid advice for people who make lower wages, and genuinely have no idea how to manage their money. And to people with higher wages that live pay check to pay check and have no idea how to handle their money.
It's super surface deep, widely generalized, and not awful if you're the kind of person that can't save a nickel due to impulse buying.
His advanced level advice is trash. Except for maybe paying a little extra in your mortgage if you've fully funded your retirement and savings accounts.
This is very interesting post/comments. I have family who loves him and they do not live pay check to pay check. They are retired traveling the world. And live off the dividends. They always tell me to watch him and think my investments are crazy. Lol
I rarely find Dave Ramsey to be an impressive person these days. He basically packages his bombastic personality to convince people to get out of debt. While I do find some aspects of his work admirable, his organization really runs borderline cult like with you basically needing to meet his standards of religion and morality in order to work there. He has already been hit with several discrimination suits.
On top of his choppy investment advice, he comes off as a rambling sociopath with a massive ego. There are plenty of other people in the finance world who give better advice without the personality. If he’s the type of guy that motivates you to stay out of debt then good for you. But I think personalities like him will remain a blight on finance, especially as his show becomes more political and exploits today’s toxic political environment for views.
That said, can we please stop taking about him?
Just set it to VT and check back in 20 years
Dave Ramsay is for people who need to turn their life around and build a strong mindset and strategy to get out of crushing debt. Part of that mindset is about being extremely financially conservative and not falling for get rich schemes or trying to invest or speculate your way out of debt. He's great at what he does, and has changed countless lives. The price of that success and mindset is to have a warped view of investing. It's simply not the point. When he recommends managed funds and financial advisors I see it as him "handing over" his financially unsophisticated fans to the new person who can hold their hand and look after them.
I prefer the barefoot investor's style of recommending low fee index funds but I get it.
Yep, in it for himself. His debt advice is gold, and also common sense. Everything else about his program feeds his gluttonous ass.
How do people here feel about Robert Kiyosaki’s (rich dad poor dad) advice and why? Ive been reading his books and i am genuinely curious as to how others feel about it
For the counterpoint, see this from Kitces.com: Dave Ramsey’s Behavioral Advice Ingenuity To Help People Make Better Financial Decisions
Always think on the margins. To a full blown Boglehead, Ramsey gives terrible advice. But we're not his audience. For someone with zero financial literacy, being a Ramseyhead is better than nothing.
The same is true when it comes to "advisors" who work at certain shops (Ameriprise, Northwestern) and may pitch people on investing in high fee funds. If you contribute to an IRA for the first time and invest in a high fee, actively managed fund, you are still better off in the long run than the person that makes no IRA contribution in the first place. Everyone here would agree that you can do better, but saving in the first place is 90% of the game.
As this forum illustrates, people with a little financial literacy and some skin in the game might start to investigate their situation more and realize they can do even better than the high fee funds they were pitched on.