Sunday, June 26, 2011

It's Not Just My Car, It's My Freedom

Many years ago, General Motors absolutely nailed the way Americans feel about their automobiles with one of the greatest ad slogans of all time, "It's not just my car, it's my freedom." If you don’t believe this is true, just ask the residents of a nursing home what not owning or being able to drive a car means to an American.

According to a recent article by Laura Rowley, one of favorite personal finance columnists, freedom is more important than money. She ought to know. As a financial reporter for CNN she learned enough about money and the creation of wealth to achieve the freedom to become a stay at home mom for her three daughters. She reports, “Psychologists Ronald Fischer and Diana Boer of Victoria University of Wellington in New Zealand found that on a national level, individualism and autonomy are more important to well-being than money. The study appears in the Journal of Personality and Social Psychology.”

I agree. If asked for a one word definition of what money means to me, I would reply, “Freedom.”

Fischer and Boer discovered nations that scored high on their autonomy surveys, “Had less stress, less burnout, less mental health problems and so on," In the 63 countries they studied autonomy and individualism was more important than money. They concluded money influences happiness through its effect on freedom. More money gives you more options and more control over your own life. That makes for happiness.

The authors conclude, "Autonomy is really about self-organization and self-regulation, and kind of goes to the heart of what a living system is," Sheldon continues. "Are you being buffeted by what's surrounding you or do you have internal guidance? To the extent you have the latter, you would be doing interesting things, performing without pressure or resentment — and you're going to grow as a person to a greater extent."

Not surprisingly, the authors also discovered that too much money and free time led to unhappiness as well as health problems. A total lack of structure in one’s life is not a good thing. "Based on the findings, people should go for balance," says Fischer. "It is important for people to earn enough money to satisfy daily needs, but then focus on things that make them happy in their lives. This is autonomy: looking for ways to use their creativity; being curious about stuff and broadening their minds; and finding activities that give them pleasure. It's not important to get a job that gives you another $5,000 a year if that means you can't actually enjoy your loved ones or some interesting hobby you could pursue."

I think the Apostle Paul would agree with the findings of this study. A long time ago in a little church in Greenville, SC we sung a song based on a couple of different scriptures.

Galatians 5: 1, 13

Stand fast therefore in the liberty wherewith Christ hath made us free and be not entangled again with the yoke of bondage.

For brethren, ye have been called to liberty; only abuse not liberty for an occasion to the flesh, but in truth serve one another.

Saturday, June 25, 2011

Dave Ramsey Real Estate and Mortgages (Class 12 of 13)

After dumping debt, real estate is the great passion of Dave Ramsey’s life. He was born in a real estate salesman’s family, he had his real estate license by the time he was 18. He went to school in finance to pursue a career in real estate. He was a real estate millionaire while still in his twenties. Real estate debt was his downfall and put him on the road to becoming famous. Real estate still constitutes the third leg of his investment stool. He has owned over 1,000 different properties during the course of his life. When Dave talks about real estate, I listen.

First Dave talks about selling your home. When selling, think like a retailer. Everything in your home should appear to be nearly perfect. Everything should be spotlessly clean. Everything that can be painted should be freshly painted. The carpets should be new and the lights blazing brightly. Closets and kitchens should be nearly empty. Curb appeal is most important. Most buyers have already made a decision from the curb. Chop down all those bushes. Trim the trees. Repair the fence, the gutters, the doors, etc. etc. The goal is a house that looks like a model home in a new development.

Dave Ramsey recommends using a real estate agent to sell your home. Choose your agent based on the Prado Principle. 20% of the agents make 80% of the sales. Choose one of the 20% that are killer sales people. If your agent does not know how to use photography and the Internet, find another agent. The Internet has become the most important sales tool in the business. Do not choose a friend or a relative to sell your home unless they are part of the 20%.

Even after the real estate crash that began in 2006, Dave considers buying a home a good plan for most Americans. It is a forced savings plan and a tax advantaged inflation hedge. When buying, look for old paint, dirty carpets, ugly bushes and other cosmetic problems that can be fixed with a little money and elbow grease. Then low ball the owner.

Location! Location! Location! Buy on the basis of the cheapest property in a desirable neighborhood. Never compromise on a good basic floor plan. Have the home inspected for mechanical and structural problems by a professional, licensed home inspector. Look for a home with a view and/or proximity to water. This will always increase the value of a property.

When buying a house, always be certain to have title insurance. Dave has too many stories to tell about what happens to buyers who did not have title insurance. If buying property outside of a modern development, always get a land survey. Where grandma thought the property line should be might not be the actual property line.

Never buy trailers, mobile homes, or timeshares. Particularly, never buy timeshares.

By this time it should not surprise the reader that Dave Ramsey preaches a hard word on mortgages. He recommends that young couples rent and save until they can make at least a 10% down payment and still have a full three to six month emergency fund after closing. The traditional rule of thumb for buying a house is 3 times gross annual salary with 10% down. Dave is a little tougher. He recommends a mortgage payment that is less than 25% of take home pay. Dave only recommends a 15 year mortgage. The savings when compared to the traditional 30 year mortgage over a lifetime are huge and the difference in the size of monthly payments is not that great. Recent increases in the cost of mortgage insurance and other changes in the business really give the edge to buyers who can put 20% down. I wonder if Dave will modify his recommendations when he remakes these videos.

Dave considers the Adjustable Rate Mortgage to be a horrible option. The risk of rising interest rates is transferred from the bank to the home owner. Bad idea! Of course interest only loans, reverse amortization loans, 40 year loans, and other foolishness from the real estate bubble years are beyond the pale. Never pay extra for an accelerated or bi-weekly payoff. While a good idea, don’t pay someone else for something you can do for yourself.

At the time this video was filmed (1988 before the crash), a conventional loan with at least 10% down, guaranteed by Fannie Mae was the best buy. These loans require private mortgage insurance with less than a 20% down payment, a big expense. Other options include a FHA loan insured by HUD and VA loans for our veterans. These were actually more expensive than the conventional mortgage. The mortgage business has become hugely complex. There are more options than at any time in history. They are difficult to understand and are constantly changing. It is good advice when Dave Ramsey counsels, move very slowly when buying real estate.

Finally, Dave is a big fan of owner financing. When negotiating a deal directly with the owner of a property, the loan can be creatively structured to meet the needs of both buyer and seller. Some of the possible options might include bartering work for lower house payments, no payments for the first year, predetermined changing interest rates, or discounts for early payoff.

This lesson also includes a calculator for estimating mortgage payments and a decision tool for refinancing. Similar tools are available on the Internet.

Saturday, June 18, 2011

Dave Ramsey Working in Your Strengths (Class 11 of 13)

Dave Ramsey believes that we should find fulfillment in our jobs. I can’t find the quote but once I saw Dave quoted as saying, “If the first thing you would do if you won the lottery is quit your job, you are in the wrong job.” Strong medicine, by that definition how many of us are in the wrong job?

Dave Ramsey begins with the bad news. The era of the “good job” is over. He observes the average job lasts only 2.1 years, less than the average NFL career. The great corporations are using low wage workers in foreign countries, automation, and computer based knowledge systems to replace American employees. Then the good news, in the decade prior to the 2008 crash small business was creating twice as many jobs as large business was eliminating. Dave Ramsey, as an entrepreneur believes that working for small business or better yet, creating a small business is the wave of the future.

Then the class changes gears. Dave discusses the psychology of success. He believes that who you are should direct where you should be in the work a day world. He believes that our basic personality and strengths (talents) never change. He does not believe that we will ever grow enough in areas of personal weakness to become a success in one of those areas. Dave Ramsey does not want to be a well rounded person. He wants to be excellent in some particular area related to his strengths. Obviously, Dave Ramsey would allow that earning enough money is important, but he states that money is ultimately never enough compensation for doing a job. He encourages his listeners to, “Find something that blends your skills, abilities, personality traits, values, dreams, and passions."

Dave Ramsey recommends the DISC personality profile as a useful tool to understanding your personality. Free versions of this test can be found on the Internet. The test divides people into 4 general categories.

D-Dominant This person is the lion, a hard charging people eating leader.

I-Influencing This person is the otter, a fun loving, playful, people pleaser.

S-Stable This person is the Golden Retriever, a loyal, amiable, stable easy going type that enjoys a slow pace.

C-Compliant The person is the beaver. A focused, detail oriented structural engineer that loves procedures and well defined processes.

Next Dave tackles the problem of finding a job. He starts by reminding the audience they will be hired if and only if an employer believes that they will solve his problem. An employer is not interested in solving your problems. Using his background in sales, he recommends the following approach. Locate a target and develop a strategy. Talk to people who work at the target company. Research the company. Learn all you can about their culture, business, and financial condition.

Then send a letter of introduction (without a resume) to your target. Tell them you think they are great and you want to submit a resume on such and such a date. Then send the resume and cover letter. In the cover letter, tell the company you will call them on such and such a day at such and such a time. AND THEN DO IT. Dave believes that except for the Government and very large bureaucratic corporation persistent follow-up and networking is more important than anything else in finding your dream job.

His advice concerning interviews is pretty standard stuff. Look like the people who work at the target company, cut your hair like those people, dress like those people, be on time, address everyone by their name, offer “a firm confident handshake, and maintain eye contact at all times.” He contends research indicates that most hiring decisions, especially in small businesses are made in the first 30 seconds of the interview. After an interview send a simple thank you note to the interviewer.

Dave spends a little time promoting the dreaded part time job to kick start your financial life. These are jobs that you do not want, but a temporary sacrifice you are willing to make to reach the next level.

He ends with his favorite inspirational poem, An American Creed by Dean Alfange. Look up a biography of this guy. You will be surprised.

I Do Not Choose to Be a Common Man
It is my right to be uncommon—if I can.
I seek opportunity—not security. I do not wish to be a kept citizen, humbled and dulled by having the state look after me.
I want to take the calculated risk; to dream and to build, to fail and to succeed.
I refuse to barter incentive for a dole. I prefer the challenges of life to the guaranteed existence; the thrill of fulfillment to the stale calm of utopia.
I will not trade freedom for beneficence nor my dignity for a handout. I will never cower before any master nor bend to any threat.
It is my heritage to stand erect, proud and unafraid; to think and act for myself, enjoy the benefit of my creations and to face the world boldly and say, “This I have done.”

Friday, June 17, 2011

Empowered by Debt?

The results of a recent survey indicate that young adults, 18-27 feel empowered by debt. While the authors of the study were not surprised that student debt would make young adults feel powerful about their future, they were surprised to learn credit card and other forms of debt had the same emotional effect. At first I was shocked by these findings, who could possibly feel empowered by $20,000 of student debt, but after some reflection I have concluded this makes perfect sense.

When I graduated from high school I thought I knew everything necessary to conquer the world. Actually, I probably thought I knew a great deal more than everything. It is a characteristic of the age. I suppose that if young people didn’t feel that way they would never leave their homes, get married, and start families of their own. Students tend to over estimate their future earning power, resulting in a willingness to take on an unreasonable amount of student debt, debt that does not go away even in bankruptcy. Since the crash in 2008, a persistently high unemployment rate, particularly among young people, has highlighted the dangers of this sort of over exuberant optimism.

Rachel Dwyer, lead author of the study and assistant professor of sociology at Ohio State University, was surprised by their enthusiasm for credit card debt, "We thought educational debt might be seen as a positive because it is an investment in their future, while credit card debt could be viewed more negatively," she said. "Surprisingly, though, we found that both kinds of debt had positive effects for young people. It didn't matter the type of debt, it increased their self-esteem and sense of mastery."

Again this makes sense. For the first time in their lives their parents are not standing over their shoulders saying, “NO!” It has to be a rush proving that you are an adult who only has to wave the magic plastic card at any desire to find fulfillment.

The article states the authors of the study can’t decide if this is a good thing or a bad thing. "Debt may make young people feel better about themselves in the short-term, but that doesn't mean it won't have negative consequences in the long-term," Dwyer said. "We found that the positive effects may wear off over time, but they still have to pay the bills. The question is whether they will be able to. There needs to be additional research to answer this question." Indeed, even if the professors are not funded, the young debtors will be exploring this question over the next 30 years or so.

The authors of the study discovered the biggest self esteem bump from debt came from lower class young adults. I guess, for the first time in their lives, they were able to purchase items they could only possess in their dreams. Middle class children received less of a bump. They view debt as a normal rite of passage. Adults borrow money and make payments for the rest of their lives. It is just the way of the world.

The article concludes with the discovery that these feelings of power don’t last very long, "By age 28, they may be realizing that they overestimated how much money they were going to earn in their jobs," Dwyer said. "When they took out the loans, they may have thought they would pay off their debts easily, and it is turning out that it is not as easy as they had hoped."

At least in one case it didn’t take a young adult that long to discover debt is not an unmitigated blessing. One morning while eating breakfast at the local McDonalds I found myself eavesdropping on a conversation between two teenaged employees, one employee was complaining in a loud emotional rant strewed with a liberal use of obscenity. “I hate this ____, ____ job. I won’t stay at this _____ job if I didn’t have this ___, _____ car payment. He continued with the ____, ____ job and ____, ____ car payment theme for several minutes while I quietly smiled and thought, “Welcome to the real world, son.”

Saturday, June 11, 2011

Dave Ramsey From Fruition to Tuition (Class 10 of 13)

In this class Dave Ramsey covers baby step number 4, saving 15% of gross household income in tax favored retirement plans and baby step number 5, save for your children’s college education using tax favored plans. Because Dave Ramsey attempts to cover all possible options available to everyone in all possible employment situations, the result is a little overwhelming and somewhat confusing. Understanding this somewhat arcane subject is further complicated, as the Government is constantly changing the law. As part of his presentation Dave has a telephone ring on stage. He answers it and discovers that once again the law has been changed. In his wrap up he admits that even he is confused and he teaches the stuff. He encourages his listeners to consider this class nothing more than a starting point in their education.

After establishing an emergency fund and paying off all debt except the mortgage, Dave considers planning for retirement the next target on the way to financial peace. He does not believe that anyone should trust the Government to provide for them in their old age. This, I believe, in Dave Ramsey’s mind is as much a statement of principle as an appraisal of our economic future.

Qualified tax favored plans that protect your retirement investments from taxes include, Individual Retirement Arrangements (IRA), Simplified Employee Pension Plans (SEPP), the infamous 401 (k) plans so battered by recent events and late night comedians, 403 (b) plans for hospitals, nonprofits, and the like, 457 plans, and Dave’s favorite the Roth IRA.

The IRA is the oldest of these plans. Basically (as of 2008 when this class was filmed) anyone with an earned income could contribute $5,000 per person to one of these funds. The investor would buy whatever product was placed in the IRA with pretax dollars. That is, the Government did not tax this income. However, the Government will tax the money when it is withdrawn during retirement. The 401 (k) offered by for profit corporations and its cousin the 403 (b) for nonprofit organizations work in a similar manner. The income the employee contributes to the plan is deducted before taxes. Frequently, the employer adds some matching funds in the neighborhood of up to 3% of the employee’s gross income. Typically, the organizations offering these plans offer a limited number of financial products as possible investment choices. For example, the Federal Government Thrift Savings Plan for their employees offers two bond funds and three stock funds. The employee can choose percentages invested in any of these funds or allow the fund managers to select a mix based on age. The 457 plan is a similar type of plan that has some advantages and disadvantages in withdrawals. Dave spends very little time discussing the 457 as it is rare and he doesn’t like it very much. The SEPP is a similar plan that allows the very small businessman the opportunity to shelter up to 15% of his profits in a tax deferred account. However, he must fund a similar percentage to his employees’ accounts as a benefit. Once the company grows beyond a family business it is too expensive to offer as a employment benefit.

Dave Ramsey is a huge proponent of the Roth IRA. This plan allows all but wealthy Americans the option of investing after tax dollars in a wide variety of investment vehicles in a tax free account. In other words, all the capital gains and all the income generated by these investments will not be taxed when used in retirement. Since Dave Ramsey projects 12% return on investments, the difference between, say, $5,000 in pretax income placed in a 401 (k) that 30 years later is taxed as regular income and $4,000 (representing the same number of working hours) in after tax dollars invested in the Roth IRA but generating tax free wealth will be tremendous.

Dave discusses the dangers of early withdrawals from these accounts or loans taken from these accounts. For the purposes of this article, consider all such actions a bad idea. If you are in that desperate a need for money, evaluate your options and their cost with your accountant before proceeding with great care.

In conclusion, for most of his audience, Dave Ramsey suggests the following strategy. Consider a family with a combined annual income of $100,000. Their investment target is $15,000.

Assume they will receive 3% in matching money. The first priority is grabbing the free money.

Place $3,000 in the 401 (k) company adds $3,000

Next place $5,000 each for husband and wife in a Roth IRA (the maximum)


Then place the remaining $2,000 in the company 401 (k) without any additional matching dollars.

Baby Step 5, saving for college should only be initiated when 15% of a family’s gross income is going into retirement saving plans. Parents should avoid any guilt trips. Kids will not die if they have to pay for their own education. Scholarships, work study programs, Government grants, and even loans are available for sufficiently motivated students. Such options will not be available to elderly parents.

Like the 401 (k) and its kin, the Education Savings Account (ESA) is available to fund future educational needs with tax sheltered dollars. A wide and growing variety of 529 plans are available in various states. They differ in quality and flexibility. For this reason Dave generally prefers the ESA. Finally, for the very wealthy who are not eligible to contribute to these more common options, states offer Uniform Transfer To Minor Acts (UTMA ) or Uniform Gifts to Minor Acts (UGMA ) that allow the transfer of capital to minors for educational and other purposes. As in other cases, Dave recommends 100% stock mutual funds as a basis for educational investment. He is particularly opposed to the use of whole life policies as a basis for this kind of savings.

Saturday, June 4, 2011

Dude! Like What Happened to Membership Has Its Privileges

Whoa dude, like you mean I can’t use my American Express card to buy medical marijuana? Bogus! Like what a heinous restriction of my rights. Dude! Like what happened to, “Membership has its privileges.”

Sometimes I come across a story in the news that I just have to share for no other reason than it just tickles me. American Express has banned the purchase of medical marijuana with its cards. Since credit card companies have no souls, I believe them when they say they are only attempting to limit risk. I expect pot heads tend not to be good credit risks.

This is not a new problem. None of the credit card companies allow their customers to use their cards to buy chips at gambling casinos. Obviously, people who are using their credit card to buy more chips are not a good risk. If the casinos were still using the credit services of Tony Soprano, at least he could send a leg breaker to make collections if the loser was late making payments. The credit card companies probably charges a higher rate than Tony Soprano, but they have to rely on telephone collection agencies. I bet Sammy “Four Fingers” Mozzarelli gets better results. This practice is a little peculiar since the credit card companies allow their customers to take cash advances out of the casino’s ATM. What do they think happens to that money? Oh well.

“American Express first banned the purchase of online pornography in May 2000, saying it faced an unacceptably high level of disputed transactions.” (From Smart Money: What Your Credit Card Won’t Let You Buy). They will let their card holders buy pornography from a brick and mortar business. I remember those days. It seemed like every week there was a new story about a fake porn site scamming the young and the restless or the old and the dirty by stealing their credit card information.

Customer rights advocates are getting all spun up about these restrictions. They state it “is an inconvenience for the merchants, infringes on consumers’ rights, and amounts to moral policy-setting.” Well, yes and no. It seems like the line between immoral and illegal behavior can get rather fuzzy. Now American Express claims their online pornography ban also is an effective tool against child pornography. They also are worried about the possible legal implications of medical marijuana sales if the Federal Government decides to use existing laws to crack down on the states that allow the sale of medical marijuana. Recently we saw such a crackdown hit the online poker industry. In such scenarios credit card companies could lose a lot of money. Credit card companies do not like to lose money.

As long as people want gambling, prostitution, or even semi-illegal drugs, I guess there will be a place for cash in our economy.

Friday, June 3, 2011

Concerns With Dave Ramsey's Of Mice and Mutual Funds

This is the only time I will part company in a substantive way with Dave Ramsey. I am reluctant to do this since I am presenting Dave Ramsey’s viewpoint, not my prejudices and beliefs. However, I have grave misgivings over some aspects of what he teaches about investments even though much of it is of value and many of his suggestions constitute a good way for a young person to begin an investment program. Where are the problems with this analysis and advice?

First Dave Ramsey is suggesting a one size fits all investment strategy with no backstop.

Here is the text of an email I sent my point of contact at Dave Ramsey’s organization. He replied with the aforementioned article that restated Dave’s opinions.

I am continuing to consider Dave’s somewhat iconoclastic recommendations concerning growth only mutual funds. I find it odd that Dave does not consider age in his risk calculations. Traditional conventional wisdom recommends the investor’s age in bonds. The new conventional wisdom recommends 115 minus your age in bonds to better protect against the risk of inflation. Hence, at my age 60, I should have somewhere between 40% and 55% of my investments in individual stocks, stock mutual funds, or exchange traded funds. 2008 would have simply massacred my 85 year old mother in law’s portfolio if it was invested exclusively in growth funds. As of 2011 there are still many empty apartments in her senior high rise. A lot of formerly rich old folks are now living with their children. Whether or not the stock market will recover in the next decade is a moot point at 85. The home health care agency wants payment for providing that aide 24 hours a day right now. Fortunately, the vast majority of her holdings are in commercial CDs (some are pretty old and pay a good rate of return), bond funds, and annuities.

I find it interesting that there is a disconnect between what Dave says and what Dave does on this particular issue. He balances his growth fund portfolio with income producing real estate. Functionally, this is identical to (but probably better in the current investment climate) using bonds, bond funds, annuities, and CDs to produce a steady income stream with limited concern as to the present value of the equity.

I would really like to hear more from Dave on this subject.

As an addition, let me add that in the decade starting in January 2000, the return on bonds exceeded the return on stocks.

My second problem involves an expected rate of return of 12% from retail mutual funds. Here is the text from my email to my contact on a variety of topics. He answered with a restatement of their position.

Dave is projecting a 12% annual return on retail mutual funds. Given his conservatism on every other issue, this strikes me as wildly optimistic. Heavyweights like John Bogle, the founder the Vanguard Funds, and John Hussman are projecting after tax and inflation returns of 0.5% to 3.0% for the foreseeable future (next ten years). Again, I am an engineer. I understand that the past is not necessarily a predictor of the future. Extrapolation beyond the last known point on a graph is a recipe for disaster. There is another problem with expecting a 12% annual return. Returns are extremely sensitive to actual start and end dates. From 2000 to 2010, for example, the return on an index fund could well have been zero. The latest study, “Revisiting Retirement Withdrawal Plans and Their Historical Rates of Return” by Christopher O'Flinn, Felix Schirripa examines this problem in great detail.

After the dotcom crash and the crash of 2008, does Dave still believe in projecting a 12% return over any five year period? If you could get an answer from him, I would very much like to hear it.

As I dig further into this number, I become even more skeptical. In the book Financial Peace Revisited which is included in the course material, Dave Ramsey states, “However, by leaving your investment alone in any possible ten-year period in the last sixty nine years, you would have made money 97% of the time and would have averaged 12% per year.” The footnote reference an article published in 1994 as the source of this information. This data ignores the last 18 years and two major stock market crashes! It also includes the great bull run from the beginning of World War II until 1970. During those years, America possessed the only industrial infrastructure that did not experience serious war damage. During those decades, we produced something close to 50% of all the manufactured products in the entire world. Those days will never return. Those years are totally irrelevant as the basis for future predictions on stock market returns over the next decade, now that we have exported 20,000,000 factory jobs to foreign countries.

After posting this article I received further information from my point of contact that provides more recent data supporting Dave's arguments. This data is much more relevent, but I still fear overly optimistic.

Dave dismisses gold as an investment using similar supporting data. He observes that“From 1833 to 2001, the compound annual growth rate of gold was only 1.54%. That’s pretty rotten.” That argument is bizarre. Until 1971 when Nixon took us off the gold standard, the price of gold was fixed by the Government. In 1971 the price of gold was $35.00 an ounce. This morning the price of gold stands at $1,542.00 per ounce, a little better than 1.54%. On January 4, 1971 the Dow stood at $904.37. This morning the Dow stands at $12,136.12.

The final problem I have with Dave Ramsey’s investment suggestions concern commissions and fees. Dave minimizes the importance of up front sales commissions. He is willing to pay such charges to obtain an excellent return on his money. He states in Dave’s Investment Philosophy. “Generally I recommend choosing A shares (upfront commissions). This is problematic as Dave recommends Endorsed Local Providers, investment salesmen with the heart of a teacher who puts the client’s needs first. These brokers and financial advisers are not considered “fiduciaries” under current law. What this means is they are under no legal obligation to act in your best interests. They can put their interests or the interests of their firm ahead of your interests. They can not legally sell an inappropriate product to a client, but they can feather their nest at your expense. Dave Ramsey also receives a fee for listing these salesmen as Endorsed Local Providers, a troubling conflict of interest.

In conclusion, let me provide the text of my final email to Dave’s staff member on this subject. Since I didn’t receive a reply, I called up this individual. He states that Dave Ramsey keeps his personal finances personal. So I will not be able to tell you how he actually divides up his own personal wealth.

I have continued to study and consider Dave Ramsey’s unusual investment advice. The Of Mice and Mutual Fund class is scheduled for this coming Friday. It occurred to me to look deeply into what Dave Ramsey does rather than focusing on his statements.

Dave does own stock in an individual corporation, The Lampo Group Inc. I suspect that significantly more than ½ of Dave’s net worth is held in these shares. By the way, you may be pleased to learn that the Lampo Group carries an A+ rating from the Better Business Bureau. I also noted the Lampo Group 401K program is rated only a little above average by Brightscope. It was down graded by below average Investment Menu Quality and Participation Rate.

Dave Ramsey’s remaining net worth is actually held in a group of widely diversified balanced funds, incorporating Growth and Income Funds, Growth Funds, International Funds, Aggressive Growth Funds, and a privately held portfolio of income producing real estate, essentially a personally held REIT.

As I have told people for a very long time (Dave says it too), don’t listen to what people say, watch what they do. In this case I would conclude if you wish to be a wealthy man, become an entrepreneur. This is probably very good advice for your generation, as the number of “good jobs” in this country continues to decline.

Dave Ramsey Of Mice and Mutual Funds (Class 9 of 13)

Dave begins by insisting investment need not be complicated. His first rule of investing is, “Keep It Simple Stupid.” Certainly the investor should, as Dave Ramsey suggests, be able to explain the details, costs, dangers, and opportunities of an investment plan to an uninformed audience. Dave Ramsey recommends, never investing purely on the basis of tax avoidance, never investing with borrowed money, and the importance of diversification. This is all pretty standard stuff.

Dave then defines the basic concepts of investments. Yields increase with risk and the nature of liquidity in investment decisions. Money in a checking account is very liquid. It can be accessed immediately, day or night up to its full value. A home is much more difficult to convert into other goods or services. It requires months, unless the owner is willing to take an extremely low price from the buyer.

In his discussion of various investment vehicles, Dave begins to build his case for mutual funds. Dave considers Certificates of Deposit a bad investment, as they pay a small rate of return and are relatively illiquid. Dave believes in using Money Market funds for the emergency fund and as a general source of ready cash. Dave considers investing in a single stock to be a risky proposition. In the order of presentation he places single stock investing next to casino gambling. He does not make a one to one comparison, but he does not leave the listener with any doubts about his position. Dave is opposed to investing in bonds for the same reason he opposes Certificates of Deposit, the rates of return are relatively low and they aren’t very liquid.

Dave is a huge proponent of stock mutual funds. He believes they provide the greatest diversification and liquidity with a minimum of risk. Since they are professionally managed, he contends, the rate of return should be higher than anything that could be accomplished by an individual investor. Dave Ramsey suggests an even split (25% each) between Aggressive Growth Funds (small cap), Growth Funds (mid cap), Growth and Income (large cap), and International. Dave Ramsey insists that mutual funds have at least a five year track record. He also makes a point to minimize the importance of sales commissions and annual fees, as some mutual funds with commissions and higher fees beat the returns of some similar, lower priced funds.

Dave also personally invests in rental real estate. However, he contends this type of investment requires more free cash than most of his listeners possess.

He rates annuities as questionable (variable annuities) to very bad (fixed annuities).

Finally, he lists what he considers bad investments gold, commodities, futures, viaticals (often outright frauds). In an additional paper entitled, Dave’s Investment Philosophy, I received from my contact at his organization Dave also expresses negative views on Exchange Traded Funds, Real Estate Investment Trusts, and Equity Indexed Annuities. Dave also argues against value based investing (funds that only invest in “moral” companies meaning they don’t give money to Planned Parenthood or that sort of thing).