Financial Advisor or Dave Ramsey? Whose Advice Do I Take?

Summary

The Ramsey Show Highlights: "Financial Advisor or Dave Ramsey? Whose Advice Do I Take?"

Release Date: December 24, 2024
Host/Author: Ramsey Network
Description: The Ramsey Show Highlights delivers concise, daily advice on life and money from experts like Dave Ramsey, Ken Coleman, Rachel Cruze, and others. This episode delves into the contrasting financial strategies between traditional financial advisors and Dave Ramsey's principles.

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1. Introduction to the Caller’s Situation

At the outset of the episode, a concerned caller reaches out seeking guidance on financial decisions as her husband approaches retirement. The couple aims to pay off their $800,000 mortgage within the next year. However, they are faced with conflicting advice: their financial advisor recommends not prioritizing the mortgage payoff due to the low interest rate of under 3% and suggests leveraging their investments instead.

Caller’s Initial Query:
"I have a husband who's retiring within the next 12 months and we'd like to finish paying off the mortgage on the house... how can we best divest of our investments and pull the money out, make the cash available to do this." [00:06–00:57]

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2. Financial Advisor’s Recommendations

The caller explains that while her financial advisor advises against paying off the mortgage early—citing the favorable mortgage rate and robust investment returns—the couple remains steadfast in their goal to eliminate the mortgage. The advisor suggests liquidating bonds, which are yielding tax-free rates, over mutual funds to avoid capital gains taxes.

Financial Advisor’s Strategy:

• Primary Suggestion: Utilize bonds to access funds without incurring capital gains taxes.
• Rationale: Bonds are perceived as safer, tax-advantaged investments compared to mutual funds.

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3. Dave Ramsey’s Initial Analysis

Dave Ramsey weighs in by challenging the financial advisor’s recommendation to use bonds for divesting investments. He posits that the bonds likely have decreased in value due to rising interest rates, negating any potential gains and possibly resulting in a loss.

Notable Quote:
"You probably got no gain on your bonds. They're probably value is down even though the coupon rate stayed the same." [00:57]

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4. Detailed Critique of the Financial Advisor’s Approach

Ramsey delves deeper into his disagreement with the advisor's strategy, highlighting two main areas of contention:

1. Advisory Attitude:
   He criticizes the advisor for a lack of personalized guidance, suggesting that the advisor is more focused on conventional strategies rather than tailoring advice to the couple’s specific goals.
   Quote:
   "His job is to say, okay, what are your goals and how can I help you accomplish them." [02:02]

2. Asset Allocation Methodology:
   Ramsey challenges the widely accepted asset allocation theory that recommends decreasing investment risk (shifting from equities to bonds) as one ages. He labels this approach as “horse crap,” arguing that over a long retirement span, lower-yield bonds result in significant opportunity losses compared to equities.

   Quote:
   "I'm 64, I have 0 in bonds and almost the same amount in money markets... as you get older, you should limit risk because that's horse crap." [03:17–05:45]

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5. The Fallacy of Bonds as Safe Investments

Expanding on his critique, Ramsey explains the inherent volatility of bonds, especially in a rising interest rate environment. He emphasizes that the value of bonds inversely correlates with interest rates—meaning that as rates rise, bond values fall, leading to potential losses for investors.

Key Points:

• Interest Rate Impact:
  "Bond prices are exactly inverse to the prevailing interest rate market." [05:45]

• Current Market Conditions:
  With historically low-interest rates over the past decade, purchasing bonds now positions investors at risk of devaluation as rates increase.
  Quote:
  "In a record low in the last 100 years, we had a unprecedented 3% interest rate environment for a decade... you would buy them in a falling interest rate environment if you were gonna buy bonds at all." [06:00–07:31]

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6. Contrasting Approaches to Financial Planning

The discussion highlights a fundamental divergence between traditional financial advising and Dave Ramsey’s principles:

• Traditional Financial Advisor:
  Advocates for a balanced asset allocation with increasing bond holdings as clients age to mitigate risk, emphasizing tax efficiency and stability.

• Dave Ramsey:
  Rejects the conventional asset allocation methodology, advocating for sustained investment in higher-yielding equities to maximize growth over the long term, even in retirement.

Co-Host’s Reinforcement:
"It's good." [05:45]
“Yeah. And I think one of the most important things we've learned with the financial advisor is exactly what you said at the top of this is that here are my goals and if they're not respecting or hearing that, they're going to do the inverse of that.” [07:31–07:43]

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7. Conclusion and Takeaways

Dave Ramsey concludes by underscoring the importance of aligning financial advice with personal goals. He encourages listeners to critically evaluate their advisors’ strategies and prioritize their objectives over standardized financial doctrines. Ramsey hints at considering a change in financial advisory support if the current guidance consistently contradicts personal financial goals.

Final Thoughts:
"So I'm not ready to fire this guy, but I really dislike bonds for him from him. And I dislike his mortgage advice and... he's kind of telling you what to do instead of asking you what you want to do." [07:48]

Call to Action:
Ramsey promotes the EveryDollar budgeting app, emphasizing the significance of personalized budgeting in achieving financial goals.

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Key Insights and Lessons:

1. Personalized Financial Planning is Crucial:
   Financial advice should be tailored to individual goals rather than adhering strictly to conventional methodologies.

2. Understand Investment Dynamics:
   Awareness of how interest rates affect different investment vehicles, such as bonds, can prevent potential losses.

3. Question Conventional Wisdom:
   Challenging standard financial theories, like asset allocation based purely on age, can lead to more optimized financial strategies.

4. Effective Communication with Advisors:
   Ensuring that financial advisors listen and adapt to personal goals is essential for a successful financial plan.

5. Maximizing Investment Growth:
   Prioritizing higher-yielding investments may offer greater growth potential, especially over extended retirement periods.

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This episode of The Ramsey Show Highlights serves as a critical examination of traditional financial advising practices, advocating for a more goal-oriented and informed approach to personal finance. Dave Ramsey’s insights encourage listeners to take control of their financial narratives by questioning standard practices and aligning their strategies with their unique financial aspirations.

Transcript

[Dave Ramsey]

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[Caller]

I have a husband who's retiring within the next 12 months and we'd like to finish paying off the mortgage on the house.

[Dave Ramsey]

Good.

[Caller]

Yes, but per your advice, and our financial advisor is advising us not to because the mortgage is at under 3% and our investments are doing well above that. However, that doesn't matter to us. We want to plow ahead and get this done. And our next question to him is how can we best divest of our investments and pull the money out, make the cash available to do this. And his next tier of advice is to pull from our bonds that are earning at tax free rates as opposed to pulling from our mutual funds that we'll have to pay capital gains taxes on. What do you suggest we do?

[Dave Ramsey]

You probably got no gain on your bonds. They're probably value is down even though the coupon rate stayed the same. But as interest rates rise, bond values go down. And so my guess is that you bought them during a lower interest rate environment, so they're probably not even worth what you paid for them today. Is that right?

[Caller]

I'm not sure that's a good question.

[Dave Ramsey]

I don't think you're gonna have any gain to amount to anything. So I like his advice on that basis.

[Caller]

Okay.

[Dave Ramsey]

And what is your total nest egg?

[Caller]

Four million.

[Dave Ramsey]

Okay. And how much is the mortgage?

[Caller]

800,000.

[Dave Ramsey]

Okay, good, good. And you guys are how old?

[Caller]

69 and 67.

[Dave Ramsey]

Cool. And how much have you got in these bonds?

[Caller]

That I don't know. That's a good question.

[Dave Ramsey]

Is about 800 is enough to do this?

[Caller]

I think so. Yes, yes. By the way he was talking about it, I wasn't that, not that specific with him.

[Dave Ramsey]

Okay.

[Co-host]

Is he the one that put you guys in the bonds, Carol, to begin with or was that something that you had?

[Caller]

Yes. No, he's. He's been, we've been with him for our entire working career.

[Co-host]

Okay.

[Dave Ramsey]

Okay. Yes, I agree with his advice on that. I would use the bonds first to answer your question.

[Caller]

Okay.

[Dave Ramsey]

Okay. This guy, you need to be aware of a couple things here with this guy. I'm not quite ready to fire him, but I'm close.

[Caller]

Right.

[Dave Ramsey]

Okay, I hear you. Number one, because he, his job is not to take his glasses on the end of his nose and speak down to you little people who have $4 million and you shouldn't be paying off your mortgage. Listen to the wise financial advisor because bull crap. His job is to say, okay, what are your goals and how can I help you accomplish them?

[Caller]

Yes.

[Dave Ramsey]

So I don't like his approach to this. And it's very typical in the financial advising world, this level of arrogance. It's just below the. It's not overt arrogance, but it's a subversive arrogance.

[Co-host]

But this advice is very prominent among us.

[Dave Ramsey]

It's a standard. It's a standard. That's the second problem I've got with him, is he'd. He did two very standard things in the financial world that I completely disagree with. One is he told you not to pay off your mortgage. And the second is he put you in bonds, right? And so these bonds, you know, you have a fourth of your money tied up in something that's substantially underperforming because of this guy.

[Caller]

Right, gotcha. Okay.

[Dave Ramsey]

And that's these bonds. So I'm. And. Cause here's the thing again, the simple thing to remember about bonds is this. In the financial advising world, we have been taught, and everyone for some reason decided to agree with it rather than actually making their own decisions. But the people like me and him that are trained in this stuff, we've been taught that as you get older, we use what's called the asset allocation methodology or theory, and that as you get older, you should be in less and less and less risk. And so that by the time your age, you should largely be in bonds and money markets and have very little in equities, okay? The problem is that everybody just accepted this as if it's a fact. It's not a fact. It's a theory, it's an idea. And I disagree with it. I'm 64, I have 0 in bonds and almost the same amount in money markets. I got a little bit in money markets just because I like some cash, but I'm not sitting in the. I haven't moved everything away from equities because as you get older, you should limit risk because that's horse crap. If I live to 94, and I'm 64 and I've been in an instrument making 8% instead of an instrument making 12 or 14, the amount of money I've lost during that 30 years is millions. So it's bad advice, this asset allocation methodology. It's bad advice. And so he puts you in these bonds. The second thing you need to know about bonds is that they, they are not legitimately safer than stocks or mutual funds, okay? Because when you track the volatility of bond values versus the volatility of mutual funds, stock values, they're very similar. It's not safer. It's really not. And the reason is the third thing. And then I'll let you go. Okay. Is this thing. But I mean, it's teaching for everybody out there.

[Caller]

That's good.

[Co-host]

It's good.

[Dave Ramsey]

It's everybody out there. So bonds, the thing you remember about bonds is there's a set interest rate on the bond. So when interest rates rise in order to achieve that same a higher. Let's say you got a 4% rate and interest rates are 7. But. And so people are expecting 7, but your bond is only paying 4. So the value of your bond goes down as interest rates rise. It goes up as interest rates fall. Bond prices are exactly inverse to the prevailing interest rate market. So in a record low in the last 100 years, we had a unprecedented 3% interest rate environment for a decade, right? Yes. And in the middle of the lowest interest rate environment in known history, this guy puts you in bonds. And where is it going to go from the lowest in interest rate environment in history up. As interest rates go up, your bond values go down. And so I'm afraid you may have actually lost money on these bonds when you get into them, but I'm hoping you at least broke even. That's what I'm hoping. So interest rates, folks, at bond prices, the value of a bond goes down as interest rates rise. So you never would buy bonds in a rising interest rate environment. You would buy them in a falling interest rate environment if you were gonna buy bonds at all. And that's because of the yield on the bond has to approximate the prevailing rate and yet the coupon rate is fixed.

[Co-host]

Yeah. And I think one of the most important things we've learned with the financial advisor is exactly what you said at the top of this is that here are my goals and if they're not respecting or hearing that, they're going to do the inverse of that.

[Dave Ramsey]

Right. Where else have I got to figure out that you're giving me bad numbers?

[Co-host]

That's right.

[Dave Ramsey]

You know, so I'm not ready to fire this guy, but I really dislike bonds for him from him. And I dislike his mortgage advice and it. And I dislike that he's kind of telling you what to do instead of asking you what you want to do. Create your free every dollar budget today. The simplest way to budget for your life.