Editor’s Note: Between the initial draft of this post and it’s publishing date, Chris Hogan no longer works for Dave Ramsey or Ramsey Solutions. Apparently, there was some workplace drama about infidelity, Ramsey’s hiring and firing practices, and there’s a court case going on. None of which had anything to do with his investment advice, which is nevertheless skewered for your entertainment below. -Andrew
I’ve never been banned from a group before. I tend to be a bit of a rule follower, but I stepped out of line.
There’s a fierce debate about how to get the most from your investments. People have strong opinions. It turns out the moderators on the Chris Hogan Everday Millionaire’s Facebook group have very strict rules about the opinions you are allowed to share.
This topic was about whether you should invest your money in actively-managed mutual funds, in which there are one or more managers buying and selling stocks within a fund, or passively-allocated index funds, in which there is only computer-driven precision to include stocks in a particular index, such as the S&P 500.
If you read the bolded phrases above and had a strong emotional response, you probably know more than the average person about personal investments.
The Dave Ramsey / Chris Hogan position on investing is that the individual investor, which is you and me, needs:
- An investment professional to help them select investments
- To work with that professional to select actively managed mutual funds, in an attempt to beat the returns of the stock market
I think if you follow that advice, you will probably do just fine in your investing life. You will, of course, do better or worse if you find a better or worse investment professional. That professional will do better or worse if he or she picks better or worse funds. Those funds will do better or worse if the fund managers make better or worse decisions that impact your investments – wait a second.
Isn’t that a lot of variability? There’s a lot of “if” going on.
- If you find a good investment professional (how do you know if they are good?)
- If they stay as good as they were when you found them (and don’t make mistakes, miss opportunities, or do something nefarious)
- If they pick good actively managed funds
- If those funds are managed well and continue to be managed well
Every one of those things can go poorly for you, through no fault of your own.
The next part is, all of those things cost you money. You pay money for the investment professional. You pay money, sometimes, just for the privilege of buying the funds they select (called front-loading, or loaded funds). And the funds tend to have higher fees associated with them, called an expense ratio.
Contrast that with famous Vanguard index funds. Index funds come in many shapes and sizes, but the most well known among personal finance folks is VTSAX, the Vanguard Total Stock Market Index Fund. This fund, and similar funds that buy the S&P 500 as an index, do it with incredibly low cost. They are computer controlled, ensuring that risks like having a bad fund manager or a bad investment professional are basically mitigated.
When you buy funds like this, you pay next to nothing in expenses. Fidelity’s total market index fund has an expense ratio of 0.015% and it costs nothing extra to buy it (no loads, or extra expenses, that is). This means if you buy $1,000 of this fund, it costs you about $1.50 in fees per year.
Many actively managed funds charge between 0.50% to over 1.00% in expense ratios, every year, on every dollar you have invested. For $1,000 invested, that’s about $5 to $10 per year, whether it goes up or down. And many of these funds, including the ones Dave Ramsey and Chris Hogan have spoken about on the air, as some American Funds have done, charge a 5% load, meaning that if you want to invest $1,000 you must pay a fee of $50, then the ongoing expense ratio.
But don’t those actively managed funds perform better? Not according to SPIVA, who tracks the data of actively managed funds against the S&P 500 index. Even in a wild trading year of 2020, in which more actively managed funds than usual beat the S&P 500, the rolling 20 year average of large cap growth funds that survive (many are culled each year) and beat the S&P 500 is only 4%. 4%!! If you want to read the whole report, nerd out, I won’t judge you.
So I got kicked off the page for getting into a spirited debate over active versus passive funds. I was calm and polite, as was the person debating with me. However, Dave Ramsey and Chris Hogan, and the business they run, get paid based on business referrals to the investment professionals that sell actively managed funds. There is no reason to tolerate a debate that can end in one of their business lines being damaged. Even if we were civil. Even if I was right!
It’s their page, I hold no ill will about the ban. But you can always remember this when callers talk to Dave or Chris on the air or on their podcast about index funds, and they poo poo them. It never made sense to me why their Baby Steps made so much clear sense, but their investing advice was more muddled.
It is difficult to get a man to understand something when his salary depends upon his not understanding it.— Upton Sinclair
As a reminder, none of this is investment advice, and my investment choices aren’t necessarily the right ones for everyone. Choose wisely.