By Kevin P. Brosious, CPA, PFS, CFP

A client recently asked me to listen to a recording of a well-known personal financial podcaster, Dave Ramsey. Over the years, Ramsey has given people great advice about saving and staying out of debt. In fact, I think his seven steps to financial peace can be quite helpful for a lot of people. What I heard, though, was not one of Ramsey’s best moments.

Ramsey was entertaining questions from callers about personal financial planning issues. One caller asked about how much he can safely withdraw from his portfolio annually in retirement without running out of money. The caller mentioned that he had watched a video on the Ramsey’s site that recommended a 3% annual withdrawal rate, but noted he also read articles that recommended a 4% annual rate. Ramsey responded that 3% was wrong and that the video should be taken down; likewise, he said those 4% studies were stupid. He went on to say that 8% annually (adjusted for inflation) was an appropriate withdrawal rate for a portfolio that consists of all stock holdings. He claimed the math was “simple”: your portfolio would earn 12%, allow 4% for inflation, and withdraw 8%.

The problem with Ramsey’s advice in this instance is exactly that his math was “simple.” The fact of the matter is that the correct answer is a bit more complicated. Ramsey starts with an assumption that the stock market return would be about the same every year – an average of 12%. The stock market doesn’t work that way. Although it may average 12% over some period, it can and will lose significant value in any particular year. For example, the S&P 500 was down 55% at one point during the Great Recession of 2008-2009, and outlier events like this must be planned for. If you did a Monte Carlo simulation using an 8% withdrawal rate, indexed for inflation over a 30-year period, you would have a greater than 65% chance of running out of money in retirement. Most people do not want to assume that type of risk in retirement, not to mention holding an all-stock portfolio to boot.¹ Despite widespread criticism from the investment adviser community, Ramsey has yet to correct his advice in this regard.

I don’t want to single out Dave Ramsey. There are many more examples of suspect financial advice. Harry Dent, for example, recently published the book, Crash of a Lifetime. Dent is Harvard educated and the founder of HS Dent Investment Management, founder of the Dent Strategic Portfolio Fund, and president of Dent Research. He has published 11 books, with a few making the New York Times Best Seller List. That said, let’s consider how some of his previous works have aged:

• The Roaring 2000s (1998): Predicted that the Dow Jones Industrial Average (DJIA) could go as high as 35,000 over the next decade. We may be there 25 years later, but the Dow closed 2010 at 11,600.
• The Next Great Bubble Boom (2006): Predicted the beginning of the greatest stock market boom in history. Eighteen months after publication, the S&P 500 was down 55%.
• The Great Depression Ahead (2009): Perhaps course-correcting after the previous two books, this one predicted a DJIA of 3,800 at the end of 2010. The DJIA closed 2010 at 11,600.
• The Great Crash Ahead (2011): Predicted that stocks would fall between 50% and 75% in 2013 or 2014. He recommended selling all market positions, or even possibly taking short positions on the market. The market returned over 40% for that same period.
• Dent Tactical Fund (DENT): Closed in 2012 due to poor performance.
• Dent predicted in 2016 that the DJIA would crash 17,000 points. Only 10 days after this prediction, he reversed course and predicted a “strong” market ahead.

I recently read an article in a national financial magazine that outlined the appropriate bond holdings for a “conservative” portfolio. The allocation included 27% of the bonds in junk bonds and 18% in senior bank loans (loans made to companies with a low credit rating). I guess the meaning of a “conservative” portfolio can be very subjective!²

¹ For more information about appropriate portfolio withdrawal rates, see my CPA Now blog "4% Rule on Retirement Withdrawals Evolves." 
² For more information about bond allocations in your portfolio, see my CPA Now blog "Tips for Careful Bond Buying as Interest Rates Rise." 

Kevin P. Brosious, CPA, PFS, CFP, is president of Wealth Management Inc., located in Allentown and Plymouth Meeting, Pa. He can be reached at kevin@wealthmanagement1.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}