With a nationally syndicated radio show, best-selling books, and a popular financial advice service, Dave Ramsey is one of the most famous names in the personal finance space. He’s so trusted that he’s also a mainstay in many churches as a guest lecturer preaching his own inspiring message of financial freedom. I’ve long admired his ability to help people work their way out of debt, and he’s doubtlessly touched more lives and improved them for the better than I can ever dream of reaching.
So as a fan of Ramsey’s message of self empowerment and snowball approach to debt elimination, I found it particularly painful to watch a recent episode where he goes on an extended rant about safe withdrawal rates. Long story short, he’s not only dangerously wrong but also angrily dismissive of an entire field of research on the topic. The reaction among financial types on social media has been equally swift and negative, with both professional investors and educated amateurs alike taking their own shots back.
Personally, I find the bickering on both sides to be mostly unhelpful because it distracts from the core issue — the truth. So for the benefit of Dave’s audience who just wants to properly understand the topic, I wanted to do something a little more constructive.
If you’re a Dave Ramsey fan who would like to understand why his advice is not the right way to approach retirement and how you can create a much safer plan, this article is for you.
If it feels like I’ve been writing a little less lately, you’re not wrong. There are a few perfectly normal reasons. First, I just returned from a nice beach vacation where I very intentionally unplugged. And second, like many people after the much-anticipated release of Diablo IV in June I’ve been playing more than my share of video games.
With the benefit of that needed vacation away from the computer and both email and games alike, I realized this might be a good opportunity to write an article exploring the overlap of investing and gaming mindsets. There are certainly a lot of parallels in my own thought processes, and I imagine many of you may relate.
My news feed recently contained a trio of interesting articles that had little to do with finance but shared a theme that is quite universal — the failure of the best of us. But rather than the typical stories of deliberate fraud and tragic mistakes that are sadly all too common, these are a more nuanced grouping that taken as a whole offer an interesting perspective on something many of us take for granted.
So if you think you have everything figured out or have hired the smartest minds to do it for you, read on. You may learn something new about risk and adjust your expectations in the process.
The world lost a true investing legend recently when Harry Markowitz passed away at the wise old age of 95. Markowitz is widely known as the father of modern portfolio theory, and it’s impossible to overstate his significance not only to my own outlook on investing but also to the entire modern industry of portfolio management. He was a good man and a brilliant thinker, and his unique insights will continue to influence us for a very long time.
Over the weekend another big bank made national news for all the wrong reasons. Silicon Valley Bank, the darling of the Bay Area venture capital community and the bank of choice for numerous tech startups, abruptly collapsed. Worried about possible contagion in other small banks, the FDIC quickly stepped in and guaranteed all deposits above the normal insurance limits. But while the immediate financial fallout may appear contained for nervous SVB depositors, the ripple effects are still unfolding in the wider banking system. To put it bluntly, the whole situation is a mess.
I think it’s safe to say that most of you don’t have more than $250k sitting in cash in the bank, so the good news is that you’re probably fine and shouldn’t be too worried. But I do think there’s a larger lesson that attentive investors can learn from the missteps of SVB. So while the talking heads on TV and social media compete for the hottest take on complex banking policy you probably don’t even care about, let’s talk about a few simple takeaways for your own investments.
Any time there is lots of money involved in a particular market, there will inevitably be a subset of people that emerge to capitalize on the situation by exaggeration, deception, and outright theft. Madoff, Enron, Lehman Brothers, Tyco — history is littered with financial frauds that cost investors billions.
How does nobody see it coming? Unfortunately the world today isn’t as simple as obvious good guys and bad guys, and it’s sometimes impossible for normal people to tell respectable companies apart from carefully constructed marketing images. The good news is that there are a few simple steps you can take to protect yourself from the fallout when things go terribly wrong from events you never saw coming.
But before we get to the good stuff, let’s unwind the most recent example of financial corruption that every investor should educate themselves about — the rise and fall of FTX.
Investing is like riding a skateboard. It takes skill, balance, lots of practice, and a certain amount of fearlessness. You know for a fact that you’re going to fall sometimes, and yet you do it anyway because you understand that perseverance pays off. Still, even the best skaters know when and how to bail gracefully without getting hurt.
With bonds cratering this year amid rapidly rising interest rates, that portion of my portfolio is currently a sea of red. Bond purchases going back a full decade are suddenly underwater, and after surveying my options it quickly became evident that it’s time for a big change. So after much deliberation, this week I finally pulled the trigger and sold every long term bond in my portfolio. With a simple click of a button, a big chunk of my total holdings that I’ve depended on for years went straight to my cash balance and I realized a sizable capital loss in my account.
Then a few seconds later, I put all of that money into an extremely similar bond fund with much lower expenses. And I used those capital losses to also swap out my gold holdings with big capital gains completely tax free. The end result is that I took advantage of unique market conditions to maintain the same asset allocation that serves me very well while saving potentially thousands of dollars a year.
What — you thought I bailed on bonds entirely? Please. My portfolio continues to cruise on, and I landed that kickflip like a champ!
Here’s how you can, too.
I had the distinct pleasure of spending time with my wife’s family this week. Between catching up on life events and helping with a few household chores, my father-in-law (let’s call him John) took the opportunity to ask his financially-minded visitor a question directly pertinent to his own immediate goals.
“How can I use my investments to cover the bills in retirement?”
I knew that John is a CPA and a knowledgeable investor who has actively traded his family accounts for years. So as a well-educated student of retirement finance, I naturally jumped in to an explanation of safe withdrawal rates, retirement spending methods, and how portfolio theory can be used to tweak the numbers to safely spend a certain percentage of his portfolio every year without fear of running out of money over his expected lifetime. John listened intently and replied with a deceptively simple follow-up question:
How do you guarantee that level of investment income every year?
That’s a terrific question, and the simple answer is you don’t have to. But that’s the exact moment I recognized my own investing bubble. The internet these days contains more information than ever about every nuance of retirement finance, but the gap between the theory debated by eggheads and John’s completely rational income-driven paradigm is just as perfectly normal as it is surprisingly wide to bridge.
I was talking about systems theory, and he just wanted to directly replace income. Which makes perfect sense! And I imagine many of you may have the same question.
So rather than jumping into a painfully long series on every possible way to tweak the numbers, let’s start with the basics. If you’ve ever wanted to know how to safely move beyond depending on regular work income to pay the bills, this article is for you.
Perhaps the single most impactful development in the financial world over the last several months is the rapid onset of high inflation. After a decade of particularly low inflation that even pushed negative in some countries, the ugly specter of quickly rising prices came roaring back late last year and has only gotten worse. As recently as March 2021, the annualized inflation in the US was at a historically typical 2.6%. But just one year later it skyrocketed all the way to 8.5%. That’s the highest it has been since 1981, and we can all feel its effects. Everything is just way more expensive today.
With consumer prices making news worldwide, it’s easy to feel helpless. Massive price tags on basic staples like food, gas, and rent have a way of humbling even the most efficient money manager and stressing household earners to the limit. And many investors with lots of money saved up no longer feel so confident either as both the stock and bond markets break under the weight of the new economic normal. It’s really tough out there!
While I don’t have a magic wand to make your grocery bill more affordable, I’m happy to help where I can. So let’s tackle the investing side. Not every asset and portfolio responds to inflation in the same way, and by learning more about how they operate we can find an asset allocation suitable to weather the current storm.
One of the things I like about the safe withdrawal rate is that it’s a rare financial metric that accounts for the worst case. While everyone else was comparing withdrawals to average returns, William Bengen had the foresight to study every investing period he could find and determine the maximum amount of money that a retiree could have safely withdrawn over 30 years even in the worst possible timeframe to retire. By flipping the problem from an exercise in chasing ever-shifting averages to studying worst-case scenarios, Bengen’s safe withdrawal rate really did make life after accumulation a lot safer for retirees.
Look at the title image of a pair of grain silos and imagine your comfort level with them filled with just enough grain to barely make it through an average year. Now picture them with enough grain to survive the worst famine on record. That’s a huge difference, and Bengen’s new perspective completely changed the way people think about retirement.
As helpful as that is, however, not everybody is in the phase of career and life where retirement is an impending concern. But I still find the approach enlightening, so let’s expand our thinking. Have you ever wondered what a similar metric might look like for accumulators seeking to guarantee long-term success in uncertain markets? Put another way, what percentage of your crop must you save in those silos every year in order to fill them by a certain date? And if the stored grain grows and shrinks on its own like money invested in stocks and bonds, how would that affect the results?
If that type of question feels as interesting to you as it does to me, this article is for you.