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Why Dave Ramsey Is Wrong

There is no denying that Dave Ramsey has done a commendable job of bringing back our grandparents’ financial values into popular culture. Many Americans have been poor stewards of their finances and have been saddled with avoidable debt. Ramsey’s advice has helped thousands get back on the right financial track. Even at my own company, we use the debt snowball of Financial Peace University to help right the finances of our pro-bono planning clients. Ramsey has become a multimillionaire by simply telling people to live within their means by creating and maintaining their household budget. Certainly, in today’s society of zero interest and only three easy payments of $19.99, this is no simple task. However, once a person overcomes modern-day financial temptation and begins investing in his or her future, Ramsey drops the ball and becomes a spokesperson for one of the most confusing industries in America, financial product sales. Ramsey recommends his followers work with brokers who are paid high commissions for investing in mutual funds. Ramsey, as popular as he is – and no one disputes that – has missed the boat on one thing – dismissing the credibility and sensibility of a fiduciary and fee-only financial advisor. That may not sound like a big deal, until you understand that picking the right financial advisor can lead to an overall stronger financial foundation for your family, your future and your state of mind. Let’s look at this a bit closer. The Fee-Only Advantage Fiduciary (your best interest) fee-only advisors take a different approach to investing. There are no selling products; fee-only advisors are not paid a commission from a product. This removes the conflict of interest that brokers carry in their relationships with their clients. This also causes the advisor to look differently at the product that he or she recommends to the client, which is why we see a much higher usage of index funds from the fee-only community. These highly diversified funds carry very low fees, because they don’t pay any advisor any commission, and historically have beat actively managed, commission mutual funds over long periods of time. A well-diversified index fund portfolio should cost no more that 0.25% a year, with most of the funds trading at no charge. Fee-only advisors are compensated as a percentage of assets they manage, by a flat monthly retainer, or bill hourly for financial planning. Each of these options are free from any conflict that the advisor gives to the client. Most fee-only firms also include financial planning in their asset management fees. A financial plan sets how the portfolio should be allocated. Proper asset allocation is a large ingredient to successful long-term investing. A mutual mess Ramsey, on the other hand, encourages his followers to contact a broker within his referral network when they are ready to start investing. In the interest of full disclosure, his network rejected my firm telling me that being a fiduciary fee-only financial services firm we did not qualify because his network is made up of only commission brokers. Ramsey recommends that his flock work with a broker and invest in a mutual fund that has a long track record of good results vs. the S&P 500. He then adds that the investor should purchase and stay put, meaning don’t sell when the market falls, be a buy and hold investor. The broker will collect a 5% +- commission from the sale and will receive a smaller percentage on a quarterly basis, assuming the investor does not sell the fund. Additional investments into the fund, whether it is annually or monthly, will also be charged the large upfront fee. Ramsey supports this model because he believes this to be the cheapest form of investing compared to fee-based firms that would be charging 1.2% a year to give advice and provide planning services. In the 80’s and early 90’s this may have been the correct advice, but unfortunately the US brokerage business has taken a turn for the worst, in that products are not built to benefit the client, they are built to make money for the firm and the broker. A retired executive from a large brokerage company recently told me he got out because his firm no longer focused on the client, they focused on what they could get away with selling to the client. Even if Ramey’s referral network has the best intentions, history is against them. There have been very few mutual funds that actually beat the S&P 500 net of fees over long periods of time. Some get lucky over a 10 year stretch, but after 15 years the list is very short. Historically we see less than 1% of funds beat the S&P 500 (after fees) over 30 years. This might be a long time, but how long are you going to be invested? If you live to age 95 and are in your 40’s or 50’s, 30 years is not that long. Another issue is Ramsey’s buy and hold philosophy. The idea is great on the surface, but when a year like 2008 strikes many individual investors, without a good financial support system, are going to sell. If you get burnt, you first want to stop the pain (sell low) and when you go back, if at all, it will be when you feel ready (buy high). Buy and hold is the correct advice, but when you call the broker for reassurance there is always the potential of him or her selling you another fund at 5% commission to help “make you feel better,” while padding his or her pockets with more of your money. This is where a fee-only advisor earns their fee. By keeping the client focused long term, buy high and sell low tendencies can be eliminated, increasing the client’s rate of return. Ramsey also recommends that you not own bonds. He states “bonds are mistakenly believed to be safe.” While it is true – not all bonds are safe – there is a good case to be made for adding the right bonds to a portfolio to lower volatility. Bonds in a portfolio help keep you from hitting the panic button when it feels like the stock market is falling into oblivion. A fee-only advisor can help choose the right bonds for the portfolio. Ramsey also wants his followers to stay away from Exchange Traded Funds (ETFs). ETFs, if used properly are more tax efficient than any mutual fund, held outside retirement accounts, are more liquid and offer cheaper fees. There are good ETFs and bad ETFs, and I think Ramsey has thrown the baby out with the bath water with this advice. Perhaps it is because his network of advisors would not receive a commission or trailing fee if ETFs were used. What should Ramsey do? If Ramsey and his network of brokers wanted to truly work in the best interest of his radio and print flock, I propose that he endorse a network of fee-only advisors, simply being paid by the hour. These advisors would help create portfolios for the Ramsey following at a fraction of the cost of his commission advisors, all while giving unbiased investment advice. In the end, Ramsey’s math does not add up and the investor loses. Ramsey, who tweeted that he was the “big dog on the porch” in a recent tweet with fee-only advisor Carl Richards, could use his status to help make all advisors work in the best interest of their clients, as is being discussed at the SEC in 2015. Instead, he sits in the pockets or every big insurance company on Wall Street who wants to maintain the current system of taking from Main Street to pad the profits of Wall Street.

Gain Exposure To U.S. Infrastructure Boom With GII

Summary Poor American infrastructure has an overall Grade of D+ by American Society of Civil Engineers. Congested roads alone cost America $101 billion in fuel and wasted time in 2010 and last major infrastructure work was in 1956 by President Eisenhower. President Obama called for greater infrastructure work in his 2015 State of the Union Address and is expected to push for wider infrastructure development. GII is a global infrastructure ETF loaded with world class infrastructure companies that are likely to be called to service in the upcoming infrastructure upgrade. Investors can add a small position of GII before adding to it. America’s Infrastructure Investment Opportunity The American Society of Civil Engineers (ASCE) is the premier organization with expertise on infrastructure works in America founded since 1852. ASCE produces a grading score of condition and performance American infrastructure every 4 years and the latest report published on 2013 was given an overall grade of D+. Their grading system follows the typical school grades where A represents Excellent, B represents Good, C represents Mediocre, D represents Bad and F represents failing. So American infrastructure is only 1 grade above failure and graded as bad. Before we go further in the economic implication of this state of disrepair for American infrastructure, let us have an idea of the scope of infrastructure by the grades of the categories of Water and Environment, Transportation, Public Facility and Energy below. (click to enlarge) Source: American Society of Civil Engineers ASCE has estimated that America requires $3.6 Trillion of infrastructure investment by 2020 to meet the infrastructure needs of America. This represents a huge investment opportunity which we can tap into through a diversified holding of infrastructure related companies through an Exchange Traded Fund (NYSEMKT: ETF ) which will be recommended at the end of this article. Cost Poor Infrastructure We will use the transportation category with roads in particular to illustrate the cost of poor infrastructure. We are all familiar with traffic congestion during rush hour where we are forced to endure hours on the road. This is a very real life example of the cost of poor infrastructure works. It is estimated that an average of 34 hours spent waiting on roads and burning 1.9 billion gallon of oil costing motorists $101 billion in 2011. 42% of America’s major urban highways remains congested and 32% of major America’s roads remain in poor or mediocre condition. (click to enlarge) This is the result of steadily falling investments on transportation as seen in the chart above. President Obama prevented a temporary boost by adding provisions for transportation investment in the 2009 Recovery Act but they were a short term boost and have since been depleted. Overall they are not sufficient to reverse the aging roads of America. The last major infrastructure work was done 59 years ago when President Dwight Eisenhower signed the Federal Aid-Highway Act of 1956 , which added 41,000 miles of interstate highways that linked different states of America together. It was completed in 1980 and represents 1% of road network in America but it carries 23% of all railway traffic. It was heralded as a major achievement at that time but 35 years later more funds are needed to maintain this vast network of roads. Obama Calls for Action During the State of the Union Address on 21 January 2015 before Congress, President Obama made the following rallying call for the United States to upgrade its failing infrastructure. “21st century businesses need 21st century infrastructure – modern ports, stronger bridges, faster trains and the fastest internet. Democrats and Republicans used to agree on this. So let’s set our sights higher than a single oil pipeline. Let’s pass a bipartisan infrastructure plan that could create more than thirty times as many jobs per year, and make this country stronger for decades to come.” There are various laws that can make this happen including the popular Transportation Infrastructure Finance and Innovation Act (TIFIA) which can be expanded further and modernizing the Federal Financing Bank (FFB) to allow for greater Public Private Partnership (NYSE: PPP ). Australia’s experiment with PPP in the 1990s should be instructive to benchmark expectations of return. Primary infrastructure returned a yield of 7%-8% and secondary infrastructure returned 13%-15%. Obama tried to make transportation infrastructure a priority in 2014 and we expect him to build on his momentum of an improving economy to try again this year in 2015. With third quarter economic growth of 5% at 11 year high, we expect Obama to seal his legacy with a wide range of infrastructure works. Infrastructure ETF Capital protection is the key word for investors and this can be achieved by investing in a diversified portfolio of stocks that an exchange traded fund ( ETF ) can provide. The SPDR S&P Global Infrastructure ETF (NYSEARCA: GII ) includes world class infrastructure companies that are likely to be called upon to build the US infrastructure. The top companies in this ETF include Transurban Group ( OTCPK:TRAUF ) (5.13%), Atlantia ( OTC:ATASF ) (4.14%), Duke Energy Corporation (NYSE: DUK ) (3.54%), Enbridge (3.43%) and Abertis Infraestructuras SA ( OTCPK:ABRTY ) (3.36%). I would provide a brief description of these companies for investors to have an understanding of the types of companies that they are gaining exposure with GII. Transurban manages and develops urban toll road networks in Australia and North America. Atlantia is an Italian company that constructs and operates toll roads. Duke Energy, headquartered in Charlotte, North Carolina, is the largest electric power holding company in the United States. Enbridge is an energy delivery company based in Canada specializing in the transport and distribution of crude oil, natural gas, and other liquids. It has 41.79% weighting in Utilities, 39.79% in Industrials, 17.67% in Energy and 0.76% in Basic Materials. Abertis is a Spanish company that operates motorways in Europe and airports in cities like London and Orlando. (click to enlarge) We can see that GII has been ranging from $47 to $49 past 2 weeks and recent price action have a bullish slant to it. GII is decently priced at with 19 times price earnings and it has a market capitalization of $111.73 million and volume of 2,592. Investors can consider taking a small exposure of GII and look out for further action on the Obama Administration before adding to their position.

A Weak Start To 2015 For MLP ETFs: Buy On The Dip?

Despite hailing from the energy space, MLPs put up a great fight last year against the oil price slump thanks to their low correlation with the underlying commodity and the U.S. shale oil boom. However, the winning streak reached the verge of a reversal as MLPs entered the New Year. The largest MLP ETF Alerian MLP ETF (NYSEARCA: AMLP ) , which added about 0.3% in the last one year against a 50% decline in oil prices, has lost about 3.2% so far this year (as of January 16, 2015). All energy MLP ETFs/ETNs are deep in the red this year with some products hitting an acute 12.5% loss in such a short span of time. Now, with the no signs of end to the oil price slouch and analysts turning more bearish on this liquid commodity, MLPs might find it tough to stay afloat. Going by a recent article by Bernstein , MLPs had a free cash flow yield of 5% in 2009 while at present these have a free cash flow yield of negative 5%. As you may know, MLPs often operate pipelines or similar energy infrastructures that make it an interest-rate sensitive sector. This group catches an investor’s eye as these do not pay taxes at the entity level and hence must pay out most of their income (more than 90%) in the form of dividends. Investors looking for higher income levels outside the traditional bond sources generally bet on these products. Investors should note that the rate scenario has been subdued since last year with yields on 30-year Treasury notes touching the all-time low in January. While this should brighten the appeal for MLP investing, a six-year low oil price comes in the way of outperformance. Strength & Weakness in the MLP Space Speculations are rife that the U.S. stockpiles will remain high in the coming days. So no matter how bad the oil price situation is, the need for mid-stream MLPs involved in the processing and transportation of energy commodities such as natural gas, crude oil and refined products, under long-term contracts, will always remain due to the energy production boom in the U.S. This is because MLP revenues depend on the volumes flowing through the pipes and not on the commodity price. On the other hand, upstream exploration MLP companies earn from every barrel of oil and are being thrashed by the endless weakness in oil prices. Still, investors’ fears pertaining to oil have hurt the MLP sector as a whole to start the year despite its allure for dividend income. Buy on the Dip Given the fundamentals discussed above, investors might consider the recent dip as an entry point to the mid-stream or energy infrastructure ETFs. Below are three such MLP ETFs for investors. AMLP in Focus It is the most popular product with an asset base of $8.62 billion and average trading volume of more than $6 million shares. The fund’s expense ratio is high at 8.56%. The product tracks the Alerian MLP Infrastructure Index and has exposure to the mid-stream securities like Williams Partners L.P. (NYSE: WPZ ), Energy Transfer Partners, L.P. (NYSE: ETP ), MarkWest Energy Partners, L.P. (NYSE: MWE ) and Magellan Midstream Partners LP (NYSE: MMP ). The fund has lost only 0.5% in the last five trading sessions and 3.2% in the year-to-date frame. AMLP pays out 6.9% in annual yields (as of January 16, 2015). Global X MLP ETF (NYSEARCA: MLPA ) The fund looks to track the Solactive MLP Composite Index. The Index is comprised of MLPs engaged in the transportation, storage, processing, refining, marketing, exploration, production, and mining of natural resources. The fund charges 45 bps in fees. The fund has garnered about $150 million in assets. This ETF too has considerable exposure to Energy Transfer Partners (6.72%), Magellan Midstream (6%) and Buckeye Partners, L.P. (NYSE: BPL ) (5.98%). The fund was off 0.6% last week and has shed about 2.6% so far this year. MLPA has a dividend yield of 6.13% (as of January 16, 2015). Credit Suisse Equal Weight MLP Index ETN (NYSEARCA: MLPN ) The ETN is equally weighted in nature. It is designed for investors seeking exposure to the Cushing 30 MLP Index. The Index tracks the performance of 30 firms which hold mid-stream energy infrastructure assets in North America. MLPN has amassed about $735 million in assets. The fund charges 85 bps in fees. MLPN lost about 0.7% last week and 4% so far this year (as of January 16, 2015). Bottom Line With oil prices falling fast on the 24 -year low Chinese GDP data in 2014 and rocketing volatility in the Euro zone, MLPs seem to be the best bet. Though the space succumbed to a slowdown to start 2015, it pared losses considerably in the middle of the month. Moreover, global growth worries kept the yields at substantial low levels and spurred the appeal for dividends. Apart from the strong return, these MLPs are acting as strong income engines reinforcing its scope for outperformance in the days ahead.