John Csiszar
·4 min read
Noted financial expert Dave Ramsey, who has over 2.7 million YouTube subscribers, is a strong proponent of the “buy-and-hold” strategy of investing in the market, and he generally recommends mutual funds as the cornerstone of his financial plan. This has led some to suggest that Ramsey is “anti-ETF,” with exchange-traded funds being a competitor for mutual funds in the marketplace.
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But in response to a caller in August, Ramsey reiterated that he is not “anti-ETF,” he just doesn’t like how some financial planners and investors use them. While speaking out in favor of ETFs, Ramsey noted specifically the three things that he thinks you should avoid if you invest in them.
Constantly Trading
One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open. In many cases, this leads to overtrading by both advisors and individual investors alike.
While you may not pay anything in commissions, overtrading creates two main problems. The first is that you’re not letting your investment compound over time, which for Ramsey and many other experts is the key to long-term success in the markets. Secondly, you’ll be exposing yourself to short-term capital gains — if you are making profits — meaning high tax rates will eat away much of your earnings.
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Trying To Time the Market
If there’s one investment principle that Ramsey can be associated with, it’s that investors shouldn’t be timing the market. As Ramsey explained in detail in his Aug. 2023 response to a caller, timing the market is not investing — it’s gambling.
Ramsey explained that by the time you hear bad news in the market, it’s too late to get out. Similarly, when you hear good news in the market, it’s too late to get in. Rather than chasing your tail, Ramsey has always advocated a long-term, buy-and-hold strategy, noting that he never sells his investments regardless of whether the market is going up or going down. As timing the market is an easy thing to pursue with ETFs, Ramsey urges caution.
Turning Over Your Money Too Often
The third thing that Ramsey warns against regarding ETFs is turning over your money too often. This concept is similar to the other two, about overtrading and timing the market, but it just points out how the ease of trading ETFs can actually work to your disadvantage. By moving your money from one ETF to another based on your emotions or news in the stock market, you’re likely going to be late to the game either way.
For example, if you own a large-cap growth stock but then hear that small-cap stocks are likely to do better, you might immediately sell your first ETF and move to another one. When that one underperforms, you might be tempted to move back to the other one. This type of constant back-and-forth action is what Ramsey is against. The better way to serve your portfolio is to choose investments based on your objectives and risk tolerance and then hold them for the long run. While you can add additional ETFs to the mix, Ramsey advises against jumping back and forth among them.
The Bottom Line
Dave Ramsey’s overall investment principles apply to all investments, not just ETFs. Ramsey is a firm believer in buying and holding investments for the long run, regardless of what they are. This way, investors can smooth out the short-term ups and downs that affect the markets and enjoy the benefits of compounding that only accumulate over the long run.
But ETFs are easy to misuse in a way that can hurt the average investor. As most ETFs now trade commission-free and can be bought and sold multiple times throughout the day, they are less likely to be used as buy-and-hold vehicles. Because of his cautionary tone, Ramsey sometimes gets painted with the “anti-ETF” brush. But to be clear, Ramsey’s all in favor of using ETFs when used properly. For investors who can use ETFs as part of a long-term, buy-and-hold investment program, rather than as trading vehicles, Ramsey has nothing bad to say about them.
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This article originally appeared on GOBankingRates.com: Dave Ramsey: Avoid These 3 Things If You Invest in ETFs
