Let me be a little more specific. I do have to tip my hat to Mr. Ramsey for all that he has done to help people get out of debt. His work has freed thousands of individuals and couples from the crippling effects of debt…that horrible thing we do that requires us to pay someone or something back WITH interest.
HOWEVER, what he recommends when the focus shifts from debt reduction to capital accumulation is just plain STUPID. I so wish Dave would just stick to what he knows best…getting out of debt.
Let’s first take a look at what he says. Here’s one straight from his website: “If you follow my plan, you will begin investing well. Then, when you are 57 years old and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds,…”
So what’s the big deal? If you look at the criteria you’ll laugh out loud. This example was a 30 year old who would invest $93 per month for 27 years into a good growth mutual fund. The basis (the total amount contributed) would be $30,132…that must be some kind of return he’s calculating. As of matter of fact,
- He assumes a 17.75% annual return EVERY year.
- Whenever he’s calculating future account balances he always uses a return between 15-18%…totally ridiculous.
- He does this all the time by the way.
- Recently on Fox & Friends (Fox’s morning news program) he was asked a question and responded in the same manner he always does: “stick with your money markets for short term needs and go with a good mutual fund, like we say over and over, for your long term investments 5, 10, 20 years out.”
- He teaches his students to NOT invest with a mutual fund that is younger than five years – “you need a good track record.”
I decided to look at 2008’s mutual funds with a return over 12%. I thought I’d be nice and only cover the first half of the year. Here are the results:
- Of the Top 10 only eight had a return over 12%
- Five of the eight were younger than three years therefore would not have been selected. One of the five was brand new and had no data at all – certainly not recommended by Dave.
- Of the three remaining, all of them had a negative five year average. All were no-loads but averaged 1.75% in fees.
- All remaining three had a huge spike that lasted less than 60 days.
So, five of the eight, with the returns Dave says is possible each and EVERY year, were too young. Three of them averaged negative returns over the previous five year history. And, they had a very short stretch of success. Remember, he never recommends to sell so all those gains would have been lost in the second half of the year…all of them are down over 40% as of now. As a side note, these returns didn’t include what was lost to fees and taxation.
But, the main point,
- There are thousands of mutual funds (there are more MFs than stocks)
- Do you really believe you could have timed it perfectly (again only a 45 to 60 day window)?
- Do you think you would have been so lucky to narrow it down to the ONLY three which actually hit the returns he talks about?
If that’s not gambling I don’t know what is. Playing with mutual funds is NO different than playing blackjack in Vegas. It’s NOT investing it’s speculating. Now look, I understand that there are people out there who can accomplish what Dave recommends but Dave does NOT deal with nor speak to those individuals who treat their money management / trading as a full-time job. He specifically recommends this strategy and “attainable” results for your average Joe – “like we say over and over”.
Just recently Dave Ramsey held what he called Town Hall For Hope. It was a great idea to market his get-out-of-debt business…which, by the way, is excellent. He has great insight with this particular niche of financial assistance.
When it gets to investing he’s simply laughable. In all seriousness it’s very frustrating because he’s just plain wrong and leads many down a path that is just not attainable (unless you are extremely talented at trading which most are not). Here’s a question that was asked of him during the Town Hall For Hope:
Q: Dave, I have been through Financial Peace University and found some of the rates of return (10–13%) you suggest for “growth mutual funds” to be unattainable in today’s marketplace. Have you revised your suggested rates of return, and where could I find those rates?
A: Those rates are what the stock market has averaged over the past 70 years. Some years it has averaged more and some less. The market may gain 15% one year, then 10% the next, then 3%, then 20%. The gain has varied year to year, but it has averaged 12%. Sometimes it may lose money, but the average is still 12%. Even in these down times, I would still project the same overall growth, based on the past. Remember, the market eventually recovered after the Great Depression, a president resigning, an energy crisis and cowards flying planes into buildings. We’ll survive this as well.
Let’s look at this answer he gave. First of all, 12%? There is not one respected financial entity that claims the average is 12%. According to www.soundmoneymatters.com anyone claiming the average to be 8% is “lying to you.” The saying is so often repeated that even newcomers know it – “over time, the average stock market return is 8-12% annually”. Dave seems to suggest that if you’re investing in the stock market you will earn 12% if you can just stay in the market long enough (so why does he calculate a 15-18% return when he’s using actual numbers?). The problem with a statement like that is incompleteness of thought and downright deceptiveness.
This statement purports the idea that if you can only buy a few (or maybe only one) stocks you are going to achieve that famous 12%. That is some really good news! Oh, by the way, which stock was that?
It’s sad but true that there are people who really believe in this mythical 8-12% stock market average return by just simply buying a stock or mutual fund and sitting there doing nothing. The flaw in the entire discussion is that the performance of “the market” doesn’t matter; what matters is the performance of the investments in your stock portfolio. If you make a 100% return on your portfolio, you had a great year regardless of the S&P 500. If the Dow made 2% and you beat it with 2.5%, did the net result in your portfolio really give you something to brag about?
You would think then that he would be a fan of a product that actually does perform based upon “the market”, like a Fixed Indexed Annuity. They can be linked to the S&P 500 and go up when it goes up. One thing they don’t do is go down when the S&P goes down…SECURING YOUR PRINCIPLE.
But Dave says they are a joke for two reasons: 1. There are fees if you pull your money out within a 10 year period and 2. They are a product of an insurance company.
Okay wait, if I were to follow his advice I wouldn’t care about the 10 year term because I’m never supposed to touch this money anyway – “you don’t sell. You think long-term and just ride it out.” As far as the second reason, I believe he’s just plain naïve here. Look back over time and show me how many investment firms, Wall Street brokers, banks, etc have gone out of business compared to insurance companies. Maybe, just maybe, they have something figured out.
I’m not recommending Fixed Indexed Annuities here I’m simply pointing out his inconsistencies.
Finally, I think its fine that he attempts to teach an idea to people. The problem I have is that outside of his advice there’s only heresy and scammers who are focused on commissions. Again, very naïve and utterly false.
Do you remember that show where Ben Stiller picks up a hitchhiker who has a great business idea? Instead of the “8 Minute Abs” video he wanted to produce the “6 Minute Abs” video. I think I may take a similar angle and start promoting that the average Joe getting out of debt and beginning to accumulate can toss away the recommendations of old with 12-18% returns and do my recommendation of 30-40%. That’s it! From now on I’m going to tell my clients to only invest their money in those “funds” and “the market” that returns them 30-40% so they can have plenty when they retire. Then, I won’t ever recommend any specific “fund” or “market” so that I don’t look like a fool.
Kelly O’Connor – firstname.lastname@example.org