I, with just about everyone who is familiar with Ramsey, admires his work on the debt side. He has helped thousands get out of and stay out of debt.
But his investment advice is misleading and potentially harmful. Finding a Fund that averages 12% over the long term is like trying to find the next triple crown winner. Good luck! And as he further recommends taking 8%/year out of your nest egg can lead to the outcome that is most feared by retirees - running out of money.
Actually, people don't tend to run out of money - they tend to run out of lifestyle. Draw down at too great a rate and one morning you wake up and realize you can't visit the kids as often, you can't eat out as often, and (drat it!) you have to ask your boss at Wal Mart if you can get more hours!
But the good thing about living in the internet age is that it is fairly easy in most instances to research claims or for that matter just about anything you are interested in. People do this in many areas but not so much in finance.
For example, Google "Large Company Stock Returns" and you'll come up with a link that shows the following table:
This table is reported by Kiplinger and the data comes from Morningstar. These Funds are the top performers out of tens of thousands of Funds.
Looking under the 10 year and 20 year columns you see no 12% s. As you do your research you'll find that Ramsey uses the non sensical arithmetic average whereas the appropriate average is a compound annual number.
But the idea here extends beyond Dave Ramsey and his investment advice. Suppose you want to know what Warren Buffet suggests as an investment approach for the average investor. Or, you have an annuity and, like most people including those who sell them, you can't make heads nor tails of it. Just go on a good search engine and look them up.
Doing the research ahead of meeting with professionals is especially useful because once the jargon starts flying the will weakens and when it comes to financial products people just give in. To hammer this home think of going in to meet with an attorney to discuss setting up a donor advised fund. If you are like most people you may be a bit intimidated in meeting with an attorney. Do a little research and this stress will be reduced and you'll be able to follow the pros and cons as presented and in the end be able to make a better decision. It is all a benefit of living in the information age.
OK, I'll bite. In about 3 minutes I found FOCPX. It's returned 13.09%, compound annualized, since 1984. Yes, they really do exist. Even net of fees it's over 12%. Even the 10 year return is 11.22%. Am I going to assume I'll get that in my retirement funds? Of course not. Is it the only fund I invest in? Of course not. He doesn't advocate that. He's telling you what the market did, what some of these funds have done, over their lifetime. To get you motivated, to get you out of debt SO THAT you can invest 15% of your income into instruments like these. And if you do that for 20+ years you will retire with dignity. He paints a much bigger picture than just "Invest $100 a month for 40 years @ 12% and you'll retire a millionaire". That's a teaching scenario for a radio audience, for an arena audience. Even the hit piece that Money magazine did on him a few years ago said something to the effect of "...admittedly, if you follow his entire plan of getting out of debt and investing 15% of your income, you'll be fine." Of course that was buried 3/4 of the way down the article. We've been working his Baby Steps since 2007 and we see our net worth increasing rapidly because of it. Yes, it really does work.
ReplyDeleteTo your bigger point of doing your own research, absolutely on point. And if someone chooses to do robo index fund investing only, that's cool. It's not for me, but anything that gets people excited about investing more is fine, as long as it's with reputable products and reputable people. My parents trusted their insurance agent to design their IRAs. He put them in a horrible annuity product, which had great commissions for him. Thankfully they were fine in retirement and until they passed. Having quality information and quality people in your corner is vital.
On Morningstar it shows a 15 year annualized return of 9.68% which is still a lot better than the return of 6.62% on the S&P 500. Over the past 12 months its return is 2.48% versus 6.39% on the S&P 500 so you gotta have the faith! Research shows though that there is no persistence in returns. Thus, I stick with low cost Funds that track the indices.
ReplyDeleteThanks for the comment!