Can you find a growth fund that will return 12% over the long term?

Debt elimination guru Dave Ramsey argues that people should eliminate all debt and then invest in a growth fund that returns 12%/year. By the rule of 72 money doubles every 72/12 = 6 years. Sweet!

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.

Are You a Dave Ramsey Fan?

Dave Ramsey is the well-known guru for people trapped by excessive debt.  His strategy is to pay off the smallest debt and to create a snowball effect with the released funds to attack the bigger debt.  If necessary, he pushes a tough love approach whereby debt-laden people need to go on a beans and rice diet to pay off the debt. At least this is my take.  I haven't taken any of his courses or ever met with any of his counselors.  I listen to his radio show from time to time and have made it about halfway through his book The Total Money Makeover.

He apparently is a huge, life-changing help to many people whose life is overrun by debt.  And to me, this is a big deal.  I look at it as your money is either working for you, earning interest and dividends, or working against you by charging interest, late payments, overdraft charges, etc.  Much of the nation seems to be in the latter boat.

From time to time I run into people who spend more than they make and are digging themselves into the debt hole and recommend that they read Ramsey.

Having said all this, I cringe when he talks about investing in a "good mutual fund that earns 12%".  By the rule of 72, a 12% return doubles your money every 6 years.  Wow!  This sounds pretty easy (especially in a world of 2% inflation and anemic bond yields) and exciting to an investment novice. Unfortunately, it is not that easy; and evidence shows that funds with prior superior performance tend to subsequently underperform the market and have high fees that severely penalize investors.

Here are two other recent takes on Dave Ramsey:

"The Reality of Dave Ramsey's 12% 'Reality' (and why it really matters)" by Dough Roller

"Take Dave's Advice With a Grain of Salt" by Getting Your Financial Ducks In A Row