Summary

Dave Ramsey's investment advice, particularly his recommendation to allocate funds equally across four types of mutual funds, is criticized for promoting high-fee funds and underperforming strategies compared to low-cost index funds like the S&P 500.

Abstract

The article critiques Dave Ramsey's investment strategy, which advocates for a 25% allocation of investment funds into each of four categories: growth, growth and income, aggressive growth, and international mutual funds. The author argues that this approach is flawed, citing that over a ten-year period, only a small percentage of actively managed funds outperform the S&P 500. The article points out that even the best-performing international mutual fund, THOIX, has significantly underperformed compared to VOO, a Vanguard S&P 500 fund, while charging much higher fees. The author also takes issue with Ramsey's recommendation to use "SmartVestor Pro" financial advisors, who pay to be listed on Ramsey's website and often charge additional fees. The article emphasizes the detrimental impact of high investment fees on wealth building and suggests that investors can achieve better results with lower-cost ETFs that align with Ramsey's categories without the need for an investment advisor.

Opinions

Dave Ramsey's mutual fund allocation recommendations are seen as suboptimal due to high fees and poor performance relative to the S&P 500.
The emphasis on actively managed mutual funds with high fees is criticized, as most fail to outperform the market over the long term.
The suggestion to invest in international mutual funds is questioned, as it may lead to investing in the same equities found in domestic markets, but with additional costs.
The article criticizes the "SmartVestor Pro" program for its potential conflict of interest, as advisors pay to be endorsed by Ramsey and may pass these costs onto clients through higher fees.
The author advocates for low-cost ETFs as a superior alternative to the high-fee mutual funds recommended by Ramsey.
The importance of minimizing investment fees is highlighted as a key factor in successful wealth accumulation.

Dave Ramsey’s Investing Advice Is Both Bad and Wrong.

Math doesn’t lie.

If you have ever listened to Dave Ramsey you likely know he regularly recommends investing money in the stock market across 4 types of mutual funds, in equal 25% allocations.

Here is an example of what I am referencing.

https://www.youtube.com/embed/wxvwt4UshH4?si=Tby1txJAFb5Rlbjy

The 4 types are “Growth, growth and income, aggressive growth, and International”, all with a “10+ year track record”.

Dave usually goes on to encourage time in the market vs. timing the market, which I generally agree with. He also advises avoiding single-stock investing for most people, which is also an idea I can embrace.

There are some glaring issues however with his mutual fund allocation recommendations that I want to examine.

As it is widely reported, over 10 years, only 8.59% of actively managed funds outperformed the S&P 500.

Not only is that a very small amount of funds for the average investor to be hunting down and tracking annually, but his mix is highly subject to above-average volatility, likely holding a lot of the same companies in every fund, and “International Funds” are always a loser.

Here is the best-performing International Mutual Fund, THOIX (the Thornburg Global Opportunities Fund Class I) I could find over the last 10 years, vs. VOO (the Vanguard S&P 500 Fund).

82% less return over that period. Again, this was the BEST International Fund I could find. The S&P trounced it.

Additionally, THOIX charges you .99% to own it, vs VOO’s fees of just .03%.

In fact, average fees for ETFs are about .06%, whereas general mutual funds average over .47% and over .68% for actively managed funds, the exact kind Dave Ramsey recommends you buy.

In this case, THOIX also has a huge overlap with VOO, which proves the point that most companies are doing business internationally anyway, and thus investing in an International Fund is just willingly giving up gains to own many of the same equities.

While it is true that you can find a fund like Baron Partners Fund (BPTRX), (which you could classify as a “Growth Fund”) that has done 17.48% average in the last ten years, you also get to pay a 1.69% fee, and do the research to find it!

And what is Dave Ramsey’s recommendation on finding these funds?

Find and work with a financial advisor called a “SmartVestor Pro”, someone that is paying him ($7,500 — $11,000 per year!) to be listed on his website and recommend this mutual fund allocation, all with high fees and no doubt charging you an AUM (assets under management) fee to do it!

Fees of any variety destroy your wealth building.

Feel free to play around with this calculator to see what I mean. It’s staggering.

This is just one example of why finding, chasing, and buying mutual funds is problematic. Vanguard, for instance, offers ETFs that complement the investing categories Ramsey recommends, all for far lower costs and not requiring an investment advisor to find or buy them.

So even if you found wisdom in breaking up your money into the categories he recommends (I don’t), you can do better.

What do you think about Ramsey’s investing advice?

Thanks for reading. Be good stewards of your earnings!

If you are looking for more help getting out of debt and building wealth, you can get my newly published Zero To Wealth Workbook here! This is the exact method I used to pay off debt and build wealth.

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The information provided here is for informational and educational purposes only. It is not intended to be, and should not be considered as, financial advice. We do not provide personalized financial, investment, or legal advice. The Matadore is not a registered CFP.