Dave Ramsey's 12% return is wrong

[Petunia 100]

The other problem is that he tells people they can take out a much higher % in retirement than the usual 4% rule. I don't remember exactly but I know it's high.

I agree that people shouldn't use 12% to decide how much they need to save or when they can retire. I think he uses it more as, "look what you could get if you start investing". I think we all agree that it's not realistic but I can understand why it can be motivational.

He recommends an 8% withdrawal rate.

[disneysteve]

He recommends an 8% withdrawal rate.

Thanks. I haven't listened to the show for a while and didn't remember. I just knew it was a lot higher than what everyone else suggests.

Of course, an 8% withdrawal rate would be okay if you were getting a 12% return.

[thestrongprofessional]

Encouraging investment

Hey everyone,

Although I don't believe there's any basis for Dave Ramsey's 12% figure , the idea of investment which he preaches is spot on. Even though your returns may not be 12%, investing is the only way you can achieve financial freedom for you and your family. Lets try not to get too hung up on the numbers.

Raphael

[disneysteve]

Lets try not to get too hung up on the numbers.

Sorry but when you're talking about personal finance and investing, it's all about the numbers. You can't just throw out wildly inaccurate figures and put yourself out there as a financial guru and teacher and expect people to trust and follow your advice.

[AJ444]

I've advised people to read Ramsey's book for the get out of debt advice but to stop there and go to Bogleheads for investing.

His return percentages are completely unrealistic and he pushes people to his high fee ELP (Endorsed Local Providers) who recommend loaded funds.


"Ramsey's scrap with advisers is also over who are best qualified to give investment advice -- and how they should be paid. The radio star has aligned himself, and part of his business, with brokers who earn commissions selling mutual funds with front-end sales charges. Many of Ramsey's critics are financial planners who are paid on a fee basis, no matter what their (mostly well-heeled) clients buy. Such critics have been trying to pick apart his ideas for years, but Ramsey has grown only more popular."

http://time.com/money/2794698/save-like-dave-ramsey-just-dont-invest-like-him/

[Petunia 100]

Hey everyone,

Although I don't believe there's any basis for Dave Ramsey's 12% figure , the idea of investment which he preaches is spot on. Even though your returns may not be 12%, investing is the only way you can achieve financial freedom for you and your family. Lets try not to get too hung up on the numbers.

Raphael

There is much more to dislike about his investing advice than his unrealistic 12% figure.

I don't believe his critics are suggesting people shouldn't invest. Rather, that people should invest prudently with realistic expectations and a sustainable withdrawal rate.

According to the Trinity Study, Ramsey's recommended portfolio allocation and withdrawal rate would have resulted in running completely out of money within 20 years 47% of the time. (The Trinity Study looked at all past periods from 1926 to 1995).

No matter how you slice it, that is simply not a prudent strategy.

[rigz]

Wouldn't an 8% withdrawal rate ruin most people's retirement?

[Learningmore]

Also, does Dave Ramsey recommend managed funds or do-it-yourself investing?

[bjl584]

I wonder if Dave Ramsey is actually getting a 12% return on his own investments? I'd have to think that he wouldn't have been touting the 12% return advice if he wasn't doing it himself. Unless he is just pitching his books and programs to the uneducated masses. I know that he holds real estate. 12% is certainly realistic in that arena, but I don't think that he makes much mention of that when he is preaching the 12% return.

[Petunia 100]

Also, does Dave Ramsey recommend managed funds or do-it-yourself investing?

He recommends commissioned advisers who pay him for the privilege of being one of his ELPs.

[Petunia 100]

Wouldn't an 8% withdrawal rate ruin most people's retirement?

Yes.

The forum insists my reply must be at least 5 characters, so I guess I will say "yes" again.

[disneysteve]

He recommends commissioned advisers who pay him for the privilege of being one of his ELPs.

If you really listen to him, he talks about both - ELPs and DIY - but he definitely pushes the ELPs more.

[Sam1000]

I am a Ramsey disciple but one of the areas I struggle is his blurb on 12% return. He advocates buying American Funds and is a proponent of growth vs value which is interesting because value outperforms but that is neither here nor there.

If you look at the average returns of the S&P 500 from inception to now they are ~ 10%. To Ramsey’s credit he advocates international and small cap funds which will boost returns while increasing the volatility of the portfolio so you must be prepared for some bumps along the way.

If we assume his recommended asset allocation (25% to each: large cap growth, mid cap growth, small cap growth, international) returns 12% then we must overcome (2) things.

1.) He advocates using a financial advisor (SmartVestor). As you can imagine financial advisors do not work for free. Many will charge 1% AUM.

2.) He advocates using American funds which have either a.) Class A - front end loads of 5.75% or b.) Class C- expense ratios of 1.2–2%

It is plausible that if you get the 12% return that at the very least 2% gets absorbed by financial advisor and fund fees. 10% returns are nothing to sneeze at but they are far different than 12% and this is one area that Mr. Ramsey needs to reconsider is recommendations.

I believe that 8–9% for a 100% equity portfolio is an appropriate guesstimate.

[TexasHusker]

I am a Ramsey disciple but one of the areas I struggle is his blurb on 12% return. He advocates buying American Funds and is a proponent of growth vs value which is interesting because value outperforms but that is neither here nor there.

If you look at the average returns of the S&P 500 from inception to now they are ~ 10%. To Ramsey’s credit he advocates international and small cap funds which will boost returns while increasing the volatility of the portfolio so you must be prepared for some bumps along the way.

If we assume his recommended asset allocation (25% to each: large cap growth, mid cap growth, small cap growth, international) returns 12% then we must overcome (2) things.

1.) He advocates using a financial advisor (SmartVestor). As you can imagine financial advisors do not work for free. Many will charge 1% AUM.

2.) He advocates using American funds which have either a.) Class A - front end loads of 5.75% or b.) Class C- expense ratios of 1.2–2%

It is plausible that if you get the 12% return that at the very least 2% gets absorbed by financial advisor and fund fees. 10% returns are nothing to sneeze at but they are far different than 12% and this is one area that Mr. Ramsey needs to reconsider is recommendations.

I believe that 8–9% for a 100% equity portfolio is an appropriate guesstimate.

It all depends upon what period of time you were/are invested in. If you invested $100,000 in the S&P 500 in 2000 and hoped to cash out 10 years later, you pretty much didn't make a dime.

Use caution when applying averages to your situation. Many will beat the average, many will do worse, and some much worse.