Dave Ramsey’s 12% Return Rate Realistic?

Categories: D Ramsey, Invest

Recently a small group leader of our current Dave Ramsey Financial Peace University Class asked me: “I have been getting some questions in my group and I have been wondering myself, Dave is a big supporter of mutual funds for savings and I agree I have some myself; however, with interest rates being what they are, is Dave’s advice still relevant?  (People’s accounts are not going to grow at the rate he states, and in fact, as you know, we are losing money.  I don’t have as much as I had probably 10 years ago or it hasn’t grown much.) I have told my group that you have to look at the history of the fund and hang in there for the market to come back, but it is discouraging.  Do you have any other advice I could give to them?”

This is a tough question to answer. Dave contends that if people just do some basic funds analysis using Morningstar mutual fund analytical software, then they can easily find large, mid, small cap and international stock funds that consistently earn 12% rate of return (ROR) over time. Most professional investment advisors recommend a different mix of those as Dave does (25% each), but an allocation customized more to the individual’s risk profile, including bond funds as well. Having been in the financial world for nearly 30 years, with experience in investments, mutual fund software, and asset allocation, it is my opinion that one’s investment expectation should match more closely their risk profile and asset allocation, with an after fund expense rate of return in the 5 – 10% range, not the 12% that Dave recommends.

The last 10 years have been brutal in the stock market; it is very discouraging. This makes a lot of people question Dave’s advice and the advice given by professional investment advisors. I agree with 99% of what Dave says, but when it comes to investing I think this topic requires a closer look. Most experts tell people to just hang in there, keep the same asset allocation and don’t try to time the market, because over time (last 100) years stocks average about 8 – 10%, but given the difficult world financial market, it makes it difficult for people to hang in there, and be confident that those averages will work out for them in the long run. I recommend that people review all the investments they own, obtain Morningstar reports for all the funds they own, and talk to their investment professionals if they have a lot of confidence in them. I’ve also heard a lot of positive things about www.soundmindinvesting.com. Checking out their performance and reading their newsletters might be helpful too. Also, for a very bearish (negative) commentary about stock investing, read this article at The Atlantic.

As I said before, this is a tough issue given these economic times, made all the more difficult by conflicting opinions. My recommendation is to make informed decisions, not emotional ones. Do research and talk to wise seasoned investment experts while lowering expectations and managing daily personal finances wisely. Investments can be disconcerting, but ultimately our peace and hope isn’t in money, it is in Him. This isn’t a cop-out but an admonishment to help us keep our focus and our emotions in check.

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