Felix Salmon and Susie Poppick write for the latest edition of Money magazine about Dave Ramsey, the personal finance author who has his own radio show and once had a personal finance show on Fox Business Network.
Their conclusion: Don’t follow his investment advice.
Salmon and Poppick write, “Ramsey seems to be so dismissive of bonds because he’s bullish on stocks. How bullish? He often speaks of earning 12% a year — a number that’s been a lightning rod for his critics. Ramsey has sometimes hedged this, but visit his website and you’ll find blog posts with headlines like ‘Yes, You Can Make 12% With Your Mutual Funds’ and ‘The 12% Reality.’
“In fact, this is unhinged from the reality of the investing world. ‘I don’t see how anybody can count on 12% annual returns,’ says William N. Goetzmann, professor of finance at Yale. Part of the issue is a wonky-sounding math point. Correctly calculated, the long-term return on stocks since 1926 is closer to 10% — before taking out mutual fund fees and front-end sales costs.
“And if you follow Ramsey, you’re likely to pay sales charges: Outside a 401(k), he recommends A-share “load” funds sold via advisers. That’s because, he says, people need a pro to help them stick to their plan and not jump out when an investment underperforms.
“The other problem with 12% is obvious: the experience of the past 13 wild years. While some periods, like the 1980s and ’90s, do deliver double-digit returns, investors know they can also see long stretches — perhaps in their peak saving or retirement years — earning a lot less.
“Ramsey recently debated that subject on his radio show with Brian Stoffel, a columnist for The Motley Fool, who wrote about that 12% number in the wake of the Twitter fight. Stoffel said 12% was unrealistic; Ramsey said that it wasn’t, and that if his listeners had taken his advice and followed it for the past 20 years, ‘they would have had a pretty strong rate of return.’ He challenged Stoffel ‘to analyze that and figure that out,’ which Stoffel obviously couldn’t do on a live radio show.”
Read more here.