Don’t follow Dave Ramsey’s investment advice

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.