Dave Ramsey is a popular personal finance personality, and he’s got some great advice about paying back debt. But his advice about retirement planning leaves a lot to be desired.
Specifically, there are three ways Ramsey is steering his readers and listeners wrong about preparing for their later years. And the advice he gives on these issues could be costly and damaging. Here are the three worst pieces of retirement advice he gives.
1. You should choose mutual funds over ETFs or stocks
Ramsey recommends mutual funds over exchange-traded funds (ETFs) because:
- Mutual funds are designed to be invested in over the long term
- It’s possible to outperform the market by selecting the right mutual funds
- ETFs come with costs, and while the fees are usually lower than mutual funds, ETFs don’t offer the professional management mutual funds do
But here’s the problem.
ETFs can also be invested in for the long term. While you have the option of trading them like stocks, you don’t have to – you can keep them in your portfolio for decades. And there are a huge number of different ETFs, many of which also give you the chance to try to outperform the market.
You don’t have to invest in an ETF that just tracks the S&P 500 – you can choose a growth ETF, a dividend ETF, or even ETFs that track specific industries or sectors such as the marijuana industry or the healthcare industry.
So, mutual funds don’t actually have these two advantages over ETFs. Ramsey’s right about one thing, though – mutual funds do typically cost more than ETFs do. These extra fees can really add up when saving over many decades for retirement, and there’s little reason to pay them. Over time, history has shown that passively managed funds tend to outperform actively managed ones, especially after taking fees into account.
Without any clear benefit to mutual fund investing, Ramsey’s advice that you pay more to put your money into them instead of choosing cheaper ETFs could end up needlessly costing you thousands in added fees over your investing career.
2. You can earn a 12% average annual return
Ramsey promises it’s possible to earn a 12% average annual return on investments. But if you listen to this advice, you’re very likely to have a major shortfall when it comes time to retire.
Ramsey’s “12% reality” is based on the simple average returns of the S&P 500, which he reports as 11.64% from 1928 to 2020. The problem is, simple average returns aren’t the most accurate way to measure how your investments perform. Here’s why.
Say you invested $5,000 and your investment went up 20% in the first year and down 20% the next year. Your simple average return is 0% since your investment went up and down by the same percentage. But you don’t actually end up with $5,000 at the end of year two. Your 20% gain after year one left you with $6,000. But, when you lose 20% off $6,000 – or $1,200 – you…
Read More: Ignore these 3 tips he gives about saving for retirement