The Truth About Dave Ramsey's Investment Philosophy

Regardless of your age, proximity to retirement, or financial profile, Dave Ramsey recommends the exact same investment allocation: divided equally among four types of funds; growth, growth and income, aggressive growth, and international.

Dave's philosophy essentially boils down to investing in the stock market.

The Money Guy show did a recent comparison between the Ramsey portfolio and the S&P 500. When the overall market was performing well, they both fared similarly, but the worst periods were considerably worse for the Ramsey portfolio because it's inherently more risky without the surplus returns that would justify the extra risk.

The S&P 500 outperformed the Ramsey portfolio in the last 1 year, 3 year, 5 year, and 10 year time periods.

Another glaring error is that the Ramsey portfolio does not contain bonds, no matter how far you are from retirement.

One tried and true investment approach is to take your age and subtract it from 100. That's how much you should be allocating to the bond portion of your portfolio. Data supports this approach, but Dave feels they don't perform as well as stocks.

When examined closely, the statistics don't support that conclusion. The Money Guy show did another comparison showing that the two different approaches have very different results.

A 60/40 portfolio doesn't have the highs of an all-stockportfolio, but the lows are where the real risk lies. A bond portfolio ends up taking less risk but earning a greater return over a 22-year timeframe.

If you are relying on your investments to support you in your golden years, one bad year in the market can completely derail your retirement. A 100% stock market portfolio exposes you to sequence of return risk that could send your retirement portfolio into a death spiral that it can't recover from.

Dave Ramsey's might have some merit if he didn't unequivocally advise against guaranteed lifetime income annuities.

With a bit of planning, an annuity when paired with a company pension and Social Security can completely cover your living expenses in retirement. This allows you to earmark your stock market portfolio for extra expenses and also take more risk in the stock market portion of your portfolio.

With your lifestyle needs taken care of with this method, you could even remove the bond portion of your portfolio. By allocating 100% of your portfolio to higher yield stocks, you dramatically increase the likelihood your portfolio will last through your life expectancy.

Dave Ramsey's one-size-fits-all anti-bond investment approach is contradicted by years and years of academic studies and empirical data. The question is why?

The unfortunate truth is that as a financial guru, Dave Ramsey does not have the luxury of nuance and has to dispense one-size-fits-all advice.

 

 

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

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Come Back America by David Walker