Does the Dave Ramsey Investing Math Add Up?

Does the Dave Ramsey Investing
Math Add Up?
Jason Hull
Hull Financial Planning
http://www.hullfinancialplanning.com

A June 4, 2013 Interview
• On June 4, 2013, Dave Ramsey invited a staff
writer from The Motley Fool onto his show
• The topics were
– Should you expect a 12% annual rate of return on
your investments?
– What funds does Ramsey suggest can beat the
stock market average?

Can You Expect a 12% Average Return
on Your Investments?
• It’s the difference between average returns –
where you total the returns and divide by the
number of years – and compounded average
returns – where you ended up
• It may sound like a matter of semantics, but
it’s not.

• The average return of the S&P 500 since 1926
is 11.88%
• The compound average return over the same
period is 9.87%

• The average annual family income in the U.S. is
$52,762. If they save 15% per year, the difference in
returns adds up over 40 years.
$6,799,510.70
$3,715,015.36
$-
$1,000,000.00
$2,000,000.00
$3,000,000.00
$4,000,000.00
$5,000,000.00
$6,000,000.00
$7,000,000.00
$8,000,000.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Year
Average Versus Compound Average Growth Returns for the S&P
500
Average return
Compounded average return

Why Does 12% Matter?
• Due to a psychological phenomenon called the
anchoring bias, people expect 12% when they
hear it, even if Ramsey claims that the number is
an example.
• Ramsey’s newsletters encourage people to figure
out how much they need to save by using 12% as
an expected return.
• Working backwards from 12% as an expected
annual return will cause you to not save enough
for retirement!

Do Ramsey’s Picks Beat the Market?
• During the interview, Ramsey cited two
mutual funds which he said beat the market
– Investment Company of America (AIVSX)
– Growth Fund of America (AGTHX)
• Both funds have a 5.75% initial front load
• He encourages people to utilize loaded mutual
funds on his website.
http://www.pewsocialtrends.org/2007/02/07/what-americans-pay-for-and-how/306-3/

Investment Company of America
(AIVSX)
• This fund invests in blue chip stocks,
comparable to the S&P 500.
• An appropriate index fund comparison is the
Vanguard 500 Index Fund (VFINX).
• Ramsey recommends investing 25% of your
funds in a growth and income fund such as
this.

AIVSX vs VFINX
• AIVSX returns are available since 5/31/1996
• Using the same family assumptions as before, we
compare $1,978.58 invested annually while paying
appropriate loads.
• VFINX provides a 1.1% higher return.
$60,883.17 $60,232.81
$-
$20,000.00
$40,000.00
$60,000.00
$80,000.00
VFINX AIVSX
Values of VFINX versus AIVSX investing annually from
5/31/1996 through 6/4/2013

Growth Fund of America (AGTHX)
• This fund invests in invests in smaller
capitalization stocks with the intent of gaining
appreciation over time.
• An appropriate index fund comparison is the
Vanguard Small Cap Index Fund (NAESX).
• Ramsey recommends investing 25% of your
funds in an aggressive growth fund such as
this.

AGTHX vs NAESX
• AGTHX returns are available since 2/11/1993
• Using the same family assumptions as before, we
compare $1,978.58 invested annually while paying
appropriate loads.
• NAESX provides a 12.5% higher return.
$119,619.06
$106,367.02
$95,000.00
$100,000.00
$105,000.00
$110,000.00
$115,000.00
$120,000.00
$125,000.00
NAESX Value AGTHX Value
Values of NAESX versus AGTHX investing annually from
2/11/1993 through 6/4/2013

Do Ramsey’s Fund Recommendations
Work?
The funds Ramsey recommended in his
June 4, 2013 interview underperformed
their index fund counterparts.

Conclusion
Do not anticipate gaining 12% returns
when conducting investment planning.

Who Am I?
• Army veteran, West Point, Darden grad
• Founded and sold a software development
company
• Financial planner, CFP® candidate
• Personal finance columnist, U.S. News &
World Report

How to Reach Me
• http://www.hullfinancialplanning.com
• jhull@hullfinancialplanning.com
• (817)476-0584
If you want to read more about the topics in this
presentation, go to
http://www.hullfinancialplanning.com/six-areas-
where-i-disagree-with-dave-ramseys-investing-
and-retirement-withdrawal-advice/

Does the Dave Ramsey Investing Math Add Up?

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