Recently, Dave Ramsey invited staff writer Brian Stoffel from The Motley Fool onto his show to discuss Ramsey's investing advice, namely Ramsey's claims that you can get a 12% average return on your investments. Ramsey suggested two mutual funds that could beat the market: Investment Company of America (AIVSX) and Growth Fund of America (AGTHX).
This presentation examines Ramsey's claims compared to equivalent index funds to see whether or not Ramsey's picks are superior to index funds.
You can read more at http://www.hullfinancialplanning.com/six-areas-where-i-disagree-with-dave-ramseys-investing-and-retirement-withdrawal-advice/
Presentation provided by Fort Worth financial advisor Hull Financial Planning.
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Does the Dave Ramsey Investing Math Add Up?
1. Does the Dave Ramsey Investing
Math Add Up?
Jason Hull
Hull Financial Planning
http://www.hullfinancialplanning.com
http://www.hullfinancialplanning.com
2. 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?
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3. 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.
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4. Can You Expect a 12% Average Return
on Your Investments?
• The average return of the S&P 500 since 1926
is 11.88%
• The compound average return over the same
period is 9.87%
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5. Can You Expect a 12% Average Return
on Your Investments?
• 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.
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$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
6. 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!
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7. 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/
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8. 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.
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9. 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.
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$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
10. 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.
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11. 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.
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$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
12. Do Ramsey’s Fund Recommendations
Work?
The funds Ramsey recommended in his
June 4, 2013 interview underperformed
their index fund counterparts.
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13. Conclusion
Do not anticipate gaining 12% returns
when conducting investment planning.
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14. 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
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15. 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/
http://www.hullfinancialplanning.com