Dangers of Dave Ramsey’s Investment Advice

I started listening to Dave Ramsey in college and really found his show to be both encouraging and entertaining (in a good way mostly).  His principles can help people struggling with debt and I encourage anyone to read the book Total Money Makeover.

Like other financial writers, there are some things Dave says that I don’t agree with completely.  One of those issues in particular is his perception of potential returns in the stock market.  Here are a few good articles that break down the misconceptions of a 12% return:

Where Dave Ramsey and I Part Ways

The Good, The Bad,  The Ugly – Dave Ramsey

Five Ways I Disagree With Dave Ramsey

The Dave Ramsey blog most recently featured an article called The 12% Reality.  It attempts to explain how Dave comes up with his advice to seek out mutual funds that are returning 12%+.  I couldn’t believe he was still promoting the idea that investors should expect no less than 12% in the stock market.  I’d much rather expect 7-10% on average and be pleasantly surprised with the years of double digit returns.

The Dangers of Dave Ramsey’s Advice

Dave may be close in his estimates for a few select mutual funds, but to get anywhere near an 11-12% return you would need to first pick the solid performer and then stay put for 10 years or more to realize any long term averages that he’s claiming.  Dave’s suggestion that you SHOULD be earning 12% ultimately harms the investor because it causes investors to search for the ‘hottest’ mutual fund.  If you tell people to expect 12% on their mutual funds and they don’t achieve it, you are fostering the behavior of switching funds more frequently, which actually hurts investors.

I really didn’t like his article and disagree with most of his investing advice.  He is great at motivating people to get out of debt, but I think that his investment advice causes more harm than good.

What are your thoughts?  Have you read his latest article about the 12% return as a reality?