How to Be a Great Investor - Never assume there is only one correct way to do anything
Never assume there is only one correct way to do anything, including investing.
Dave Ramsey is right about many things, but he is wrong on his investment philosophy.
Taken directly from his website: “Dave recommends mutual funds for your employer-sponsored retirement savings and IRAs. Divide your investments equally between each of these four types of funds:
Growth
Growth and Income
Aggressive Growth
International”
This is extremely dangerous advice! By putting 100 percent of your retirement funds in stock market funds, you run the risk of losing a bundle when the stock market corrects or goes through a bear (down) market cycle.
Let’s do some quick math.
If you took Ramsey’s advice in 2007-2009,[1] you would have lost 50% of your portfolio value. You would have lost 33% in the 1987 crash and 36% in the aftermath of 9/11. That doesn’t say much for Dave’s “philosophy.” Ramsey states in his book, Total Money Makeover, “Your financial process and principles must work in good times and in bad times―otherwise, they don’t work.”
If what Dave states is true, then his own investment advice is useless. Losing 50% of my hard-earned money doesn’t sound like great advice to me. King Solomon said, “Divide your portion to 7, even to 8, for you do not know what misfortune may occur on earth.” So, who’s right―King Solomon or Ramsey?
A diversified portfolio made up of seven or eight asset classes makes a lot more sense to me than putting all of my eggs in one basket (stock mutual funds) as Mr. Ramsey suggests.
To be absolutely clear: Dave Ramsey is not a trained or licensed investment professional. There are numerous flaws in his philosophy besides lack of diversification. He recommends front-end loaded mutual funds with a 4-5% up-front commission paid to his “endorsed local provider(s)” who pay the Ramsey organization $549 per month for the privilege of being “endorsed.” This is an outrageous conflict of interest.
In my latest book, How to Be a Great Investor,[2] I devote an entire chapter to Ramsey vs. Reality. It’s extremely eye-opening. It can also save you a lot of sorrow and grief.
Listen to counsel and accept discipline, that you may be wise the rest of your days. -Proverbs 19:20
Visit GreatInvestor.org to listen to our podcasts.
Thanks, and Blessings!
[1] The Great Recession
[2] Available on Amazon