Following Ramsey's advice could hurt your retirement prospects.
Dave Ramsey is a finance expert offering advice on many issues, including where you should put your retirement money.
Ramsey gave some good suggestions about what kinds of brokerage accounts you should be putting your money into. But, when it comes to suggesting assets to invest in, he's given some very bad advice that you likely should not follow.
Specifically, Ramsey recommended mutual funds over exchange-traded funds for most retirement investors. And he gave some explanations for this recommendation, most of which highlight just how incorrect he is. Here are two reasons Ramsey is dead wrong.
1. Ramsey says actively managed mutual funds are worth paying more for
When comparing mutual funds and exchange-traded funds, Ramsey acknowledged that mutual funds can have higher fees than ETFs. But, he suggests, that could be a good thing if you're paying for a fund manager to personally select assets.
"ETFs are managed passively (the fund just follows the market index) while mutual funds are managed actively by investment professionals," Ramsey explained. "The goal of having someone actively managing your mutual fund is to benefit from their expertise and beat average market returns. That makes mutual funds a little more expensive to own than ETFs, but the idea is you'll benefit from stronger returns."
There are some big problems with this advice, though.
Most importantly, actively managed investments very rarely, if ever, outperform market indexes over the long term -- especially after factoring in the fees that fund managers charge. In the rare cases where active investing does net higher returns, it's usually in situations where wealthy investors are purchasing assets regular people can't access.
Why would you ever want to take a chance on paying more for a fund manager to pick your stocks when the odds are very good that you'd do better with a cheaper passively managed ETF?
2. Ramsey says index mutual funds can be a better buy than ETFs
Ramsey suggested that if you do want to engage in passive investing, you're better off doing it with an index mutual fund than with an ETF that tracks a market or financial index.
His reasoning: Mutual funds are meant to be invested in over the long term, while ETFs trade daily. He goes on to argue that mutual funds allow you to avoid brokerage fees often charged by ETFs.
There's problems with this advice, too, though. ETFs can also be held for as long as you'd like, even though they do trade like stocks. So there's no reason long-term investors can't opt for an ETF. And many brokerage firms offer more options for commission-free ETFs than mutual funds. So, you could have a broader choice of fee-free investments if you opted for ETFs instead.
For these key reasons, Ramsey's advice isn't the best on this issue. If you want to build a retirement nest egg that provides the security you deserve and you don't want to pick individual stocks, an ETF could be a way better bet than most mutual funds would be.
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FAQs
Plain and simple, here's the Ramsey Solutions investing philosophy: Get out of debt and save up a fully funded emergency fund first. Invest 15% of your income in tax-advantaged retirement accounts. Invest in good growth stock mutual funds.
Is Dave Ramsey's advice outdated? ›
Business Insider's Post. Younger workers say the advice of financial guru Dave Ramsey is outdated as they battle rising costs and prioritize life over work.
Why does Dave Ramsey say not to invest in ETFs? ›
Constantly Trading
One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open.
What are the 4 areas of investment Dave Ramsey? ›
I put my personal 401(k) and a lot of my mutual fund investing in four types of mutual funds: growth, growth and income, aggressive growth, and international.
What does Dave Ramsey recommend for retirement? ›
The post on Ramsey Solutions recommends going back to your traditional 401(k), 403(b) or TSP workplace retirement plan. Keep bumping your contribution up until you hit 15%. While you're there, make sure you have your account set up for automatic withdrawals.
How much does Dave Ramsey say to put in retirement? ›
We tell folks to invest only 15% for retirement because you'll need money for some other important financial goals—like saving for your kids' college funds and paying off your house early.
What does Dave Ramsey say is the most important thing to do? ›
Eliminate Debt Before You Invest
The No. 1 rule of the Ramsey investing philosophy is not to invest a dime — at least not until you eliminate all of your toxic debt, which he considers to be pretty much everything but your mortgage.
How much is Dave Ramsey really worth? ›
At the age of 26, Dave Ramsey's real estate portfolio was worth $4 million, and his net worth was just over $1 million. 6As of 2021, his net worth is around $200 million.
Why doesn t Dave Ramsey like debt? ›
Ramsey has made it clear that he doesn't think there's ever a reason to borrow because of the financial danger that being in debt presents. "Debt always equals risk, and it's always dumb," he said.
Can you retire a millionaire with ETFs alone? ›
Investing in the stock market is one of the most effective ways to generate long-term wealth, and you don't need to be an experienced investor to make a lot of money. In fact, it's possible to retire a millionaire with next to no effort through exchange-traded funds (ETFs).
Warren Buffett owns 2 ETFs—this one is better for everyday investors, experts say.
Why no ETFs in 401k? ›
ETFs are generally highly liquid because they are traded on stock exchanges. You can buy and sell ETFs throughout the trading day at market prices. Unfortunately, this benefit is usually lost among 401(k) investors, who are likelier not to want to trade securities often and throughout the day.
What are the 4 C's of investing? ›
Trade-offs must be weighed and evaluated, and the costs of any investment must be contextualized. To help with this conversation, I like to frame fund expenses in terms of what I call the Four C's of Investment Costs: Capacity, Craftsmanship, Complexity, and Contribution.
What are the 3 A's of investing? ›
Remember the 3 A's for retirement saving: amount, account, and asset mix.
How to Prepare for a Recession Dave Ramsey? ›
Here are seven steps to help you prepare for a recession:
- Don't panic. ...
- Take a look at your finances. ...
- Get on a budget. ...
- Build up your emergency fund. ...
- Leave your investments alone. ...
- Pay down your debt. ...
- Reevaluate your job situation.
He helps a lot of people pay off their debt. But when it comes to the stock market, Dave doesn't really know what he's talking about. He uses his own personal experience, which he provides almost no information on, so we can't fact-check what he's investing and he uses it as an investing plan for everybody.
What is the 7 year rule for investing? ›
Let's say your initial investment is $100,000—meaning that's how much money you are able to invest right now—and your goal is to grow your portfolio to $1 million. Assuming long-term market returns stay more or less the same, the Rule of 72 tells us that you should be able to double your money every 7.2 years.
What is the 5 rule of investing? ›
This sort of five percent rule is a yardstick to help investors with diversification and risk management. Using this strategy, no more than 1/20th of an investor's portfolio would be tied to any single security. This protects against material losses should that single company perform poorly or become insolvent.
What is the number 1 rule investing? ›
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”
