Monday, August 1, 2011

Does Dave Ramsey’s 12 percent growth stock fund exist?

Dave Ramsey, the nationally-syndicated radio talk show host, has done a great deal of good for a great number of people. His core message – that the only reliable way to obtain financial peace is to consistently live within your means so that you can pay off your debts and accumulate savings – makes perfect sense.

I cringe, however, whenever he mentions that people should put their savings into — in his words — a good growth stock mutual fund because it will earn 12 percent annually.

Whether it is on his radio show, his website, his books or his educational programs, Dave Ramsey quotes that 12 percent figure again and again. He uses the 12 percent figure to tout the superiority of stock mutual funds over nearly every possible alternative, such as annuities and cash value life insurance products.

I investigated whether the 12 percent return that he quotes is realistic, and I found some surprising facts.

I started my research with Dave’s explanation, which is found on his website. He says, “The current average annual return from 1926, the year of the S&P’s inception, through 2010 is 11.84 percent. From 1986–2010, it’s 11.28 percent.”

These return figures include the value of reinvested dividends.

You think that would settle the issue, but let’s look deeper at three questions.a) Is that truly the S&P 500’s average return?
b) Has the average person actually achieved that return?
c) Is the past return a good indication of the future expected return?
Shockingly, the answer to each of these three questions is a resounding no.

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