With nearly 32 years of financial experience, Dave Ramsey has seen it all. He went through bankruptcy and bounced back to amass over $200 million in assets and has helped millions of people with their personal finances.
In recent episodes, ramsey showa financial guru took time to analyze the worrying trend that young investors are no longer able to understand the basic financial principle of balancing the risk-reward ratio.
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He laments the fact that many online influencers promote high-risk speculative assets with little prospect of return.
“It’s not an investment. It borders on gambling,” he said.
Here’s what a veteran real estate investor has to say and why younger investors could be putting their futures at risk by ignoring this rule.
risk spectrum
“One of the first things taught in finance classes is the risk-return ratio,” Ramsey says. This ratio shows the potential reward an investor can earn for every dollar he risks on an investment.
In this context, Ramsey says all investment opportunities lie somewhere on the risk-reward spectrum.
At one end of the spectrum are government bonds, which academics and institutional investors like BlackRock consider a risk-free asset class because they are backed by the government.
If you are willing to take a greater risk than that posed by government bonds, you should be compensated with a higher return. The yield on the 10-year U.S. Treasury note is currently 4.45%, according to Bloomberg. Ramsey believes investors should demand higher returns when investing in other asset classes such as real estate and stocks.
Mr. Ramsey was talking about a mutual fund that has returned an average of 12.2% a year since 1934, with only 10 consecutive years of losses since then.
“If you can make that investment by just pressing ‘Enter’ on your computer, you don’t have to work on it,” he said. “Okay, so if you’re going to flip a house, that’s speculation, okay, daddy better make more than 12% on his money. You have to make at least 20%.”
Unfortunately, many investors lose sight of this basic rule, he says.
read more: ‘They’re terrible’: Dave Ramsey is fed up with Millennials and Gen Zers who insist they don’t work but want to own a home — this is what he says it takes to be a ‘successful’ investor To tell
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Ramsey highlighted the fact that social media influencers often ignore the risks of the investments they promote, which can lead to harmful outcomes.
Social media has had a significant impact on investment culture. The “meme stocks” phenomenon that emerged during the pandemic on online forums like Reddit and rising stocks like GameStop and BlackBerry have changed the way some investors approach the market.
On the other hand, investors are becoming more short-term oriented. The average holding period for individual stocks has fallen from five years in the 1970s to just 5.5 months in 2023, according to eToro. Additionally, the daily trading volume of speculative assets such as cryptocurrencies still exceeds $75 billion, according to CoinMarketCap.
For Ramsey, these risky assets are just one step away from gambling. The only difference between Bitcoin and roulette is that the odds of winning at the casino are lower.
“If you’re going to walk away from Las Vegas, the house wins 100 percent,” he joked. “Las Vegas is built on losers.”
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