Dave Ramsey is a popular financial guru and author with a nationally syndicated radio show and a sizable audience. Ramsey is especially popular with Christians because many of his financial principles are rooted in Christian values and biblical teachings. Ramsey has spoken openly about his shaky business career before becoming a financial commentator, which included building a $4 million real estate portfolio and then losing it all in bankruptcy before turning 30.
Since then, Ramsay has enjoyed financial success in his personal life, with a net worth now estimated at around $200 million. He encourages his followers to emulate his methods, such as avoiding individual stocks and instead buying top-performing mutual funds. But Ramsay’s critics say some of his financial advice is questionable and that building wealth using his methods may be harder and riskier than it seems.
Here’s a look at Ramsay’s investment philosophy and how it compares to mainstream financial advice.
Dave Ramsey’s entrepreneurial career began at age 12 when he started a lawn care business in his hometown. By age 19, Ramsey quickly earned his real estate license and paid for his college tuition with real estate sales commissions. After college, Ramsey began flipping real estate using his family’s connections at a local bank. By age 26, he owned a large real estate portfolio and a net worth of over $1 million.
Just two years later, Ramsey was forced to file for bankruptcy after his bank lender demanded he repay a $1.2 million loan within 90 days. The failure of his early real estate ventures led Ramsey to turn to Christianity, which became central to his financial philosophy. He founded the Lampo Group, a company offering personal financial counseling, which grew to more than 350 students in just a few years.
With his counseling business gaining momentum, Ramsey published his first book, “Financial Peace,” in 1992. He also began co-hosting a finance-focused radio show, “The Money Game,” and hosting his own radio show, “The Dave Ramsey Show.” The show was later renamed “The Ramsey Show” and featured more “Ramsey personalities” (i.e., team members other than Dave) as the company became more proactive in addressing succession issues. Dave Ramsey is 63 years old.
Ramsey’s personal finance principles are generally sound and simple, including avoiding or eliminating debt, investing 15% of your income in tax-advantaged retirement accounts, focusing on long-term returns, and making consistent contributions. He also often weaves Bible verses into his financial advice. For example, Ramsey quotes Proverbs 21:20 to emphasize the importance of saving and living within your means: “In the house of the wise there is a store of good food and oil: but the foolish man eats away all that he has.”
While Ramsey’s simple, Christian-inspired personal finance teachings have certainly resonated with a large audience, critics say some of the techniques he recommends for investing and retirement may not be as straightforward or easy to understand as he makes them out to be.
One of the pillars of Ramsey’s investment philosophy is to buy and hold a mix of equity mutual funds, including growth and income funds, growth funds, aggressive growth funds and international funds. His Ramsey Solutions website offers the following suggestions:
“When looking for mutual funds to invest in, look at funds with a long history of strong returns (at least 10 years) that consistently outperform the S&P 500.”
Ramsay encouraged his followers to find these top-performing mutual funds, but didn’t mention which ones or where to find them.
After all, it is extremely difficult for even the best professional fund managers to consistently outperform the S&P 500 over the long term: A recent study of 2,132 actively managed mutual funds by S&P Dow Jones Indices found that not a single fund was able to consistently achieve top-quartile returns over a five-year period.
Unfortunately, even if a fund achieves strong performance for several consecutive years, there is no guarantee that the strong performance will continue in the future.
Dr. Roger Silk, CEO of Sterling Foundation Management and co-author of “Decoding the Investor’s Dilemma,” says there are examples in the past of mutual funds that have consistently outperformed the S&P 500 over long periods of time, but a Yale University study of mutual fund performance from 1963 to 2018 highlights how difficult it can be.
“From 1963 to 1993, there was evidence of persistence of performance,” Silk says, “but from 1994 to 2018, knowing that a particular fund had outperformed would not have been useful to an investor because it was not a predictor of future outperformance.”
In other words, the few funds that performed consistently well over a 30-year period failed to continue to outperform over the next 25. So Ramsey’s advice to simply pick mutual funds that “consistently outperform” the S&P 500 isn’t as simple or straightforward as he makes it out to be, even as he chastises his listeners for overcomplicating what he claims is an easy way to beat the market.
Ramsay likes to recommend this general investment approach on air, but is loathe to point out specific funds that have consistently outperformed the market, although of course he would allow listeners to backtest his strategy and objectively show how it worked.
Another piece of financial advice that has landed Ramsay in hot water recently is his recommendation that retirees withdraw 8% a year of the initial value of their retirement portfolios. On his radio show, Ramsay called the suggested 3% withdrawal rate “ridiculous” and recommended an 8% withdrawal rate, double the industry standard of 4%.
“If you make 12% in a good mutual fund and the S&P averages 11.8% and inflation over the last 80 years has averaged 4% then you’re making 12% and you need to leave 4% for inflationary increases, that leaves you with 8%. So I’m totally comfortable withdrawing 8%. But if you want to be a little more conservative, 7%, but definitely not 5% or 3%.” Ramsey said.
Morningstar then back-tested Ramsey’s recommended strategy on a 30-year basis, going back to 1926. They found that retirees using Ramsey’s recommended 8% withdrawal rate would run out of money within 20 years in 32% of test cases. In 45% of test cases, retirees would run out of money within 30 years. In 6% of cases, retirees would spend all their savings in less than 10 years. Morningstar concluded that while Americans with serious health problems or those retiring in their mid-70s may be comfortable with this level of risk, most retirees would be unwilling to take chances when it comes to managing their lifetime savings.
Michael Hills, a financial adviser at Apex Wealth, said Ramsay’s recommendation of an 8% withdrawal rate was a major red flag when it came to risk management.
“If retirees incur losses early on by following Ramsay’s 8% guideline, their portfolios may not recover even if markets subsequently perform well, which could result in financial instability and potential shortfalls at a time when they need to save most,” Hills says.
Shawn Robison, founder and principal adviser at Purpose Built Financial Services, says it’s more realistic to assume that retirees will earn an average annual return closer to 7%, taking into account inflation and market fluctuations.
“A 4% withdrawal rate, widely recognized in the industry as a safer standard, reflects a more sustainable approach to preserving the life of a portfolio,” Robison says.
“Withdrawal rates as high as 8% can expose retirees to significant risks, especially during market downturns, unless the retirement period is expected to be much shorter, such as after age 75.”
Dave Ramsey’s practical personal finance philosophy has undoubtedly benefited thousands of readers and listeners immensely. Ramsey’s recommendations of eliminating and avoiding debt, consistently investing in diversified mutual funds, taking a long-term approach to finances, living within your means, and working with a financial advisor can be powerful pillars of any wealth creation plan.
That being said, Ramsey’s lack of detail on specific investment recommendations, his questionable risk management, and his overly optimistic return assumptions suggest that investors should not blindly follow all of Dave Ramsey’s advice without at least getting a second opinion from a qualified financial advisor.
