I'm a pretty big fan of Dave Ramsey. He preaches (and I mean preaches) debt elimination more vehemently and consistently than any other advisor or radio personality I have ever seen. His baby steps plan is sound and should work for most people.
However, once you have paid off your debt and fully funded your emergency fund, I think Dave Ramsey's usefulness effectively ends right there. I was listening this morning and I hear the following call:
Dave: Robert in Memphis Tennessee, welcome to the Dave Ramsey show. How can I help?
Caller (not really Robert, just using a name): Hi Dave, thanks for taking my call. My Dad is one of these guys who saves up some money and once he has enough goes to the bank and buys another CD. I hear you talking about these... mutual funds? Can you tell me what's involved, the pros and cons?
Now, I'm assuming here, but the caller sounded like he was clearly an adult, like thirty plus. So, that makes his dad likely fifty plus. Maybe sixty plus.
Dave: Well Robert, I call CDs Certificates of Depression. You see, how much do you get for a CD? 4%? Well, inflation is running at 4%. Before you get the money home, you have to give up almost half in taxes. So, you're really losing money in CDs. Yea, it's safe in that you're not going to lose the money, but you're going to get tackled from behind by inflation because you're walking too slowly.
Caller: Oh man. I see. So, that's why you like mutual funds?
Dave: Well sure. You get yourself a good growth and income mutual fund that averages about 10%. What this means is that it's invested in big old boring companies. It's not exciting and not aggressive. If you hear that the market's up 28%, you'll probably be up 16%. But if the market's down 28% you'll probably be up 3-4%.
Is that so Dave? Like I said, Dave is as good as anyone out there for helping you get out of debt. But based on this one conversation, I wouldn't consider discussing investing with him.
First of all, CDs with rates over 5% can easily be found. Some approaching 6%. Just check in with
Bank Deals' Blog. If Dave doesn't know this, I would be very cautious.
Second, Dave is quick to factor the impact of taxes on CDs, but apparently not mutual funds.
Third, do I really even need to say it? When the market is down 28%, growth and income funds will be up three to four percent? Let's take a look at examples of a few of the biggest growth and income funds around.
Note: This is not a recommendation or advice. The funds named are purley for demonstration purposes. You may and will likely lose money by investing in anything you read about on any blog. Do your own research or hire an advisor who understands your specific needs.
Fidelity Growth and Income fund (FGRIX)
1999, S&P 500 up 21.04%, FGRIX is up 10.42%. So far it's more or less in line with Dave's description.
2000, S&P 500 down 9.10%, FGRIX is down 1.98%. It's not down nearly as much as the market, but that doesn't sound like a positive number. Hmmm....
2001, S&P 500 down 11.89%, FGRIX is down 9.35%. Well, that doesn't sound right.
2002, S&P 500 down 22.10%, FGRIX is down 18.08%. Whoa! No one said anything about losing close to 30% in three years! I thought this goes up 3-4% in down markets!
Well, maybe I picked a bad Growth and Income fund. Let's try another:
The Investment Company of America (AIVSX)
1999, S&P 500 up 21.04%, AIVSX up 16.6%. Sounds just like what Dave told me.
2000, S&P 500 down 9.10%, AIVSX up 3.8%. Bingo! Dave is right on the money!
2001, S&P 500 down 11.89%, AIVSX down 4.6%. Well, I didn't count on losing money, but I guess it's not too bad.
2002, S&P 500 down 22.10, AIVSX down 14.5%. Yikes! I thought this fund makes a little money when the market is down twenty something.
Well, the second fund obviously has provided better downside protection in that past (remember past performance is not a guarantee or indicator of future returns). And yes, you would have outperformed CDs in the AIVSX over the last three, five, seven, ten years or more. The problem I have is with so many advisors and personal finance writers who do not make the downside risks clear to their readers/listeners. Think Robert Kiyosaki and skipping college to start your own business. Think David Bach and buying a house. Or two.
By the way the Investment Company of America is part of the American Funds family, and is a load fund. The above numbers do not include sales charges.
And most importantly, read my disclaimer: This is general advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio. You, alone, are responsible for any losses or damages that may and will likely result from your financial decisions. The specific investments named here are for demonstration purposes only, not a recommendation of any kind.