Breaking Down the Dave Ramsey Investing Strategy

We break down Dave Ramsey’s investing strategy.  Can we all retire millionaires as he promises?  Today we find out.

Dave Ramsey is a well respected financial guru. He has helped many people begin their personal finance journey. While we disagree with the math behind Dave’s snowball method of debt reduction, you will pay off debt if you follow it.

We reviewed Total Money Make Over and came away pretty (but not entirely) impressed. Today we take a look at his investment strategy.

Guide

Dave Ramsey’s Guide to Investing is a free PDF available on-line. It’s not exactly a weighty tome, just 17 pages, two of which are the cover page and table of contents. Dave’s investing strategy consists of just three steps:

* Ask yourself specific questions. Things like at what age you want to retire, what kind of lifestyle you want to live, etc.

* Diversify. This section is just four sentences long, and two of them speak of eggs and baskets.

* Stay focused.

This is basically the sum total of Dave Ramsey’s investing strategy. It is heavy on cliches (I counted four) and light on advice or even basic information like explaining different types of investments. If you don’t know anything about investing, Dave’s advice won’t tell you much.

At LMM, we want our listeners and readers to be fully informed. That’s why we produce things like Investing 101: An Introduction to Simple Investing. Once you understand the basics, we’ll explain the various types of investments available.

The Rule of 72

The rule of 72 is a method Dave recommends as part of building your investment strategy; it identifies your investing timeline. You divide 72 by the rate of return you get on an investment. That number is about how many years it will take for your investments to double in value.

There are a few problems with this. Numbers and averages aren’t the same things. The bigger problem is that Dave uses 12% as the average return you can expect to earn. This number is exaggerated. At LMM, we use 7% which is a little lower than the average rate of return you can expect in the market over the long term.

He posits that if you invest $100 a month from age 25-35 with a return of 12%, you will retire with just over one million dollars. The backlash was immediate. Dave’s defense was that his advice was “inspirational and instructional.” He continued, “…if you save money over time, you’ll have some.”

Well, no shit Dave. I get the inspirational part. One hundred dollars a month doesn’t sound unreasonable, and a million dollars sounds like a lot. But I think most of us could do with a bit more of the instructional bit.

But you don’t need instructions because Dave will hand you off to one of his ELP’s! More on that to come.

Buy and Hold

Dave encourages long-term investing. In order to play the long con, you have to tune out a lot of the coverage about the stock market and the economy. Good news doesn’t sell as well as doom and gloom, and if you jump every time you hear scary economic news, you will never be a successful investor.

We show you how to take the emotion out of investing so that your decisions are based on data and not the lates...

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