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Dave Ramsey's Investment Advice

November 17th, 2009 at 07:08 pm

I was thinking about Dave Ramsey and specifically his investment advice. He recommends investing in good quality mutual funds (5+ year track record). He also talks about A shares and paying the front end load.

The reason I believe he deals with front end loads is because he advises using a mutual fund broker to help comb through your investments and use as a teacher when questions arise.

By talking about good quality mutual funds, he is talking about actively managed funds as opposed to index or passively managed funds. In the actively managed case, the manager will look at the S&P 500 (or some other index) and make bets (this will be a good year for consumer products but not banks). The passively managed fun will just buy all the stocks in the S&P 500 and keep the same weight of the securities in the S&P 500.

There are pros and cons of each. People say a good manager should be able to out perform their benchmarks but yet only 25% seem to do that in any one year. But there are some who do seem to do it year over year. There is also reason to believe that good manager leave firms to start their own hedge funds or investment firms.

But Dave's basic advice seems to be actively managed portfolios with experienced managers outperforming the market and using a good mutual fund broker to help navigate and educate you on the market and what you are buying.

He goes on to talk about 4 types of funds: growth, growth and income, aggressive growth and international. He says all should be equally weighted. He also mentions on his web site that if this is too risky, you can substitute a balanced fund for part or all of the aggressive growth fund.

So he is recommending a 75/25 US/foreign portfolio that has small, large and medium sized companies. Seems like a pretty well diversified portfolio from the stock side, but you will notice he doesn't have a fixed income piece.

I believe the second part of his investment strategy takes care of that. The second part of his strategy that he talks about is buying paid for investment real estate. You buy the investment property for cash and you have an income stream that should be fairly well adjusted for inflation. As inflation goes up, the rent you charge should also go up.

I will agree that there is probably more risk then in a government bond fund or investment grade bond fund. However, I believe that by investing in the real estate you can have a third party manage it and set up a nice inflation adjusted stable cash stream, and the cash stream would be more stable then a mutual fund's cash stream.

On the surface, everything Dave Ramsey talks about seems to be rather simplistic and overly simplified. When I start peeling back the layers, I generally feel that the advice he gives is pretty solid and well thought out.

I could argue in getting an annuity instead of real estate or dividing international investing into international and emerging markets. I could also argue that passive index is the way to go. You could also argue that his allocation is aggressive, and I would tend to agree, but replacing the fixed income portion with a real estate portfolio is an interesting spin.

But if you feel uncomfortable about investing or don't know where to start, I believe his advice at the end of the day is pretty solid and a good place to start. As you become more educated and confident, you can then tweak as you want.

3 Responses to “Dave Ramsey's Investment Advice”

  1. baselle Says:

    Front loaded fee funds as place to start? I would still claim the passive index fund is really the place to start and mostly finish, if nothing else just for the low fees, and the fact that you will out-perform 75% of what's out there.

    The one message that a lot people don't get (and Dave should pound into people) is that to get a lot of money at the end you have to put a lot of money in. Many are somehow under the impression that your 6% with the perfect mythic allocation is going to get you there.

  2. kdice Says:

    I agree with Baselle, index funds are the place to start and often the best choice to stay in. Why pay load fees and managers who usually can't outperform the market?

    Check out the stuff by John Bogle and A Random Walk Down Wall Street.

  3. Jerry Says:

    I think that Ramsey simplifies things because, let's be honest, the vast majority of the population has absolutely no idea what to do with investments to begin with. Buying and selling and investing and funds are foreign concepts to many people, so he goes with something that he can explain on the radio. It's not insurance that it's the best plan for everybody, but he's kind of forced into a one-size-fits-all mentality due to the nature of what he does. I do think that investing something, somehow, according to a reasonable plan, is usually better than not doing it at all.

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