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I’ve always been a big fan of Dave Ramsey. His famous “baby-step” plan for improving one’s financial circumstances is really the only financial plan most Americans need. It’s the perfect recipe for shedding the paycheck-to-paycheck lifestyle and transforming oneself from a wealth-destroyer to a wealth-builder.
The one aspect of his financial mantra that I have always discarded, however, was his expected return on stock investments. Mr. Ramsey is fond of saying that any investor—even a well-manicured ape like you and me—should have no problem earning a 12 percent return on his or her stock portfolio. Just put your money in a “good growth stock mutual fund” and watch your investments grow.
I always regarded Mr. Ramsey’s 12 percent return as a pipe dream. I have no doubt that there are a number of portfolio managers who achieved a 12 percent return or better over a long period of time. But could a well-manicured ape like you and me find these elite managers and stick with them through their inevitable down years? I don’t think so. That’s why I have never used 12 percent returns when projecting long-term investment results. I always use a 7 percent return—a return well within the means of a broad-based stock index fund and therefore well within the reach of a well-manicured ape like you and me.
But then the other day I went online to Fidelity to check the performance of my investments. And below the returns for my Roth IRA, Mrs. Groovy’s Roth IRA, and our joint brokerage account were the returns for a number of common investment benchmarks.* Check ’em out:
* Returns for the above benchmarks were as of 3/31/2022.
Well, it turns out that 12 percent returns aren’t a pipe dream. Anyone who invested in either a drab, no-nonsense S&P 500 index fund or a drab, non-nonsense total stock market index fund would have earned an annual average return of over 14 percent during the past 10 years.
So, yes, any well-manicured ape can earn 12 percent returns in the stock market. My apologies to Mr. Ramsey.
The stock market is a tricky thing. The future is just so unpredictable. It would be nice if we could bank on 12% returns, even over a 10-year or longer stretch.
How does your portfolio look now, with the Dow Jones and S&P 500 having lost 15% and 20% of their value so far this year?
With all of the supply chain issues and other strange things happening in the economy, I’ve seen a lot of investors looking for alternatives to traditional investments.
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I diverge from Mr. Ramsey’s advice at two points. One of them is actively managed mutual funds. He sells endorsements to financial planners. And his endorsed local financial planners (in my experience) tilt toward actively managed funds.
However, there’s this guy John Bogle who started this company called Vanguard. Last year Vanguard predicted that the market would yield a 4% return. And they were wrong, I did more like 12% with Vanguard’s index total stock index fund last year.
I remain a Dave Ramsey fan, but I also cling to my heretical beliefs about debit cards (i’m against) and his four-fund investing strategy (index funds do better).
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Agreed. I’m a Boglehead all the way as well. Dave’s financial shibboleth regarding 12 percent returns only reflects reality when index funds are so obliging. Happily, over the past 10 years, index funds have played along. But I wouldn’t count on it going forward. In short, I’m a big fan of Dave’s financial-makeover advice, but not a big fan of his active-management-investment advice. Thanks for stopping by, my friend. Cheers.
Now run the same analysis from 3/31/2002 to 3/31/2012. Never mistake a bull market for investing genius.
Good point. Mr. Market has been very kind for the last ten years. Will he be so kind for the next ten years? Oh, and by the way, just two weeks ago I was a Warren-Buffett-level financial genius. This week? Not so much.
Stock market returns have most likely been elevated the past ~20 years due to an extremely accommodative Fed, increased fiscal spending and technological advancements.
While technology may continue to increase efficiencies and productivity, I’m a little concerned returns will be much lower as investors will face headwinds from rising interest rates and quantitative easing, AKA money printing.
I think 9% average returns are much more in line with long term historical norms. Thanks for sharing your returns, nice work!
Agreed. A good percentage of the returns over the past couple of decades has been ginned up by a less-than-responsible Federal Reserve. At some point, the game-playing will no longer be tenable and the double-digit returns will go bye-bye. Thanks for stopping by, my friend. I really appreciate your contribution to our conversion. Peace.