Dave Ramsey is a genius when it comes to inspiring people with common sense to get out of debt and to live within their means. He gets a fair bit of criticism on his investing advice though. Dave recommends people spread their investments across four types of mutual funds:
- Growth (25%)
- Growth and Income (25%)
- Aggressive Growth (25%)
- International. (25%)
Enthusiastic readers and listeners probably run off to Google to find these 4 mutual fund investments to invest like Dave and build wealth. But the answers are hidden – and followers end up having to contact an investing ELP (or endorsed local provider) that follows Dave’s rules (and pays for his endorsement).
Dave purposely shies away from giving specific investment advice to his listeners. Part of it probably has to do with the rules and regulations around giving investment advice, and part of it is probably because he’s honed his message for simplicity and maximum effect. The problem is: many debt-free followers are left wondering where to invest their retirement or extra money. I’m no ELP, but let me help fill-in where Dave has left off when it comes to investing in mutual funds for maximum efficiency.
4 Mutual Fund Types
Dave recommends investing equally among four mutual fund “types”:
- Growth and Income
- Aggressive Growth
The first problem is that it isn’t clear what these fund “types” mean. These aren’t exactly common terms used to describe mutual funds. So we have to interpret what Dave means. According to several others who have explored this topic and Dave’s own words, it’s fair to interpret his mutual fund recommendations as follows:
- Growth = Large Cap Funds (which invest in big companies like Apple, Exxon Mobile, and GE)
- Growth and Income = Large Cap Value Funds (which invest in big steady companies like Coca-Cola and Home Depot)
- Aggressive Growth = Small/Mid Cap Growth Funds (which invest in smaller companies poised to grow bigger)
- International = World stocks funds (which invest in companies outside of the US)
Going backwards, international is the easiest one to interpret. Obviously Dave recommends investing in mutual funds that focus on companies outside of the US. The problem is that there are many types of international funds which only invest in China, or only Europe, or only “developing markets” like Southeast Asia or South America. How can you know which one to choose?
Next, Dave recommends Aggressive Growth, and that most likely means smaller (or possibly mid-sized) companies. Small cap companies are considered aggressive growth because they invest most of their profits back into themselves in order to get larger (and more profitable). So, aggressive growth definitely means small or mid cap companies, and we can find funds that invest specifically in small companies focused on growth.
Growth and Income means that the companies offer dividends or interest payments. These companies are usually larger companies that have grown large enough to offer value in the form of consistent profits (think Coca-cola and Home Depot). There’s not a lot of room for growth in these large companies. So growth and income likely means large cap value (with a mix of growth).
The first category Dave always recommends is simply Growth which likely means funds that invest in stable, large cap companies. The safest, and most reliable category left, after we have small and mid cap, value, and international, would simply be large cap companies. This category is considered the foundation of many diversified portfolio strategies, and Dave always says growth first, so we can assume he means large cap funds. He also regularly mentions S&P500 index funds as safe investments for people who have maxed out their retirement accounts and need to invest in regular taxable account. Large cap funds (or growth funds) most closely match S&P500 funds.
Which Funds to Choose?
This is the golden question. Dave purposely makes a point not to recommend specific funds when he discusses investing. He emphasizes that investing in any mutual funds that even somewhat match his recommendation is a million times better than sitting out of the market. He relies on his ELP’s (endorsed local providers) to handle the specifics. Well, I’m no ELP, but I’ve looked up mutual funds in an online screener and found the best performing over the last 10 years with average risk (or less). I also specifically screened funds headed by the same manager for at least 5 years to fit Dave’s recommendation of fund with “long track records”. Here are 3 example portfolios loosely matching Dave Ramsey’s mutual fund recommendations:
|Growth & Income||JVAIX||JVASX||AUIIX|
You can copy these ticker symbols and put them into your favorite search engine (Google Finance, Yahoo Finance, Morningstar, etc) to get more specific information. Or copy them down and ask your ELP to find funds that match or beat these.
All 3 of the Dave Ramsey’s portfolios outperformed the S&P500 total return over 10 years.
The S&P500 is the green line in the graph below. Notice how it’s lower than the other 3 lines representing Ramsey-like portfolios. The dates are from Jan 2006 to November 2015 or approximately the last 10 years.
The inflation adjusted compound annual growth rate (or CAGR) was 10.8%, 10.09%, and 9.49% for each of the 3 portfolios. This essentially means you would’ve earned around a 10% return on your money over the 10 years. In another 18 months your money would’ve tripled over the 11.5 years at that rate. Had your money been sitting in your checking account, it would literally be worth less (because of inflation). So, people may give Dave Ramsey a hard time about his investing strategy being simple, or risky, or just plain wrong. And we all know Dave’s forte is helping people get out of debt. But once you’ve followed his plan to get out of debt, go ahead and take his investing advice as well, because you’ll be much better off each year that passes. Disclaimer: I am not an investing professional. I’m also not affiliate with Dave Ramsey or any company he owns. The above is an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.