Dave Ramsey Of Mice and Mutual Funds (Class 9 of 13)

Dave begins by insisting investment need not be complicated. His first rule of investing is, “Keep It Simple Stupid.” Certainly the investor should, as Dave Ramsey suggests, be able to explain the details, costs, dangers, and opportunities of an investment plan to an uninformed audience. Dave Ramsey recommends, never investing purely on the basis of tax avoidance, never investing with borrowed money, and the importance of diversification. This is all pretty standard stuff.

Dave then defines the basic concepts of investments. Yields increase with risk and the nature of liquidity in investment decisions. Money in a checking account is very liquid. It can be accessed immediately, day or night up to its full value. A home is much more difficult to convert into other goods or services. It requires months, unless the owner is willing to take an extremely low price from the buyer.

In his discussion of various investment vehicles, Dave begins to build his case for mutual funds. Dave considers Certificates of Deposit a bad investment, as they pay a small rate of return and are relatively illiquid. Dave believes in using Money Market funds for the emergency fund and as a general source of ready cash. Dave considers investing in a single stock to be a risky proposition. In the order of presentation he places single stock investing next to casino gambling. He does not make a one to one comparison, but he does not leave the listener with any doubts about his position. Dave is opposed to investing in bonds for the same reason he opposes Certificates of Deposit, the rates of return are relatively low and they aren’t very liquid.

Dave is a huge proponent of stock mutual funds. He believes they provide the greatest diversification and liquidity with a minimum of risk. Since they are professionally managed, he contends, the rate of return should be higher than anything that could be accomplished by an individual investor. Dave Ramsey suggests an even split (25% each) between Aggressive Growth Funds (small cap), Growth Funds (mid cap), Growth and Income (large cap), and International. Dave Ramsey insists that mutual funds have at least a five year track record. He also makes a point to minimize the importance of sales commissions and annual fees, as some mutual funds with commissions and higher fees beat the returns of some similar, lower priced funds.

Dave also personally invests in rental real estate. However, he contends this type of investment requires more free cash than most of his listeners possess.

He rates annuities as questionable (variable annuities) to very bad (fixed annuities).

Finally, he lists what he considers bad investments gold, commodities, futures, viaticals (often outright frauds). In an additional paper entitled, Dave’s Investment Philosophy, I received from my contact at his organization Dave also expresses negative views on Exchange Traded Funds, Real Estate Investment Trusts, and Equity Indexed Annuities. Dave also argues against value based investing (funds that only invest in “moral” companies meaning they don’t give money to Planned Parenthood or that sort of thing).