### 12 Percent Annual Returns Are Unrealistic:
### 8 Percent Retirement Withdrawal is WAY Too High!
### Actively Managed Funds vs. Passively Managed Funds:
We often like to think that personal finance is an exact science, but in reality, it involves a lot of guesswork. It’s about evaluating certain numbers, past returns, and other intangible factors to make informed decisions about your investments. Since this can be very subjective, there’s always a risk of being misled or wasting time.
If you received bad advice, you’d typically expect it from an inexperienced financial planner or someone with their own agenda. But what if it came from someone like Dave Ramsey? According to Money Magazine’s October 2013 issue, even Ramsey has given advice that’s questionable.
If you’re into personal finance, you’ve probably heard of Dave Ramsey. He’s everywhere—books, TV, websites—and he has a massive following. Personally, I’ve always felt a bit out of place with Ramsey’s teachings because they’re more geared towards people trying to get out of debt. My focus has always been on building more passive income. Because of this, I’ve never really delved deeply into his advice. Clearly, though, his popularity shows he’s doing something right.
But what are the controversial things Ramsey has been accused of in the Money Magazine article? They claim he’s telling people:
1. To expect 12 percent annual returns.
2. To withdraw 8 percent of their savings each year during retirement.
As someone who’s read a lot about personal finance, I can tell you these points are worrisome.
It’s well-known in the investment world that the average annual return of the stock market since the 1920s ranges between 8 to 10 percent. This makes it widely accepted that over the long run, an investor is unlikely to beat these average returns. John Bogle, the founder of Vanguard, is a significant proponent of this idea. While there may have been periods like the 1990s where returns exceeded 10 percent, market cycles tend to balance these gains over time.
Given that the realistic returns are around 8 to 10 percent, withdrawing 8 percent each year during retirement is asking for trouble. Since the 1990s, a 4 percent withdrawal rate has been the standard advice to ensure your money lasts for at least 30 years. Experts agree that the higher your withdrawal rate, the greater the risk of running out of money. Mentioning an 8 percent withdrawal rate would make them laugh.
Another common strategy is investing in index funds, also known as passively managed funds, which tend to perform better in the long run compared to actively managed funds. John Bogle and many others advocate for this approach. The book “The Big Secret” by Joel Greenblatt also argues that actively managed funds are unlikely to outperform passive index funds, largely due to higher fees cutting into your returns.
So why would Ramsey promote questionable advice like 12-percent returns and actively managed funds? Likely for referral income. When you’ve got a name as big as Dave Ramsey, your endorsement becomes valuable. An article writer from Money Magazine found that one of Ramsey’s recommended advisors pushed for an investment with a 5.75 percent upfront fee.
While making money from referrals isn’t inherently bad, it becomes problematic when you have a large, trusting audience. With great influence comes great responsibility. Other finance gurus like Suze Orman have faced backlash for endorsing high-cost products like prepaid debit cards.
In conclusion, while personal finance is subjective, it’s crucial to base your decisions on solid facts, like historical stock returns. Listen to diverse opinions, agree with what makes sense to you, and be skeptical of advice that promises unrealistic returns. And remember, no one will care for your money the way you do.
