Breaking Down the Dave Ramsey Investing Strategy

We break down Dave Ramsey’s investing strategy.  Can we all retire millionaires as he promises?  Today we find out. Dave Ramsey is a well respected financial guru. He has helped many people begin their personal finance journey. While we disagree with the math behind Dave’s snowball method of debt reduction, you will pay off debt if you follow it. We reviewed Total Money Make Over and came away pretty (but not entirely) impressed. Today we take a look at his investment strategy. Guide Dave Ramsey’s Guide to Investing is a free PDF available on-line. It’s not exactly a weighty tome, just 17 pages, two of which are the cover page and table of contents. Dave’s investing strategy consists of just three steps: * Ask yourself specific questions. Things like at what age you want to retire, what kind of lifestyle you want to live, etc. * Diversify. This section is just four sentences long, and two of them speak of eggs and baskets. * Stay focused. This is basically the sum total of Dave Ramsey’s investing strategy. It is heavy on cliches (I counted four) and light on advice or even basic information like explaining different types of investments. If you don’t know anything about investing, Dave’s advice won’t tell you much. At LMM, we want our listeners and readers to be fully informed. That’s why we produce things like Investing 101: An Introduction to Simple Investing. Once you understand the basics, we’ll explain the various types of investments available. The Rule of 72 The rule of 72 is a method Dave recommends as part of building your investment strategy; it identifies your investing timeline. You divide 72 by the rate of return you get on an investment. That number is about how many years it will take for your investments to double in value. There are a few problems with this. Numbers and averages aren’t the same things. The bigger problem is that Dave uses 12% as the average return you can expect to earn. This number is exaggerated. At LMM, we use 7% which is a little lower than the average rate of