What specific mutual funds is Dave Ramsey referring?

[jbeall]

Hi All,

First off, I have done a fair amount of searching on this, so I'm aware that Dave Ramsey's investing advice is not very popular on Bogleheads.com (or, quite frankly, anywhere else that I've been able to find). But I'm hoping this question can avoid morphing into a critique of Mr. Ramsey--instead, I have a question about a specific quote of his wherein he speaks about certain mutual funds, gives specific details, but doesn't identify the funds by name. I'm trying to figure out which funds he's referring to.

In the 2007 edition of Dave Ramsey's book The Total Money Makeover: A Proven Plan for Financial Fitness (ISBN 978-0-7852-8908-1), on pages xv & xvi, he states the following:

Many intelligent but ignorant people seem to think that making a 12 percent rate of return on your money in a long-term investment is impossible.

He goes on to provide some evidence from his own portfolio:

I purchased a Growth and Income Stock Mutual Fund many years ago, that I still invest in, and it has average 12.78 percent per year since 1934 (72 years as of this writing). I bought another last week that has averaged over 15.43 percent per year since 1959, as of this writing. And yet another with average annual returns of 13.55 percent since 1984, and another averaging 13.51 percent since 1973, and yet another averaging 12.67 percent since 1952. Any decent broker with the heart of a teacher can, in his or her sleep, lead you to funds with long track records averaging over 12 percent.

1934 + 72 = 2006, so presumably he came up with those numbers at some point during 2006.

He never identifies the specific mutual funds--not here, nor anywhere else that I've been able to find. When asked, he refers you to an "Endorsed Local Provider," i.e., to someone who pays Mr. Ramsey for leads.

Given specific numbers, and a specific date range (15.43% per year from 1959 to 2006) it should be possible to determine the exact mutual funds that Mr. Ramsey is referring to. This question is two-fold:

1. What mutual funds fit Mr. Ramsey's description?
2. What tool did you use to determine this?

One of the challenges I have found is that all the free, online mutual fund performance & rating tools I've reviewed don't look back more than 10 or perhaps 20 years. Additionally, there numbers are always use "today" or "this year" as an endpoint--you can't arbitrarily pick your endpoint.

Note that this answer suggests that perhaps the first fund (12.78% per year) is The Investment Company of America® (growth-and-income fund) (symbol AIVSX). The numbers don't quite align, but the question being answered in that link uses numbers Mr. Ramsey provided during 2012, so you would expect them to be slightly different from the numbers he provides in 2006.

Thanks!

-Josh

[robertalpert]

Note that this answer suggests that perhaps the first fund (12.78% per year) is The Investment Company of America® (growth-and-income fund) (symbol AIVSX). The numbers don't quite align, but the question being answered in that link uses numbers Mr. Ramsey provided during 2012, so you would expect them to be slightly different from the numbers he provides in 2006.

Thanks!

-Josh

It probably is american funds aivsx. Dave Ramsey apparently doesn't mention that the load and 12b1 fee should be subtracted from that 12% return, bringing its true return to about 5% net of fees.

[jbeall]

I'm new to this, so forgive my ignorance, but I'm not sure how the numbers work. Here's what I thought. Figure you start with $100 in 1934, and the front-load is 5.75% (that's what Morningstar says it is today). So you immediately lose $5.75, leaving you with $94.25 invested.

Morningstar also says the net expense ratio is 0.62%, and I think the 12b1 fee is included in that, if I'm reading this right.

So, I take the average return of 12.78%, subtract 0.62%, and that's the actual return I get on my $94.25--is that right?

I'm not sure I did this right, but I took a look this investment calculator, and it says that after 72 years the $94.25 would become $365,272.86. If you spread that "load" out, it's the same as paying no load (so all $100 gets invested at the beginning) but earning 12.068% annually to hit that same target of $365,272.86.

So the front end load and fees definitely takes a bite out of your returns, but I don't understand how it takes it down to 5%?

I'm new to this stuff so please fill me in on what I'm missing about how all these expenses work... am I not calculating things correctly?

Thanks!

-Josh

[LadyGeek]

Welcome! This doesn't answer your question, but it might help put things in perspective:

There are more expenses than you realize. Take a look in the wiki: Expense ratios and Mutual funds: additional costs

Once you have the expenses figured out, this spreadsheet is useful to run a comparison: Effect of expenses on a portfolio

Do you need any assistance configuring your portfolio? See: Getting started and Asking Portfolio Questions

[greg24]

Do not listen to Dave's investing advice. Follow this forum for investing advice.

[leonard]

Even if one identified these funds - then what?

[jbeall]

Even if one identified these funds - then what?

Then you could find out the "rest of the story" on those funds. What are the expense ratios? Loads? Minimum investments? Volatility? Performance during the last 5, 10, and 20 years?

I'll say that I'm pretty much sold on the idea of index investing, but that doesn't mean I don't want to learn what "the other side" is doing.

[jbeall]

It probably is american funds aivsx. Dave Ramsey apparently doesn't mention that the load and 12b1 fee should be subtracted from that 12% return, bringing its true return to about 5% net of fees.

In case this wasn't clear, Mr. Ramsey mentioned five different funds. AIVSX would be only one of them. There are four others I'm hoping to identify.

-Josh

[JW-Retired]

He (Dave Ramsey) goes on to provide some evidence from his own portfolio:

I purchased a Growth and Income Stock Mutual Fund many years ago, that I still invest in, and it has average 12.78 percent per year since 1934 (72 years as of this writing). I bought another last week that has averaged over 15.43 percent per year since 1959, as of this writing. And yet another with average annual returns of 13.55 percent since 1984, and another averaging 13.51 percent since 1973, and yet another averaging 12.67 percent since 1952. Any decent broker with the heart of a teacher can, in his or her sleep, lead you to funds with long track records averaging over 12 percent.

1934 + 72 = 2006, so presumably he came up with those numbers at some point during 2006.

He never identifies the specific mutual funds--not here, nor anywhere else that I've been able to find. When asked, he refers you to an "Endorsed Local Provider," i.e., to someone who pays Mr. Ramsey for leads.
Given specific numbers, and a specific date range (15.43% per year from 1959 to 2006) it should be possible to determine the exact mutual funds that Mr. Ramsey is referring to. This question is two-fold:
1. What mutual funds fit Mr. Ramsey's description?
2. What tool did you use to determine this?

One of the challenges I have found is that all the free, online mutual fund performance & rating tools I've reviewed don't look back more than 10 or perhaps 20 years. Additionally, there numbers are always use "today" or "this year" as an endpoint--you can't arbitrarily pick your endpoint.

It's tedious, but Morningstar's growth of $10,000 charts give total return after expenses and you can adjust the start & end dates. For example, this FCNTX fund has around 15% compound growth between 1984 & 2006 (22 years of growth & 10K grows to 223k). So 10[(1+i)^22] = 223 ===> i=0.1515 ............. even better than Dave Ramsey's since 1984 find above.
http://quotes.morningstar.com/fund/f?re ... gf&t=FCNTX

If you data mine through 5000 funds you will find a few that have excellent long past performance records. So what? Why should you believe this is anything but random?
JW

[Toons]

I recall him mentioning American Funds on more than one occasion

[Cuzz35]

I'm new to this, so forgive my ignorance, but I'm not sure how the numbers work. Here's what I thought. Figure you start with $100 in 1934, and the front-load is 5.75% (that's what Morningstar says it is today). So you immediately lose $5.75, leaving you with $94.25 invested.

Morningstar also says the net expense ratio is 0.62%, and I think the 12b1 fee is included in that, if I'm reading this right.

So, I take the average return of 12.78%, subtract 0.62%, and that's the actual return I get on my $94.25--is that right?

I'm not sure I did this right, but I took a look this investment calculator, and it says that after 72 years the $94.25 would become $365,272.86. If you spread that "load" out, it's the same as paying no load (so all $100 gets invested at the beginning) but earning 12.068% annually to hit that same target of $365,272.86.

So the front end load and fees definitely takes a bite out of your returns, but I don't understand how it takes it down to 5%?

I'm new to this stuff so please fill me in on what I'm missing about how all these expenses work... am I not calculating things correctly?

Thanks!

-Josh

Just one quick note. It is very unlikely that the fund fees today are the same as they have been throughout its history. It is likely they were much higher at one point and possibly paid AUM fees as well.

[MapleHermit]

I think it's pretty obvious that's he's some sort of semi-fraudulent person who wants to sell the idea to people that they can attain financial freedom if they buy what he says.
A 12% consistent return is a joke.

[LadyGeek]

^^^ OK, but let's not discuss Dave Ramsey here. The question is on the funds.

To the OP - JW Nearly Retired has supplied you with an appropriate tool for fund analysis. It's called the Growth Of 10K and is used to do an "apples-to-apples" comparison of funds. It's not perfect, but it can get close.

JW is also questioning why you picked this fund. Are you following the advice in this book to configure your portfolio?

[JW-Retired]

So the front end load and fees definitely takes a bite out of your returns, but I don't understand how it takes it down to 5%?

I'm new to this stuff so please fill me in on what I'm missing about how all these expenses work... am I not calculating things correctly?

None of the Morningstar growth of $10k data accounts for loads, but they do account for ERs. The sales load gets highly diluted over long times so it's importance fades away. The ER continues but is taken into account. Ramsey's numbers are probably about right for these funds he has picked using hindsight.

It isn't that there are no funds at all that have given these 12%-15% sort of returns over long periods of time, only that there are very few and nobody can know which ones will do it ahead of time.
JW

[jbeall]

It's tedious, but Morningstar's growth of $10,000 charts give total return after expenses and you can adjust the start & end dates. For example, this FCNTX fund has around 15% compound growth between 1984 & 2006 (22 years of growth & 10K grows to 223k). So 10[(1+i)^22] = 223 ===> i=0.1515 ............. even better than Dave Ramsey's since 1984 find above.
http://quotes.morningstar.com/fund/f?re ... gf&t=FCNTX

How does this work? When I try click the link you provided and try to adjust the date range to, e.g., 01/01/1984 through 01/01/2006, and hit enter, it changes it to 01/20/2004 through 01/21/2006.

JW is also questioning why you picked this fund. Are you following the advice in this book to configure your portfolio?

I'm not sure what fund you're referring to, but I haven't picked any of the funds mentioned in this thread. Instead, I'm wondering what five funds Dave Ramsey is referring to in his book. You're worried, and rightfully so that I will go out and buy shares in those funds once I've found them. Not true--the reason I'm wondering what those funds are is still the same as what I indicated in this post:

Even if one identified these funds - then what?

Then you could find out the "rest of the story" on those funds. What are the expense ratios? Loads? Minimum investments? Volatility? Performance during the last 5, 10, and 20 years?

I'll say that I'm pretty much sold on the idea of index investing, but that doesn't mean I don't want to learn what "the other side" is doing.

[jbeall]

It's tedious, but Morningstar's growth of $10,000 charts give total return after expenses and you can adjust the start & end dates. For example, this FCNTX fund has around 15% compound growth between 1984 & 2006 (22 years of growth & 10K grows to 223k). So 10[(1+i)^22] = 223 ===> i=0.1515 ............. even better than Dave Ramsey's since 1984 find above.
http://quotes.morningstar.com/fund/f?re ... gf&t=FCNTX

How does this work? When I try click the link you provided and try to adjust the date range to, e.g., 01/01/1984 through 01/01/2006, and hit enter, it changes it to 01/20/2004 through 01/21/2006.

I think found my issue: you need to first click "more", which takes you to another "growth of 10k" chart, and from there you can enter whatever date ranges you want. I did get a different number than you, though--I'm getting a growth to $213,031.13. Curious why you got a different number? What start and end dates did you use?

[Random Musings]

It's moving forward what matters to the investor, not cherry picking certain funds.

Dave does not have a special crystal ball. He's just marketing his advisory network so he can get his cut.

RM

[JW-Retired]

It's tedious, but Morningstar's growth of $10,000 charts give total return after expenses and you can adjust the start & end dates. For example, this FCNTX fund has around 15% compound growth between 1984 & 2006 (22 years of growth & 10K grows to 223k). So 10[(1+i)^22] = 223 ===> i=0.1515 ............. even better than Dave Ramsey's since 1984 find above.
http://quotes.morningstar.com/fund/f?re ... gf&t=FCNTX

How does this work? When I try click the link you provided and try to adjust the date range to, e.g., 01/01/1984 through 01/01/2006, and hit enter, it changes it to 01/20/2004 through 01/21/2006.

I think found my issue: you need to first click "more", which takes you to another "growth of 10k" chart, and from there you can enter whatever date ranges you want. I did get a different number than you, though--I'm getting a growth to $213,031.13. Curious why you got a different number? What start and end dates did you use?

I was pretty sloppy doing this. My dates were a little different than 1/1/1984 to 1/1/2006. I don't recall them exactly. If I do it carefully from 1/1/1984 to 1/1/2006 I get the same $213,031 that you do.
JW

[beammeupscotty]

Hi All,

He goes on to provide some evidence from his own portfolio:

I purchased a Growth and Income Stock Mutual Fund many years ago, that I still invest in, and it has average 12.78 percent per year since 1934 (72 years as of this writing). I bought another last week that has averaged over 15.43 percent per year since 1959, as of this writing. And yet another with average annual returns of 13.55 percent since 1984, and another averaging 13.51 percent since 1973, and yet another averaging 12.67 percent since 1952. Any decent broker with the heart of a teacher can, in his or her sleep, lead you to funds with long track records averaging over 12 percent.

1934 + 72 = 2006, so presumably he came up with those numbers at some point during 2006.

He never identifies the specific mutual funds--not here, nor anywhere else that I've been able to find. When asked, he refers you to an "Endorsed Local Provider," i.e., to someone who pays Mr. Ramsey for leads.

Given specific numbers, and a specific date range (15.43% per year from 1959 to 2006) it should be possible to determine the exact mutual funds that Mr. Ramsey is referring to. This question is two-fold:

1. What mutual funds fit Mr. Ramsey's description?
2. What tool did you use to determine this?

One of the problems is that he apparently uses average returns rather than compound annual growth rate (actual returns): http://www.bogleheads.org/forum/viewtop ... 17535&f=10

[younginvestor]

The terminology of "growth-and-income" is certainly used by American Funds, so that is my guess.

Is it just me, or does this terminology seem odd to anyone else?

My 401k is through American Funds, and I remember asking what the stock/bond percentage was for one of their Target Date funds. The person on the phone said something to the effect of, "It's 30% growth, 20% growth-and-income, blah, blah."

I asked him what he was talking about and if it was close to my asset allocation of 70/30. He told me he could not determine the % stocks and bonds.

The whole thing felt like a scam. I told him if I can look it up on M* in 5 seconds, then he should be able to tell me. Then I asked to speak to his supervisor, who used the same jargon and couldn't tell me either.

[Phineas J. Whoopee]

To sustain a 12% compound annual growth rate (CAGR) is perfectly simple:

Step 1: Have your research assistant look for still-extant mutual funds with long histories and high annualized returns.
Step 2: Use your time machine to go back and buy the funds which already did well.

I fail to understand why people can't grasp such straightforward and obvious concepts.

PJW

[jimb_fromATL]

To sustain a 12% compound annual growth rate (CAGR) is perfectly simple:

Step 1: Have your research assistant look for still-extant mutual funds with long histories and high annualized returns.
Step 2: Use your time machine to go back and buy the funds which already did well.

I fail to understand why people can't grasp such straightforward and obvious concepts.

PJW

That's not the only way.

Another way is to lie about the return.

Another -- which a lot of folks think Dave may be doing -- is to erroneously calculate the average of the yearly yields instead of the real Compound Annual Growth Rate. For example, the average of the yearly gains and losses for the S&P 500 for the last 20 years has been 12.34% but the actual compound average growth rate has been about 9%.

And even calculating the CAGR using the yearly averages only works for a lump sum that was invested at the beginning. The actual average APY or CAGR for dollar-cost-averaging with contributions to a 401(k) or other retirement plans with monthly or more often --or even yearly-- may be considerably different.


jimb

[Phineas J. Whoopee]

...
That's not the only way.

But it is the way that relates to the OP, quoting Dave Ramsey, who wasn't even born until 1960 and therefore could not, even if he'd pawned any proverbial silver spoon, have invested prior to that year:

I purchased a Growth and Income Stock Mutual Fund many years ago, that I still invest in, and it has average 12.78 percent per year since 1934 (72 years as of this writing). I bought another last week that has averaged over 15.43 percent per year since 1959, as of this writing. And yet another with average annual returns of 13.55 percent since 1984, and another averaging 13.51 percent since 1973, and yet another averaging 12.67 percent since 1952. Any decent broker with the heart of a teacher can, in his or her sleep, lead you to funds with long track records averaging over 12 percent.

Another way is to lie about the return.
...

Indeed, pretending that past performance does not guarantee future results was the point I meant to make.

And, while I suspect Mr. Ramsey himself understands arithmetic perfectly well, he may be relying on his audience not to understand it.

On the other hand, and to be fair, his "snowball" method of getting out of debt, although not mathematically optimal, appears to be emotionally compelling for lots and lots of people, therefore he is in fact accomplishing quite a bit of good in this world.

PJW