Dave Ramsey, a well-known talk show host, is brilliant when it comes to managing spending, debt, and real estate. I recommend his books in my books and frequently hand out his DVD’s on budgeting and cash flow management.
However, when it comes to understanding investments and portfolio withdrawal rates, Dave could use a little education. I listen to Ramsey on my 11-minute commute home each day. Over the past month, I’ve caught enough incorrect information that I thought it was time to respond in writing instead of talking back to my radio.
On the October 22nd show, a caller asked Dave his opinion of real estate investment trusts. While Dave likes real estate as an investment class, he trashed REITs as having terrible returns, mainly because of excessive management fees. He said there wasn’t a REIT around that garnered anywhere near a 12% return over the past 10 years, like “good growth mutual funds,” which according to Dave easily return 12 to 15% a year.
During another program that same week, a listener asked him if value funds had overall returns in excess of growth funds. Dave quickly responded no, that growth oriented mutual funds out-perform value oriented funds.
Unfortunately, Dave didn’t check the facts, which directly contradict his advice.
Over the past 10 years (ending 9/30/07), the Vanguard REIT Index fund averaged 11.91% annually, while “good growth mutual funds” (I used the Morningstar U.S. Growth Index) have averaged 2.6%. Wow! Mutual funds that held value oriented stocks returned three times more than growth stocks, at 8.91%. Of the 2,014 growth mutual funds that have been around 10 years or more, the REIT Index had a higher return than 89% of them.
Let me put this another way. If you had $100,000 in the REIT index fund 10 years ago, today you would have $308,098. Had you followed Dave’s investment advice and invested in “good growth mutual funds” you would have just $129,263.
Giving Dave the benefit of the doubt, I thought that perhaps he was looking at the five-year stats and just got confused. So I checked. The Vanguard REIT Index fund earned an annual return of 20.81%, “good growth mutual funds” still lagged REITs but earned a respectable 14.63%. The Vanguard REIT Index fund had a higher return than 80% of all growth mutual funds. Also, value mutual funds thumped the “good growth funds” again, earning 18.5%.
Maybe the three-year picture was better? Nope. The REITs did 18.59%, while the “good growth funds” lagged again with just 12.83% and the value funds trumped growth again with 15.6% return. Once again, the REIT index fund beat 79% of all the growth funds.
The facts would seem to suggest just the opposite of Dave’s advice: buy a “good REIT mutual fund” and forget about those underperforming, poor-returning “good growth mutual funds.” Of course, long-time readers of this column know that isn’t sound advice, either. It is essential for a good portfolio to be diversified in order to reduce volatility and balance risk. This means including at least five asset classes, including US stocks (growth and value), international stocks, REITs, market neutral funds, natural resource funds, and bonds.
Dave Ramsey does a great job of helping you minimize your debt and maximize your cash flow. If he weren’t so popular and well respected, I could have easily been content to groan at my car radio and forget about it. However, because so many listeners value his advice, he owes it to his audience to do more thorough research before giving them investment information.