Today we’re going to talk about Dave Ramsey’s recently viral video promising 12% returns in the stock market and 8% annual withdrawals. We’re also going to break down Dave Ramsey’s investing advice, explain it and why you shouldn’t listen to him.
Who is Dave Ramsey?
First, let’s start at the beginning. Who is Dave Ramsey? Why is he going viral? And why do people like me care? Dave Ramsey is a personal finance media figure who has been in the game for a very long time. Dave founded his first financial counseling business in 1988 after experiencing bankruptcy, and he self-published his first book in 1992, called Financial Peace.
For context, I was born in 1988. So Dave has been a financial media figure for literally my entire life. Dave goes viral every once in a while because he is probably the biggest financial media personality in the United States. I would say it’s him and Suze Orman, because they both had decades long careers. And they’re both kind of polarizing figures. So in this recent viral clip, a listener calls into Dave’s radio show and has a question.
Dave’s Advice on Annual Stock Market Returns
The listener wants to know if he and his wife can pull back on their stock market investments in order to redirect some of their money to paying off their house. And he’s specifically curious about what kind of annual returns you can expect on his existing stock market investments because he found an article on Dave’s website that says between three and five percent. But Dave himself has a very different take. Here’s what he said:
“You don’t need to have a 3% withdrawal rate, that’s ridiculous… Like, no, it shouldn’t be four to 5%. It’d be more than that. I mean, if you’re making 12 in good mutual funds, and the S&P has averaged 11.8. And if inflation for the last 80 years is average 4%. If you make 12, and you need to leave 4% in there for inflation raises, that leaves you eight. So I’m perfectly comfortable drawing eight. But if you want to be a little bit conservative seven, but sure, not five, or three… There’s a lot of studies that are stupid in this space. So just listen, man, the math I just gave you is the math. If you’re making 12% and inflation is four, and you leave four in there, so your nest egg grows by four. It’s simple. And so if we can be a little bit conservative, maybe 5%. There’s all these goobers out there, I’ve always put this 4% crap in the market. And I’m just irate right now that we have joined the stupidity… It’s too low!”
Dave is Giving Conflated Data
So Dave definitely said words… How many of them were correct? Well, turns out very few. The number one reason why this is bad advice is because Dave has conflated data and he is giving really bad advice based off of incorrect data. Dave says the S&P has averaged 11.8%. But that is not true, at least not in the way the Dave means.
A Little History of the Stock Market
Quick stock market history lesson. So the first stock index was formed in 1926. But the stock market and the way that we tend to think of it now was formed in 1928. So we have data going back to 1928 about Stock Market Annual average returns. On Dave Ramsey’s website, he talks about the expectation that an investor today can have for an annual average return if they’re investing in mutual funds. Dave Ramsey says that you can make a 12% return on your investment. He’s using a real number that’s based on the historical average annual return of the S&P 500.
What the S&P 500 looks at is the performance of the stocks from the 500 largest most stable companies in the New York Stock Exchange. It’s pretty much thought of as the most accurate measure of the overall stock market. The historical average annual return from 1928 through 2021 is 11.82%.
That’s a long look back and most people aren’t interested what happened in the market 90 years ago. The way that this is written makes it sound like the S&P 500 has returned an average of 11.82% since 1928. But that is incorrect. Dave has conflated his data. The S&P 500 as we know it was introduced in 1957. So it’s impossible for for us to have data on the S&P 500 going back to 1928, because the S&P 500 did not exist.
Today’s version of the S&P 500 didn’t exist until 1957
Now I want to give Dave the benefit of the doubt here. This is not a post to bash on Dave. But it is to point out why he’s so wrong. The history of the S&P is a little confusing, because various versions of the S&P have existed since 1923. But it wasn’t until 1941, that it became the “Standard and Poor” and then it wasn’t until 1957, that it became the S&P 500 that we know about today. So I think Dave… doesn’t get that.
So now that we know the truth, if we look at the actual historical return from 1928 to 2022, it’s not 12%. It’s not even 11.82%. The actual historical return from 1928 to 2022 is 9.82%, significantly lower than 11.82%. And the return from 1957 through 2022 is 10.15%. Again, lower than Dave’s promised 12% returns. Also, it’s important to note the Dave’s math is missing inflation, this 9.82%, or this 10.15% return is pre-inflation.
We also need to take inflation into account
And as anybody living today can tell you inflation is very real and it eats into your profitability. So to take a return that A) doesn’t exist and B) doesn’t include inflation, is a bonkers piece of advice to give people. So what kind of annual return should you actually expect? An average annual return with inflation is about 7%. For the S&P 500, 7%. Not bad at all, I would be thrilled with that return, but significantly, significantly lower than Dave’s promised 12%. And in this same clip, you can hear Dave say, most years might have done much better than 12.
Dave’s investing advice is anecdotal
This is another classic investing mistake from Dave. He is using anecdotal data, his own experience in the stock market, and saying that everyone can have this experience. It happened to him. So why can’t it happen to every single investor? Also, by the way, he offers absolutely zero proof in this video that he’s actually getting above 12% annual returns. I would love to take a peek at the investments he has that are returning every single year over 12%. Because let’s take a quick look at some of the annual returns for the S&P 500.
For example, in 2013 the S&P 500 returned 29.6%. But then in 2015, it returned -.73%. In 2019, we had 28.88%. But in 2022, it was -19.44%. Dave Ramsey is playing on your emotions. So why does Dave say things like this? Well, Dave’s empire is first and foremost built on simplicity. Dave has ironclad rules that he tells people to follow in order to be able to build wealth, and he never deviates from these rules. And his 12% annual average returns are a part of that rule.
Dave Ramsey Preys on his Audience’s Emotions
But more than that Dave has long preyed on his audience’s emotional connection to money in order to a build his audience and be take their money. In that same video he says, “The problem is, is when you go down the stupid nerd rabbit holes in these Reddit threads with these morons who live in their mother’s basement with a calculator. And then you didn’t put that out into the daggum community. And then people go, I don’t have enough money, it’s hopeless, I’ll never be able to save enough to retire. A million dollars should create for you an $80,000 income boys and girls. So you shouldn’t perpetually like it forever. You should be able to pull 80,000 forever and never destroy it. Now that and so when you tell people that a million dollars creates a $40,000 income, you go, Oh, I’ve got to have $2 million. And I can’t make that then there this system doesn’t work. So what you’re doing with this bogus math is you’re stealing people’s hope. That’s why I’m pissed about it. Because it’s hopes dealing with super nerds that have never really done anything to start with.”
Who doesn’t want to feel like a rich man is on your side fighting for you against the evil government or the evil Redditors in their mom’s basement who don’t have your best interest in heart? Dave has your best interests at heart. He tells his audience over and over and over again that by listening to him, they’re going to be able to live a wealthy and happy life. And you can see the emotional manipulation really easily in this clip, I think because Dave outlines three clear things.
How to Spot the Emotional Manipulation
He gives you a “bad guy”
First, he gives you a bad guy. Those loser Redditors living in their mom’s basement who claimed that you can only withdraw 4% from your stock market portfolios. He’s saying these people who are not living a wealthy, cool, ambitious life, they’re just chillin’ in their mom’s basement because they can can’t afford a home of their own. Why would you even listen to them? They’re the bad guy, they don’t have your best interest in heart.
He’s infuriated on your behalf
Plus Dave is infuriated on your behalf. He thinks it’s asinine that someone would tell you that you have to learn to live on only 4% withdrawals every year, when if you simply followed his method, you could live on 8% withdrawals. That’s double, baby, and he wants you to have that rich life!
He offers you a solution
And finally, number three, Dave offers you a solution. So he points out the bad guy, he gets angry on your behalf. And then he offers you the solution. Listen to him, buy his book, enroll in his course, call into his show. By listening to him, you are going to unlock the secret to wealth and you are going to be able to live the life of your dreams and avoid that annoying Redditor in their mom’s basement.
As we’ve seen from the data and as we’ve seen from many other instances of Dave’s virality, Dave doesn’t really know what he’s talking about. Frankly, Dave is commonly referred to in the financial space as a debt guy. He helps a lot of people pay off their debt. But when it comes to the stock market, Dave doesn’t really know what he’s talking about. He uses his own personal experience, which he provides almost no information on, so we can’t fact check what he’s investing and he uses it as an investing plan for everybody. He attacks people who disagree with him. And he conflates data so that when he gets on his high horse and he yells at people, he’s not even using correct information.
So Dave, if you’re reading this, please hire a better fact checker. Please understand what you’re talking about before you get on the internet to rant about it. Please leave a comment if you have any questions about anything we’ve talked about here today or anything Dave Ramsey says in general. If you’re interested in the clips that I referenced in this article and my take in video-form, check out the video below. And be sure to hit that Subscribe button over on my channel.