What do you think of Dave Ramsey's 12% return

[cashisking500]

Dave is always talking about how you should easily average 12% over the life of your investments inside of your 401k and/or Roth IRA.

Just interested in everyone's opinion. Do you think this is realistic?

[scfr]

Dave is always talking about how you should easily average 12% over the life of your investments inside of your 401k and/or Roth IRA.

Just interested in everyone's opinion. Do you think this is realistic?

Here's something from Dave's page explaining it: http://www.daveramsey.com/blog/the-12-reality/

My opinion is that not only is it not realistic, it's not wise for someone to put their entire nest egg in the S&P 500, and (most importantly) not necessary to earn that much. If you never rack up debt and save consistently starting at a young enough age, you don't need to earn 12% on your investments to achieve financial independence.

This is the paragraph from Dave's page that I liked the most - direct quote here:
QUOTE "Will your investments make that much? Maybe. Maybe more. But the idea here is that you invest and invest for the long haul. Don’t let your opinion over whether or not you think a 12% return is possible keep you from investing.

In fact, if you’d rather project your mutual funds to grow at 10% or 8%—that’s cool with us. Just set a goal and invest whatever you need to in order to meet that goal." END QUOTE

The "Maybe more" sentence is hilarious, but the rest seems like sensible advice. Personally I only expect my investments to keep pace with inflation. My calculations are based on that, and if they do better then it's icing on the cake.

[MonkeyMama]

Here's something from Dave's page explaining it: http://www.daveramsey.com/blog/the-12-reality/

My opinion is that not only is it not realistic, it's not wise for someone to put their entire nest egg in the S&P 500, and (most importantly) not necessary to earn that much.

Agreed.

[disneysteve]

There are numerous mutual funds that have long-term track records of returning 12% and more over time, so a 12% return is theoretically possible, but I definitely wouldn't base my savings projections on that high of a number.

Just as an example for those who think it isn't even possible, I've owned VGHCX for about 20 years.
Here are the average annual returns for that fund:

YTD: 17.20%
1 year: 31.28%
5 year: 25.21%
10 year: 13.44%
Since inception (May 1984): 17.66%

So for over 30 years, this fund has consistently had stellar returns, well beyond Dave Ramsey's 12% figure. I'm sure there are other funds like this out there, but still, I wouldn't base projections on 12%. In a Roth you can choose your funds, but in a 401k you are limited to the choices given. You might not have any 12% funds to choose from. And, as always, past performance is no guarantee of future returns.

[marywantsmoney]

I'm a noob but don't you use about 7% off the 12% number due to inflation and taxes? I think I remember Dave saying a person has to make at least 7% to break even.

[rennigade]

You may want to head over to bogleheads and read some of their wiki pages. This will help clear up some of your thoughts and answer some of your questions.

[feh]

Dave is always talking about how you should easily average 12% over the life of your investments inside of your 401k and/or Roth IRA.

Just interested in everyone's opinion. Do you think this is realistic?

It's ridiculous.

Do a search - DR has been discussed many times.

[corn18]

There are numerous mutual funds that have long-term track records of returning 12% and more over time, so a 12% return is theoretically possible, but I definitely wouldn't base my savings projections on that high of a number.

Just as an example for those who think it isn't even possible, I've owned VGHCX for about 20 years.
Here are the average annual returns for that fund:

YTD: 17.20%
1 year: 31.28%
5 year: 25.21%
10 year: 13.44%
Since inception (May 1984): 17.66%

So for over 30 years, this fund has consistently had stellar returns, well beyond Dave Ramsey's 12% figure. I'm sure there are other funds like this out there, but still, I wouldn't base projections on 12%. In a Roth you can choose your funds, but in a 401k you are limited to the choices given. You might not have any 12% funds to choose from. And, as always, past performance is no guarantee of future returns.

From Dec 2000-2012 it was net no gain. 12 years of flat sucks.

[97guns]

im grossing a 9.9% return on investment right now through rents, it was almost 12% before i bought my last property that eroded my ROI. with a 10% return you will get your investment returned to you in 10 years, i think i figured around 7 years at 12%

[disneysteve]

From Dec 2000-2012 it was net no gain. 12 years of flat sucks.

Where did you find that?

I'm looking at Vanguard's site. They have a chart that goes back to 2005 and from the start of 2005 until the end of 2012 a $10,000 investment would have about doubled to right around $20,000. I realize that's not the same time period you are referencing, though, since it starts 5 years later.

[corn18]

Where did you find that?

I'm looking at Vanguard's site. They have a chart that goes back to 2005 and from the start of 2005 until the end of 2012 a $10,000 investment would have about doubled to right around $20,000. I realize that's not the same time period you are referencing, though, since it starts 5 years later.

Just looked it up on google finance.

$137.66 8 Dec 2000
$137.69 5 Apr 2012

It has done VERY well since 2009 (up 186% overall, 37% CAGR)

[disneysteve]

Just looked it up on google finance.

$137.66 8 Dec 2000
$137.69 5 Apr 2012

That's a faulty comparison, though. Just looking at NAV doesn't tell the whole story. It fails to account for dividends and capital gains.

I have an account in this fund within my traditional IRA which I no longer contribute to so all changes in value are from gains or losses of the investments. No new money goes in.

My balance in VGHCX on 8/7/05 was $9,715.97.
My balance on 12/17/12 was $16,125.63.

That's an increase of $6,409.66 or a 66% gain.

During that same period, the NAV went from $139.21 to $144.74 so just looking at that, you'd assume the gain was only about 4% over that time period. Big difference between a 4% gain and a 66% gain once you have the whole story.

[corn18]

That's a faulty comparison, though. Just looking at NAV doesn't tell the whole story. It fails to account for dividends and capital gains.

I have an account in this fund within my traditional IRA which I no longer contribute to so all changes in value are from gains or losses of the investments. No new money goes in.

My balance in VGHCX on 8/7/05 was $9,715.97.
My balance on 12/17/12 was $16,125.63.

That's an increase of $6,409.66 or a 66% gain.

During that same period, the NAV went from $139.21 to $144.74 so just looking at that, you'd assume the gain was only about 4% over that time period. Big difference between a 4% gain and a 66% gain once you have the whole story.

Agree.