Long term investment return

[doxie]

I was listening to Dave Ramsey today, and he was giving a scenario where if you paid your house off, then invested the $2000 a month in mutual funds for 30 years at a 12% return, it would be worth about $7 million. I thought 12% seemed excessively high. Usually when I'm using calculators to estimate what my retirement investments will be worth, I base it on 6-8% average returns. Suze Orman has gone in the complete opposite direction and is using I think 4% (though I think she is overly conservative in many ways).

Is 12% a realistic number to use? Would you have to have an extremely aggressive portfolio to expect those kind of returns?

[jpg7n16]

The standard expected return is typically between 7-11%. 4% is too low. 12% is realistic, though slightly higher than the norm. But Dave's recommendations are usually to invest in growth stock mutual funds with long term track records.

I wouldn't be surprised if these funds returned anywhere from 6-15% long term. So yes 12% is realistic.


To show you it's possible, remember that Warren Buffett's portfolio has averaged around 21.5% over several decades. Although yes he's done exceptionally well, it's not impossible. Many other funds have averaged 12-18% over several decades.


If I were you, I'd plan around 8 or 9% and then any above that is a bonus

Or do 2 estimates. 1 at 7% and 1 at 11%. You'll likely be somewhere inbetween those two.

[disneysteve]

No, it is not a realistic number. It is one place where DR loses credibility with a lot of folks. There will be funds who post those kinds of returns, but many won't and even the ones that do, won't do it consistently year after year. Plus, that would assume that you keep your portfolio 100% in growth stocks for your entire working life. Few people do this. Most get more conservative as they get closer to retirement, adding bond funds and fixed-income instruments to generate a predictable cash flow in retirement. That lowers the overall return of the portfolio to something well below 12%.

I'd agree that 6-8% is a much more reasonable number. I, too, think Suze Orman is low with the 4% figure.

[disneysteve]

I see JPG was posting at the same time as me so let me expand on my comments. 12% is achievable. It just isn't what the typical investor is going to see, especially within a 401k-type plan where the investment choices are limited. I don't think it is realistic to use 12% in your planning because if you do, I think you are very likely to not meet your goals because you didn't save enough, counting on 12% returns to get you where you needed to be.

[jpg7n16]

I see JPG was posting at the same time as me so let me expand on my comments. 12% is achievable. It just isn't what the typical investor is going to see, especially within a 401k-type plan where the investment choices are limited. I don't think it is realistic to use 12% in your planning because if you do, I think you are very likely to not meet your goals because you didn't save enough, counting on 12% returns to get you where you needed to be.

I think both of these are spot on. Achievable is a much more accurate term to use.

And I likewise think you shouldn't plan on optimistic figures (like 15%) or pessimistic figures (like 4%).

To use a Benjamin Graham/Warren Buffett phrase: your estimates should have a margin of error.

If you only save enough that you require 12% returns to live the lifestyle you want, that could be tragic. But if you give yourself a margin of error in your planning, you should be okay.

[GREENBACK]

Who pays off a house and then has 30 yrs. to invest aggressively enough to earn anywhere near those percentages. Pretty unrealistic but I suppose he's just making a point. I'm not a big fan of his advice by the way.

[jpg7n16]

Who pays off a house and then has 30 yrs. to invest aggressively enough to earn anywhere near those percentages. Pretty unrealistic but I suppose he's just making a point. I'm not a big fan of his advice by the way.

Technically, not even Dave Ramsey baby steps followers.

Step #4 is save 15% of your income for retirement
Step #6 is pay extra on the mortgage

So you should already be investing a good amount for your future before paying off the home.

http://www.daveramsey.com/media/pdf/fpu_babysteps.pdf

[doxie]

Greenback, a couple called in to do the obnoxious "we're debt free" holler. They were 37 years old and had just paid off their house. So Dave started demonstrating how if they take what they were paying toward the mortgage and invest it until they are 70 they will have $7 million.

I thought 12% was too high, especially since like Steve says you are not going to keep your portfolio in aggressive growth stocks when you are past 60. Personally, I also can't imagine amassing cash so that you have $7 million when you are 70, I'd rather retire sooner than that if I had the means.

I'm not a fan of a lot of his advice either. I listen sometimes because I figure it does reinforce some good habits for me. Basically the same reason I watch Suze Orman, they both remind me to live within my means and save for retirement. And the poor callers remind me what happens if you don't do those things. To me Suze has a much more likeable personality, Dave just rubs me the wrong way.

[GREENBACK]

I'm curious if the couple described had put anything or much toward their retirement instead of putting everything towards DR's holy grail of mortgage payoff. Do they get the concept of compounding interest? That's kind of been my problem with DR. His logic is sometimes screwy to people who aren't up to their neck in debt(like he was). I've never heard his radio show but have thumbed through a few of his books and wasn't impressed. The scenario you describe seems pretty irresponsible for someone giving financial advice. Kind of reminds me of the insurance guys that promise wonderful things with variable annuities.

[disneysteve]

I'm curious if the couple described had put anything or much toward their retirement instead of putting everything towards DR's holy grail of mortgage payoff.

Yes. DR's plan is to first get out of debt, then start saving 15% for retirement, then save for college and then pay off the mortgage. He doesn't advise prepaying the mortgage until you are already putting away 15% for retirement.

I agree with you that his system and advice are geared toward folks in debt. It is about teaching people to create a budget and live below their means. His investment advice is pretty limited but that really isn't what he is all about.

[littleroc02us]

Actually anything is achievable but not gaurenteed. What I do works for me and that is all that matters in my world because no one else is going to do it for me. I have an excel spreadsheet that calculates for FV using the formula FV=(rate,nper,pmt,pv,type) and have a column with %'s ranging from 1-20% that can be used for annual calculations. So, at the end of the year I can look up my personal rate of return on my Vanguard investments. Last year I had a return of 22.8%, other years worse.. David Ramsey is just speaking for himself and for the average person getting 12% return probably won't happen, I would calculate all the variables using 4,8,12% just to see the possibilities. Remember that nothing is gaurenteed.

[AmySL]

I'm completely with you on that one Greenback.

[littleroc02us]

Who pays off a house and then has 30 yrs. to invest aggressively enough to earn anywhere near those percentages. Pretty unrealistic but I suppose he's just making a point. I'm not a big fan of his advice by the way.

Actually David Ramsey is being misquoted in this thread based on his principles. You can either get his book or check out his website. David says this:

1. $1000 EF fund
2. Pay off debt smallest to largest
3. Bulk EF fund up to 3-6 months of expenses
4. Invest 15% in non taxable income
5. Invest in 529 plan
6. Pay off house
7. give money away

So, if you go by his methods why wouldn't it be possible to do both?