Updated on 09.15.14

Is Dave Ramsey Making Up Stuff About The Stock Market?

Trent Hamm

Dave RamseyI’ve heard many times that Dave Ramsey makes some very broad generalizations about the broad stock market when convincing listeners of his radio show to invest their money in a broad index fund. I never really paid much attention to this, mostly because if you don’t speak in some degree of generalization, it’s very difficult to actually make a point when it comes to financial data.

Today, I received this message from a reader:

Dave Ramsey often says on his show that the stock market is up over every ten year period. Do you have anything that validates if that is really true? I am skeptical of it, especially around the 1929 crash time frame.

Since I don’t have access to Dave’s show, I had to turn to one of his books to find out exactly what Dave is saying. I turned to page 148 of his book Financial Peace Revisited and found the following:

By leaving your investment alone in any possible ten year period in the last sixty nine years, you would have made money 97% of the time and would have averaged over 12 percent per year.

In the footnotes, I find that this sixty nine year time frame mentioned by Ramsey thus covers the years 1924 to 1993. This means that the first ten year range is from 1924 to 1933.

I took the raw Dow Jones data and did the calculations myself over this timeframe and found that indeed Ramsey’s statement is true. Using the year-end numbers of the Dow, there are only two ten year spans in the 1924 to 1993 timeframe that show a loss over that span, and both of those are related to the huge run-up in the stock market at the end of the 1920s. There were a few ranges in the 1970s that were very narrow gains. Even if you carry those numbers out through 2006, there are no new ten year spans of losses.

In short, Dave’s exact statement from his book is true. If you take that specific timespan of the market, then there is a 97% likelihood of gains over a ten year span. However, making an esoteric statement like that makes it very, very easy to generalize from that and make a broad statement that the stock market is up over every ten year period. That general statement is false, and demonstrably so.

Dave is walking a fine line here with such statements. If he prefaces them correctly, he is speaking the truth, but with only a slight bit of generalization, the statement becomes provably false.

So what’s the point? Broad-based index funds, on average, have returned over 12% annually over any given ten year period since the Depression. For example, the Vanguard 500 has returned 12.15% annually on average since its inception. However, it’s easy to find smaller periods where the gains aren’t nearly as good, and even where such investments see a loss (compare the close at the end of 1999 to the close at the end of 2002, for example). That’s because stocks, as an investment, involve risk – they are not a guaranteed gain.

Also, Dave likes to make things simple, and sometimes too much simplicity lets the heart of the message be right while the specifics aren’t quite as true. In print, however, he’s both accurate and precise.

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  1. lorax says:

    Something else to think about: there haven’t been all that many non-overlapping ten year periods in the range Ramsey uses. How statistically significant is that?

  2. MossySF says:

    Trent, you made one major mistake almost everybody does when analyzing stock index data — dividends. Add the historic 4% dividend yield and the results could be quite different.

    On the otherhand, I do have the S&P500 total returns starting from 1928 — and there are 10 year periods with slight losses.

    1928-1937: -6%
    1929-1938: -15%
    1930-1939: -9%

    Of course, just 2 years later, the rolling 10 year periods make a huge jump in returns

    1931-1940: 9%
    1932-1941: 69%
    1933-1942: 120%

  3. MossySF says:

    Doing the same for the 1970s periods:

    1960-1969: 117%
    1961-1970: 96%
    1962-1971: 155%
    1963-1972: 79%
    1964-1973: 14%
    1965-1974: 38%
    1966-1975: 90%
    1967-1976: 43%
    1968-1977: 38%
    1969-1978: 78%
    1970-1979: 126%
    1971-1980: 89%
    1972-1981: 91%
    1973-1982: 173%
    1974-1983: 291%
    1975-1984: 275%
    1976-1985: 258%
    1977-1986: 308%
    1978-1987: 346%
    1979-1988: 264%

    The periods ending in 72-73, 76-77 were small gains. But just waiting a few years later and the gains skyrocket — especially if you were buying during these down periods.

  4. lorax says:

    Are these inflation adjusted returns?

  5. ck_dex says:

    About a year ago I listened for several weeks to Dave Ramsey and his advice was always to invest your money in a GROWTH mutual fund, not a blend (broad-based) fund.

    I don’t know if he was choosing growth over value/blend for some reason at that time, but it’s bad advice to invest all in growth. As much as I admire “Your Money or Your Life” it has the same flaw giving short shrift to the investment advice.

  6. Trent Hamm Trent says:

    Your Money or Your Life isn’t supposed to be an investment book at all. Personal finance does not equal investments.

  7. Trent Hamm Trent says:

    Mossy: I’m not “making a mistake” in my calculations. All I’m doing is checking Dave’s numbers.

  8. MossySF says:

    The question is how are you checking Dave’s numbers. I don’t have his book so all I can go by is the wording in this post “the stock market is up over every ten year period”. Does Dave specifically say he used the DJIA index alone?

    You say you used the DJIA raw data. Why did you pick that the basis for your number? The raw data there only shows the stock index which does not include dividends. That means any period you are calculating could be anywhere from 2%-6% less per year than the actual return.

  9. James says:

    Trent that is some of the worst logic I’ve seen out of you in a while.

    OF COURSE you can make a mistake while checking someone else’s numbers. Let’s see a few different ways that this can happen:
    1. A typo or incorrect math when “running the numbers.” Generally having two people independently doing the math will catch these errors, but not always.
    2. The data source has errors in it. This won’t get caught by multiple people doing the calculations if both people use the same data source. This source of error is much harder to catch.
    3. An assumption used in the calculation is wrong, or not applicable in this situation. This happens in engineering a lot, and unless someone realizes that the assumption or formula does not apply, then this mistake will not get caught.

    This third one is exactly what MossySF is suggesting. It appears you used raw stock performance, not accounting for dividends. Quite silly since dividends can be a major source of income. Also, you do not clearly state (perhaps because you do not know) if Ramsey used dividends in his calculations. This could easily change the numbers such that every 10 year period was a winner…and with significantly different rate of return.

  10. ck_dex says:

    Both Ramsey and YMOYL do a great job of helping people get out of debt and realign priorities. I think YMOYL is far more complex and probing than Ramsey’s simplistic approach (the subject of one of your previous blogs on Ramsey). I think your analysis of Ramsey is right-on. Though I heard him several times refer to himself as a “math guy” I was turned off his show by his careless (or politically manipulative??) errors.

    But YMOYL goes further in pushing investment in the 30-yr U.S. bond enabling one to live off the interest, and I think Vicki Robin ought to update that last section of the book more frequently. I’d honestly like to know what she thinks and where she is finding interest income sufficient to live these days.

    I’m not sure pushing 30-year bonds as the sole investment was ever good advice, but it certainly isn’t now when we have inversion (and 30-years were even sunsetted until recently). Post-financial independence is an integral part of the book and necessarily involves investment considerations.

  11. Rob in Madrid says:

    I prefer dividend stocks from companies that have a history of raising it regularly. To me it doens’t matter if the stock market is up or if it drops 25%. Acutally a stock market crash is prefered over a bull market becuase I can pick up the stocks cheaper.

    Secondly the rate of return on dividends increases as they raise it. For example the current yield on Trans Canada Pipelines (a Canadian stock my Dad owns) is about 3%, but my dad’s actual yield is about 10% because he bought the stock when it went on 50% off sale. (Was 20 he bought at 10 and is currently 35) as well they have raised the dividends numerous times.

    I would skip index funds and stick to good quality companies that have a history of raising there dividends. Over time your dividend investments will replace your regular income. But the secret is to buy you stocks cheap! For more info google DRIP stocks. (Dividend Reinvestment Plans)

  12. boardmadd says:

    As far as Ramsey’s advice today regarding investing in funds, he encourages investors spread their investments out as follows:

    25% – Growth Funds
    25% – Growth and Income Funds
    25% – International Funds
    25% – Aggressive Growth Funds

    If you have any money that you will be using in the next five years, it should not be *invested*, but put into a high yield money market fund with check writing privileges, no withdrawal penalties, etc.

    The core of his message is buy and hold and invest over the long term, with regular contributions to your investment plan, and reinvest your dividends.

  13. kentuckyliz says:

    His “claims” are in line with information put out by Ibbotson & Associates (as quoted by Jane Bryant Quinn) and in Nick Murray’s and Ric Edelman’s books. Why do they seem so shocking to you?

    Treasury securities are “safe” but there is a flight to quality right now and the massive amount of buying at the auctions has driven down the interest rate to .01%, only slightly better than stuffing it under your mattress.

    Having the nerve to stay in the game right now, and buy buy buy, will make you wealthy in the long run. If you need some cheerleading, read Nick Murray…if you need some perspective on what just happened, go to Ric Edelman’s website and read his Sept. 19 report.

  14. Sara R says:

    At Town Hall for Hope, Dave silently changed his usual quote. He said, “All of the 15-year periods in the stock market’s history are positive.” How convenient to change one little digit and be honest again (without admitting the change). CDs have been a better long term investment than the S&P 500 bought and held long term: http://globaleconomicanalysis.blogspot.com/2009/06/long-term-buy-and-hold-is-still-bad.html.

  15. John C -CFP says:

    Dave gives advice to a specific audience. The people who spend more than they make and cant pay their bills. For this demographic, Dave is great. But, I doubt Bob Doll or Jeremy Grantham are tuning in nightly.

    Index funds are good investments, so are Dividend paying stocks…but the best portfolios make money in up, down and sideways markets. Dividend stocks and fixed income funds combined with index funds and tacticle actively managed small, mid and large cap funds, domestic and international and emerging markets…paying attention to style drift,correlation and reballancing, fund fees and understanding the effects of geometric mean on your index funds….that will get the best results.

    But, before we get this far, we need to pay off the 27% credit card and have more than 500 bucks in the checking account….

    Kuddos to you Dave….you are helping the people who need you.

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