Dave Ramsey, for those who don’t know, is a financial advice celebrity. His investment advice is that an investor should only invest in stock mutual funds.
Another thing Mr. Ramsey is clear on is that he recommends everyone stay away from bonds and bond mutual funds. Dave’s reasoning is that bonds don’t make as much money as stocks on average. On that point we agree. Stocks have earned an average of around 11%/year since 1928 while bonds have earned around 5%/year on average.
Unfortunately, Dave is making a mistake that 90%+ of investors make. He’s concerned first with how much money you can make. It’s that exact thinking we’re fighting against. Instead, you need to focus primarily on not losing money as your utmost priority. If Dave could change his thinking, he wouldn’t miss the only reason to invest in bonds.
In finance speak; bonds are “non-correlated” to stocks. That’s just a fancy way of saying that when stocks go down, bonds typically go up and vice versa. Let’s take today as an example. Today (Jan 5th, 2015), the Dow Jones plummeted 331.21 points (or 1.86%). Not a very good day for stocks. However, bonds (TLT) went up 1.57%.
If your $100,000 portfolio was 100% invested in stocks today, you would have lost around $1,860. If you were 100% invested in bonds you would have made $1,570. The Green Apple Investment Society portfolio currently has 40% stocks and 60% bonds so our portfolio made around $200 today. If we listened to Dave Ramsey, we would have lost $1,860. That would have gone completely against our mission of not losing money.
Today’s example is just a small one. It’s just one day. How bad should Dave Ramsey feel for providing advice that would have caused stock only portfolios to drop more than -50% from 2007-20009. 50% of your hard earned money just gone. I know I would feel horrible. Actually, not having that horrible feeling is why I created our current investment methodology that doesn’t lose money.
By the way, bonds increased a little over 40% during that same period. The Green Apple Investment Society portfolio gained 31% during that time frame. Instead of losing $50,000 from our $100,000 portfolio, we made $31,000. That’s an $81,000 difference. That’s a kid’s college tuition, that’s paying off your house, that’s helping mom in her retirement. There are lots of ways to spend $81,000.
So, yes, I agree with Dave Ramsey that bonds don’t, on average, make as much money as stocks. But that’s the thinking we’re fighting against. Stocks go down and lose money. When they go down you want to be invested in something that goes up. For that you’ll want to be invested in bonds. Don’t focus on how much you can make. Your primary focus needs to be on how to not lose money. So, instead of bonds being bad because they don’t make as much money as stocks, it should be bonds are good because when stocks go down, bonds go up.
By the way, the above report by no means discredits Dave Ramsey’s financial advice in other matters. I probably agree with 80%+ of his recommendations. However, his investment advice is way off base and I would run far away from it as fast as you can.