Financial Knowledge All Adults Should Know?

[NTL2009]

Back with two questions for the financial chat gang here!:

1.) Cost of homeownership - Does anyone know if there's a formula for determining how much it costs a person a year in "hidden fees" to own a house (vs. just renting). Some things I know you have to keep in mind are:

a.) homeowner's insurance
b.) property taxes
c.) upkeep, repairs, and prevention (lawn, broken fixtures and structures, termite inspections, etc.)

What else might you have to pay for that would be unique to owning a home versus just renting somewhere? And is there a "formula" (even if a general one) for determining how much you'll be paying each year for these home costs? Say you have a three bedroom house in an average suburb in middle America (let's say it's worth $250,000). Would you say $5,000/year is adequate to cover everything you'd need (i.e., stuff like the above listed)? ...

I don't think generalities/averages will be of much help to you. These things vary widely by area, and the specific building (age, condition, environment) and your own personal wants/needs.

Though it is certainly useful to try to estimate them for yourself, they are significant, and should not be ignored. I've done some estimating with a spreadsheet, and put in estimates based on the current conditions like (made up examples here): HVAC replacement in 5 years, new roof in 15 years, WH, washer/dryer in 7 years, new kitchen appliances and outside house painting in 12 years, and any other big things you can estimate. Then throw in an annual factor for the smaller misc. Then factor in what it will take to support that (with some buffer if something happens sooner than estimated). It won't happen exactly that way, but it gives you something to review, and is better than nothing.

 

[jtbell]

But, basically, he said if he had $500,000, he'd feel comfortable quitting his job and living off the investment money (10% per year = $50,000).

Dave Ramsey says you should expect 10% growth

Absolute BS. We've had a pretty good run the past 9 years, but nobody expects it to continue forever. Play around with Firecalc a bit. It uses historical data going back to 1871 IIRC. If nothing else, it will give you an impression of the huge range of possible outcomes for a given initial portfolio value and withdrawal rate.

A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US. The worst case would have been retiring in the late 1960s, just before the period of stagnant stock market and high inflation that lasted until the early 1980s. Longer periods require lower withdrawal rates, but it bottoms out around 2% to 2.5%. It isn't super sensitive to the % of stock in the portfolio, maybe 50%-75%.

In this context, "withdrawals" means both collecting any dividends and interest, and selling shares or withdrawing cash as necessary.

 

[Vanadium 50]

Would you say $5,000/year is adequate to cover everything you'd need (i.e., stuff like the above listed)?

Your guru Dave Ramsey has apparently left you so financially dependent that you can't find this out on your own. A quick Google shows that the average property tax bill is $3300 and the average homeowners insurance bill is $1200, leaving you $1.40/day for everything else on your list.

As far as being able to take 10% out every year, Mr. Ramsey is leading you astray here as well. The S&P growth over the last 20 years has been 7.16%. (As an aside, he would say it's 8.36% because he averages the annual returns rather than compounds them. I don't know if he does this because he is dishonest or merely innumerate - or which is better for a guru.)

If you started with $500,000 twenty years ago, invested it in the S&P 500 and withdrew $50,000 per year, you would have run out of money in 2012. If you took his 8.36% number instead of 10%, you'd last until 2017. If you want to make it to 2018 with $500,000 in buying power remaining, you can only take out about $28,500. In short, if you take his advice you will end up bankrupt.

"I help people with their investments, until there's nothing left" - Woody Allen

 

[NTL2009]

Absolute BS. ...

:) I tried to be a bit gentler and more politically correct, but I think sometimes concise/direct is better!

... A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US. ...

To put a finer point on that, the "4% guideline" includes ~ 5% failures. To get to a 100% historically successful portfolio, you are closer to ~ 3.4%. Of course, the future could be worse than the worst of the past, but it at least gives us some yardstick (meter-stick?).

... The worst case would have been retiring in the late 1960s, just before the period of stagnant stock market and high inflation that lasted until the early 1980s. Longer periods require lower withdrawal rates, but it bottoms out around 2% to 2.5%. It isn't super sensitive to the % of stock in the portfolio, maybe 50%-75%.

In this context, "withdrawals" means both collecting any dividends and interest, and selling shares or withdrawing cash as necessary.

Yes, I also found it interesting that for longer periods, there just has not been much sensitivity to the % of stock in the portfolio. I see some people debating this and sweating out a few % difference. I've joined the "What, me worry?" camp in this regard. I rarely ever re-balance, just let things ride. Results don't really look much different until you get down below ~ 35% in stocks. Which I find kind of funny, because some proclaimed 'conservative' investors say they keep their stock ratio very low, maybe even zero. But they are actually taking on more risk of their portfolio failing. Is that really 'conservative'? They commonly confuse 'volatility' with 'risk' - unfortunately, those terms are used interchangeable in the financial world, but they are very different.

 

[Stephen Tashi]

but Dave Ramsey says you should expect 10% growth (maybe it's not technically interest/compound interest, but the same idea)

It's not the same idea if Ramsey is talking about 10% growth to your initial holdings at the end of , say, 15 years, and you are expecting 10% growth on your initial holdings each year.

in investments annually if you're smart about it. He says if you're not easily getting 10%, then there's something wrong.

Ramsey may be referring to 10% growth, averaged over a decade. He may (or may not) be correct about that figure. However, if you take your gains as income each year there could be some years where you do better than 10% and some years where you do worse. So it becomes a "cash flow" problem. What happens in a lean year? What happens if the first year you try the scheme is a lean year? You might load yourself down with credit card debt.

His mutual fund strategy has netted him 10% annually for decades. Is that a standard yield?

I don't know. That could be answered as a historical question. We are in a period where the way markets work is undergoing radical changes. History may not be a good guide.

True, you'd have to pay capital gains taxes, but you'll be taxed at a lower percentage than with "normal" income. 15% isn't too bad, imo, for profits off of investments. The same $50,000 in salary through a normal job would get taxed worse in the upper margins.

Unless you plan to do without Social Security and Medicare in your over-60's years, you have to figure out a way to make contributions to those programs.

 

[kyphysics]

Absolute BS. We've had a pretty good run the past 9 years, but nobody expects it to continue forever. Play around with Firecalc a bit. It uses historical data going back to 1871 IIRC. If nothing else, it will give you an impression of the huge range of possible outcomes for a given initial portfolio value and withdrawal rate.

A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US. The worst case would have been retiring in the late 1960s, just before the period of stagnant stock market and high inflation that lasted until the early 1980s. Longer periods require lower withdrawal rates, but it bottoms out around 2% to 2.5%. It isn't super sensitive to the % of stock in the portfolio, maybe 50%-75%.

In this context, "withdrawals" means both collecting any dividends and interest, and selling shares or withdrawing cash as necessary.

I'll take a look at the historical data and see what else Ramsey is doing with his mutual funds.

NOTE***: Ramsey doesn't say to do this. This was my friend, who wants to retire early and just enjoy life. He started hypothesizing what amt. of money he'd need to live off the interest alone. The only thing Ramsey said was that you should average 10% in investment profits/year over the long haul (he does acknowledge ups and downs in the short-term) and that if you'e not averaging that, then there's something wrong with your investment strategy. He uses his decades of mutual fund investments as "proof."

Where I think my friend goes wrong is also COL increases (inflation essentially) that have grown dramatically. It's gotten out of whack since the early 1970's to 2018. The COL-to-wages ratio was much more propitious for the middle (and even lower) class in the U.S. prior to the 1970's. Post campaign finance reform law changes in the 1970's (Buckley v. Veleo and also the famous Belloti corporate "free speech" ruling) that have gotten worse every decade since and culminated in 2010's Citizen's United ruling (putting legal political bribery on steroids in the U.S. with SuperPacs), we've seen the rich and corporations rig the system more and more in their favor (killing unions, stripping the social safety net, giving the rich and corporations tax breaks, and allowing for stagnant wages while production has gone up). I see $40K as minimum to live in the U.S. without being in a ghetto, but that's increasingly getting worse with rising costs to all the fundamentals (housing, healthcare, and transportation).

Good thing McDonald's dollar menu is still $1.00. They actually lose money on $1.00 menu items, but hope you'll buy other stuff when you're there.

 

[NTL2009]

I'll take a look at the historical data and see what else Ramsey is doing with his mutual funds.

NOTE***: ... The only thing Ramsey said was that you should average 10% in investment profits/year over the long haul (he does acknowledge ups and downs in the short-term) and that if you'e not averaging that, then there's something wrong with your investment strategy. He uses his decades of mutual fund investments as "proof." ...

So have you looked into this? What did you find? Is it reasonable to say if you are not averaging 10% returns you are doing something 'wrong'? Or is it BS from a BS-er (dropping political correctness, as this is getting tiring)?

The advice you keep getting from this forum is the "teach a person to fish" method. You are looking for people (financial 'gurus') to give you answers (fish - the noun). You need to learn how to find answers on your own (learn to fish - the action/verb). Some of the fish you are being given are rotten, they stink to high heaven! But you don't know that, you just accept what they give you.

Learn to 'fish'.

 

[kyphysics]

So have you looked into this? What did you find? Is it reasonable to say if you are not averaging 10% returns you are doing something 'wrong'? Or is it BS from a BS-er (dropping political correctness, as this is getting tiring)?

The advice you keep getting from this forum is the "teach a person to fish" method. You are looking for people (financial 'gurus') to give you answers (fish - the noun). You need to learn how to find answers on your own (learn to fish - the action/verb). Some of the fish you are being given are rotten, they stink to high heaven! But you don't know that, you just accept what they give you.

Learn to 'fish'.

Not yet. I'm dealing with mold issues and fungus (the latter making me feel miserable this weekend, but don't ask).

Why do you keep saying that I blindly accept a "guru's" advice? I didn't do that in my post. I asked about it above to see if there was any validity to it (quite the opposite) and as a conversation starter. But, back to the topic at hand, here's what Ramsey says:

So, let's see. If you were to invest $100 a month from age 25 age 65 or age 30 to age 70. 40 years. $100 a month. Let's put it in a Roth IRA, so that it grows tax free. And I'm going to recommend a good growth stock mutual fund that has an average annual return of 12%. I own one that's done that for over 75 years. Average. Now some years it makes 18% and some years it makes 4%. But the average annual return is about 12% for 75 years. So, let's just say you did that...And I've done it. My 401K has been funded, my Roth IRAs have been funded, and anything else I can fund has been funded. Because even though I'm a natural spender, I figured out I would have more to give and more to live if I saved and invested. And I've done a lot of that in good growth stock type mutual funds. Now, were you doing that in the growth stock mutual fund, were it to average 12%, were you to put a $100 a month in. Now what do you spend $100 on? I'll guarantee you this. 95% of you listening to me right now do not do a unique written budget every month unique to that month. Almost no one does. Those that do, however, find all kinds of money that's being lost. Because your checking account is a freaking sieve. Money leaks out of it like you're sending it to Congress or something. You have no idea where your money goes. And you make more than your parents made and you make more than a lot of your friends make. And you make more than any other country in the world virtually - personal income. And you're freaking broke. Let's just establish here that you can find $100 latte breath. Let's establish that you can find $100 Mr. and Mrs. Cable. You spend $100 on things you don't even realize you did it. You impulse more than $100 at Target every month...

A hundred dollars invested every month - every month - from age 25 to age 65 averaging 12% in a good growth stock mutual fund Roth IRA is $1,176,000. So, if you're listening to this show and you're under 40 years old and you don't retire with a million dollars that's no one's fault but your's. It's YOUR FAULT in this country if you retire broke...

For every one of you listening to not retire a millionaire is absurd. IT'S ABSURD! Average household income in America today is $50,000. If you save 15% of that, that's $7,500 a year. If you do that in your 401K with no match into Roth IRAs into good growth stock mutual funds, you would retire with around $7,500,000 if you save 15% of your income...So, maybe I'm wrong: $7,500,000. Let's say I'm half wrong, so you end up with $3,000,000. SHUT UP! SHUT UP! Maybe you can't save 15% of your income, because you're so deeply in debt and you've not followed these steps to get out of debt. Well, then follow the steps to get out of debt so that you can...Let's say that I'm 90% wrong, because you're a loser. Let's just call it that. You're a loser. And I'm 90% wrong. That's $750,000 you would have, which is a whole heck of a lot more than social insecurity.

Transcribed half of his rant above for Russ Watters' sake (IIRC, his mobile device won't play these vids) and convenience of quoting later. This is what I was referring to, but he's also got other advice on picking mutual funds elsewhere. And he's talk about 10% returns in other advice vids too.

The major push back I've seen from listeners is his 12% rate. People agree on the importance of saving and investing early and other advice he gives. But, I mostly see people question the 12% returns figure.

I think Ramsey's not factoring in cost of living: wage ratio changes since he was growing up and working. Adjusted for inflation, the same dollar bought a lot more back then. The increase in costs to college (often resulting in debt) are a bigger disadvantage for us millennials too.

 

[NTL2009]

OK, after I posted, I realized you are questioning it, but... it's to the tune of 'accepting it until we prove it wrong'. That's not healthy. Question it upfront.

You can do the research on that - why do you keep looking for us to do it? Here's what I (and you could have) easily found:

https://seekingalpha.com/article/3101496-dave-ramseys-12-percent-return-strategy-is-replicable

Now to defend Dave. If one listens to him carefully, he often refers to a mutual fund that has averaged 12% since 1934. All of my conversations with professionals in the field leads one to conclude that he is talking about American Funds' Investment Company of America (MUTF:AIVSX). Started in 1934, the ICA has averaged a 12.13% annual return since inception. When Dave says there is a mutual fund that has averaged 12% since 1934, he is telling the truth. To validate his claim, the Pioneer Fund (MUTF:PIODX) has averaged 11.88% since 1928, so there is evidence to prove Dave's thesis.

So plug those funds in for the past 20 years, with a 10% inflation adjusted withdrawal:

https://goo.gl/xnTu8F

And you are broke, or close to it. In 20 years. A young person needs to plan on a much longer time span. Is Dave (or his heirs) going to let you move in with him, and feed you if you are broke in 20 years?

And w/o the withdrawal:

https://goo.gl/VsVzJc

You get 7.34% and 6.03% returns (5.04% and 3.76% inflation adjusted), far from 10% (and you need better than that to w/d 10% inflation adjusted, and you cannot ignore inflation over 20 years or more).

Now here's the real question:

We have given you links to tools like this. Why don't you use them and tell us what you found, instead of quoting Dave Ramsey and asking us why we shouldn't believe him?

Time for you to go fishing. Good luck. The fishing is good if you put in a little effort.

 

[Vanadium 50]

Good thing McDonald's dollar menu is still $1.00. They actually lose money on $1.00 menu items, but hope you'll buy other stuff when you're there.

Source, please.

Getting back on track.

AIVSX has over the last decade, done just slightly worse than the S&P 500 - nowhere near 12%. Over the last 30 years, it has done much worse. I am willing to believe in 12% since inception, but of course that means that it started at the nadir of the Great Depression and most of the gains were half a century ago.

It might be instructive to look at why this model fails.

Start with $500,000 in 1998. S&P is up 29.63%, so you have $648,000. Woo hoo! Take out $50,000 and you have $598,000.
Next year the market is up 14.16%, so after my $50K, I have $633,000. This is working great!
The next year the market is down 6.31%. OK, they can't all be winners, but I still have $542,000.
The year after that is pretty bad - down 14.63%. I'm left with $413,000. The bear market can't go on another year, can it?
I guess it can: down another 21.43%. Down to $274,000.
Ah, great - the market is up again! Up 26.42%! My troubles are over. Wait...I only have $294,000.
Next years are up 4.32%, 8.24% and 11.34% and the market is where it was before the downturn. How much do I have? $208,000.

You run out of money in 2011, when the market is actually slightly up.

What happened?

When the market fell, instead of taking 10% out, now you're taking 18% out. You can't recover from that. And, as NTL's tools show, you don't. Firecalc shows this fails 98+% of the time (for 30 years, and 100% of the time for 34 years).

I'm going to suggest a different tactic. Kyphysics, please do exactly what Dave Ramsey tells you to. That means you'll be selling at the bottom of the market - and who will you be selling to? Me, or someone like me. This is a golden opportunity for someone to make a lot of money: buy stocks you're selling at the bottom. Your strategy essentially hands your retirement nest egg to those of us who adopted a strategy of working longer, spending less, and having a sane investment plan, and I'm OK with that. Sure, it means that I'll be dining on champagne and caviar while you'll be grateful to find a can of Alpo, and based on your past posts, you'll be more likely to attribute this to "being screwed by the millionaires and billionaires" rather than your own bad decisions, but I can live with that. Because I will have all your stuff, thanks to Mr. Ramsey.

 

[jtbell]

A common rule of thumb is that if you start by withdrawing 4% of your initial portfolio value per year, then adjust the dollar amount upwards for inflation in succeeding years, it would have lasted for the duration of a 30-year retirement starting any time since the late 1800s, in the US.

I should have actually tried Firecalc for this scenario. Using a starting value of $1,000,000 and a first-year withdrawal of $40,000 (4.0%) I get five failed 30-year periods out of 117, starting in 1965-69 and 1973.

A 3.7% initial withdrawal gives me one failure, starting in 1966.

A 3.5% initial withdrawal never fails, at least for 30-year periods starting 1871-1987. Firecalc's data currently runs through 2016.

The 4% figure comes from studies done in the early 1990s IIRC, so their 30-year periods would not have included the ones that Firecalc fails on. There's also probably some variation depending on the makeup of the portfolio. Firecalc's default is 75% stock (total-market index funds), but you can change this in one of the tabs.

A 10% initial withdrawal rate fails 115 out of 117 times.

 

[Vanadium 50]

A 10% initial withdrawal rate fails 115 out of 117 times.

So you say there's a chance!

Firecalc's default is 75% stock (total-market index funds), but you can change this in one of the tabs.

You can also see how this allocation changes the outcome. I was surprised by how flat this was: 75-25 or 50-50 makes relatively little difference. What does matter, though (unsurprisingly) are the fees. Mr. Ramsey's AIVSX charges a load of 5.75% and expenses of 0.58%. Compare with a Vanguard index fund (VFAIX) that slightly outperforms it at zero load and expenses of 0.04%.

 

[kyphysics]

You can do the research on that - why do you keep looking for us to do it? Here's what I (and you could have) easily found:

https://seekingalpha.com/article/3101496-dave-ramseys-12-percent-return-strategy-is-replicable

I'm not asking for you (or anyone) to "do it" for me. I'm just posing stuff as conversation starters. If you don't want to chime in, no problem.

I guess I'm viewing this much more lightly than you or others perhaps and less formal. Like, this isn't homework section of Physics Forums, where I feel the need to put work into solving something (certainly not with an urgent time limit on it, at least), but rather a casual chat section. I throw stuff out there for convo. starters. It's casual in nature - key word.

And, no, I haven't researched a lot, because I'm preparing for an internship that starts literally in four days (I'll be gone from PF for a few months - yay me!).

I don't click on random links I'm not familiar with, so I can't click those right now. But when I have time later (maybe a few months later!), I'll look into all of this stuff. I have to read up on taxation of stocks/dividends income. Not sure how it works fully (though I know a little). My big issue with my friend's idea is that you can't really control for market volatility in a short time period. Another poster mentioned this too earlier. What happens if the market dives 20% over 2 or 3 years?

Thus, I don't feel $500,000 is enough. Another poster said $1,000,000 would be a starting point and that sounds more sane.

ETA: As I noted earlier, Ramsey never recommended this. It was a friend who talked about trying to do something like this.

Also, I saw this article from Ramsey's website:

https://www.daveramsey.com/blog/the-12-reality

Look like a scam?

Return on Investment; the 12% Reality

4 MINUTE READ
You may have heard the phrase, “12% return on investment.” And whether you first heard Dave mention it in Financial Peace University or you read it on daveramsey.com, it was undoubtedly followed by questions.

But most of those questions boil down to two important ones:

Can you really get a 12% return on mutual fund investments, even in today’s market?

If so, what mutual funds should you choose?

We’ll answer those questions, but let’s cover a couple of other questions first.

Where Does the Idea of a 12% Return on Investment Come From?
When Dave says you can expect to make a 12% return on your investments, he’s using a real number that’s based on the historical average annual return of the S&P 500.

The S&P 500 gauges the performance of the stocks of the 500 largest, most stable companies in the New York Stock Exchange—it’s often considered the most accurate measure of the stock market as a whole.

The current average annual return from 1923 (the year of the S&P’s inception) through 2016 is 12.25%.(1,2) That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.

So let’s look at some numbers that are closer to home. From 1992 to 2016, the S&P’s average is 10.72%. From 1987 to 2016, it’s 11.66% In 2015, the market’s annual return was 1.31%. In 2014, it was 13.81%. In 2013, it was 32.43%. (3)

So you can see, 12% is not a magic number. Based on the history of the market, it’s a reasonable expectation for your long-term investments. It’s simply a part of the conversation about investing.

But What About the “Lost Decade”?
Until 2008, every 10-year period in the S&P 500’s history has had overall positive returns. However, from 2000 to 2009, the market endured a major terrorist attack and a recession. S&P 500 reflected those tough times with an average annual return of -1% and a period of negative returns after that, leading the media to call it the “lost decade.” (4)

But that’s only part of the picture. In the 10-year period right before that (1990–1999) the S&P averaged 18% annually.(5) Put the two decades together, and you get a respectable 8% average annual return. That’s why it’s so important to have a long-term view about investing instead of looking at the average return each year.

But that’s the past, right? You want to know what to expect in the future. In investing, we can only base our expectations on how the market has behaved in the past. And the past shows us that each 10-year period of low returns has been followed by a 10-year period of excellent returns, ranging from 13% to 18%!
If You Are on the Fence About Investing . . .
Will your investments make that much? Maybe. Maybe more. But the idea is that you invest for the long haul. Following Dave’s investing philosophy has inspired tens of thousands of Americans to start investing in order to reach their long-term financial goals

Don’t let your opinion about whether or not you think a 12% return is possible keep you from investing.

Related: How to Hire a Financial Advisor

How to Invest in Mutual Funds
It’s not difficult to find several mutual funds that average or exceed 12% long-term growth, even in today’s market. An investing professional can help you find the right mix of mutual funds.

But the value of a professional doesn’t end there.

The stock market will have its ups and downs, and the downs are scary times for investors. They react by pulling their money out of their investments—that’s exactly what millions of investors did as the market plunged in 2008. But that only made their losses permanent. If they’d stuck with their investments like Dave advises, their value would have risen along with the stock market over the next two years. This is yet another value of a professional—they can help you keep your cool in tough times and focus on the long term.

In fact, increasing your investments during down markets may help drive total return on investment in your portfolio. It’s important not to be scared by the short term (or chase performance spikes). Remember, investing is a marathon—it takes endurance, patience and will power, but it will pay off in the end.

Discuss your investing concerns and goals with an investment professional in your area today!

 

[Rive]

Look like a scam?

Yes.

Well, the most shocking and useful revelation for me was when I finally understood that most of the so called 'experts' are actually selling the market itself instead of trading in any instruments, stocks, commodities or currencies.

That guy exactly doing just that. Selling the market.
I have to admit, he is good in marketing.

 

[russ_watters]

I'm not asking for you (or anyone) to "do it" for me. I'm just posing stuff as conversation starters. If you don't want to chime in, no problem.

I guess I'm viewing this much more lightly than you or others perhaps and less formal. Like, this isn't homework section of Physics Forums, where I feel the need to put work into solving something (certainly not with an urgent time limit on it, at least), but rather a casual chat section. I throw stuff out there for convo. starters. It's casual in nature - key word.

The problem with that approach is that this is a serious subject and this thread is intended for serious discussion of it. If you can't provide anything better than clickbait, then you shouldn't be posting in it.

 

[Stephen Tashi]

The problem with that approach is that this is a serious subject and this thread is intended for serious discussion of it.

We should give the original poster some say in what the thread is intended for!

 

[russ_watters]

We should give the original poster some say in what the thread is intended for!

Granted, though the wording of the OP sounds like it was intended to be serious and most of us treated it that way. Frankly, I don't think we would have left the thread open if it was just intended to be a clickbait dumping ground.

 

[Vanadium 50]

I guess I'm viewing this much more lightly than you or others perhaps and less formal.

This is perilously close to "You shouldn't have taken me seriously; I was just messin' with you." Are you sure this is the path you want to go down?

So let’s look at some numbers that are closer to home. From 1992 to 2016, the S&P’s average is 10.72%.

On January 1, 1992 the S&P 500 was at 416.08. On January 1, 2016 it was at 1918.60 and on December 31, 2016 it was at 2275.12, for an average annual return of 6.58% and 7.03% respectively. Not the 10.72% that Guru Ramsey claims.

 

[StoneTemplePython]

On January 1, 1992 the S&P 500 was at 416.08. On January 1, 2016 it was at 1918.60 and on December 31, 2016 it was at 2275.12, for an average annual return of 6.58% and 7.03% respectively. Not the 10.72% that Guru Ramsey claims.

You'd probably want to add a couple points to that to account for the dividend yield. A nice summary graphic is here:
http://www.multpl.com/s-p-500-dividend-yield/

- - - -
Coincidentally, inflation has been around 2% over this time. So if you are estimating real returns, for back of the envelope purposes, the numbers net.

- - - -
I strongly suspect Dave Ramsey has money illusion and doesn't consider inflation very much.

 

[Stephen Tashi]

On January 1, 1992 the S&P 500 was at 416.08. On January 1, 2016 it was at 1918.60 and on December 31, 2016 it was at 2275.12, for an average annual return of 6.58% and 7.03% respectively. Not the 10.72% that Guru Ramsey claims.

Maybe Ramsey is thinking about "compound average growth rate" instead of "average annual return".

You'd probably want to add a couple points to that to account for the dividend yield.

Yes. More complications!

 

[Vanadium 50]

According to the financial professionals who attempt to reproduce his number, the 12% is the average of the annual gain or loss. e.g. if you are up 50%, down 50% and up 15%, he would claim the average gain is 5%, even though you are down almost 14%. And presto! A loss becomes a profit.

 

[NTL2009]

OP may have packed it up, but for any other followers, we can put a sharper point on some of these numbers...

Maybe Ramsey is thinking about "compound average growth rate" instead of "average annual return". ...

According to the financial professionals who attempt to reproduce his number, the 12% is the average of the annual gain or loss. e.g. if you are up 50%, down 50% and up 15%, he would claim the average gain is 5%, even though you are down almost 14%. And presto! A loss becomes a profit.

Exactly, and this can be clearly demonstrated using the same calculator that Dave Ramsey references as his source for those numbers. That calculator provides both "Average" (and even there, "Average" is put in "quotes"! ), and Annualized return (= True CAGR) - w/o any "quotes".

http://www.moneychimp.com/features/market_cagr.htm

So we plug in 2008(Jan)-2011(Dec) and we get an "Average" positive return (gain) of 1.71%, while in real life, we would have experienced a negative True CAGR (loss) of 1.65% (-1.65%). A dollar 'grew' to $0.94. Hey, where did that 1.71% "gain" go! I want my money!

And for 2007-2011 we get an "average" of +2.46%, compared to a true loss of -0.27%. A dollar 'grew' to $0.99. Hey, where did that 2.46% go! I want my money!

It's been mentioned as a 'defense' that Dave's target audience is not the sophisticated investor - so shouldn't Dave be pointing out to these beginners that "Average" isn't a meaningful number to use? Why doesn't he do that (answered below)? I mean, assuming you want to actually use money to do things like, I dunno, put food on the table, rather than look at a phony number on a spreadsheet.

kyphysics said: ↑
Look like a scam?

Yes.

Unfortunately, I have to agree. I took a closer look at the links that OP posted. They really are a lot like 'click-bait'. For example, a link that says "How to Choose the Right Mutual Funds", or "How to Invest in the Right Mix of Mutual Funds" don't really do that, and they don't list the funds Dave says he uses so you can look for yourself. They take you to web pages of Financial Advisors selling their services.

And these FAs give this sort of advice, offered up unequivocally: "I recommend front-end load funds. With this type of fund, you pay fees and commissions up front when you make your investment."

You would be hard pressed to find any respected independent source recommend paying a front-end load (that just takes away money for growth, forever). That is terrible advice for the consumer, good advice for the FA to separate the consumer from their money.

And Dave's use of "Average" returns, which are misleading and not meaningful and used to Dave's advantage is more evidence of his putting the "sell job" ahead of the people he is supposedly helping.

Yep, it's pretty scam-my, and it is sad that the OP has not seemed to recognize this. Oh well, maybe he will come around. Maybe this thread will serve to educate others. We can only hope.

 

[CWatters]

I know it's easy to find free historic data for the major stock market indices but can anyone point me to a free source of "Total Return" data? I'm looking for data for any of the major indices back to 2003 or earlier.

Edit: Ah I see the link above (http://www.moneychimp.com/features/market_cagr.htm) has S&P 500 data.

 

[StoneTemplePython]

According to the financial professionals who attempt to reproduce his number, the 12% is the average of the annual gain or loss. e.g. if you are up 50%, down 50% and up 15%, he would claim the average gain is 5%, even though you are down almost 14%. And presto! A loss becomes a profit.

$GM \leq AM$ strikes again!

(There was a great xkcd comic about this, around a decade ago circa financial crisis, I'll see if I can find it.)

 

[BWV]

This is a good free source for LT global financial asset returns (1900-2017) for most developed countries.

The US real total stock return was 6.5% annualized from 1900-2017, which outperformed the global return of 5.2%

https://www.credit-suisse.com/media...a/media-release/2018/02/giry-summary-2018.pdf

 

[jtbell]

I know it's easy to find free historic data for the major stock market indices but can anyone point me to a free source of "Total Return" data? I'm looking for data for any of the major indices back to 2003 or earlier.

On Morningstar, use the search box at the top to get a quote for a fund that tracks the desired index. Then click the "Chart" tab. By default, it gives you a "Growth" chart which tracks an initial investment of $10,000 with dividends reinvested. For example, here's VFINX, Vanguard's S&P 500 index fund.

http://quotes.morningstar.com/chart/fund/chart?t=VFINX&region=usa&culture=en_US

 

[Vanadium 50]

On Morningstar,

The founder of Morningstar is the brother-in-law of a physicist. :)

 

[NTL2009]

The founder of Morningstar is the brother-in-law of a physicist. :)

I did not know that. I guess I could put this in the TIL thread. From wiki:

Morningstar was subsequently founded in 1984 from his one-bedroom Chicago apartment with an initial investment of US$80,000.[5] The name Morningstar is taken from the last sentence in Walden, a book by Henry David Thoreau; "the sun is but a morning star"

IIRC, you are from the Chicago area (as am I, but far NW 'burbs). I guess I can put 2 and 2 together? Interesting.

 

[Demystifier]

My favorite advice along these lines is "Buy a stock. When it goes up, sell it. If it doesn't go up, don't buy it."

I think it's a bit self-contradictory. From the 3rd statement it follows that you buy it only when it goes up. Then from the 2nd statement it follows that you have to sell it when you buy it. In this way you cannot make any profit, so what's the point?

 

[NTL2009]

I think it's a bit self-contradictory. From the 3rd statement it follows that you buy it only when it goes up. Then from the 2nd statement it follows that you have to sell it when you buy it. In this way you cannot make any profit, so what's the point?

Humor is the point :)

https://www.brainyquote.com/quotes/will_rogers_161236

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.
- Will Rogers

https://en.wikipedia.org/wiki/Will_Rogers < humorist

And another I like, from Mark Twain:

OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in.

The other are July, January, September, April, November, May, March, June, December, August, and February.

- Pudd'nhead Wilson's Calendar

 

[Demystifier]

3. Marry someone who earns (or can earn) a decent salary, and is at least as thrifty as you are.

Applying this to both partners, it follows that they should marry only if they are equally thrifty, which in practice is impossible to achieve.

 

[NTL2009]

Applying this to both partners, it follows that they should marry only if they are equally thrifty, which in practice is impossible to achieve.

This is harder than we thought! :)

Similarly, a recent Dilbert was about how you should always hang around with people who are smarter than you. But then, they have to not be so smart that they know they are supposed to hang with people smarter than them, or they would not hang with you!

 

[jtbell]

The founder of Morningstar is the brother-in-law of a physicist. :)

Anyone want to take bets on which one makes more money?

 

[Vanadium 50]

You would be hard pressed to find any respected independent source recommend paying a front-end load (that just takes away money for growth, forever).

In principle, I wouldn't be averse to paying a front load if that reduced my fees (or increased my returns) - assuming the numbers worked out. It's no worse (and no better) than paying points on a mortgage. In practice, AIVSX has a front-end load, and higher fees, and lower returns. Hard to see much good in that.

 

[mheslep]

Anyone want to take bets on which one makes more money?

Remember Musk has a BS Physics, and was accepted to Stanford's Phd program. Maybe Musk succeeds with PayPal without a physics degree, but I doubt he builds SpaceX from scratch without one.

 

[Vanadium 50]

To get back on track, I would say everyone needs to know:

1. Nobody is as motivated as you with respect to your finances. They may do well if you do well. Maybe.
2. Understand compound interest. This is important for its own sake, but it's also important to understand that if some charlatan tells you he can get 12% on your money, and has since 1934, this means he is claiming to do fifty times better than the stock market.
3. Know what a prospectus is, and why if there's a difference between what the salesperson is saying and what's in the prospectus that the prospectus is always right. Same for a loan contract.
4. Set goals and a plan to reach them. If you don't know where you're going, any road will take you there.

 

[Ucha]

Whatever income you make, always put aside money for that month's rent/bills in an envelope and do not touch it until you pay off that month's rent and or bills.

If you live in a house, same goes for mortgage payments. If the house is paid off, the same concept can apply but for other things, you might need to definitely save for.

An even better option is to do this with multiple savings accounts, each designated for a specific use. But some might find the lure of convenience to be too strong.

 

[Stephen Tashi]

We should consider: "Don't take out student loans", at least in the USA.

 

[BWV]

We should consider: "Don't take out student loans", at least in the USA.

That is horrible advice! An education is about the best investment anyone can make

Average annual earnings for Bachelors Degree:
$59,124, unemployment rate 2.8%

Average annual earnings for High School Degree
$35,256, unemployment rate 5.4%

That is roughly a $24K difference, making a few thousand dollars a year in debt service well worth the investment, esp with the interest tax-deductible at that income level

https://smartasset.com/retirement/the-average-salary-by-education-level

 

[Stephen Tashi]

That is horrible advice! An education is about the best investment anyone can make

However, student loans may be the worst way to make such an investment. They have a different legal status than other types of loans.

 

[BWV]

However, student loans may be the worst way to make such an investment. They have a different legal status than other types of loans.

So how else can someone finance their education? While they cannot be discharged in bankruptcy, which could be a problem, this fact also allows for lower interest rates than other forms of unsecured consumer credit.

 

[Stephen Tashi]

So how else can someone finance their education?

The typical decision about financing education involves considering whether a student will have part time jobs, how many hours they will work, whether they will formally take out a loan from their parents or other relatives and sometimes whether they have assets that can be used to obtain a secured loan. Student loans are promoted by staff at universities, but they aren't always the best choice. I'd say they are a bad choice for people on financially risky paths , such as majoring in art or pursuing an education while in poor physical or mental health.

 

[NTL2009]

We should consider: "Don't take out student loans", at least in the USA.

... Student loans are promoted by staff at universities, but they aren't always the best choice. I'd say they are a bad choice for people on financially risky paths , such as majoring in art or pursuing an education while in poor physical or mental health.

Your first statement, IMO, is far too broad brush. The second is better, but more generally, don't take on more debt than you can reasonably expect to repay. Think long and hard about the debt versus the increased opportunity it will provide. Try to minimize debt through choice of the institution (maybe a less prestigious, but still very good school will provide more tuition assistance?), part time work, etc.

It doesn't need to be completely financial either. If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

 

[Mark44]

If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

That's a big if. There are many students who go into debt for many thousands of dollars, and aren't really sure about how enjoyable that career path will be, but don't consider that they will have to get by on less money for many years.

 

[NTL2009]

That's a big if. There are many students who go into debt for many thousands of dollars, and aren't really sure about how enjoyable that career path will be, but don't consider that they will have to get by on less money for many years.

Agreed it is a big 'if'. But (I think) we are talking about what people should do/know, not what they are doing.

 

[Stephen Tashi]

But (I think) we are talking about what people should do/know, not what they are doing.

Much of the conventional financial advice on the internet seems to be written by someone who is in reasonably good health and whose long term financial plans visualize years of retirement in the same physical state. One thing people should know is the odds of this happening.

I don't know the odds. I'm curious how many people do not eventually end up in a nursing home - i.e. are "lucky" and die before they become debilitated.

In the USA, typical sound planning for retirement won't fund long term care in a nursing home. (For example, typical "long term" care insurance pays for 2 to 4 years of care.) In the USA, the financial advice for nursing home residents is antithetical to conventional planning for retirement. You are advised to "spend down" your assets until you qualify for Medicaid.

 

[CWatters]

Much the same applies in the UK. Typical care home fees are between £700 and £1100 a week and having visited a few for a relative I wouldn't want to live in one currently charging less than about £1000 a week. More if any kind of medical/nursing care is required.

 

[Vanadium 50]

If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

There is a school of thought, ascendant during the last two Progressive eras, that it's the government's job to protect us from our own bad decisions. (A recent example is the erstwhile NYC soda ban)

If a student has decided he wants to buy the college experience and doesn't have the money, he has two choices. A student loan costs about 5%, and an unsecured personal loan costs substantially more than that - probably around 20%. It is not irrational to take on debt that is substantially harder to discharge in bankruptcy if you can take on substantially less of it. I think the better question is what you are spending it on: four years of work or four years of parties? One forum member has called college "young adult day care". Colleges claim that classes+studying for a full load is 48-60 hours per week. The actual average is 29.

 

[russ_watters]

If a person needs to go into debt for a degree that doesn't pay well, but they are sure that is what they would enjoy, and are willing to get by with less disposable income for years while they pay off that student loan, who am I to say that isn't a good choice for that individual?

There is a school of thought, ascendant during the last two Progressive eras, that it's the government's job to protect us from our own bad decisions. (A recent example is the erstwhile NYC soda ban).

Hopefully I won't push this too much into policy, since we can advise on "good" advice regardless of policy. However...

Even if a person is "willing to get by with less" when they accept the loan;
1. They might think that when they accept the loan and think differently when it comes time to repay.
2. Statistics will probably tell us they are more likely to default.

V50, you and I tend to be well aligned on such issues, but I would say for this one that since at least part of it is already a federal program, it would be reasonable for the government to ensure it's not being misused -- if for no other reason than to prevent it from collapsing under its own unrealistic assumptions. But I suspect many of the same people who think they would be willing to accept less and later change their minds are also the same people who would oppose having their loan capped due to their choice of major; in principle and in practice.

Regardless, my general advice is this:
-Before you accept a loan, make sure you have a realistic plan for how you will pay it back.

 

[StoneTemplePython]

If a student has decided he wants to buy the college experience and doesn't have the money, he has two choices. A student loan costs about 5%, and an unsecured personal loan costs substantially more than that - probably around 20%. It is not irrational to take on debt that is substantially harder to discharge in bankruptcy if you can take on substantially less of it...

This reminds me:

Financial knowledge all adults should know: Rule of 72. This is very useful for back of the envelope estimates involving small to moderate positive growth rates. A $20\%$ growth rate / interest rate (assuming people PIK /roll the interest while studying and without much income) means that the principal will double in about $3.8$ years. I used a calculator for this.

Rule of 72 says I can estimate the time till doubling as $\frac{72}{20} =3.6$ and in my head I said $\frac{72}{20} \approx \frac{70}{20} = 3.5$. So somewhere in the neighborhood of 3.5 years, maybe 4 years, for the initial principal amount to double. That is quite fast, and it gets worse if people take a long time to graduate, or go to grad school, etc. (The flip side is it gives a good estimate on how compounding can work in your favor with investments over time.)

- - - -
Back of the envelope estimates can be very useful in eyeballing extreme events -- in particular highlighting extremely good opportunities (probably rare) and red flagging extremely bad ideas (probably not so uncommon).