The correct return to use is the average annualized return, also known as the compound annual growth rate. That rate, adjusted for inflation, for the S&P 500 from 1929-2010, is 6.7%.

this sounds alot like what I called the geometric of 9.23% minus 2-4% for inflation and you are still ahead by 5-6 percent. seems to me that's not to bad. even if you subtract the mutual fund fees you are still ahead . better than a savings account or anything the banks have out there to "save your money"

I suppose if you have the time to invest properly - researching companies, buying and selling on a daily or weakly basis- you can probably do well with single stocks. My self I just don't have the time. I guess I have to pay someone to do it for me.

I have also heard that mutual funds have lower management fees in the states, to that probably factors into the canadian picture to.

Actually, good past past performance isn't a very good indicator of good future performance. There have been many studies showing that the best performing funds in any particular year have a very strong likelihood of doing poorly in subsequent years.

One year would be a poor indicator, I agree on that , but what if you look back 5 years or 10 years, if the funs has done well for 10 years is that a better indicator of its future. I know it's not perfect but it's better isn't it?

Nobody's saying that investing in a mix of stocks and bonds is a bad idea or that you should just plunk your money in a savings account instead. It's just that Ramsey is setting up unrealistic expectations of growth by constantly touting that 12% figure when the reality is more like half that amount.

He even uses the 12% growth rate as a cornerstone assumption in his well-publicized strategy for flipping cars.

I think the dangers by setting up these unrealistic expectations are that 1) he can encourage people to lose even more money by constantly shifting their investments if they're not producing the expected 12% annual growth, and 2) he can cause people to become complacent, setting aside much less money than they should for future goals like retirement because they trust his advice that they'll earn 12%.

I have listened to dave ramsy usually while working. what I have come away with is that we must understand our investments before makeing them. the 12% isn't to be expected but 6% is about the minimum you need to stay ahead of taxes and inflation. Try for more than 12% that is just what the stockmarket has averaged over 80 years. wether accurate or not his main point is that if 12% is an average you should be able to find something better than average. one reason so many mutual funds do so poorly is that they are very conservative investments. Some are poorly managed, some are lucky, and so on. choosing good ones isn't going to be easy.

But he's wrong: 12% isn't the average; the real average is about 6.7% and that would apply for a fund that tracks the S&P 500 index. Many funds don't track the index -- the reason most do so poorly is because they try to beat the index, not because they're too conservative. Any aggressive fund has a very good chance of beating the index over a period of 5-10 years. Over longer periods, the chances dwindle rapidly (because good picks and good timing get counterbalanced by bad picks and bad timing), and the index ends up beating more than 80% of managed funds. You could be lucky and end up in the small percentage of managed funds that consistently beat the market over 20-30 years, but there's no way you can know in advance whether you picked one of those. You can only know in hindsight. It's a guessing game, really.

No, actually, it's not. You don't need to speculate and guess at such things - it's already all been thoroughly researched. Just read books like "A Random Walk Down Wall Street" and "Where are the Customers' Yachts?"

There's no such thing as fund "inertia." That is, at the start of each year, every fund is equally likely to have a winning or losing year, regardless of how they performed last year. How they performed 5 years ago is even less relevant, so I don't understand why you think it would be more relevant.

A classic illustration is the coin-flip example. If 1,000 people (OK, 1,024 for you nerds) all flip a coin, 500 of them will flip "heads." If those 500 flip again, 250 will flip heads again. If those who flip heads keep flipping, eventually you'll be left with 1 guy who flipped heads 10 times in a row.

If you square that guy off with someone who flipped "tails" on their first flip and was eliminated, is the 10-time-heads-flipper any more likely to flip heads than the round 1 loser? Of course not. They're both exactly equally likely to flip heads on the next flip.

Off Topic: You really need to learn how to properly quote another user

Not after you adjust for risk.

Comparing earning 8% with RIM stock to earning 2% in a savings account is not a valid comparison. One is far, far riskier than the other. Hence the higher return. This is an elementary economic principle. There is such thing as a risk/return spectrum.



Maybe. Or maybe not. On average, you would match the performance of the market. After accounting for "friction" (trading fees, taxes, etc.), you'd be behind.

The market is a closed system. It's just a bunch of people selling the same stocks to each other. They can't all be "above average" consistently. For every winner, there has to be a loser.



Think about it. If the person you were paying to "beat the market" for you were really able to consistenly do so, why would he waste his time helping schlubs like you get rich? Why wouldn't he just leverage up the wazoo, double his money a couple of times, and retire to a warm island at age 25 with millions in profits?

You cannot pay someone to "beat the market" for you consistently. It's simply not possible, and even if it were, those people would not waste their time and talents helping YOU get rich. They'd simply get rich themselves and be done with it.



They absolutely do, yes, that's true.

If we'd all just take Ramsey's advice, we could all be above average!

Think about that for a second. Ever hear of Lake Wobegon?

Another caveat about Ramsey's investment advice is his "Endorsed Local Providers" network of financial advisors, described on this page: https://www.daveramsey.com/elp/why-use-an-elp/.

His site states "Being an ELP isn’t easy; it’s hard work because ELPs are held to a higher standard of excellence. While ELPs do pay a fee to cover website maintenance and employment costs, Dave’s endorsement is not bought — it’s earned. We have over a 30 person team that interviews potential ELPs several times and provides support to make sure they provide the best advice just like Dave does."

How does this translate to reality? According to the new book "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry" by financial writer Helaine Olen, when she talked with one former ELP he told her that the screening process amounted to a 5-minute phone call in which a Ramsey employee told the prospective ELP how much it cost to be listed, which in his case was around $1,000 per month.

While I agree with the basic point you are making Kombat, I will point out a couple of "holes" in your argument:



Now, suppose you watched that game for 1000 flips and you noticed that there were 600 heads and 400 tails. Intrigued, you watch the next 10000 flips and observe 6075 heads and 3925 tails. You might conclude that there is something wrong with your assumption about the coin being fair. Based on that you might be wise to bet on more than 50% heads occurring on the next 1000 flips. You could even quantify the odds if you wanted to. The point being that observing actual behavior sometimes reveals flaws in underlying assumptions that can be exploited profitably. It's darned hard work though.



I would have to think on this. There is a statistical property of distributions called "memory." Some distributions are memoryless and some are not. Many of the "studies" looking at whether stock returns are correlated to past performance are based on implicit assumptions about the distribution they have or similar properties. There is also pretty good analytical evidence for autocorrelation - dependence on previous performance- over ~monthly periods and this is even mentioned in one of Bernstein's books. I think you are probably right that in your statement that there is no "inertia" that you can make money from. But the evidence is not entirely convincing.