Dave Ramsey has the third most popular radio show in the country and the largest one with a financial focus. It is also far from the worst financial shows out there which tend to be thinly-disguised infomercials put on by insurance agents and loaded mutual fund salesmen. He is generally regarded as fantastic at getting people out of debt and fired up about saving money and less than fantastic at giving investing advice.
Due to his reach, a lot of people have heard of his recommended asset allocation. Unfortunately, this asset allocation, while it sounds very specific, is actually incredibly vague. It usually goes something like this:
- 25% Growth and Income
- 25% Growth
- 25% Aggressive Growth
- 25% International
In addition, Dave also recommends, at least for those who are “real estate guys”, to invest a portion of the portfolio (up to 100%) in paid for, income-producing real estate.
That doesn't seem crazy, does it? Most of my own portfolio looks an awful lot like that. (For new readers, my portfolio is 40% US stocks with a small value tilt, 20% International Stocks with a small tilt, 20% bonds, and 20% Real Estate/Small Businesses.)
I've long advocated that there is no perfect portfolio. You can only know the theoretical “efficient frontier” retrospectively. The most important thing is to pick something reasonable, fund it adequately, and stick with it for the long term. (If you want to see what reasonable looks like, check out 150 Portfolios Better Than Yours.)
The problem with Dave's recommended portfolio is the terminology. I think it was a lot more common in past decades like the 1990s to use terms like these. Nobody really uses them anymore as they have opted for more precise terminology. Ramsey is very good at keeping things EXTREMELY simple and sometimes when you do that you make the mistake of making things overly simple. As Einstein said, “Everything should be made as simple as possible, but not simpler.” Most of the criticism appropriately leveled at Dave is that he makes things simpler than he should have.
The Dave Ramsey Portfolio
So let's see if we can decipher the terminology. Since these terms are quite vague, let's start by simply asking Dave what he means. Luckily, his website has an article by one of the “Ramsey Personalities” Chris Hogan (the retirement guy). The funny thing is that Chris Hogan had to find a mutual fund broker (Brant) to help him define what Dave means. The fact that neither Dave nor Chris could write this article on their own and had to rely on someone else is obviously concerning given how many people are taking their asset allocation recommendation.
Growth and Income: These funds create a stable foundation for your portfolio. Brant describes them as big, boring American companies that have been around for a long time and offer goods and services people use regardless of the economy. Look for funds with a history of stable growth that also pay dividends. You might find these listed under the large-cap or large value fund category. They may also be called blue chip, dividend income or equity income funds.
So he apparently means Large Blend Stocks or Large Value stocks. Bear in mind that is NOT how every mutual fund company on the planet uses the term “Growth and Income”.
What Mutual Funds Does Dave Ramsey Recommend?
While the Vanguard Growth and Income Fund is 100% stock and mostly a blend of very large Growth and Value stocks, it leans more toward the Growth side than the Value side. On the other hand, the Fidelity Growth and Income Fund is mostly Value Stock and in fact, has 12% of its fund invested overseas. The Calamos Growth and Income Fund is a balanced fund, with 5% bonds and a bunch of convertible notes. Sometimes, just to keep things interesting, mutual fund companies call them Income and Growth funds, like the offering from Allianz which is 33% stock, 31% bonds, and 30% “other”.
The bottom line is that “Growth and Income” is a catch-all term that can be used by anyone for anything. So best to just ask Dave what he means if you want to do what he says. He means Large Cap stocks with perhaps a tilt to Value.
Growth: This category features medium or large U.S. companies that are still experiencing growth. Unlike growth and income funds, these are more likely to ebb and flow with the economy. For instance, you might find the latest gadget or luxury item in your growth fund mix. Common labels for this category include mid-cap, large-cap, equity or growth funds.
Okay, the explanation on the website is a little more useful. He's talking about Mid Cap and Large Cap Growth stocks. Next category.
Aggressive Growth: Think of this category as the wild child of your portfolio. When these funds are up, they’re up. And when they’re down, they’re down. This volatile growth usually accompanies smaller companies. “So small-cap funds are going to qualify—or even a mid-cap fund that invests in small- to mid-sized companies,” Brant says. But size isn’t the only consideration. Geography can also play a role. “Aggressive growth could sometimes mean large companies that are based in emerging markets,” he adds.
Okay, this one is bizarre. It's either small-cap stocks, small and mid-cap stocks, or emerging market stocks. That should be easy to replicate. Just pick whatever you want I guess.
International: International funds are great because they spread your risk beyond U.S. soil. That way your retirement fund doesn’t totally tank if America goes through an unexpected downturn. It also gives you a chance to invest in big non-U.S. companies you already know and love. You may see these referred to as foreign or overseas funds. Just don’t get them confused with world or global funds, which group U.S. and foreign stocks together.
Okay, that one is more straightforward. Dave is recommending you invest your mutual funds in 100% stocks, split 75/25 between the US and international (unless you decide your “aggressive growth” portfolio is going to be all in Indian large-cap stocks).
So if you put it all together, perhaps the Dave Ramsey portfolio looks like this:
- 12.5% Large Value
- 12.5% Mid Cap Growth
- 12.5% Small Blend
- 12.5% International
- 50% Real Estate
Easy peasy, right? Now, if you've wisely chosen to ignore Dave's advice to use a loaded mutual fund salesman as an advisor, his advice to chase performance and ignore costs, and his advice to choose an active manager “who can beat the S&P” you might end up replicating the portfolio like this:
- 12.5% Vanguard Value Index Fund
- 12.5% Vanguard Mid Cap Growth Index Fund
- 12.5% Vanguard Small Cap Index Fund
- 12.5% Total International Stock Market Fund
and then go buy some rental properties.
But before you do that, you might want to run those domestic funds through the Morningstar X-ray tool and compare it to just buying a Total Market Fund and possibly tilting it to small or value (or growth?).
Here's what the Vanguard Total Stock Market Fund X-ray looks like:
Here's what a portfolio of 1/3 Value Index, 1/3 MC Growth Index and 1/3 Small Cap Index looks like:
See the tilts? A slight tilt to large value, mid growth, and small. That's apparently Dave's favored portfolio. Doesn't look so special now, does it?
Is it reasonable? Sure. However, I would describe it as quite aggressive. Not only is it 100% stocks, but it has significant small and value tilts as well. Make sure you can tolerate that kind of volatility before you follow Dave's recommendation. My personal US domestic stock allocation is 25% Total Stock Market and 15% Small Value Index. Its x-ray looks like this:
Those aren't really going to perform very differently and NO ONE can predict in advance which will do better so if you like one more than the other, knock yourself out.
But if I were you, I'd do a bit more reading and settle into an asset allocation that you like, fund it adequately, and stay the course.
What do you think? Do you use the “Dave Ramsey” asset allocation? How have you interpreted it? Comment below!
Thank you for breaking it down. The financial world is full of jargon, which makes for glib talking on their part and a shroud of mystery for consumers. Perfect set-up. Though in this instance, its more like ill-defined terms- we’re used to seeing plenty of those in medicine. Like Acute Kidney Injury- has a different definition in every trial. Makes comparisons a trial!
Love the quote on this page- cheeky but wise words.
-PFB
This article makes me wonder how much you have actually listened to Dave Ramsey. I have listened a lot through the years, although not much lately. I have been to two of his seminars in Nashville, EntreLeadership and training to be a counselor. I have heard him speak at other events as well. He does not claim to be an investment advisor and that may be one reason you feel his advice is vague. He is always careful to tell people to get professional advice for that. Not everyone is capable of doing it all on their own and not everyone wants to.
I know you didn’t slam Ramsey but I just hope your somewhat negative piece does not discourage people from considering using the Ramsey plan for getting out of debt because I am testament to the fact that it works.
Congrats on getting out of debt.
If one is going to suggest an asset allocation, I think you need to be responsible for it. Dave does, so I think it’s fair to discuss it.
I don’t really think this is a negative piece at all.
This sentence were poorly worded (IMO) and could make the column sound worse than intended: “It is also far from the worst financial shows out there which tend to be thinly-disguised infomercials put on by insurance agents and loaded mutual fund salesmen.”
I believe WCI is just trying to help break down Ramsey’s investment plan a little. He has done many columns on Ramsey and he usually tries to take a contradictory position. My guess is that it helps get WCI clicks to his page. So it is just good business to find something that you could improve from one of the most famous investment personalities out there. He usually prefaces all the Ramsey columns with how much he agrees with what Ramsey preaches….and then picks one detail with which to disagree.
I thought it was an interesting piece. I agree that the investing advice from DR is vague. I like how you x-rayed the model portfolio and compared it to the TSM and your own.
In the 90’s, a “Growth and Income” fund encompassed a wide range of strategies, from those including bonds to dividend growth, value, and core. It was crummy, imprecise terminology that sounded good for marketing because it offers something for everyone.
I appreciate these asset allocation pieces you do–always well done. Not a Dave Ramsey follower myself, but could you please explain why you describe his (extrapolated) portfolio as having a significant value tilt?
I agree that he has a significant small tilt as mentioned, but it seems (from M*) that he has ~31% value compared to ~32% value for TSM, so I would perhaps describe it more as just market-weight in that regard. Especially considering that his portfolio and TSM are both ~33% core/blend as well. Perhaps I am missing something.
It’s a Large Value and Small Growth tilt compared to TSM. Look at the ratio of large value to large blend in the Ramsey portfolio vs TSM.
Nice article. I have been using the Morningstar x-ray tool for some time now and find it very useful, in that it also will tell you the asset allocation to the stocks that the funds own. In other words just because you have a certain “9-box” style doesn’t mean that you might be too heavy in MSFT or AAPL, when some different funds might do the same thing with more diversification. If you can keep any stock below 2% I feel that is a good target.
Personally from your style charts above mine looks more like the Total Stock Market index, with maybe 3% more outside the large-cap (small + mid is 10 to 11% total instead of 7%). Of course cash and bonds are about 25% right now.
Jim,
I enjoyed this read. I wonder if you would emphasize or address the dilemma about “sticking with” your personal allocation. I find this dilemma arises for two reasons: one, as we gain more experience and age our opinions change about the validity of the best allocation model, and two, The facts on the ground may change, such as the rise of desktop real estate investment platforms. So it’s kind of hard to expect that you’re going to believe the same way about your portfolio at age 30 than at age 40 or 50. But because of the fear of losing the advantage of rebalancing to the original commitment, I am kind of stuck with it.Plus I’m lazy, which is probably good when you’re in a downturn. So, assuming you made a reasonable first choice, is tweaking your allocation later really an exercise in futility?
If you’re making asset allocation changes more than once a decade you’re probably chasing performance. But to say you can NEVER change seems unrealistic. We have a 3 month waiting period for any change so we have to think about it for a while.
I think this is a great “decoding” of DR’s outdated investing advice. I personally don’t have a problem with his recommendations other than the fact he strongly pushes innocent people toward his ELPs who are likely AUM and “selling” mutual funds with loads. On his website they straight-up recommend “front-end load fees for long-term holding so you only pay it once” – I wonder, why pay them at all? The market has to go up about 6% to break even for a 5% front end load fee! I do wish he’d update his advice and get with the times but I know he makes a lot on ELP endorsements. Great piece!
Good thoughts! I’ve used FPU as A tool to help spark financial literacy with many others. My wife & I recently watched the new online lessons. Interesting that for the first time Dave says that Growth & Income is Large Cap, Growth is Mid Cap, Aggressive is Small Cap, & International is just that. In all the other generations of DVD lessons, he is not clear! First time I’ve heard him ever say that Growth = Mid Cap.
Via email:
I use the guy you mentioned in your article (Brant) and am in NC for one small Roth. I had this account years ago and honestly googling American Funds was what brought me [to the Bogleheads] several years ago. Anyhow, he has me in:
AIVSX (The one Ramsey touts but has been creamed the last 10 years)
AGTHX (The more known American Fund “Growth Fund of America”)
AMCPC
AMRMX
SMCWX
CWGIX
NEWFX
ANWPX
They aren’t perfectly proportional but they are mostly even (say 12.5% in each fund). As you see if you put under an Xray they are 70/30 US/Intl and mostly large cap growth tilt (not value tilted as it may appear from the ambiguous verbiage from Ramsey with the “4 kinds of funds”). What I don’t understand is how his 4 funds that are supposed to compete against the S&P (aivsx/agthx/amcpx/amrmx) have been tilted toward Large cap growth and still gotten beaten by the S&P the last 1/3/5/10 years and that’s of course before taxes (if taxable acct) and front end loads on A shares.
Dave Ramsey gets paid by the mutual fund salesmen that he recommends , nothing more need be said.
Dave Ramsey is great for simple beginner information about fiances but I’m also not a huge fan of his. He basically tells his followers the financial world is black and white. He thinks his opinion is the only smart/right way to do things (this goes how to live life too not just fiances) and if you disagree then that makes you stupid/wrong. I’m always super weary about people that think their way is the only to do things.
I think you are misreading Ramsey’s advice.
I understand it much more straight forward. His is talking about investing in three different levels of risk – and then diversifying with a broad international stock.
Let me explain:
Growth & Income: This is (we agree) Value stock. Level 5 risk.
Typical stock would be Proctor & Gamble, Coca-Cola etc. A typical index fallowing these stock would be the S&P 500 Dividend Aristocrats.
Growth: This is not primarily mid-cap but large cap and mid cap growth stock. Level 6 risk. This is stock like Amazon, Netflix, Facebook etc. A typical index fallowing these stock would be the S&P 500 Growth or Russell 1000 Growth.
Aggressive growth: This is stock with the highest levels of risk. Small Cap growth, Mid cap growth, Energy transition Funds and Emerging Markets. Level 6-7 risk. This is Stock like Hannon Armstrong Sustainable Infrastructure, Maximus Inc, Tencent and Alibaba. Two typical index fallowing these different kinds stock would be the Russell 2000 Growth and MSCI Emerging Markets.
International: This is broad international stock. Nestle, Unilever, AstraZeneca. A typical index would be MSCI World ex USA Index .
If you plug this in a Box-analysis what you will find is a portfolio leaning heavely towards growth stock of all three sizes.
When inputing three index ETF:s in Morningstar fallowing above mentioned US index. I found a box with much less value stock (20%) and much more Growth stock (40%) then the total market.
This is also consistent with Dave Ramsey always saying on his show to invest in “Growth Stock Mutal Funds” to achive 12% yearly portfolio growth.
I don’t think I’m misreading it as I heard it from his own mouth. But you’re right that it can sound pretty vague. Keep in mind the Morningstar style boxes change over the years and over the last couple, the market has definitely taken a leap to the growth side, which probably accounts for your analysis.
If you really follow Dave Ramsay and you have read several of his books then you know that it depends on where you are on the baby steps , how old you are, how much money you have saved and how much money you earn. Unless you are rich like Dave, he would not want you to have 50 percent in real estate.
I really like Dave Ramsey, like the article and like TWCI. I do not think this is a hit piece at all. Dave Ramsey always suggests one talk to a retirement adviser with the heart of a teacher. That advice is for people who are nervous or unknowledgeable about mutual funds. As a Boglehead, I have had a set asset allocation I believe works for me long before I heard of Dave Ramsey or TWCI, and I rebalance once or twice a year. For years I’ve tried to BE the market and not beat the market. I’ve always outperformed the S&P 500 with four Vanguard mutual funds. It works for me. I do not have any overlap in stocks in my mutual funds. Is it correct to do that? Who knows. Funny thing is, I am not far off from the vague Dave Ramsey asset allocation or TWCI’s asset allocation depending on how you judge the stocks within the fund. The point is, I am saving. My retirement is growing. There is no perfect asset allocation. Just save save save… grow grow grow. At the end, if you really want to compare… well… who are you going to compare with? When you get to your destination will you really look in the rear view or just enjoy the fact you saved and grew your money? Retire well my friends!
Analyzing Dave Ramsey’s portfolio is kind of ridiculous. Its an all stock porfolio with exactly one asset class.
If you dont need the money within 10 years and can hang on for dear life you may be ok. Just dont ever peak at the Japanese stock market.