Dave Ramsey’s Mutual Fund Picks Exposed – Are they really that good?

Don't Most  Mutual Funds Perform Poorly?

According to one article from CNBC,  "80% of active fund managers are falling behind the major indexes" such as the S&P 500 and the Dow. 

This somewhat terrifying statistic comes from The S&P Indices versus Active (SPIVA) scorecard, which keeps track of the performance of actively managed funds in regard to their respective category benchmarks.

In another article, this one from the New York Times, it's stated that:

"No actively managed stock or bond funds outperformed the market convincingly and regularly over the last five years".

This statement comes from the review of 2,132 mutual funds where the researchers looked at the top 25% of the funds and then looked at whether any of these achieved top 25% performance over the past 5 years (up to June 2022), to which the answer was a big NO.

Even those that did have their finer moments seemed to more or less "get lucky" since their success wasn't repeated.

And these are far from the only articles out there reporting drastically high failure percentages of mutual funds. A quick Google search will provide you with plenty of supporting results.

But, why is this? Why is it that most mutual funds actually underperform the market? And what's the point of investing in an actively-managed mutual fund if you'd have better luck throwing your money in an index fund such as an ETF that would have lower fees altogether?

One of Ramsey's arguments as to why you should invest in a mutual fund instead of an ETF is that ETFs are traded frequently and mutual funds aren't because they are meant to be long-term investments, yet this doesn't say much because, of course, just because ETFs are often traded frequently doesn't mean you can't hold them long-term.

Not only this, but if he's making 12% annually like clockwork, this sounds like a steady and safe investment, right?

We'll take a deeper dive into how good a 12% average per year really is, but first, let's get to the point of this entire article and go over his investment strategy and what mutual funds Ramsey actually recommends.

Dave Ramsey's Investment Philosophy

Ramsey isn't one to give handouts. He seems to side more with the philosophy of teaching people to fish instead of just handing out fish.

While he doesn't directly tell us his specific fund recommendations, he does give us his investment philosophy and helps guide us to pick our own funds, 

As far as this investing philosophy goes, he recommends that you:

1. "Calculate your investing budget.

2. Open up tax-advantaged retirement accounts.

3. Pick the right mix of mutual funds.

4. Brush up on mutual fund lingo.

5. Manage your investment portfolio."

Number 3 in this list, Pick the right mix of mutual funds, is the most relevant to this article. At this step, you want to be picking the right funds, of course. 

But, what funds to pick?

Ramsey suggests diversifying your portfolio by spreading money out over four types of mutual funds:

1. growth and income
2. growth
3. aggressive growth
4. international

Just to clarify here, Ramsey suggests dividing up your investments evenly between 4 different mutual funds, each of which focuses more on one of the 4 areas above. 

This way, you'll hold mutual funds which are already quite diverse in and of themselves, and on top of this you'll be spread out over 4 differently focused funds.

We've all heard about diversification before which Dave is a big fan of. But how sound is this advice actually?

Well, according to one person:

"it's fair to say that past performance doesn't indicate future results. but I ran Dave's recommended allocation through Portfolio Visualizer, using low-fee indexes from Vanguard and other companies. Dave's 4-way split has outperformed the market averages for decades, due to the greater weighting in small and mid-size companies which tend to beat large cap over time."

Not only this, but we also have to remember that many of Ramsey's followers will be investing through their 401k - maybe you too - and his recommendation of diversifying with mutual funds like this is a more widely accessible option.

Not only is he trying to provide good advice, but he's also trying to provide good advice that just about everyone listening to him can take action on.

The Mutual Funds Ramsey Recommends

As I've mentioned a few times, Ramsey never clearly states what mutual funds he's invested in himself and what he recommends. This is likely for liability reasons. Or at least partly due to this. The other big reason would likely be because he refers people to local providers and gets kickbacks from this. It's advertising and while Dave does seem to genuinely try to help people out, he's still trying to make a buck.

All this said, he's dropped us a few hints over the years - some better than others - and I've been able to come to conclusions for some of his picks with a fairly high degree of certainty.

Let's start out with a mutual fund that I'm certain is one of Ramsey's recommendations.

Mutual Fund Pick #1... one that has an "11.98% average return since 1934, 13.4% average over the last three years"

As has been stated by Ramsey in the past:

“I own a mutual fund with 11.98% average return since 1934, 13.4% average over the last three years. Is your investment adviser too STUPID to find this?”

This statement comes from a tweet of his back in 2012. 

The strange thing is that I can no longer find this tweet on Twitter. He may have deleted it. Luckily, however, the tweet was posted to his Facebook account and it is still shown here...

There were quite a bit of comments below this Facebook post with many guessing what mutual fund Dave is talking about and with many arriving a the same conclusion as myself, which may be the reason the original tweet seems to have been deleted.

This clue matches up perfectly with American Funds' Investment Company of America (AIVSX) mutual fund... for the most part.

This fund's inception was back in 1934 and, although the average yearly return has dropped a bit since Dave made this statement, back in 2012 the past 3-year return would have been higher. This said, Dave made this statement in May 2012 and if you do the math you'll find that the past 3-year average return at this point actually comes out to be 12.09%.

So, where does Dave get his 13.4% from?

Is it possible that AIVSX isn't actually his pick here? Or is Dave just really bad at simple math?

I'm not sure the answer to this, but I do believe AIVSX to be his pick here because I can't find any other mutual funds that were founded in 1934 and still around today with a near-matching historical return average.

Mutual Fund Pick #2... one that "has averaged over 15.43 percent per year since 1959"

In his book called The Total Money Makeover: A Proven Plan for Financial Fitness (2007 edition), he states that:

"I purchased a Growth and Income Stock Mutual Fund many years ago, that I still invest in, and it has average 12.78 percent per year since 1934 (72 years as of this writing). I bought another last week that has averaged over 15.43 percent per year since 1959, as of this writing. And yet another with average annual returns of 13.55 percent since 1984, and another averaging 13.51 percent since 1973, and yet another averaging 12.67 percent since 1952. Any decent broker with the heart of a teacher can, in his or her sleep, lead you to funds with long track records averaging over 12 percent."

***Yes, he seems to tease 5 picks here instead of just 4 as he suggests nowadays.***

This quote was presumably written by him in 2006 and the clue about his mutual fund pick that started out in 1934 also matches with what he's said previously and with the pick being AIVSX as I've just gone over.

As for his second pick here, the one he says "has averaged over 15.43 percent per year since 1959". I was thinking it could be the Vanguard U.S. Growth Fund (VWUSX), but then I did the math and found that it's averaged 12.84% since its inception in 1959... a decent amount lower than that 15.43% that he mentions.

This said, I haven't even been able to find any other mutual funds that started in 1959 and are still around today.

Mutual Fund Pick #3... a fund "with average annual returns of 13.55 percent since 1984"

This could possibly be American Funds EuroPacific Growth Fund (AEPGX), which was founded in 1984. 

But again, after doing the math on this one I found the average return to be 15.64%, a bit higher than the 13.55% that Dave mentions.

Another fund that has the same inception date is Vanguard PRIMECAP Investor (VPMCX). But I did the math on this one and found the average yearly return to be even higher from its inception date up through 2005 - at 16.69%.

So I'd say that the American Funds EuroPacific Growth Fund (AEPGX) is the more likely pick here.

Mutual Fund Pick #4... another "averaging 13.51 percent since 1973"

This one is likely American Funds' The Growth Fund of America (AGTHX). It matches up with the limited clues such as the 1973 inception date ands I have found others claiming to be one of his picks. 

I did the math for this one and the average yearly return up through 2005 was 17.04% since its inception date... a good bit higher than Dave's stated 13.51%.

Again, I don't know what numbers Dave is using here. If anyone could provide further insight on this that would be great (leave a comment below this post).

Mutual Fund Pick #5... "another averaging 12.67 percent since 1952"

This pick could be the American Funds Washington Mutual Investors Fund (AWSHX). 

Dave says that it's been "averaging 12.67 percent since 1952". This one was founded that year and with my math I got a 13.94% average yearly return, a bit higher.

Notable Mentions:

Spending hours skimming through forums like bogleheads.org, reddit.com, and money.stackexchange.com, reading comments on various YouTube videos, etc... I've found quite a few guesses from other people as to what the funds are that Dave's always gloating about.

Some of these include:

• Vanguard S&P 500 fund

I found a comment by someone stating that Dave claims to own this fund but have not been able to verify this claim.

• AIVSX/AMCPX/AMRMX/AGTHX

From a comment on a forum discussing Ramsey's picks, one commenter casually claimed that these are Dave's 4 picks, but didn't mention how he/she came to this conclusion.

While I do agree that AIVSX and AGTHX are likely two of his picks, I'm not so sure about AMCPX and AMRMX. The inception dates are the easiest clues to use to find matches and these two other picks don't match the dates Dave has stated.

On the BogleHeads forum, I also found a comment where one person shared the top 401(k) holdings of Dave's Lampo Group company...

I haven't been able to find their holdings on the DOL website myself. I'm not sure why. Maybe they are no longer publicly viewable. 

However, I do think that this is some valuable information. If Dave's company (The Lampo Group is Dave's company by the way) is invested in these holdings then it makes sense that Dave could very well be too.

In the screenshot above, we can see that the following 3 funds that I've already concluded are likely Dave's picks are also included there...

• American Funds' Investment Company of America (AIVSX)
• American Funds' EuroPacific Growth Fund (AEPGX)
• American Funds' The Growth Fund of America (AGTHX)

So, having already come to the conclusion that these are three of his likely picks and now seeing that all three are also picks for his company's 401(k) - back in 2018 anyhow -, I'm more confident that these are indeed 3 of his picks.

Are his picks really that good?

Let's take a look at the performance of these funds and see how they measure up.

First, we have American Funds' Investment Company of America (AIVSX), which is the pick that I'm probably the most certain of.

We see that it has performed well over the years, averaging a load-adjusted return of 11.86%/yr since its inception in 1934 (at the time of me writing this).

That's a decent return. However, if we look at the past 10 years of performance of this fund it has still only managed to beat the S&P 500 three out of ten times if we look at annual returns.

And if we look at its returns vs the category benchmark, it falls behind in most of the date ranges...

The Growth Fund of America (AGTHX), another pick I'm confident is one of Dave's, isn't any better. 

If we look at its trailing return vs its category benchmark we can also see that it fails to outperform in most time ranges...

What about his American Funds' EuroPacific Growth Fund (AEPGX) pick?

This fund has performed the best when compared to the category benchmark over the various time frames, coming out ahead in 5 out of the 9 listed here....

That said, looking at the 10-year average yearly return gives you the best idea of how well the fund actually performs over time and here it falls behind the benchmark by a good bit.

Yes, these are good funds and have both performed well over the years if you compare them to other mutual funds, but why not just buy some index funds like Warren Buffet suggests? Not only do they often outperform mutual funds, but they also incur less fees.

Take for example American Funds since their mutual funds comprise some of Ramsey's sure picks. This place charges load fees at a standard of 5.75% on stock-heavy funds and 3.75% on bond funds. Take this into account and the performance of these mutual funds is worse than expected because of the missed potential gains that were lost due to the fees.

In a blog post, I found online, one investor did the math and figured out that the load fee charged by American Funds would have cost him around $1,000 over a 10-year period taking into account not just the fee itself but also the missed compound gains that would have been realized if the fee hadn't taken away so much money.

Quick Recap & Conclusion

Dave recommends spreading your investments evenly in mutual funds over 4 different areas, growth and income, growth, aggressive growth, and international. 

However, as you've just seen, he doesn't seem to follow his advice, or perhaps this is newer advice that he's started offering, since in that quote I pulled from his 2007 book he brags about having 5 different mutual funds.

I suppose that you could have any number of funds spread evenly over the 4 different areas and this would satisfy his investment philosophy, but it makes one wonder what he's really doing with his personal investments.

As you know, Dave doesn't tell us what exactly he's invested in. This is likely for liability reasons and because he makes good money referring people to sponsored investment advisors.

The three funds that I've uncovered that I'm fairly confident are personal picks of Dave's based on the clues he's laid out include American Funds' Investment Company of America (AIVSX), The Growth Fund of America (AGTHX), and American Funds' EuroPacific Growth Fund (AEPGX), all of which are good mutual funds yet all of which still underperform their respective category benchmarks.

While I understand that Ramsey provides decent blanket advice to many financially struggling Americans out there, I still don't understand why you wouldn't just invest in some good index funds instead... as people such as Warren Buffet recommend. If it's diversification that you're looking for, this seems to be the more profitable option... and with less fees.

Something else I'd suggest taking a look at is the investment advisory service that I follow. The guys running this service look for stocks that have 3x potential at a minimum. They do this by looking for entire sectors that are (usually) politically or socially out-of-favor yet still vital for the functioning of society as we know it and then picking a handful of financially strong stocks in these sectors.

This way, they mitigate risk while investing in hugely discounted stocks, oftentimes down 90%+ from their previous highs. 

Their approach is certainly different from that of investing in a mutual fund, yet they do offer pretty good diversity with their picks and because of this, I'd recommend that you read more about this advisory service here.