If you’ve ever explored personal finance, you’ve probably heard names like Dave Ramsey. Ramsey has helped many people with his financial advice, especially when it comes to getting out of debt. But when it comes to investing—specifically mutual fund returns—there are claims that need a closer look. Today, we’re going to break down one of Ramsey’s most famous claims: the 12% return on mutual fund investments.
Why Should You Care About Mutual Fund Returns?
Most people look at mutual funds as a key part of their retirement strategy. If you’ve been told you could easily earn 12% annually, you might think you’re set for life. But the reality can be quite different. Understanding the real return on mutual funds is critical for anyone trying to plan their financial future.
Mistake 1: The Problem with “Average” Returns
Dave Ramsey frequently cites an average 12% return over time, but there’s a huge issue here—averages don’t reflect reality. Markets are volatile. Your investments go up and down, and those fluctuations have a massive impact on your actual results.
Imagine this: You invest $100,000, and in the first year, it goes up by 50%. Great, right? But in the second year, it drops by 50%. The “average return” would say you earned 0%, but the reality is that you’re now left with just $75,000—not your original $100,000. Average numbers hide the ups and downs that really matter to your wealth.
Mistake 2: Ignoring the Impact of Fees
Another big problem is investment fees. When you invest in mutual funds, you’re typically paying management fees, transaction fees, and more. These fees can quickly add up and eat away at your returns. Even if Ramsey’s 12% claim were true, fees could reduce that significantly. Imagine your 12% return turning into 9% or lower just because of the costs involved. Fees matter, and they have a major impact on what you actually keep.
Mistake 3: Taxes, Taxes, Taxes
Taxes are another critical factor. Mutual funds aren’t tax-free, and unless you’re investing through a tax-advantaged account, you’re going to owe money on your gains. Ramsey’s bold claim ignores this reality. Different types of investments—stocks, bonds, mutual funds—are taxed differently, and those tax implications can drastically reduce your actual return. If you think you’re getting 12%, but taxes bring that down to 8%, that’s a big deal, especially over decades of investing.
Let’s Put It in Perspective
Let’s say you start with $100,000 and put it in a mutual fund following Ramsey’s advice. Over 20 years, if you consider real market fluctuations, management fees, and taxes, your ending balance is likely much lower than you’d expect if you believed in a flat 12% return every year.
The takeaway? Real returns are not as straightforward as “just averaging 12%.” They require a careful look at all the factors that affect what you’ll actually get to spend in the future.
The Bottom Line: Be Realistic with Your Expectations
Ramsey’s advice has worked wonders for debt reduction, but when it comes to investing, it’s vital to approach claims like “12% guaranteed” with a healthy dose of skepticism. The real world is full of variables—market volatility, fees, and taxes—that can significantly alter your results.
If you’re serious about investing, you need to understand the whole picture. It’s about more than just big, attractive numbers; it’s about the strategy that works best for your goals, your situation, and your future. Whether you’re a seasoned investor or just starting, avoiding the allure of “too-good-to-be-true” promises and focusing on sound financial principles will help you build the wealth you deserve.
Call to Action:
- Want to dig deeper into how mutual fund returns really impact your financial plan? Check out our other blog posts at financialcaffeine.com.
- If you’re ready for a personalized discussion on your investment strategy, book a one-on-one consultation at financialcaffeine.com/survey.