Have you ever wondered why Dave Ramsey is such a huge fan of mutual funds? If you’ve listened to his radio show or read his books you’ve probably noticed he recommends mutual funds over and over again. But why is he so convinced they’re the best investment vehicle for building wealth? Let’s dive into Ramsey’s investing philosophy and unpack the reasons behind his unwavering support for mutual funds.
The Foundation of Ramsey’s Investing Philosophy
Before we jump into mutual funds specifically, it’s important to understand Ramsey’s overall approach to investing. His philosophy is built on five key principles
- Get out of debt and save up a fully funded emergency fund first
- Invest 15% of your income in tax-advantaged retirement accounts
- Invest in good growth stock mutual funds
- Keep a long-term perspective and invest consistently
- Work with a financial advisor
As you can see mutual funds are baked right into his core investing principles. But to truly understand why we need to look at the bigger picture of his financial strategy.
The Baby Steps Come First
One thing that’s unique about Ramsey’s approach is that he doesn’t believe everyone should be investing right away. He’s adamant about following the Baby Steps in order, which means getting your financial house in order before you start investing.
According to Ramsey, you should:
- Pay off all debt (except your mortgage)
- Build a 3-6 month emergency fund
Only then should you start investing 15% of your income for retirement. His reasoning? “Your income is your most important wealth-building tool. As long as your money is tied up in monthly debt payments, you can’t build wealth. That’s like trying to run a marathon with your legs tied together!”
This sequencing is crucial to his philosophy because it creates a stable foundation for investing. Once you’re debt-free with an emergency cushion, you can invest without risking financial disaster if something goes wrong.
So Why Mutual Funds Specifically?
Now let’s get to the meat of the question: Why does Dave Ramsey prefer mutual funds over other investment options? Here are the key reasons:
1. Diversification Reduces Risk
Ramsey is a big believer in spreading your risk, and mutual funds do exactly that. As he puts it, mutual funds “let you invest in a lot of companies at once, from the largest and most stable to the newest and fastest growing.”
Think about it – when you buy shares of a mutual fund, you’re instantly investing in hundreds of different companies. This diversification means that if one company tanks, your entire investment doesn’t go down with it.
Ramsey often contrasts this with the dangers of investing in single stocks, which he considers much riskier. He’s not a fan of putting “all your eggs in one basket,” and mutual funds help you avoid that mistake.
2. Professional Management
Another reason Ramsey loves mutual funds is that they come with professional management. As he points out, “These funds have teams of managers who do tons of research on the company stocks they choose for the fund to invest in.”
For the average investor who doesn’t have time to research individual companies, this professional management is invaluable. Fund managers spend their entire careers studying the market and making investment decisions, which takes the pressure off you to become an investment expert.
3. Long-Term Growth Potential
Ramsey is all about the long game. He recommends a “buy-and-hold strategy” and often compares the stock market to a roller coaster – there will be ups and downs, but “the only people who get hurt are the ones who try to jump off before the ride is over.”
Mutual funds align perfectly with this long-term mindset. Historically, according to Ramsey, the stock market has averaged 10-12% annual returns over the long haul. While individual years may vary dramatically, mutual funds that track or beat the market have provided solid returns over decades.
4. Simplicity and Accessibility
Mutual funds are relatively easy to understand compared to more complex investments like options, futures, or cryptocurrencies. This simplicity fits with Ramsey’s overall approach to personal finance – he believes in straightforward strategies that anyone can implement.
Plus, mutual funds are accessible through employer retirement plans like 401(k)s and individual retirement accounts (IRAs). This accessibility makes it easier for people to follow his advice to invest 15% of their income in tax-advantaged accounts.
Ramsey’s Recommended Mutual Fund Strategy
Ramsey doesn’t just say “buy mutual funds” and leave it at that. He has specific recommendations for how to allocate your investments:
He suggests dividing your investments equally between four types of mutual funds:
-
Growth and Income Funds (also called large-cap or blue-chip funds)
- These invest in large, established American companies
- They provide stability to your portfolio
-
Growth Funds (mid-cap or equity funds)
- These invest in medium-sized U.S. companies with growth potential
- They tend to follow overall market performance
-
Aggressive Growth Funds
- These invest in smaller companies with high growth potential
- They’re more volatile but offer higher potential returns
-
International Funds
- These invest in companies outside the U.S.
- They provide geographical diversification
By spreading investments across these four categories, Ramsey believes investors can capture growth while managing risk. As he says, “This lowers your investment risk because now you’re invested in hundreds of different companies all over the world in a whole bunch of different industries.”
What About Fees?
One common criticism of mutual funds is their fee structure, especially for actively managed funds. While Ramsey acknowledges fees matter, he doesn’t believe they should be your primary concern.
In his words: “While it’s important to pick funds that don’t have outrageously high costs, fees won’t keep you from being wealthy. We don’t have a problem paying a commission for mutual funds.”
He believes the value of having a financial advisor guide your investment decisions outweighs the slightly higher costs you might pay compared to index funds or ETFs. As he puts it, “Don’t get so fixated on fees that you start stepping over nickels to pick up pennies.”
What Ramsey Avoids (And Why)
Understanding what Ramsey recommends against can also help clarify why he prefers mutual funds:
- Individual Stocks: Too risky and requires too much research
- Cryptocurrencies: He considers these speculative and not true investments
- Day Trading: Goes against his buy-and-hold philosophy
- Complex Investment Products: Often have hidden fees and risks
By comparison, mutual funds offer a simpler, more diversified approach that aligns with his overall philosophy of steady, consistent investing over time.
The Role of Financial Advisors
One key aspect of Ramsey’s mutual fund strategy involves working with a financial advisor. He believes professional guidance helps investors:
- Choose the right mutual funds
- Stay disciplined during market volatility
- Make informed decisions based on their specific goals
Through his SmartVestor program, he connects investors with advisors who share his philosophy. This human element is important to his approach – he wants people to work with professionals who can explain investments and provide accountability.
The Baby Steps Millionaires Proof
Ramsey often points to what he calls “Baby Steps Millionaires” – people who’ve become millionaires by following his principles, including investing in mutual funds. According to his research:
- 8 out of 10 millionaires invested in their company’s 401(k)
- 3 out of 4 millionaires invested outside their company plans too
These statistics reinforce his belief that consistent investing in mutual funds through tax-advantaged accounts is a proven path to wealth building.
Consistency Trumps Everything Else
Perhaps the most important element of Ramsey’s mutual fund strategy is consistency. He emphasizes that “the top indicator of investment success is your savings rate” – how much you save and how often you do it.
In his view, consistently investing in solid mutual funds month after month, year after year, is far more important than trying to time the market or find the “perfect” investment.
As he bluntly puts it: “Stop sitting around arguing with your broke family members and just freaking do it!” This focus on taking action and staying the course is central to his philosophy.
The Bottom Line: Why Ramsey Loves Mutual Funds
To sum it up, Dave Ramsey prefers mutual funds because they align perfectly with his overall financial philosophy:
- They provide diversification across hundreds of companies
- They’re managed by investment professionals
- They work well with his recommended tax-advantaged accounts
- They support a long-term, buy-and-hold strategy
- They’re relatively simple for average investors to understand
While other investment approaches might offer lower fees or potentially higher returns in certain scenarios, mutual funds provide a balanced approach that has worked for millions of his followers.
For Ramsey, investing isn’t about finding the most sophisticated or trendy investment vehicles – it’s about following a proven plan that ordinary people can implement to build extraordinary wealth over time. And in his experience, mutual funds are the vehicle best suited for that journey.
What do you think about Ramsey’s mutual fund strategy? Have you followed his advice and seen results? I’d love to hear your experiences in the comments!
Investing Principle 3: Invest in good growth stock mutual funds.
What should you invest in inside your 401(k) and Roth IRA? There are many different types of investments to choose from, but Ramsey says mutual funds are the way to go!
Mutual funds let you invest in a lot of companies at once, from the largest and most stable to the newest and fastest growing. These funds have teams of managers who do tons of research on the company stocks they choose for the fund to invest in, making mutual funds a great option for long-term investing.
Why are mutual funds the only investment option Ramsey Solutions recommends? Well, we like mutual funds because they spread your investment across many companies, and that helps you avoid the risks that come with investing in single stocks and other “trendy” investments (we’re looking at you, Dogecoin).
And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international. This lowers your investment risk because now you’re invested in hundreds of different companies all over the world in a whole bunch of different industries. In other words, you’re not putting all your eggs in one basket!
Here’s a closer look at those four types of funds and what they bring to your investment portfolio:
These funds create a stable foundation for your portfolio by investing in big, boring American companies that have been around for decades. They might also be called large-cap or blue-chip funds.
Sometimes called mid-cap or equity funds, growth funds are filled with stocks from U.S. companies that are still on the up-and-up, but their performance tends to ebb and flow with the stock market as a whole.
Meet the wild child of your investing portfolio. These funds invest in smaller companies that have tons of potential. When they’re up, they’re up. But when they’re down, buckle up—because you’re in for a bumpy ride.
These funds are great because they help spread your risk beyond American soil by investing in large companies that aren’t based in the U.S. Just don’t get them confused with global funds, which bundle U.S. and foreign stocks together.
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Why Mutual Funds Over Index Funds?
FAQ
Why does Ramsey recommend mutual funds?
Diversification Without Complexity
Mutual funds offer diversification within a single investment, reducing risk compared to individual stocks. Dave’s recommendation to diversify across fund types (domestic and international, conservative and aggressive) helps balance risk while still aiming for high returns.
Why does Dave recommend that you invest in mutual funds for at least 5 years?
What mutual funds does Dave Ramsay invest in?