There’s a lot to love about mutual funds. But after doing some research on your own, you may be feeling a little overwhelmed by all the details and lingo. It’s easy to get confused!
First, take a deep breath. Once you get past all the fancy investment jargon, you’ll see that mutual funds really aren’t all that complicated. In fact, you can start investing in mutual funds with these five easy steps:
Don’t worry—we’re going to help you cut through the noise and walk through each step. That way, you’ll know exactly what mutual funds are and how to invest in them . . . the right way.
Are you scratching your head over mutual funds? Don’t worry—you’re definitely not alone! When I first heard about mutual funds, my eyes glazed over faster than a donut at Krispy Kreme But here’s the good news understanding Dave Ramsey’s approach to mutual funds isn’t rocket science, and I’m gonna break it down for you in plain English
Dave Ramsey, the personal finance guru who’s helped millions of Americans get out of debt has some pretty clear advice about mutual funds. Let’s dive into what he recommends and why it matters for your financial future!
What Are Mutual Funds According to Dave Ramsey?
Dave Ramsey defines mutual funds as professionally managed investments where regular folks like us pool our money together to buy different types of investments—mainly stocks, bonds, and short-term debt.
Think of it this way: imagine you and a bunch of friends each putting $100 into a bowl. Y’all just mutually funded that bowl. That’s basically what a mutual fund is!
The beauty of mutual funds is that they’re managed by investment pros who select which stocks or bonds to include in the fund. When you invest in a mutual fund, you’re essentially buying tiny pieces of dozens or even hundreds of different companies at once.
Why Dave Ramsey Loves Mutual Funds for Long-Term Investing
Dave isn’t shy about his love for mutual funds as a long-term investing strategy. Here’s why he’s such a big fan:
1. Instant Diversification
Remember the old saying, “Don’t put all your eggs in one basket”? That’s diversification in a nutshell. Mutual funds spread your investments across many different companies, which reduces your risk.
If one company tanks, it won’t sink your entire investment ship because you’ve got pieces of many other companies that might be doing just fine.
2. Lower Overall Costs
Trading individual stocks can get expensive real quick! Those transaction fees for buying and selling stocks add up faster than impulse purchases at Target.
Mutual funds make it more affordable to invest in a wide range of stocks without getting nickel-and-dimed to death with transaction fees.
3. Professional Management
Unlike index funds or ETFs that just copy what a stock market index does, mutual funds are actively managed by investment professionals who aim to BEAT the stock market’s returns.
These experts do research, monitor performance, and make adjustments when needed. It’s like having a team of financial nerds working for you around the clock!
Dave Ramsey’s Recommended Mutual Fund Strategy
If you’ve listened to Dave for any length of time, you probably know he has a specific recommendation for mutual funds. He doesn’t believe in just picking any random funds—he has a proven strategy:
Dave recommends spreading your investments evenly between four types of growth stock mutual funds—growth and income, growth, aggressive growth, and international. You can invest in mutual funds easily through tax-advantaged retirement accounts like your workplace 401(k) plan and a Roth IRA.
Let’s break down each of these fund types:
1. Growth and Income Funds (25%)
Also known as large-cap funds, these contain stocks from big, established companies valued over $10 billion—think Apple, Microsoft, etc. These are the most stable and predictable funds in your portfolio.
They might not give the highest returns, but they provide a solid foundation. Think of them as the reliable minivan in your investment garage.
2. Growth Funds (25%)
These mid-cap funds invest in medium to large companies that still have room to grow. They tend to rise and fall with the economy but are generally stable over the long run.
Growth funds typically earn higher returns than growth and income funds. Consider them your crossover SUV—a nice balance of stability and performance.
3. Aggressive Growth Funds (25%)
Sometimes called small-cap funds, these are the wild children of mutual funds. When they’re up, they’re WAY up, but when they’re down—watch out!
These funds contain stocks from companies with huge growth potential, like small tech startups. They’re higher risk but potentially higher reward. Think of them as your sporty convertible—fun but unpredictable!
4. International Funds (25%)
These funds invest in companies outside the U.S.—like BMW, Mercedes, or LG. They help you diversify globally and take advantage of international markets.
International funds can balance out domestic market fluctuations. Consider them your exotic foreign car—adding some international flair to your portfolio.
How to Start Investing in Mutual Funds the Dave Ramsey Way
Ready to put Dave’s advice into action? Here’s how to get started:
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Max out your 401(k) match first. If your employer offers matching contributions to your 401(k), invest enough to get the full match. That’s FREE MONEY, y’all!
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Open a Roth IRA. After maxing out your employer match, Dave suggests opening a Roth IRA, which allows your money to grow tax-free.
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Spread investments evenly. Allocate 25% to each of the four fund types we talked about.
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Stay in for the long haul. Dave is big on patience. He recommends holding onto your mutual funds for at least 5 years, preferably longer.
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Work with a pro. Dave strongly recommends finding a good investment professional to help you select specific mutual funds that align with his strategy.
What Types of Mutual Funds Dave Ramsey Says to AVOID
Dave isn’t just vocal about what funds to invest in—he’s crystal clear about what to AVOID:
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Bond mutual funds: Dave believes these provide unimpressive returns that barely outpace inflation.
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Target-date funds: These funds automatically shift from aggressive to conservative as you approach retirement. Dave argues they become too conservative, allowing inflation to eat away at your returns.
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Balanced funds: These funds mix stocks and bonds, but Dave warns they get weighed down by the lowest-performing investments, robbing you of potential returns.
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Specialty funds: Dave isn’t a fan of sector funds or commodity funds that focus on specific industries or raw materials, as they lack diversification.
Common Questions About Dave Ramsey’s Mutual Fund Advice
Does Dave Ramsey recommend index funds?
Not particularly. Dave prefers actively managed mutual funds over index funds because he believes good fund managers can beat the market average over time.
What about ETFs?
Dave doesn’t typically recommend ETFs because they’re designed to be traded throughout the day like stocks. He prefers the automatic investing options available with mutual funds, which aligns better with his long-term investment philosophy.
When should I sell a mutual fund, according to Dave?
Dave suggests evaluating your mutual funds annually with an investment professional. Consider selling if:
- The expense ratio is too high
- There’s excessive turnover in the fund
- Your portfolio has become unbalanced
- The fund consistently underperforms similar funds over the long term
Final Thoughts: Why Dave’s Mutual Fund Strategy Works
Dave’s mutual fund approach ain’t complicated, but it is effective. The beauty of his strategy lies in its simplicity and balance. By spreading investments across different types of growth funds, you’re positioned to take advantage of growth opportunities while managing risk.
Remember that investing is a marathon, not a sprint. Dave often reminds listeners that the tortoise wins the race when it comes to building wealth through mutual funds.
The most important thing? Get started! Even if you can only invest a small amount each month, the power of compound interest means your money can grow substantially over time.
Have you started investing in mutual funds using Dave’s strategy? What’s been your experience? I’d love to hear about it in the comments!
How to Invest in Mutual Funds
Now it’s time to get down to business! If you’re ready to start investing in mutual funds, just follow these simple steps and you’ll be well on your way:
Open up tax-advantaged retirement accounts for your mutual funds.
Your mutual funds have to go somewhere. If you have access to a tax-advantaged retirement savings account—like a workplace 401(k) plan or a Roth IRA—that’s the best place to start investing in mutual funds.
And if you get a company match on your 401(k) contributions, even better. That’s free money and an instant 100% return on your investment, people! But don’t count the match as part of your 15% goal. It’s nice to have, but it’s just the icing on the cake of your own contributions.
If you ever get confused about where to start investing, just remember: Match beats Roth beats traditional.
If you have a traditional 401(k) at work with a match, invest up to the match. Then, you can open a Roth IRA. With a Roth IRA, the money you invest in mutual funds goes further because you use after-tax dollars—which means you won’t have to pay taxes on that money when you withdraw it in retirement. It’s all yours!
The only downside to a Roth IRA is that it has lower contribution limits than a 401(k).1 It’s possible to max out your Roth IRA without reaching your 15% goal. That’s okay. Just go back to your 401(k) and invest the rest of your 15% there.
Have a Roth 401(k) with good mutual fund options? Even better. You can simply invest your whole 15% in that account and boom—you’re done!