Ryan in Los Angeles wants to know why he should invest in mutual funds given all the fees they incur. Dave warns Ryan to take that advice with a lot of caution and goes on to explain why using a professional will statistically cause him to do better investing.
ANSWER: Obviously, this particular guy has done well, and I know people who have bought stocks and done well with stocks. I know a lot more people who have done poorly with them.
The studies that have been done of individuals buying and selling single stocks on behalf of their own account using whatever strategy—from a book or a money magazine formula or whatever formula like this guy—he’s got it figured out supposedly, ha ha—they average about a 7% rate of return where the S&P 500 has averaged about 11.69% through the years. If you just bought an index S&P 500 fund, you’re going to beat 90% of the people who play single stocks. You’re not going to have the tremendous upside, but you’re not going to have the tremendous downside.
You’re not going to have that story to tell your golfing buddies about how you made $X on this or that, but I’ve got to tell you . . . for every one of those stories that those guys have, they should tell you the other story of the one that got away—the time that they lost their butt on something because they were playing a game and they missed a trade by three hours, the market shifted on them, and they’re basically day trading. There are very few people who really make money doing that. It’s stuff out of the movies, mainly.
I know a lot about it, and I could develop a stock trading formula. I’ve been licensed in all of that. I’ve been trained in all of that. If I didn’t do anything else all day long and I just sat and did that, I could develop a little stock trading formula and then print a book and say, “Dave Ramsey’s stock trading formula” and all that. It would be a lie because my personal investments do not include any single stocks because I don’t like the risk.
Here’s the thing. Take Fidelity or American Funds or Vanguard. You’ve got a team of people leading one of those mutual funds that has literally billions and billions of dollars in it. If the people running that fund—if there was a formula out there for buying stocks that was proven, they would all be using that formula. So anytime someone says, “I can sell you a book or a piece of software. I’ve got a system,” and they’re not running a billion-dollar mutual fund, it doesn’t play out. That’s kind of like your guy saying “day job.” But this guy’s day job is to run a billion-dollar fund or a half billion-dollar fund, and if there were a formula, they’d be using it because those funds want to buy stocks to create returns for the mutual funds.
I think it’s a bunch of crap. I really do. I don’t doubt that particular guy has done well. I don’t do it, so I wouldn’t tell you to do it. It would be inconsistent.