![]() Your actual ROI is -4%, not 0%.Īs you can see, using simple average returns isn't going to paint a very realistic picture of how your investment is likely to perform. But, when you lose 20% off $6,000 - or $1,200 - you end up with $4,800 at the end of year two. Your 20% gain after year one left you with $6,000. But you don't actually end up with $5,000 at the end of year two. Your simple average return is 0% since your investment went up and down by the same percentage. Say you invested $5,000 and your investment went up 20% in the first year and down 20% the next year. The problem is, simple average returns aren't the most accurate way to measure how your investments perform. Ramsey's "12% reality" is based on the simple average returns of the S&P 500, which he reports as 11.64% from 1928 to 2020. But if you listen to this advice, you're very likely to have a major shortfall when it comes time to retire. Ramsey promises it's possible to earn a 12% average annual return on investments. Without any clear benefit to mutual fund investing, Ramsey's advice that you pay more to put your money into them instead of choosing cheaper ETFs could end up needlessly costing you thousands in added fees over your investing career. Over time, history has shown that passively managed funds tend to outperform actively managed ones, especially after taking fees into account. These extra fees can really add up when saving over many decades for retirement, and there's little reason to pay them. Ramsey's right about one thing, though - mutual funds do typically cost more than ETFs do. So, mutual funds don't actually have these two advantages over ETFs. You don't have to invest in an ETF that just tracks the S&P 500 - you can choose a growth ETF, a dividend ETF, or even ETFs that track specific industries or sectors such as the marijuana industry or the healthcare industry. ![]()
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