Dave Ramsey is best-known for his anti-debt crusading: Cut up your credit cards. Live without a credit score. Complete his baby steps and maybe you'll get to scream that you're debt-free from his Financial Peace Plaza in Brentville, Tennessee.

Ramsey is lesser-known for his investing advice, but he's got plenty of it — and it's often based on fuzzy logic and questionable math. Here are four things Ramsey gets wrong about investing.

An upset man slaps his hand to his forehead in front of a graph with an arrow trending downward.

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1. Get rid of all non-mortgage debt before you save for retirement.

In Ramsey's baby steps, saving for retirement only happens once you have zero debt aside from a mortgage and a three- to six-month emergency fund

But investing while you have debt makes sense when you can earn more than you're paying in interest. Tackling credit card debt at 14% APR before you invest will pay off. But not investing because you have a car loan at 3%? Nonsense -- especially when you can boost your returns further with a 401(k) company match.

The cost of delaying retirement savings is astronomically higher than minimal interest payments, especially if you're in your 20s or 30s.

2. Invest in front-load mutual funds.

Ramsey wants you to invest in mutual funds with a front-end load, which means you pay an upfront commission. If you invested $5,000 in a fund with a 5% front-end load, you'd really be investing $4,750. Ramsey's argument: Upfront fees are transparent and result in lower maintenance fees. 

But if you want low maintenance fees, why not invest in an exchange-traded fund? ETFs tend to have the lowest fees because they're usually passively managed index funds. Most mutual funds, by contrast, are actively managed, and human management isn't cheap.

Ramsey says he doesn't like ETFs because he's a buy-and-hold guy. Unlike mutual funds, ETFs trade on stock exchanges. So what's a buy-and-hold ETF investor to do? Easy. Buy the fund and hold it. No need to pay a commission to stop yourself from day trading.

Ramsey also likes fees because they buy you an investment pro's wisdom. (Conveniently, he has a huge referral network of investment professionals). But over time most active managers underperform compared to passively managed index funds after expenses.

3. You can earn 12% returns on your investments.

Ramsey says that when he tells people they can expect 12% returns, he's "using a real number that's based on the historical average annual return of the S&P 500" over 80 years.

But Ramsey's calculations are problematic for a couple of reasons.

Average annual returns tell you nothing about your actual returns. Say I invest $1,000 and earn 100% returns in the first year, which means I doubled my money. The second year, my investment drops by 50%. At the end of two years, I earned 0%, yet my average annual return was 25%.

Now let's say my $1,000 investment earned 25% the first year and 25% the second. My average annual return was 25%, even though I now have $1,562.50 — a 56.25% gain.

The compound annual growth rate (CAGR), which accounts for the ending balance, is a better number to use when you evaluate an investment. 

Ramsey also isn't accounting for inflation, which is typically around 2% annually.

Using CAGR and assuming all dividends were reinvested, the S&P 500 produced annual inflation-adjusted returns of just over 7% between 1940 to 2020, according to data from Yale economist Robert J. Shiller.

4. You can withdraw 8% per year in retirement.

When you're 75 and retired, you typically can't afford the level of risk that you could at 25. If you have nightmares when the S&P 500 drops 100 points, you have a lower risk tolerance than the options traders on Robinhood. 

Taking less risk obviously lowers your returns. But Ramsey preaches 12% as the magic number you should always shoot for, regardless of your age and personal risk tolerance. And retirees should plan for 4% inflation. 

12%-4% = Ramsey's estimate that you can withdraw 8% of your portfolio each year when you retire.

Ramsey thinks you should always be 100% invested in stocks. While allocating too conservatively is a common investment mistake in retirement, when you're no longer earning income, you can't afford as much risk as you could when you had 20 or 30 working years left. While it's unwise to completely cash out of the stock market when you retire, your asset allocation should shift to include some bonds as you get older.

The 4% rule for retirement withdrawals that financial planners have traditionally espoused may be overly conservative. But withdrawing 8% annually leaves you highly vulnerable to a market crash in your retirement years.

What Dave Ramsey Gets Right

All that said, Ramsey does have plenty of wisdom. Eliminating debt will help you avoid outliving your retirement savings. His message about living within your means is solid.

But it's important to make investment decisions based on reality. You can't rely on consistent 12% returns, especially in retirement. Adjusting your expectations is key to achieving the financial peace Ramsey preaches.