2 Reasons Dave Ramsey Is Dead Wrong About Where to Invest Your Retirement Money

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  • Dave Ramsey recommends mutual funds for retirement investing, and more specifically, actively managed mutual funds.
  • You should not follow this advice, as actively managed funds don't outperform the market.

Following Ramsey's advice could hurt your retirement prospects.

Dave Ramsey is a finance expert offering advice on many issues, including where you should put your retirement money.

Ramsey gave some good suggestions about what kinds of brokerage accounts you should be putting your money into. But, when it comes to suggesting assets to invest in, he's given some very bad advice that you likely should not follow.

Specifically, Ramsey recommended mutual funds over exchange-traded funds for most retirement investors. And he gave some explanations for this recommendation, most of which highlight just how incorrect he is. Here are two reasons Ramsey is dead wrong.

1. Ramsey says actively managed mutual funds are worth paying more for

When comparing mutual funds and exchange-traded funds, Ramsey acknowledged that mutual funds can have higher fees than ETFs. But, he suggests, that could be a good thing if you're paying for a fund manager to personally select assets.

"ETFs are managed passively (the fund just follows the market index) while mutual funds are managed actively by investment professionals," Ramsey explained. "The goal of having someone actively managing your mutual fund is to benefit from their expertise and beat average market returns. That makes mutual funds a little more expensive to own than ETFs, but the idea is you'll benefit from stronger returns."

There are some big problems with this advice, though.

Most importantly, actively managed investments very rarely, if ever, outperform market indexes over the long term -- especially after factoring in the fees that fund managers charge. In the rare cases where active investing does net higher returns, it's usually in situations where wealthy investors are purchasing assets regular people can't access.

Why would you ever want to take a chance on paying more for a fund manager to pick your stocks when the odds are very good that you'd do better with a cheaper passively managed ETF?

2. Ramsey says index mutual funds can be a better buy than ETFs

Ramsey suggested that if you do want to engage in passive investing, you're better off doing it with an index mutual fund than with an ETF that tracks a market or financial index.

His reasoning: Mutual funds are meant to be invested in over the long term, while ETFs trade daily. He goes on to argue that mutual funds allow you to avoid brokerage fees often charged by ETFs.

There's problems with this advice, too, though. ETFs can also be held for as long as you'd like, even though they do trade like stocks. So there's no reason long-term investors can't opt for an ETF. And many brokerage firms offer more options for commission-free ETFs than mutual funds. So, you could have a broader choice of fee-free investments if you opted for ETFs instead.

For these key reasons, Ramsey's advice isn't the best on this issue. If you want to build a retirement nest egg that provides the security you deserve and you don't want to pick individual stocks, an ETF could be a way better bet than most mutual funds would be.

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