Dave Ramsey: How To Invest For Beginners

You guys know by now that I'm a firm believer that the borrower is slave to the lender because your most powerful wealth building tool is your income. And when you haven't committed your income in the form of payments to everybody else, you can invest it and become wealthy. Really, the average car payment in America today is $503. That's just cray cray. That's nutty. If you invest $500 in a decent growth stock mutual fund from age 30 to age 70, you'll have over $5 million. That one thing will make you worth $5 million. Isn't that amazing? And so I've become known for getting people out of debt, and it changes your life. It changes your family tree. It changes your retirement. You retire with dignity. You don't have to buy that cookbook, 72 Ways to Prepare Alpo and love it, but you have to do it on purpose. And getting out of debt in order to invest is the shortest way. And what is amazing to me is that almost the entire financial industry focuses on one part of the equation, and that's the investing part of the equation. And they all have a bunch of theories. Now, I've had all the letters and licenses after my name. I have a degree in finance. I've had all the licenses in the business. It is amazing the number of people in the financial world, whether they're financial advisors, writers, bloggers, whatever they do, that have opinions about money that don't have any money and whose track record on teaching people to invest and getting them to invest sucks. Three percent of the public is where all of those people make their money off wealthy people. They make all their money off wealthy people. And most of the advisors out there won't fool with you if you don't have some money. They don't want to sit down and talk to you. And so we started teaching people, of course, all these years ago how we invest. And then as we've met with many, many, many thousands of millionaires over the years, how did they invest? What are they doing? Well, we suggest, and I personally invest in good growth stock mutual funds. I spread it across four types. Growth and income, growth, aggressive growth, and international. And I buy mutual funds that have at least a 10-year track record. Well, Dave, shouldn't you just buy index funds? Well, you can if you want. Index funds, basically an S&P 500 fund, mirrors the market. That basically is the stock market. And so you're going to do exactly what the stock market does, good or bad. The mutual funds that I buy outperform the S&P 500. And they're really not that hard to find. A lot of mutual funds don't outperform the S&P 500. So if you're going to buy that, well, that'd be dumb. Just buy an S&P 500. But I buy mutual funds that outperform the S&P 500. And my portfolio mix that I just outlined is pretty much always beats the market, because I buy funds that outperform the market. It's not that hard to do. You open up the prospectus, and there's two little lines on the graph. One of them is the S&P 500. If the mutual fund you're looking at, if that line is below that S&P 500 line, don't buy that fund. This is hard. Really not that much to this. But, Dave, you just tell people to buy those loaded funds. Yeah, they'll pay a commission. That's fine. Have somebody in your life helping you do the investing. All the data says that you'll continue to invest doing that. But when you're out there by yourself with all your theories, and some idiot newscaster comes on the evening news predicting the end of the world, what do you do? You cash out all your mutual funds at exactly the wrong time, because you don't have anybody in your corner saying, don't jump, don't jump. Instead, you're just out there with your own emotions and the newscaster. And that's how you pick out when you jump in or out of the market. And that's just dumb. So all the data says a decent portfolio of good performing mutual funds wins. And the big thing is actually putting money into the mutual funds, actually investing. One piece of research shows that 74% of the reason of retirement success is doing it. It's called savings rate. The number of you that put money in versus talk about it and continually put money in. Year after year, year after year, year after year, month after month, week after week, out of your check, into your 401k, over and over and over and over and over again. This is how you get wealthy. It's ludicrous. I know a lot about mutual funds. And let me tell you how I pick mutual funds. About 80% of the choice on my mutual fund, 85% is based on its rate of return. It's track record. If the track record's tied and I'm trying to look, I look for the longest track record. Who's been doing it a long time. I like neighborhoods with big oak trees when I'm buying real estate. You see what I'm saying? I like a long track record, something stable. I don't like risk. I like to make money. Risk equals not making money for me. Big risk anyway. We should spread it across four types, growth and income, growth, aggressive growth, and international. Let's talk about those for a second because there's all kinds of names for mutual funds and the name of the mutual fund tells you what is in the fund. A growth and income fund is also called a large cap fund, sometimes also called a blue chip fund. The blue chip is the most expensive chip on the poker table so that means these are big companies in this. Large cap is short for large capitalization. Large capitalization means these are large companies and so your growth and income funds are large companies. Boring. Of the four types of mutual funds that I put money into and I recommend, this is the calmest. If you were to chart this volatility on this fund versus the stock market, you would see it's a lot calmer than the market and so it's your friend when things are going down, in other words. It's your stable. It's the big old dinosaur companies. They're boring. When things are going up, by the way, it's also boring. It's not exciting when things are going up. It's a downer. You look at that thing going, why is it not doing well when the rest of the market's going up? Because it goes slower than the market up and slower than the market down because it's a stable land. A growth fund is right in the middle. The S&P 500 index fund would be considered a growth fund. A growth fund is companies that are growing. They're kind of medium-sized companies so you might hear it call mid-cap fund. These are just standard growth stock mutual funds. There's a whole lot of these out there. A ton of funds that fall in this area. The idea is pretty simple. The growth fund, that's kind of right there in the middle. You want something in the middle. It's pretty much going to do about what the market does in terms of volatility but you can get mutual funds that outperform the S&P 500. You can even get growth and income funds even though they're not as volatile that outperform the S&P 500. Then there's the aggressive growth fund. This is the wild brother. It's the crazy one. You might guess it's going to be also called a small cap fund. These are the small companies, the startups. A lot of tech companies would fall into there. Very crazy. All the fun weird stuff is in there and that means some of it fails and goes to zero. It's a crazier mix. It's going to be much more volatile than the stock market is. It's going to go up faster than the market goes up but it's going to go down faster than the market goes down. Small cap, aggressive growth stock mutual funds. Also known in there as emerging market. You would call it that too as well. International funds means that the stocks in it are overseas companies. They're not American companies. It has a kissing cousin called a global fund. If you think of a globe, what is it? It's everything. That would have international and U.S. companies in a global fund and it would be a cousin to an international. By the way, American companies generally outperform other international companies by and large as a group. Your international fund will be your worst performing of the four over the last several decades. A global fund will outperform an international fund because you put some spice in there. You put some American companies in there usually. They're a little bit better but at least you got some stuff overseas. You're not 100% betting on the American economy. Not that I'm anti-American. I am not. This is not a patriotic thing. This is a diversification thing. You want to have some BMW and some Mercedes in there. You want to have some LG and some other stuff. Even though some of those things are made stateside, those are foreign companies. You look for companies that are overseas based. Could be a French company. Could be whatever that are in an international fund and then you spread your investing across those four types. Very simple here. The thing is do it. That's the thing. Everybody talks and talks and talks and talks about investing. The problem is nobody does it. People we talk to on the Millionaire Theme Hour that are millionaires, you know how they got to be millionaires? They did it and they never want to ask them how they became millionaires. They never say, oh man I hit the home run. They never say that because it never happens. Oh Dave, I hit the home run. I got this mutual fund that went straight up and I made all my money in one good buy. You know my golfing buddy gave me a stock tip. I don't meet millionaires that did that. I hear stories about it but a golfing buddy with a stock tip is like a golfing buddy with a fishing story. The one that got away. I mean it's just everybody's got an opinion and it's all a It's the way. It's the only way to go. So growth and income, growth, aggressive growth, international. Don't chase the returns. Do not invest money in things you do not understand. People get ripped off when they invest money in things that someone told them is good and they trusted the person instead of knowing what the flip they were doing. You know all these athletes you read about? The know? You know how they lose their money? Because they give it to someone else to handle and they don't even look at it and then they're shocked to find out that person was a crook. That's how you lose your money. It's your money. It's like it's your kids which means you have to make it behave. It's like you have to make your kids behave. You have to do that. If you want good kids that's how it's going to happen. If you want money that's how it's going to happen. You have to understand it. Now you don't have to have a master's degree in finance. This stuff is not rocket science. It is really not that difficult and you really really seriously have to do this and you have to understand what the money is going into. Do not put money in. That's why when you're buying insurance, when you're getting a mortgage, doing your investing in mutual funds, that's why when you do all of that that you have to understand what you're doing and the only way you're going to do that is when you're picking someone to help you in one of those areas. You're doing your estate plan if it's complicated. You're doing your taxes if they're complicated. That kind of thing. You need someone sitting on the other side of the table that is not a salesperson but they have the heart of a teacher not the heart of a salesperson. I'm an easy sale once I understand something but until I understand it I'm not putting a dime in it. I'm not going forward with this. It's that simple.