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With nearly 32 years of financial experience under his belt, Dave Ramsey has seen it all. He’s been through bankruptcy, bounced back to accumulate over $200 million in assets and helped millions of people with their personal finances.
In a recent episode of The Ramsey Show, the finance guru took some time to dissect a worrying trend: younger investors have lost touch with the basic financial principle of balancing risk-reward ratios.
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He bemoans the fact that many online influencers are pushing high-risk speculative assets with little potential for returns.
“That’s not investing, it’s right next to gambling,” he said.
Here’s what the veteran real estate investor had to say and why younger investors could jeopardize their future by ignoring this rule.
Risk spectrum
“One of the first things they teach you in finance class is a risk-return ratio,” Ramsey said. This ratio marks the potential reward an investor can earn for every dollar they risk on an investment.
In this context, Ramsey says that all investment opportunities lay somewhere on a spectrum of risk and reward.
On one end of the spectrum is government bonds, which academics and institutional investors like Blackrock consider a risk-free asset class because it’s backed by the government.
If you’re willing to take more risk than a government bond presents, you need to be compensated with higher returns. A 10-year U.S. Treasury Bond currently offers a 4.45% yield, according to Bloomberg. Ramsey believes investors should demand greater returns when investing in other asset classes such as real estate and stocks.
Ramsey talked about a mutual fund he invested in which has delivered a 12.2% annual average return since 1934 with only 10 non-consecutive years of drawdowns since then.
“If I can make that investment by simply pushing ‘Enter’ on my computer … I don’t have any effort to go with it,” he said. “Then if you’re going to flip houses, that’s speculating, all right, and you dadgum better be making more than 12% on your money. You oughta make 20% at least.”
Unfortunately, he says many investors have lost sight of this fundamental rule.
Read more: ‘They are awful’: Dave Ramsey is fed up with millennials and Gen Z who he claims don’t work but want to own homes — here’s what he says you need to be a ‘successful’ investor
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Ramsey highlighted the fact that social media influencers often ignore the risks of the investments they’re pushing, which could lead to detrimental outcomes.
Social media has had a noticeable impact on investment culture. The “meme stock” phenomenon that emerged on online forums like Reddit during the pandemic and elevated stocks like Gamestop and Blackberry have changed the way some investors approach the market.
Meanwhile, investors are becoming more short-term oriented. The average holding time for individual stocks has dropped from five years in the 1970s to just 5.5 months in 2023, according to eToro. And speculative assets such as cryptocurrencies are still experiencing over $75 billion in daily trading volume, according to CoinMarketCap.
For Ramsey, these risky assets are only one step removed from gambling. The only difference between Bitcoin and a roulette wheel is that the odds of winning in a casino are lower.
“If you’re going to walk away from Vegas, the house wins 100%,” he quipped. “Vegas is built on the back of losers.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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