What Mutual Funds Does Dave Ramsey Invest In?

Dave Ramsey’s investment strategy focuses on long-term wealth building, primarily through mutual funds. His approach emphasizes financial discipline and a clear path to investing once foundational steps are in place.

Dave Ramsey’s Investment Philosophy

Dave Ramsey’s investment philosophy is built upon a foundation of financial discipline. His core principles begin with eliminating all debt, excluding a mortgage, and establishing a fully funded emergency savings account. This approach ensures individuals are not investing borrowed money and have a financial buffer against unexpected expenses. He strongly advocates for long-term investing.

Ramsey also advises against investing in individual stocks due to their volatility and research demands. Instead, he champions growth stock mutual funds as the preferred investment vehicle. Mutual funds offer diversification by pooling money from many investors to purchase a variety of stocks, bonds, or other securities. His strategy focuses on growth, aiming to maximize returns over decades.

The Four Mutual Fund Categories

Dave Ramsey recommends allocating investments across four distinct categories of mutual funds to achieve diversification and long-term growth. He suggests an equal 25% distribution across these four types.

Growth mutual funds, often referred to as Large-Cap Growth Funds. These funds typically invest in companies with a market capitalization exceeding $10 billion. These established companies are generally transparent and stable, reinvesting their profits back into the business for expansion rather than regularly distributing dividends.
Growth & Income mutual funds, also known as Large-Cap Value Funds. These funds focus on large, stable companies, often with a market capitalization of $10 billion or more, that pay dividends to investors. While their growth may be slower than pure growth funds, they supplement this with a share of their profits, providing a stable foundation for a portfolio.
Aggressive Growth mutual funds, which include Mid-Cap and Small-Cap Funds. Mid-cap companies have market capitalizations typically between $2 billion and $10 billion, offering greater growth potential than large-cap funds with less volatility than small-cap funds. Small-cap companies, with market capitalizations ranging from $300 million to $2 billion, seek young or rapidly growing companies, offering high growth potential but also increased volatility. This category aims for higher returns by investing in smaller, less established companies.
International mutual funds broaden investment horizons beyond the domestic market. These funds invest in companies located outside the United States, providing diversification across different economies, currencies, and industries. International funds can be divided into developed markets, which are generally established and industrialized countries, and emerging markets, which are considered to be between developing and fully developed economies. This global exposure helps spread risk and can tap into growth opportunities not available domestically.

Selecting Specific Mutual Funds

When selecting specific mutual funds within these four categories, Dave Ramsey emphasizes certain characteristics. A primary consideration is the fund’s track record, with a preference for funds demonstrating strong positive returns over at least a 10-year period. This long-term performance history provides insight into a fund’s consistency and management effectiveness.

Another important criterion is the fee structure of the mutual fund. Ramsey generally recommends no-load funds, which do not charge a sales commission when purchased or sold. However, he acknowledges that some load funds with professional guidance can still be beneficial if the advice leads to consistent adherence to the investment plan.

Investors should also pay close attention to the expense ratio, which represents the annual fees charged by the fund to cover management and operating costs. An expense ratio exceeding 1% is typically considered high. A lower turnover ratio, ideally 10% or less, is also preferred, indicating that the fund’s management has confidence in its holdings and is not frequently trading assets, which can lead to higher tax costs in taxable accounts.

Building Your Investment Portfolio

Before beginning to invest, individuals should prioritize eliminating all consumer debt, such as credit cards and car loans, and fully funding an emergency savings account with three to six months of living expenses. This financial stability serves as the bedrock for long-term wealth accumulation. Once these foundational steps are complete, the focus shifts to consistently investing a percentage of income, typically 15% of gross household income, into tax-advantaged retirement accounts like 401(k)s and Roth IRAs.

Regular contributions to mutual funds, regardless of market fluctuations, leverage dollar-cost averaging, which can help reduce the average cost per share over time. For those seeking guidance, working with a qualified financial advisor, particularly a SmartVestor Pro from Ramsey’s network, can be beneficial. These advisors can assist in selecting appropriate mutual funds that align with the recommended categories and criteria, helping individuals navigate the complexities of investment choices and stay committed to long-term financial goals.