In 1983, 16 women in Beardstown, Illinois, started an investment club in the basement of a church building. The official name was the “Beardstown Business and Professional Women’s Investment Club,” which is too much to say every time, so most people ended up calling them the Beardstown Ladies.
By the mid-1990s, they had a book out from Hyperion, the publishing company owned by Disney. It was called The Beardstown Ladies’ Common-Sense Investment Guide, and it sold more than 800,000 copies. Throughout the book, they bragged about this number: 23.4%, which is what the club said it had averaged every year from 1984 to 1993.
That’s an impressive number, right? Give me 20+ percent on my money and I’m in for sure!
What this told everybody is that, on paper, there was this nice group of ladies in a church basement in a small town in Illinois, beating the stock market by a mile. Of course, who wouldn't want to buy that book and learn their secrets?
Then in early 1998, the managing editor of Chicago magazine, a man named Shane Tritsch, started asking questions about that number. As a good reporter should, he didn't take it at face value and started investigating. The club agreed to let Price Waterhouse, one of the biggest accounting firms in the country, go through the books.
What did they find? To everyone's surprise, the real return wasn't 23.4%. The real number was only 9.1% a year. Still not a bad return, but it certainly isn't 23.4%. Compare that to the S&P 500 over the same 10-year period and you will discover that the S&P out-earned the ladies by a significant margin. Specifically, the S&P 500 returned 14.9% a year! The ladies’ investment club that America thought had beaten the market had actually trailed it by almost 6 points a year.
The club blamed a computer input error, and the publisher said the 23.4% was really a return for 1991 and 1992 that got passed off as the 10-year number. Honestly, I don’t think those women set out to fool anybody. And I don't think that they purposefully lied to anybody. But more than 800,000 copies of a book got sold on a return that never happened to their money.
#### An average return makes you 2 promises
While the Beardstown Ladies’ inflated return may have been an honest mistake, the unrealistic promises you hear today from a financial planner or so-called wealth manager who’s trying to earn your business usually aren’t mistakes. People are actively misleading you, and I want to show you exactly how it’s happening.
You’ve heard the pitch, or something close to it: “I’ve averaged my clients 12% a year,” or “The market averages 12%.”
The guy telling you this usually isn’t making the number up. When it’s a simple average, he really did add up the yearly returns and divide, so the math checks out, and he knows you’ll never think to question it.
But an average of the percentages and what actually happened to your money, in dollars, can be two very different things.
When somebody quotes you an average return, he’s making you two promises buried in one sales pitch.
- The first promise is that your money grew at that rate.
- The second promise is that you’ll earn what the investment earned.
Both of those promises can be false, and I’m going to show you exactly how, one at a time.
#### After a 50% loss, you need a 100% gain just to get back to even
Let’s start with the first promise, that the average tells you how fast your money grew.
Percentages don’t add up the way whole numbers do. Remember this from high school math class?
If your $100,000 goes up 10%, you’ve got $110,000. If it goes up another 10% the next year, you don’t add another $10,000. You add $11,000, because the second 10% is figured on the bigger number, so 2 gains of 10% add up to 21%.
That’s great when the market is going up. When it’s going down, the same math hurts you a lot more than you’d think.
Say your $100,000 goes up 50% in one year, so now you’ve got $150,000. The next year it drops 50%.
You’d think you’re back where you started, but 50% of $150,000 is $75,000, so you’re sitting on $75,000. You gained $50,000 and then lost $75,000.
Now flip it around. If your $100,000 drops 50% to $50,000, how much does it have to grow to get back to $100,000? It has to double.
After a 50% loss, you need a 100% gain just to get back to even.
It works that way with every loss. A 20% loss takes a 25% gain to make up, and a 33% loss takes almost a 50% gain. The bigger the loss, the faster that gap grows.
This is why, when people say that you can get an average return of X, it's practically worthless. Averages simply do not matter as much as you think they do when we're talking money.
And if you're still not convinced, consider this…
Say your $100,000 doubles to $200,000 in year 1, and in year 2 it drops 50%, right back to $100,000. Add those 2 years up and divide by 2, and you get an average of 25% a year (100 minus 50 is 50, and 50 divided by 2 is 25). Somebody can honestly tell you he averaged 25% a year, and you made exactly nothing!
A simple average of the yearly returns tells you nothing about what your money actually did. The only numbers that tell you the truth are what you started with, what you ended with, and how long it took.
(To be fair, the official returns in a mutual fund’s paperwork are compounded, and those do tell you what a dollar left in the fund did. The 12% you hear on the radio isn’t one of those.)
#### Dave Ramsey promotes a retirement paycheck based on the average
Dave Ramsey’s company is headquartered down the road from me in Franklin, Tennessee, and he has used a 12% return in his calculations for years. His company’s website says the S&P 500’s “average annual return from 1928 through 2025 is 11.86%.” That’s an average of the yearly percentages, the same kind of average we just took apart.
In November 2023, Dave told a caller on his show that retirees could safely take 8% a year out of their retirement savings. This is how he got there: [“If you’re making 12[%] in good mutual funds, and the S&P has averaged 11.8[%]... and if inflation for the last 80 years has averaged 4%... that leaves you 8[%].”](https://www.investmentnews.com/retirement-planning/after-dave-ramsey-unleashes-on-4-rule-advisors-unleash-on-him/246454) He also argued that you wouldn’t run out of money doing it.
So let’s run that advice through what the stock market actually did. Say you retired on January 1, 2000, with $1 million in the S&P 500, and you took out $80,000 at the start of every year, which is 8% of what you started with. I’m using the S&P 500 because that’s the number Dave quotes, and I’m leaving out taxes and fees, which would only make it worse.
According to NYU’s data, the market dropped 3 years in a row: about 9% in 2000, 12% in 2001, and 22% in 2002. By the end of 2002, your $1 million was down to about $458,000. You’d need more than a 100% gain just to get back to where you started, and you’re still taking out $80,000 every year.
By the end of 2009, you’d have about $67,000 left. In year 11, you can’t take your $80,000, because it’s not there.
And over that same 10 years, the S&P 500’s average annual return was a gain of about 1.2%. If you’d just left $100,000 in and never touched it, you’d have ended the decade with about $91,000. The average says the market made money that decade, and either way, you lost money.
To be fair, 2000 turned out to be a terrible year to retire, and Dave’s defenders would say you can cut back when the market has a bad year. But you don’t necessarily get to pick the year you retire, and the average doesn’t warn you.
Now, I’m not telling you the stock market is a bad place for your money, and Dave is right to want people investing instead of sitting on cash. My problem is building a retirement plan on an average.
That’s the golden cage in this lie. A retirement plan built on an average looks fully funded on paper every year you look at it. You don’t find out it’s short until you’re at the age where you can’t do much about it.
So what return is your retirement plan built on? Is it an average, or is it what your money actually did?
#### The best fund of the decade lost its investors money
Remember how I told you that when someone says they can get you an average return of X, they're making two promises without actually saying them? The first promise is that your money grew at a specific rate.
Now the second promise, that you’ll earn what the investment earned.
At the end of 2009, the Wall Street Journal named the best stock fund of the decade. It was a fund called CGM Focus, run by a manager named Ken Heebner, and it went up more than 18% a year for 10 years, while the S&P 500 went basically nowhere.
You’d think everybody who owned it got rich. According to Morningstar, the money investors actually put into CGM Focus lost about 11% a year over that same decade.
How do you lose money in the best fund of the decade? How is that possible? I'll tell you: if you buy it after a great year and then sell it after a bad year, that's how it's possible.
In 2007, CGM Focus went up 80%, and investors noticed. In 2008, they put $2.6 billion of new money into the fund, and that year it fell 48%.
Heebner’s 18% is accurate, and it’s a compounded return. That number measures what happened to a dollar that went in on the first day and sat there for all 10 years, but very few people’s money did that. What you actually earn depends on when your dollars went in and when they came out.
#### Ask for your number in dollars
So what do you do with all of this? If you run a business, you already know the answer, because nobody makes payroll with an average month. You make payroll with what’s in the bank on Friday.
So when somebody pitches you and quotes you a return, ask him one question: “If I had given you $100,000 10 years ago, how much would I have today, after your fees?” If he can’t answer that in dollars, you’ve learned what you needed to know about him.
And for the money you already have invested, ask whoever manages it for your own number: what you’ve put in, what you’ve taken out, and what’s there now, after fees, since the day you started.
And when you plan for retirement, use a number that’s conservative and compounded. David Blanchett at PGIM DC Solutions told CNBC that planning on 12% is “absolutely nuts,” and he suggests about 5% for a mix of stocks and bonds, or about 7% if you’re mostly in stocks. Those aren’t guarantees either. But if your plan only works at 12%, you don’t have a plan.
#### Solomon said the simple believe everything
If you’ve read my blog for any amount of time, you know I always try to pull in a Proverb each time. Well, this time is no different. Solomon wrote about this roughly 3,000 years before Dave Ramsey ever pushed mutual funds on the radio.
“The simple believes everything, but the prudent gives thought to his steps.” (Proverb 14:15, ESV)
The Hebrew word for “simple” in that verse is pethi, and it comes from a root word that means “to entice.” It describes somebody who’s easy to talk into things, somebody who hears a good number and believes it because he wants it to be true.
I’ll be honest, that was me. I heard Dave say 12% and believed it without ever checking.
The prudent man in that verse gives thought to his steps. In this case, that means he checks what kind of number he’s being shown before he builds his retirement on it.
More than 800,000 copies of the Beardstown Ladies’ book got sold before anybody checked their number, and all it took to find the real one was a magazine editor who asked a question.
So the next time somebody tells you what he’s averaged, ask him what $100,000 would have turned into, in dollars, over those same years. That’s the number you’re going to retire on.
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