Geometric vs. arithmetic returns

Yesterday I posted a video explaining why Dave Ramsey’s claim that retirees can safely spend 8% of their portfolios did not make sense.

I realized after posting that his claim was even worse than I initially thought.

The S&P 500 returned around 12% per year 1926-2022 measured as an arithmetic average.

Measured as a geometric average, which is what matters to investors, it has been closer to 10%.
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[KillBob_GangPants]

Dave is a self described "math guy". As someone working towards a degree in Applied Mathematics, Dave is not a math guy.

[oldgreg]

I've been saying this into the void for years: Dave quotes an "average" return of 12% which is a misleading/useless term. The relevant metric to an investor is what the *annualized return* was over the investment period.

[scmile]

These markets got my boy Ben growing hair everywhere

[simonlynch]

Ben, not satisfied with a burn going back in with additional gasoline...

[vicgill]

If you can bench 100 lbs for 10 reps then you could probably bench a 1000 lb once

[thedicehavespoken]

Dave has great advice for people who are lost in debt and have no idea how to get out of it. I've seen a lot of people turn their lives around using his program.
But beyond that it seems like he's got no clue what he's talking about half the time. And all that time spent with millions coming in has put him a little out of touch with the average joe, especially as the cost of living is getting more and more out of hand.

[TK-ekkp]

...thanks for producing your vid on Bank Reserves and the money creation process. It's one of the most important topics imo, and there are few that understand the process, fewer that have tried to communicate it, and fewer that have done a good job at communicating it. Your vid is among the best.

[sprintmiles]

I had no idea the geometric mean approximates the arithmetic mean less 1/2 of variance! Since investors earn the geometric mean, the arithmetic mean overstates the potential returns.

[FA]

Its amazing to me anywone below 50 listens to Dave Ramsey

He is financial advice for a world that existed 50 years ago 😂

[Alberto-]

I have been getting more and more content from Dave Ramsey lately. Although I tend to agree with the general concepts he expresses, when he puts actual number in I always raise an eyebrow. Thanks for confirming my impression!

[Blinky]

This has always been a peeve of mine. Average annualized returns are highly deceptive, especially when you have really negative years followed with good years.

[bneedels]

I think the Baby Steps are useful for most people, but his continued use of 12% returns in his material is not great. I wonder if he uses that, in part, to promote his network of financial advisors?

[mikemcmullin]

I like Ramsey's be debt free advice. Credit ruined his business, and a credit card in mine put us in debt. 'Oh it'll pay for itself', until all transactions weren't tracked and paid for. :( The partner who was using the damn card opted for paperless billing but never signed up to get the bloody bills.

[maxrivshin]

I am sure as the cycle turns all these neat math equations from youtube gurus will be forgotten. investing is very hard and there is no long term easy way to get around it, indexing is akin to creation of mutual funds in the 20s, neat well explained idea that will not survive the test of time.

[LucianoB]

Great that you point this out!
The formula relating geometric and arithmetic average raised my eyebrows, though. I guess there must be some assumption about the distribution of the underlying returns and that this relationship only approximates well for large sample sizes. Which resource is this from?

[victors]

Learning so much quality information from you, Ben! So grateful for that, thanks!

[jaredthomas]

Glad someone is calling him out finally. He doesn’t run the numbers and is out of touch with our current economy.

Thanks a lot. Please consider making a video about geo-political risks for stocks if there is a literature about them.

[mrslcom]

There’s a huge gap between Dave’s audience and Ben’s. Unfortunately, Dave wins because most of the population is ignorant and that’s why he has a huge following.

[brianbirnbaum]

Wish this was explained a little bit more thoroughly. I want to know why.