12% Returns? Think Again: Expert Debunks Suze Orman And Dave Ramsey's Investment Claims And Reveals More Realistic Return Rates

Dave Ramsey and Suze Orman have frequently been heard telling their listeners that they can achieve 12% returns by investing in the stock market. Dave Ramsey talks about how it's more than possible to get 12% returns and even has an article on his website telling people how he recommends achieving these numbers. 

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Suze Orman advises people to start investing when they're young, and that if you start at 25 and invest $100 per month in the S&P 500 with 12% returns, you'll have $1 million by the time you're 65. 

But are 12% returns really attainable? Dave Blanchett, head of retirement research at PHIM DC Solutions, doesn't seem to think so. In fact, he told CNBC that the 12% returns figure is "absolutely nuts."

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So, where did the 12% claim come from? Orman and Ramsey both base their 12% return figure on the historical performance of the S&P 500. 

On Ramsey's website, his team highlights the average returns over several decades: 

• 1990 to 2020: S&P's average was 11.55%
• 1985 to 2015: S&P's average was 12.36%
• 1980 to 2010: S&P's average was 12.71%

It's important to note that each of these averages is over a 30-year timeframe. Some years, the returns are much, much lower. For example, in 2015, it was just 1.38%. And sometimes it's much higher. In 2013, it was 32.15%. 

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However, these figures are arithmetic averages, which some experts say don't necessarily account for the real-world complexities of investing. The geometric average, which many experts consider more accurate, shows something different. The geometric return from the S&P 500 from 1928 to 2023 was 9.8%, and from 2014 to 2023 it was 11.91% – still closer in the last decade, but under 12% and lower than the averages from the arithmetic return. 

With the geometric average from the last decade still close to 12%, why does Blanchett say that number is nuts? The market is volatile, meaning returns can vary a lot from year to year. When factors like inflation come into play – which has averaged around 3% annually from 1926 to 2023 – it erodes the purchasing power of investment returns. 

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"The nominal geometric return only exceeded 12% in five of the 113 rolling 40-year periods, which is 4.4% of the time," Blanchett said. "If getting 12% were ‘probable,' one would expect a higher percentage of the periods to be at or above 12%."

Blanchet says that a more realistic return for aggressive investors is closer to 7%, while those with more balanced portfolios might only see 5% returns. 

While it may be tempting to aspire to high returns, it's important to make sure you have realistic expectations about the returns for your investments. Investors should be wary of overly optimistic claims and understand the volatility of the market and how it can impact their long-term investments. 

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Speaking with a trusted financial advisor is a great way to better understand the risk tolerance of your investments, what returns to expect, and how these figures will impact your long-term financial goals.