All Forum Posts by: George Gammon

 Steve, thx for your post.  Sincere question:  

If the market has an average return of 10%, do you think this means your money will increase by 10% per year?  

Or do you think after 5 years of a 10% average return, you could have less money than when you started?  (In nominal terms) 

Thank you, you’ve connected the first dot.   

But you didn’t answer the last question.  Is it possible to have a 10.6% average rate of return over 5 years and have less money than when you started?  

The answer is, of course,  yes.  

Or better yet, look at the example given on the CAGR calculator in one of my earlier posts.  

100% gain year one, and a 50% loss year two, leaves you with a 0% total gain and a 25% average rate of return.

How many of DR followers would expect their investment to have a 0% gain if the index was averaging 25% returns?  (Read the posts on this thread, you might be the only person that understands this)...This is my point.  

DR followers and 99.9% of BP hears average rate of return and thinks their money will grow by 25% per year.  

DR, and the entire financial services biz, knows this. Its a smoke and mirrors tactic to give xyz investment the illusion of making more money that it actually does.  

Just like showing RE returns w/o adjusting for inflation. 

IMO, this is misleading, and just plain wrong.  

Like I said in my previous post.  I don’t understand how anyone can justify it while condemning RE gurus who sell their edu using inflated return numbers?  

It's not that his investment strategy "sucks."   He's intentionally misleading the least financially sophisticated of our society by conflating an average rate of return with compound annual growth rate.  He's profiting by misleading people but it's ok because the net result of his misrepresentation some people are better off?  

What about the 1000's, who bought into an index fund because of his misrepresentations?  What happens when they build their entire retirement around a 12% return (as how it was presented) and then can't retire because for the last 30 years the index only produced a 7% return?  I'm shocked at how many on this thread sweep this under the rug.  

How is this any different than real estate guru's who sell courses promising higher returns than are realistic?  Everyone does realize DR takes a cut of everything his followers invest with one of his companies/affiliates.  

For some reason BP hates real estate gurus who mislead by using over inflated numbers but defends Dave Ramsey who misleads by using over inflated numbers??  

After reading many of the posts in this thread, I think the disconnect is most on BP don't understand the difference between an average return and a compound annual growth rate, so when DR does it they don't see it as a big deal? 

Jason, thx for the post.  I’ll respond to the key points people have made when I get a little time.  

But to start, can you please tell me the difference between a 10.6% “average historical return” and a 10.6% compound annual growth rate?  

Or maybe a better question:  Is it possible for the S&P, Dow, Russel 2000 etc.  to have a 10.6% “average historical return” over 5 years, yet be lower after 5 years than where it started?  In other words can the Dow start at 1000 and 5 years later be at 900 and still have a 10.6% “average historical return?”  

James, awesome point. I'm specifically referring to using a HELOC to make a 100% cash purchase of rental property.

You can then term out the HELOC. You'll have 100% equity in the rental prop.

You can then rinse and repeat with the equity in the rental prop.  Obviously there are debt to income requirements and probably a Fannie Freddie limit, but you get the concept.   

To answer your question specifically, I'm not sure how it works if you use the HELOC to fund a down payment, remodel for equity build, and then refi??

George 

Matt, I'm not sure I follow your question? I suggest doing the HELOC first, then when you find a cash flowing asset to purchase, pull the trigger using the HELOC. Once you've acquired the property, assuming it's a long term buy and hold, term out the HELOC. In other words, switch HELOC to a 30 year fixed rate mortgage once you've found and purchased a good positive cash flowing prop.

Hope that answers your question,

@Craig McLaughlin hey Craig thx for your reply.  Just wanted to show you a calculator that actually calculates returns as defined by average Joes.  In other words, how much money have I made or lost.  

You can find it at moneychimp.com, (I'm in no way affiliated) I included the websites description because I think it does a better job than I did of explaining the average return fallacy.  Hope that helps.  

@Mike Dymski Hey Mike, yes looks like the returns as defined by normal people are around 7% 1923-2016.  I agree with you mostly, but I just can't recommend index funds.  P/E ratios are extremely high (see chart) 

Interest rates have been in a 40 year bear market, which is highly cyclical.  How do index funds perform if we go back to 18% rates in the next 40 years?  And let's not forget the yield curve is inverted.  My advice is to buy things when they're cheap and sell them when they're expensive.  Nothing about any asset in the US is cheap except 30 year fixed rate debt (which I consider an asset)

As long as people understand the risk, but IMO they don't because they're sold index funds as low risk. The set it and forget it index fund has only worked because of a 40 year interest rate bull market and other market influences that most likely won't be there for the next 40 years.  Look at the S&P returns 1923 - 1980 adjusted for inflation less dividends.  Basically flat.  

You're ignoring the fact it's a misrepresentation because joe public thinks an average annual return is the same as CAGR.    

Moving on.  I can only answer one question at a time. ;) 

1.  3 properties in the midwest, good neighborhoods, great school districts, 1200 sq ft, 3 bed 2 bath, will run you about 450k-475k (turnkey, much less if you buy/remodel/rent).  They'll rent for about $1400 a month giving you a gross of $4200 a month.  Assume $1000 for expenses and your mortgage will be about $1600 a month, bringing your total to  4200 - 1000 - 1600 = $1600 positive cash flow.  

Of course I'd suggest buy/remodel/rent which would give you a much larger margin of error.  

They way you mitigate risk is to buy/remodel/rent cash flowing properties under the cost of construction in "A" US neighborhoods with a portion of your portfolio and buy cash flowing properties outside the US, denominated in another currency, in a country with very little to no credit in the system, with a portion of your portfolio.  

That portfolio set up, along with some gold, eliminates the most risk possible.  I'm specifically talking about macro risk, but the first part of the suggestion applies to bottoms up risk you were referring too.  Because of the supply constraints and inflation, demand for those props in the US should be strong on the rent and buy side for the medium term.

@Mac F. I maybe wrong.  I thought he was blatantly fraudulent, now I'm leaning towards him just being an idiot.  Here's a blurb from his website.

Notice he provides links after "The current average annual return from 1923 to 2016 is 12.25%."  If you actually click the link, that he provides, it takes you to a calculator which correctly measures the CAGR.  

 Even the calculator he links to in his post says he's lying!  haha

And it's adjusted for inflation and includes dividends... 7.26%, not 12.25%.  

I included the description of the calculator because it probably does a better job than I did of explaining why average rates of return are a sham.  

Lastly, you'll notice he has an affiliate link right below where he over inflates the return you can get in the S&P, and right above where he says, "12% isn't a magic number, based on the history of the market, it's a reasonable expectation for your long term investments." 

Is he a fraud or an idiot?  I let others decide.  

Mac what numbers do I have incorrect?  I'm not sure you understand my point.  My point is NOT that xyz mutual fund doesn't have a 12% average return going back to 1934.  My point is the way Dave Ramsey, and the entire financial services industry, make it seem as if you put $100 into a mutual fund, and that mutual fund has an average return of 12%, your $100 will grow at 12% annually.  

That's unequivocally false.  

The market goes up and it goes down.  A 12% loss and a 12% gain the following year is a loss to your capital but it's a 0% annual return.  Let's go over my original example once again.  

You start with $1000.  The mutual fund goes down by 50%.  You now have $500.  The following year the mutual fund goes up by 60%.  You now have a 60% gain from your balance of $500, giving you a total of $800.  You are down $200 from your original investment of $1000.  But the mutual fund has an average return of 5%.  

If a mutual fund told you it had an average annual return of 5% would you expect it to make money or lose money?  

That's my point.  A mutual fund  (S&P, Dow, anything) can have a positive average return and the fund can still lose money.  Just because you're in a fund that has a 12% average return, it doesn't mean your money will grow at 12% per year.  

Here's a chart from the link in your post. 

 Notice, it includes dividend reinvestments.  Also, it's over 20 years, 19 of which have been parts of the largest/longest bull market in US history (in other words, the numbers only get worse if you go back to 1934).  According to this very chart, from their own website, $10,000 invested with them in 1999 would now be worth $35,000, including dividend reinvestment.  

$10,000 compounded at 6.5% is $35,000.  Notice: 6.5% NOT 12%.  And thats not adjusted for inflation.  Adjusted for inflation $35,000 in 2019 is actually only about $23,000 in 1999 dollars. 

Adjusted for inflation, $10,000 invested in the very fund you sent me the link too, compounded at a rate of about 4.2%.  A far cry from 12%.

And remember this 20 year time frame includes 19 years of the greatest bull market in history.  Yes, we had a 50% draw down, but thats what happens in a stock market.  It goes up, and it goes down.  And it's cyclical, and we're 11 years in to a the longest bull market in history, and interest rates have been declining for 40 years, and the S&P was lower (adjusted for inflation) in 1980 than it was in 1928...52 years with a negative real return.  

I'm sorry for anyone invested in a mutual fund assuming an average rate of return is the rate at which your money should grow...that's simply not true.  

The good news is you can take your money out of a mutual fund without penalty, and put it into cash flowing real estate, bought under the cost of construction in linear markets with 30 year fixed rate debt...Unless of course you took Dave Ramsey's advice and your money is in a 401k or IRA. ;)

George