The Underperformance of Dave Ramsey's Portfolio vs. Index Strategies

In the realm of personal finance, few names carry as much weight as Dave Ramsey. His advice-rooted in simplicity, debt elimination, and disciplined saving-has resonated with millions. Yet, when it comes to investing, Ramsey's recommended portfolio has increasingly come under scrutiny. A 2025 analysis by Brian Preston and Bo Hanson of The Money Guy Show reveals a stark reality: over the past decade, Ramsey's portfolio has lagged significantly behind both the S&P 500 and the widely adopted three-fund strategy, according to a Benzinga analysis. This underperformance, consistent across multiple time horizons, raises critical questions about the efficacy of active management and the enduring appeal of passive investing.

The Ramsey Portfolio: A Closer Look

Ramsey's investment strategy emphasizes a 25% allocation to four categories of mutual funds: growth and income, growth, aggressive growth, and international. He argues this approach offers diversification and the potential to outperform the market through active management, as Ramsey Solutions explains. However, empirical data tells a different story. Over the past 10 years, the hypothetical Ramsey portfolio returned 8% annually, compared to 12% for the S&P 500 and 9% for the three-fund portfolio, according to the Benzinga analysis. Over five years, the gap widened further, with the S&P 500 posting 15% returns versus Ramsey's 10%.

The root of this underperformance lies in the structure of the recommended funds. While Ramsey's strategy seeks to balance risk across asset classes, the funds he promotes often underperform large-cap U.S. stocks, which have historically driven the S&P 500's gains. For instance, the S&P 500's 10–12% annual returns over decades far outpace the average actively managed mutual fund, which, according to SPIVA data, has failed to beat the benchmark 80% of the time, per Green Bull Research.

The Case for Passive Investing

Passive investing, epitomized by index funds, has long been championed for its low fees, broad diversification, and simplicity. John Bogle's 1975 creation of the first index fund marked a paradigm shift, and by 2023, passively managed assets accounted for 48% of U.S. market holdings, up from 19% in 2010, as noted in a UCI Merage article. The S&P 500's dominance is not accidental. Its low expense ratios (often below 0.1%) and exposure to the largest, most liquid companies in the U.S. economy have made it a bedrock of long-term wealth creation.

Critics of passive investing, including Ramsey, argue that index funds lack the agility of active management. Yet, as Robert Arnott and colleagues note, even passive strategies face hidden costs. For example, stocks added to the S&P 500 often trade at steep premiums, while deletions are sold at discounts, creating a "buy high, sell low" cycle that erodes returns-an observation highlighted in the Benzinga analysis. However, these inefficiencies pale in comparison to the drag of active management fees, which typically range from 0.5% to 2% annually, a point also made by Green Bull Research.

The Mirage of Active Management

Ramsey's advocacy for mutual funds hinges on the belief that active management can outperform the market. While some funds, like T. Rowe Price U.S. Large Cap Growth Equity Fund (TRLGX) and PGIM Jennison Technology (PGKRX), have indeed outpaced the S&P 500 over five years, an InvestorsObserver roundup shows such success is rare and inconsistent. The SPIVA scorecard underscores this: 80% of active managers underperform their benchmarks, as noted by Green Bull Research. The challenge lies in selecting the few funds that can consistently beat the market-a task requiring expertise and resources most individual investors lack.

Moreover, Ramsey's portfolio has shown historical strengths in periods like the pre-2008 bull market, when emerging markets and growth assets thrived, a pattern the Benzinga analysis documents. However, these gains have not translated into sustained outperformance. The S&P 500's resilience, particularly in the post-2008 recovery and the tech-driven rally of the 2020s, has made it a formidable benchmark.

Systemic Risks of Passive Investing

While index funds have clear advantages, their dominance has introduced new risks. Research by Lu Zheng and colleagues highlights how passive investing biases markets toward overvaluation, as inflows disproportionately boost large-cap stocks; this dynamic is discussed in the UCI Merage article. This concentration can amplify volatility and reduce diversification benefits during downturns. Yet, these systemic risks do not negate the individual investor's need for low-cost, diversified exposure. For most, the trade-off between modest underperformance and the certainty of index fund returns remains favorable.

Conclusion

Dave Ramsey's portfolio, while well-intentioned, underscores the limitations of active management in a market increasingly dominated by low-cost index strategies. The data is unequivocal: over the long term, the S&P 500 and three-fund portfolios outperform Ramsey's recommended mix of mutual funds. For investors seeking simplicity, consistency, and cost efficiency, passive investing remains the gold standard. Ramsey's broader financial philosophy-emphasizing debt elimination and emergency savings-remains sound, but his investment strategy may need reevaluation in an era where passive approaches have proven their mettle.

As markets evolve, the lesson is clear: in the battle between active and passive investing, the latter continues to prevail-not through perfection, but through its ability to harness the market's collective power at a fraction of the cost.