Can You Pick a “Good Growth Mutual Fund” Like Dave Ramsey Says You Can? – Image for illustrative purposes only (Image credits: Unsplash)
Dave Ramsey has long encouraged listeners to build portfolios around actively managed mutual funds chosen for their extended histories of outperforming the S&P 500. The approach calls for splitting contributions evenly across four categories – growth and income, growth, aggressive growth, and international – while favoring funds with strong long-term returns and expense ratios below 1 percent. Yet repeated examinations of fund results indicate that past outperformance offers little reliable signal about what lies ahead.
The Strategy and Its Central Assumption
The recommendation rests on the idea that managers who have delivered above-average results for a decade or more possess identifiable skill. Ramsey has described rate of return and track record as accounting for roughly 80 to 85 percent of his fund selections. In practice, this means screening for funds that have beaten the benchmark over the longest available periods and holding them within the four-fund framework.
The underlying premise is straightforward: if a fund has succeeded before, the same process should continue to work. When that premise does not hold, the entire allocation method loses its foundation. Research across multiple decades has tested exactly this claim by tracking how often yesterday’s leaders remain leaders.
Evidence from Large-Scale Performance Reports
One of the most comprehensive sources is the SPIVA Scorecard produced by S&P Dow Jones Indices. It compares active funds to their benchmarks while accounting for funds that disappear through merger or liquidation. The year-end 2024 edition shows the following pattern for large-cap U.S. equity funds against the S&P 500:
| Time Period | Share of Active Funds That Underperformed |
|---|---|
| 1 year | 65% |
| 3 years | 85% |
| 5 years | 76% |
| 10 years | 84% |
| 15 years | 90% |
Across all 22 U.S. equity categories examined over 15 years, not one category saw a majority of active managers beat their benchmark. The same report’s companion Persistence Scorecard examined whether top-ranked funds stayed on top. Among domestic equity funds in the top quartile at the end of 2020, none remained in that quartile through the following four years. For large-cap funds ranked in the top quartile in 2022, none stayed there over the next two years.
Academic Findings on Performance Persistence
These patterns align with earlier academic work. In 1997, Mark Carhart analyzed mutual-fund returns while removing survivorship bias and found that apparent skill largely reflected short-term momentum, higher fees, and trading costs rather than repeatable manager ability. A 2021 update by James Choi and Kevin Zhao extended the analysis through 2018 and concluded that even the modest persistence Carhart had identified had largely vanished in later periods.
The studies point to structural reasons. Markets are competitive, so one manager’s gain typically comes at another’s expense. Fees for active funds average around 0.59 percent annually compared with 0.11 percent for index funds, creating a persistent drag. In addition, periods of outperformance often coincide with a particular investment style being in favor; when that style falls out of favor, the same managers tend to lag.
Practical Considerations for Investors
Investors who follow a track-record approach therefore face two consistent observations: most active funds trail their benchmarks over longer horizons, and selecting past winners does not reliably improve future odds. A low-cost index fund that simply tracks the broad market delivers the market return minus a minimal fee, an outcome that has exceeded the results delivered by the large majority of active large-cap managers over 15-year stretches.
Broader diversification across asset classes further reduces reliance on any single category’s recent performance. While no single allocation leads every year, a balanced mix tends to avoid the extremes that concentrated bets can produce. The data continue to show that consistent outperformance remains difficult to identify in advance, leaving many investors with a simpler choice between attempting to select winners and owning the market at low cost.