Why Does Dave Recommend That You Invest in Mutual Funds for At Least Five Years?

If you have ever listened to Dave Ramsey on the radio or read his books, you have heard him say the same thing over and over: why does Dave recommend that you invest in mutual funds for at least five years? The answer is easy to understand. Five years is the shortest amount of time where the stock market usually goes up more than it goes down. It gives your money time to grow, smooths out the scary drops, and stops you from making big mistakes when the market looks bad.

Dave wants everyday people — not Wall Street experts — to build real wealth. His five-year rule is perfect for beginners who have a job, pay their bills, and now want their money to work for them.

Who This Five-Year Rule Helps the Most

This advice is made for five kinds of people:

• Beginners who only have a few hundred dollars a month to invest.
• Moms and dads saving for retirement or their kids’ college many years from now.
• Busy workers who don’t want to check stock prices every day.
• People who get nervous when the market drops but know they won’t need the money soon.
• Anyone who wants a simple plan instead of trying to pick winning stocks.

If you need the money in the next 1-3 years (for a house, car, or emergency), Dave says do NOT put it in mutual funds. Keep it safe in a bank.

The Big Reasons Dave Says “At Least Five Years”

Here are the main reasons behind Dave’s five-year investment rule — explained in plain words¹:

1. The Market Almost Always Goes Up in Any Five-Year Period Since the 1920s, the stock market has made money in more than 94 out of every 100 five-year periods. One year can be bad. Three years can still be rough. But five years? Almost every time you end up ahead. → See real examples of market crashes and recoveries here: What Caused the Crash of the Stock Market in 1929? Key Factors Explained
2. Your Money Starts Growing on Itself (Compounding) In the first year or two, growth feels slow. After year five, it speeds up because you earn money on the money you already earned. It’s like a snowball rolling downhill and getting bigger fast. → Learn exactly how compounding works in long-term investments: How Compounding Works in Long-Term Mutual Fund Investments (see the compounding section)
3. Big Drops Don’t Hurt as Much When You Wait The market falls hard sometimes — 2008, 2020, 2022. Every single big drop came back when people waited. Five years is usually long enough to see the recovery. → Read what happened during the biggest recent drop: Nvidia Shed a Record $406 Billion in Weekly Market Value – What Happened and What to Do
4. It Stops You from Selling When You’re Scared Dave knows most people sell at the worst time because they panic. When you promise yourself “five years,” you are less likely to grab the money and run when the news sounds scary.
5. Diversification Needs Time to Work Good mutual funds own hundreds of companies. Some do great, some do okay. Over five or more years, the winners pull the whole fund up.

How Dave Ramsey Wants You to Build Your Mutual Fund Portfolio

Dave teaches a simple four-part plan. He calls it splitting your money into four buckets:

• 25% in Growth funds
• 25% in Growth and Income funds
• 25% in Aggressive Growth funds
• 25% in International funds

He likes these Ramsey-approved mutual funds that have beaten the market for 10 years or longer. Yes, they cost a little more than index funds, but Dave says the extra growth is worth it for people who want someone else driving.

Long-Term vs Short-Term: A Simple Comparison Table

A Real-Life Example Dave Loves to Tell

Picture this: You put $10,000 into mutual funds in October 2007 — right before the huge 2008 crash. Your account dropped almost in half by early 2009. Scary!

But if you followed Dave’s rule and left it alone, by the end of 2012 — just five years after you started — that same $10,000 grew to over $20,000. People who sold in 2009 and went to cash never got that money back.

Frequently Asked Questions from Beginners

Is five years really long enough for mutual funds to grow?

Yes! History shows almost every five-year period ends with a profit when you own a mix of good stock funds².

What if the market crashes again?

Crashes always feel terrible, but every single one in history recovered. Five years has always been enough time so far.

Should I just buy cheap index funds instead of Dave’s funds?

Many smart people do. Dave likes active funds that try to beat the market. Both plans work great if you leave the money alone for years.

How much should I invest each month?

Dave says after you have no debt (except house) and a full emergency fund, invest 15% of your income every month. Even $100 or $200 a month adds up huge over time.

Extra Tips to Make the Five-Year Plan Even Better

• Turn on automatic monthly investments (dollar-cost averaging).
• Never borrow money to invest.
• Keep adding money every paycheck.
• Look at your accounts only once or twice a year.

Final Summary: Why Dave’s Five-Year Rule Is Still One of the Best Tips for Beginners

Why does Dave recommend that you invest in mutual funds for at least five years? Because it turns scary837 ups and downs into steady growth. It uses real history, the magic of compounding, and simple discipline to help normal people become millionaires over time.

If you are just starting, have a steady job, and can leave the money alone for five years or more — start today. Pick good funds, split them into Dave’s four groups, add money every month, and let time do the rest.

You don’t need to be a genius. You just need to be patient.

What is the one thing that still worries you about keeping money in mutual funds for five or more years? Tell me in the comments — I read every single one!

References & Helpful Links

1. Reddit thread on Ramsey-approved funds – reddit.com/r/DaveRamsey ↩︎
2. Quora discussion – quora.com/Why-does-Dave-Ramsey-recommend-mutual-funds ↩︎