Tony Wolski

The Simple Path to Wealth - JL Collins

JL Collins lays out a straightforward guide to reaching financial independence in The Simple Path to Wealth. There really is no excuse to delay thinking about your financial future, and as the author explains, investing can be as simple as sticking your money in one low cost index fund. This is a fantastic resource for those of us who prefer to let someone else think about money and investing.

My notes

You’ll be relieved to hear that you can be very successful by holding only a single Vanguard fund over your entire lifetime. You can branch out and get a little fancier if you like, but there is nothing to lose, and everything to gain, by keeping things as simple as you can. (Emphasis mine)

Here’s an important truth: Complex investments exist only to profit those who create and sell them. Further, not only are they more costly to the investor, they are less effective.

Guidelines (a few of my favourites):

If you intend to achieve financial freedom, you are going to have to think differently. It starts by recognizing that debt should not be considered normal. It should be recognized as the vicious, pernicious destroyer of wealth-building potential it truly is. It has no place in your financial life.

More house also means more stuff to maintain and fill it. The more and greater things you allow in your life, the more of your time, money and life energy they demand.

Youth should be spent exploring—building and expanding one’s horizons—not griding away in chains.

Those who live paycheck to paycheck are slaves. Those who carry debt are slaves with even stouter shackles. Don’t think for a moment that their masters aren’t aware of it.

Being independently wealthy is every bit as much about limiting needs as it is about how much money you have. It has less to do with how much you earn… than what you value. Money can buy many things, none of which is more important than your financial independence. Here’s the simple formula:

_Spend lesss than you earn—invest the surplus—avoid debt—

… you need to understand a few things about the stock market:

  1. Market crashes are to be expected.
  2. The market always recovers. Always. And, if someday it really doesn’t, no inveestment will be safe and none of this financial stuff will matter anyway.
    • Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.
  3. The market always goes up. Always.
  4. The market is the single best performing investment class over time, bar none.
  5. The next 10, 20, 30, 40, 50 years will have just as many collapses, recessions and disasters as in the past.
  6. This is why you have to toughen up, learn to ignore the noise and ride out the storm; adding still more money to your investments as you go.

The vast majority of investors in mutual funds actually manage to get worse returns from their funds than the funds themselves generate and report.

There’s lots of money to be made with actively managed funds. Just not by the investors.

Simple is good. Simple is easier. Simple is more profitable.

…idle cash doesn’t have much earning potential. I suggest you keep as little as possible on hand, consistent with your needs and comfort level.

…working on his thesis as a student and his decades in the business only served to confirm it. Namely, buying all the stocks in the market index reliably and consistently outperforms professional management, especially when taking costs into consideration. (Jack Bogle)

Before you start trying to pick individual stocks and/or fund managers ask yourself this simple question: “Am I Warren Buffet?” If the answer is “no,” keep your feet firmly on the ground with indexing.

Bonds are in our portfolio to provide a deflation hedge. Deflation is one of the two big macro risks to your money. Inflation is the other and we hedge against that with our stocks.

If you are going to hold bonds, holding them in and index fund is the way to go.

Put all your eggs into one large and diverse basket, add more whenever you can and forget about it. The more you add the faster you’ll get there. Job done.

…the most effective investing is also the simplest.

Flexibility. How willing and able are you to adjust your spending? Can you tighten your belt if needed? Are you willing to move to a less expensive part of the country? Of the world? Are you able to return to work? Create additional sources of income?

Age does begin to limit your options as it advances. Age discrimination is a very realy thing, especially in the corporate world. As you get older, you may not have all the same options readily available as you had in your youth. If your life journey involves stepping away from highly paid work occasionally, you’ll do well to consider this.

Even if if Vanguard were to implode (a vanishingly small possibility), the underlying investments would remain unaffected. They are separate from Vanguard the company.

For anyone serious about achieving financial independence, taking full advantage of all your tax-deferred opportunities is a must.

Unfortunately most advisors don’t get better results (than indexing). Investing only seems complex because the financial industry goes to great lengths to make it seem complex. Indeed, many investments are complex. But as you now already understand, not only are simple index investments easier, they are more effective.

The basic concept behind Vanguard is that the investment firm’s interests should be aligned with those of its shareholders. This was a stunning idea at the time and to this day it is the only firm that is, and as such the only firm I recommend.

Even Warren Buffett, perhaps history’s most successful stock-picker, has gone on record as recommending indexing… In Berkshire Hathaway 2013 annual shareholder letter Buffett writes:

“My advice… could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

If you absolutely, positively want a sure thing and your yearly inflation raises, keep your withdrawal rate under 4%. And hold 75% stocks / 25% bonds (this is once you’ve reached financial independence).

Assuming a 4% withdrawal rate on a portfolio with an initial value of $1,000,000, here’s what you’d have left (median ending value) after 30 years:

From Table 3 (without inflation adjusted withdrawals)

From Table 4 (with inflation adjusted withdrawals)

This is very powerful stuff and it should give you a lot to feel warm and fuzzy about as you follow The Simple Path to Wealth.

If as needed you can readily adjust your living expenses, find work to supplement your passive income and/or are willing and able to comfortably relocate to less expensive places, you will have a far more secure retirement no matter what rate you choose. Happier too I’d guess.

If you are locked into certain income needs, unwilling or unable to ever work again and your roots go tood deep to ever seek out greener pastures, you’ll need to be much more careful. Personally, I’d work on adjusting those attitudes. But that’s just me.

Houses are not investments, they are expensive indulgences.