JL Collins - The Simple Path to Wealth

JL Collins – The Simple Path to Wealth

Today on the Financial Independence Podcast, my buddy JL Collins from jlcollinsnh.com joins me for his second appearance on the show to dive even deeper into the topic of investing!

Jim was last on my podcast way back in 2012 and was my second guest ever. A lot has happened since then so it was great to chat with him about his acclaimed Stock Series and how his investment philosophy has changed over the last four years.

We also discuss his new book, The Simple Path to Wealth, which was released yesterday. I had the chance to read the book in advance and I can say, it really does contain everything you need to know to become a successful investor (and it’s actually enjoyable to read, unlike most investing books).

Jim is the reason I don’t often write about general investing topics here, because I just link to the great stuff he’s already written instead, so I’m thrilled he’s finally collected all his excellent advice into a book. It seems like other people are excited about it too because when I checked last night, The Simple Path to Wealth was ranked #129 out of all books on Amazon!

Hope you enjoy the interview and if you decide to pick up his book (which I highly recommend), let me know what you think of it in the comments below.

Listen Now!

  • Listen on iTunes
  • Stream audio file here
  • Download MP3 by right-clicking here


  • Origin of The Simple Path to Wealth
  • What’s changed about his investment philosophy over the last four years
  • Three simple steps to financial independence
  • Difference between good debt and bad debt
  • Why buying a house is an indulgence
  • The only two funds you need and why you don’t need to invest in an international fund
  • When should you invest in bonds and why the decision has nothing to do with your age
  • The bad investing habits Jim and I still can’t shake
  • The important lesson Jim learned from working with the top stock analysts in the industry

Show Links

Full Transcript

Mad Fientist: Hey, welcome to the Financial Independence Podcast, the podcast where I get inside the brains of some of the best and brightest in the personal finance space to find out how they achieved financial independence.

I’m excited to welcome back my first repeat guest on the show. But before I do, I have a proposition for you. The email I most often get from people and readers and listeners is request to do more podcast episodes. I know you guys like them, and I love doing them, but the problem is it just takes a lot of work to do it. So if I’m going to increase my frequency, I’m going to need some external motivation to do it because otherwise, I would’ve done it already.

So, here’s what I’m thinking. I often here other podcasters ask their listeners to leave iTunes reviews. And I imagine that’s because the more reviews the show has, the higher it will rank in iTunes and then the more people that will listen and the more fun that everybody has.

I know, personally, I love getting reviews. I recently just got one from MKDuran. And it was probably my favorite review I ever got. It really motivated me to put out more shows and to keep doing it.

So, here’s my proposition. I will double my podcasting frequency as soon as I hit 200 5-star reviews on iTunes. I currently publish about once a month, so that would mean increasing my frequency to twice a month, which seems crazy to me right now, but there are a lot of guests I really want to get on the show. And hopefully, once I get to the rhythm of the new frequency, then it won’t be that much work. It seems overwhelming right now, but I think I can do it.

So, yeah, hopefully, this would be a win-win for everyone. You now have a big incentive to leave a review. And then, if we hit that number, I’ll have a very big incentive to publish more frequently because I won’t want to break my promise.

I can’t promise that I’ll keep that frequency forever, but at least until the end of the year. Hopefully, it will become a habit, and it’ll keep going indefinitely. But I’ll at least commit to doing it until the end of the year.

So, if you’re interested, please head over to iTunes. I’ll put a link in the show notes. You can leave a review there.

And while you’re there, check out my new podcast logo. I had a buddy of mine who’s a graphic designer, he took some photos of me with some laboratory equipment that I borrowed from my brother-in-law who actually works in a real lab. We put together a new logo. And in that podcast logo is the new Mad Fientist logo which will be coming out. So if you want to get a sneak peek of what that new Mad Fientist logo looks like, head over to iTunes as well.

And while you’re there, you might as well leave a review!

So, thanks a lot in advance. And hopefully, we’ll get some more podcast episodes up.

So, back to the real reason we’re here, I’m excited to introduce back my second guest on the show, my second ever guest way back in the day right when this podcast started, Jim Collins.

Jim has become a really good friend of mine over the years. We’ve hung out many times. We used to live close together. So I’m excited to get him back on the show.

It’s a really exciting time for Jim because he’s just releasing his first book called The Simple Path to Wealth. And if you’re familiar with his work over at JLCollinsNH.com, you know that it’s going to be good.

I’ve had the chance to read it already, and it definitely is!

So, if you’ve read his stock series over the years, you know that he’s the main man when it comes to investing. In fact, I don’t really write about general investing topics because I just send everyone to him because he’s written really everything you need to know about investing. And this book contains it all. So I’m really excited to talk to him about it.

And I’m also excited to see if anything has changed over the last four years or so since I last talked to him on the show.

So without further delay, Jim, welcome. Thanks for being here.

JL Collins: Brandon, it’s my pleasure. It’s nice to talk to you. Again, it’s been a while since we’ve done this.

Mad Fientist: I know! I actually looked into it just because I knew you were my second podcast guest ever.

JL Collins: Oh, wow!

Mad Fientist: …which hopefully, the interview will be a bit better than last time. I remember way back then, I was pretty awful at asking questions, and then I had to re-record every single question I asked because I would fumble through it and it was just disgusting. So, I would spend like five hours editing every single episode. So hopefully, this one’s going to go a lot smoother.

JL Collins: That’s not how I remember it. I remember it fondly and I remember listening to it saying, “You know what, that’s pretty good.”

It was one of the first times I’ve ever been interviewed.

Mad Fientist: Oh, you were a fabulous interviewee…

JL Collins: I was so fabulous, you waited four years to…

Mad Fientist: I know. Yeah, yeah. Four long years, it was…

JL Collins: Four years [to recover], right?

Mad Fientist: Exactly, four years. I looked into it, and it was October of 2012 that that podcast got released. It’s just insane to me.

JL Collins: That blows me away!

Mad Fientist: Absolutely crazy! So yeah, it’s good to finally have you back on again. And it’s something that I actually was hoping to do over the years. You’ve obviously put out a ton of amazing content over the years. And one of the best things I think you’ve created on your site is the stock series.

And I know you had written some of those posts prior to our interview, but you’ve collected them into one place and laid them out as well. And it’s the place where I send everyone to if anyone asked me about investing or if I’m writing a post and I don’t feel like writing about a topic, then I’ll send them to your stock series.

So, that’s something I definitely want to get into today because that wasn’t there in its entirety when we chatted last time.

And in addition to the stock series, I’m excited that you’re now releasing a book that takes all of that great information and lays it out in a very easy to consume manner. So, we definitely have a lot to talk about.

But can you maybe talk about why you decided to write the book and maybe the progression from that stock series into what is now The Simple Path to Wealth?

JL Collins: Sure! Well, let’s start with the stock series because that’s been an interesting journey.

When I first came up with the idea for it—and there are now, I think it’s up to 29 posts in the stock series. And you said I have a button on my website which is labeled “Stock Series” where these 29 posts are listed in the order they were published. And then I also list related posts.

And when I first came up with the idea for the stock series, I only had the first five that appear in there in mind. That was my plan. That there were going to be these five posts, and that would be it.

So, I put them up one at a time, and I started to get feedback from my readers, really good feedbacks. And over the course of the intervening years from those first five, based on that feedback and based on the questions that readers would ask, they begin to lead me into other topics. I would think, “Oh! Yeah, it makes sense that people who are pursuing financial independence,” which is the core of what you and I both talk about, “Yeah, I got to write about that.” I would, and that would be a post in the Stock Series.

And then, sometimes, there would be posts that didn’t quite fit in the Stock Series or maybe I’ve written before the Stock Series that also relate to it which is why that “most related posts” are in that same kind of thing.

So, the Stock Series has grown organically. And I forget who—it might have even been you, Brandon, who first suggested that I pull them all together under that. In the Archives, you could find them that way, but it wasn’t prominent.

And in terms of the health and the growth of the blog, that was one of the smartest suggestions that I was ever smart enough to follow because that gave a place for people to go.

And it gave other bloggers like yourself who like the Stock Series and who want to refer their readers to a single place to go. So it made sharing it a lot more convenient.

And then, as you indicated—so to take it to the next step—I began to realize there was a book there.
And in the book, there was an opportunity to better organize all of these materials. This Stock Series, as I’ve mentioned, they’re in the order they were published, but that’s not necessarily the best order to read them in in terms of absorbing the information.

So, the book, I had an opportunity to organize it the way that made the most sense to incorporate some of those ideas and posts that were not part of the series, but were really part of the overall concept—and in the process, to make it much more concise.

And also, I think, better-written. I mean, I put a lot of effort in my blog posts as you do, but there’s a whole other level of polishing that goes into a book.

I think of The Simple Path to Wealth, the book, as the Stock Series and related posts condensed, better organized, and probably, an easier way to absorb the information.

Mad Fientist: Oh, absolutely, yeah. It’s definitely laid out very nice. It reads very well. It is literally everything you need to know to be a successful investor. Pretty much your whole life of experience with investing, I know from speaking to you last time that you learned many lessons the hard way over the years. But I would say four years ago, you had a pretty much solidified—what I think is a great strategy.

I was wondering if there’s anything that’s changed or that you’ve tweaked since then.

JL Collins: Well, it’s interesting because when I started writing the blog five years ago—I started in investing at 1975 (so now, I’ve just aged myself, dated myself). So I’ve been knocking around this stuff for a long time.

And I heard somebody earlier today say that the definition of an expert in a field is somebody who’s made all the possible mistakes that can be made. And that’s certainly—if I ever claim any expertise in this, it’s because I have made all the possible mistakes that you could make.

And by the time I started writing the blog, I had pretty much made those mistakes. That was 2011. I guess I’ve been investing for 35 years, something like that at that point.

So, there has not been a lot of change in my philosophy or approach. And as I’m sitting here, the only one I can really think of is when I first started writing the blog, I recommended three mutual funds. That’s one of the things that I’m known for, keeping things absolutely as simple as possible.

And now, I only recommend two. I recommend total stock market index fund and I recommend the total bond market index fund.

When I first started the blog, the third was the REIT fund. I no longer—I actually have a posted blog called Stepping Away from REITs. I didn’t step away from them because I think REITs are bad. I stepped away from them because the role that I wanted them to play in the portfolio, I was becoming more convinced that they didn’t play as well as I initially thought they would, and that the total stock market index fund was playing that role at least as well if not better. And the role I’m referring to, by the way, is inflation protection.

So, real estate is somewhat commonly thought of as a good inflation edge. And to a certain extent, it is. But surprisingly, it’s not much better or maybe even slightly worse than holding individual equities. So, over time, I decided, “You know, if you own the total stock market index fund,” which is the core of what I recommend, “You already own REITs because they’re part of this total stock market.”

And by the way, for anybody who doesn’t know, REIT stands for “real estate investment trust.” It’s a way of holding real estate investments without physically having to buy real estate. It’s just like holding stocks as a way of holding businesses without actually having to operate the things.

So anyway, I just came to the conclusion that I really didn’t REITs to accomplish what I had originally meant to accomplish.

But other than that, there’s probably one or two minor things that I’m not thinking of, but they’re pretty minor.

Mad Fientist: Right! So, it really is The Simple Path to Wealth. I think that’s probably a good point. You actually described a little bit about your investment philosophy for those that may not know or may not have read your blog.

So, when you say “simple,” you mean simply. You’re two funds. Is there anything else you want to just quickly discuss about the general philsoophy?

JL Collins: Sure! Well, if you want to be financially independent, there are really three things that you need to do. And if you do these three things, simply, you’ll wind up wealthy.

One is you have to avoid debt. You can’t become financially independent and be in debt.

You have to spend less than you earn because the surplus that you don’t spend is the money that you have to free up so you can investment.

And that’s the third leg of the school, investing.
So, avoid debt. Spend less than you earn and invest.

And when it comes to investing, index investing—and we can talk about that what that means if we have time and you’re so inclined. But index investing has been around for 40 years. And it was initially—and not just initially, but even to this day—villified by Wall Street because it strips away a lot of the costs that are involved in investing.

The research over the 40 years has been copious and dramatic. And index investing simply outperforms everything else.

That’s counterintuitive in a lot of cases, but there it is! And that’s not just me saying that. It’s what the research says.

Even people like Warren Buffet who had become incredibly wealthy and incredibly famous by not indexing, by actively picking stocks, Warren Buffet is on record with saying, “When he passes the investment strategy for his widow is going to be index investment.”

And it’s important to recognize that the reason Warren Buffet is as famous as he is that he has accomplished something that is incredibly difficult to accomplish—and that’s he’s outperform index.

My blood runs a little bit cold, and I cringe when I hear people say, “Well, I’m not going to bother with index. Hey, I’m going to do what Warren Buffet is going to do.” When Warren Buffet is done, it’s like “As if!”
I have read all the books and I’ve watched all the films of Mike Tyson boxing in the ring, and it would still be suicide for me to get in the ring with Mike Tyson.

And the idea that you’re going to go to Warren Buffet’s annual events (which are wonderful things to attend), you’re going to read his books and books that people have written about him, and then go duplicate what he’s done, well, let me know about it and I’ll sell the tickets.

Mad Fientist: So, I want to step back to your first comment of avoiding debt. I know people out there will maybe be confused as to, “Well, does that include mortgages and student loans?” I’m actually interested in your take on it.

JL Collins: You know, that’s a great question. And it’s a tricky issue.

When I was working on this book, I had nothing in it about that. Tim was my editor. Tim Laurence was my editor. He started insiting that I write a chapter about debt because it was that important.

And I resisted that for a variety of reasons that don’t make too much sense as I look back on it, but I did resist it for whatever reason.

Eventually, he prevailed.

And I think it’s critically important. I think I resisted it because my thought was, “Well, obviously, you can’t begin to set aside money to invest if you’re still paying off debts. So it goes without saying, you get rid of the debt first, and then you read my book and you’ll know where to go from there.”

But it made a lot of sense as I listened to Tim to write about dealing with the debt.

And there is such a thing, or at least a term, of “good debts.” Bad debt is generally defined as things that you borrow money to buy that immediately go down in value. A car is a classic example.

So, a car loan is bad debt. You’re borrowing money to go buy something that the moment you drive it out of the dealership is worth 10% or 20% or whatever it is percent less.

A good debt is traditionally defined as buying something that will hopefully go up in value. So, if you’re operating a business, not every business uses debt, but a lot of business uses debt to facilitate their growth. And that’s considered good debt because, if used wisely and successfully, the business will grow even faster and will be more prosperous than if you didn’t have it.

And people then look at houses and mortgages and says, “Well, that’s a good debt because the value of my house will rise.” Well, this is a little trickier because, first of all, the value of houses doesn’t always rise. In fact, your business doesn’t either. But at least your business is in your control. The value of your house (as a lot of people found out to their sorrow five or six years ago) may or may not go up or down. And there will be very little in your control.

Some people will say, “Oh, you have to buy wisely in the right area,” and et cetera, et cetera. But sometimes, the right area today turns out not to be the right area tomorrow.

So, it’s a little more difficult. Traditionally, people say getting mortgages for houses is good debt because they will go up. I’m a little more cautious about it. This is really beyond the scope of the book, but I’m a little more cautious about the idea of automatically buying houses because “it’s a good idea.” And I have written about this on the blog.

Mad Fientist: Yeah, I think that is my favorite post of yours, actually. I will definitely link to it in the show notes. I would say that’s one of my favorite blog posts in general of all time. So I will definitely link to that.

JL Collins: You’re referring to Why Your House is a Terrible Investment?

Mad Fientist: That’s it! That’s the one.

JL Collins: That’s the post that got me the most love and the most hate.

Mad Fientist: Yeah.

JL Collins: The challenge is the American religion.

And some people come away from that saying, “Well, Collins says you should never own a house.” And that’s not true. I’ve owned houses myself. I don’t own one at the moment, and I am relieved to be done with owning houses…

Mad Fientist: It’s the best thing ever, isn’t it?

JL Collins: Yeah, it is a benefit from my point of view, but not for everybody. I mean, I understand some people really put down the roots and take great value and satisfaction in our homes. And I’ve written about that too. I have a post called Roots versus Wings.

So, I’m not opposed to owning houses. What I’m opposed to is the real estate industry propaganda that everybody should own a house, you should always own a house, and it’s the best financial thing you can do.

In my world, owning a house is an expensive indulgence. And there’s nothing wrong with expensive indulgence if you can afford them. But if you’re striving for financial independence, you have to very carefully weight whether buying a house is going to suit your goal of reaching financial goal.

You can in some markets. And I have a post about that which is taking you through the exercise of evaluating renting versus buying in a given market just from a financial point of view. And I think everybody ought to do that. Not all decisions you make are financial, but all decisions you make, you should understand what the financial implications are.

And so, if you run through that—for instance, we sold our last house three years ago. And the lifestyle that we prefer at the moment is renting. So, I did this analysis. And as it happens, renting is and considerably less expensive for us than owning a house was.

Now, that’s not true everywhere in all markets. And if I ran the analysis and found out renting was more expensive, I might still have decided to rent because that would have been the expensive indulgence that I was willing to buy and willing to afford. But I would’ve known what I was doing, and that I was making the more expensive choice.

But I’m just saying to make sure that you run the numbers, so you know. If you want to own a house, you might run the numbers and find that it is the more economically advantageous decision, and I agree. That aligns perfectly with what you want to do anyway. But you might find out that it’s going to cost you more money. And that’s okay too as long as you understand. And if that’s how you’re willing to spend your money, then that’s fine.

Mad Fientist: So, you mentioned that you have a two-fund approach. You have a total stock market index fund, total bond market index fund. I know some people out there may be thinking, “Maybe you need some international exposure.” A lot of people recommend having a total international fund to diversify further. So, I’d like to get your take on that.

JL Collins: Well, Brandon, you’re right. This is a key area where my advice parts company with the vast majority of people out there who are talking about this stuff. The vast majority of sample portfolios that I’ve seen put together include international. But as you pointed out, I don’t.

There are really three reasons for this—one, added risk, added expense, and we’ve got it covered. So, let’s talk about those.

Added risks, you have a couple of added risk when you buy international funds—one is currency.

We own international companies in international markets. They’re all trading in their local currencies. So, if you own European companies, for instance, they’re trading in the Euro. If you own Japanese companies, they’re trading in the Yen, et cetera. And those currencies fluctuate and trade against the U.S. Dollar.

So, there is what’s called “currency risk” that the value of your holdings will go up and down not just with the value of your holdings, but with the value of the currency that you are holding them in.

You don’t have that when you own VTSAX which is the fund that I recommend. It’s the total stock market index fund for the U.S. from Vanguard. It owns every publicly-traded company in the United States.

So, the second risk you have internationally is accounting risk. The U.S. isn’t perfect, but the accounting standards and the transparency of those standards are the best in the world in the U.S.

And we certainly have our Enron’s. We have companies that occasionally blow up, so that risk doesn’t completely go away. But it is a lower risk than you have anywhere else in the world.

So, currency risk and accounting risks are two risks that you take on when you invest internationally.

And then, you have added expense, the cost of VTSAX. Total stock market index fund here in the U.S. is 0.05%. Vanguard has great international funds if people are interested in them. Their expense ratios are very, very low, but they’re still about three times what VTSAX is. They’re around about, I think today, the last time I looked, they were 0.15 or 0.18 or something like that. It’s still incredible low as expense ratios of funds go. But nevertheless, more expensive than our VTSAX.

But the most important thing is—and the reason that I don’t personally own international, and I don’t see the need—is we’ve got it covered. When you own VTSAX, you own about 3600 U.S. companies virtually, every publicly-traded company in the market. And the vast majority of those or the vast majority of your holdings are in the largest companies in the U.S., what’s called the SMP500. About 80% of VTSAX just tilted towards those large companies.

And those large companies, for the most part, are by definition international businesses.

So, if you think of companies like Apple or General Motors or Caterpillar or Google or Facebook for that matter, these are international businesses.

So, when you own the U.S. market, you have a significant participation in the growth of the world markets. And you own it in the least expensive and the least risky possible way that you could own it.

Now, having said all that, if somebody came to me and said, “Well, I get that. But I still want to own international,” I don’t think it’s a terrible thing to do. I just don’t think it’s a necessary thing to do.

Mad Fientist: Oh, great explanation. I’d like to dive into the balance between the total stock market and total bond market index funds. So, obviously, two funds, that’s very simple. That’s great. I think it’s a great way to go. What are your thoughts on the percentages between those two especially today in the current interest rate evn? What do you take on bonds and how much should you have?

JL Collins: Well, actually, you’ve covered a lot of ground in that one question. So let’s talk about allocation first, and then if you remind me, we’ll talk about bonds and the interest rate issue. You should second that. I’ll probably forget about it by the time we get there.

So, as you read through my Stock Series or if you read through the book, The Simple Path to Wealth, you’re going to see I talk about two different stages in an investor’s life. One is the wealth accumulation stage, and the other is the wealth preservation stage.

The wealth accumulation stage is simply that time in your life when you’re working, you’re earning in income. As we discussed earlier, you’re living on less than you earn, and you are investing the difference. And of course, the more aggressively you are saving (the less you’re living on and the more you’re saving and investing), the faster you’ll get to financial independence. So that money that you’re investing is flowing into your stocks and your investments.

And that serves to smooth out the ride because while stocks and the stock market is an incredibly powerful wealth-building tool, it is also very, very volatile. It goes up and down dramatically. It marches relentlessly upwards, but in a very volatile fashion as anybody who pays attention to it notices and certainly anybody who was around in investing during the ’08/’09 financial crisis.

When you are in that wealth-building phase, I recommend that you are 100% VTSAX, 100% stocks. In most quarters, that’s considered very, very aggressive. But because you’re continually putting new money in as you’re earning money and you’re taking that savings rate, that new money is actually taking advantage of those dips in the market, that volatility.

So that volatility begins to work in your favor. And that’s in the wealth accumulation stage.

Now, the wealth preservation stage comes when you no longer have earned income and you are no longer putting new money into your investments, and instead, you are now having your investments support you. You’re financially independent or maybe you’re just taking a sabbatical for a while.

That’s the wealth preservation stage. That’s at the point where, because you no longer have that cashflow of new investable money, you need something else to smooth out the votality of the stock market. And that’s bonds. And so, at that point, you add bonds to your portfolio.

Now, I want to make the point that this is not necessarily an age-related thing. Traditionally, it would be because traditionally, it would work from coming out of school for 40 years or whatever it is to retire at 65. And that’s very cut-and-dry. But in this modern world—and particularly for the people that are probably listening to this podcast—there are a lot more dynamic ways to live life. And a lot of people—and you’re a good example. You’re working for a while, and then they stop. Maybe they’ve accumulated enough to be financially independent and they’re done working forever. But more likely, if you’re that young, you’re going to wind up doing something else that creates cashflow down the line.

So, the point being, your growth stage and preservation stages can vary at different times in your life. So, I would say that whenever you step away from earned income, that’s when you want to always step into your wealth preservation portfolio.

Now, as to what that allocation should be, that depends a lot on your tolerance for risks because bonds serve to smooth the ride. I encourage people not to think so much of the return you get on bond (especially in this low interest rate environment), but rather as the counterbalance to the volatility of stocks that they provide.
If you were to graph VTSAX (the total stock market index fund) and VBTLX (which is the total bond market index fund), you would see a very wild ride with VTSAX, the stocks, than ultimately winds up much higher over a given period of time. And you would see a very slow, gradual, almost no volatility on the bonds. But it underperform stocks over time. So that’s why you don’t want to go entirely with bonds.

Mad Fientist: Yeah, that all definitely makes perfect sense. And as you were saying that, I was trying to envision how I’m going to feel in a couple of months when I finally step away from work.

And I completely agree that I should move more into bonds. I currently don’t have any because, just as you’ve mentioned in your wealth accumulation phase, I’m happy writing out the bad times just to have better times when the good times come.

But ideally, I should move into bonds. It’s just really difficult to do right now considering interest rates and everything. That made me think investing is such a psychological thing. If only it was just numbers, then I think most of us listening to this—me included—would kill it because numbers are easy and you can solve numbers. But it’s the psychology behind it that’s really difficult that people struggle with which is why I like your Simple Path to Wealth because the last thing you need is more complexity in your strategy when you’re trying to deal with all these psychological things as well.

So, I’m wondering if there’s anything that you still personally struggle with when you know you should do something, but you still do something different?

JL Collins: I mentioned earlier that I started investing in 1975. Well, as it happens, that was the year that Jack Bogle created the first index funds. I didn’t hear about index funds for ten years, and it probably took me another 10+ years to be smart enough to accept how powerful they were.

So, I spent the early part of my investing life—in fact, as I look back, most of my investing life—picking individual stocks and trying to pick individual managers of mutual funds who were, in turn, picking individual stocks.

It’s like a disease. I still occasionally buy the individual stock. I happen to own two. I’m not going to say what they are because it’s probably not a good idea to own either one of them.

It’s interesting. I was talking to a friend of mine who was into individual stocks these last few days. And one of them that I own is down sharply and I’ve been thinking about adding to the position because I still like it and I still like the story.

And this guy also owns it. He said, “By the way, I really like…”—you know, I was talking about ABC Company, and he said, “By the way, I really like XYZ Company.” I emailed him back and I said, “You don’t understand. I am not looking to build a portfolio of stocks. I own two. I don’t want to own any more than two. I’m probably not all that happy owning these two.”

“So, if you say that you really like XYZ, that only makes any difference to me if you’re saying I should sell ABC or DFE and move in there because I am not going to be adding XYZ.”

I will also add very quickly that the percentage of my portfolio that I allocate to these individual stocks is less than 5% of our net worth. So it’s my play money…

Mad Fientist: I’m glad you haven’t completely reformed and are now a perfect investor.

JL Collins: The problem with individual stocks is that when you buy one and it works, there are few better feelings than analyzing a stock and buying it and watching it begin to soar. But what I began to realize more and more over the years—and I am a slow learner—is that the times that it’s worked and soared and it’s such a wonderful feeling and the times that it hasn’t worked and hasn’t gone anywhere (worst yet, it’s gone down), there’s been no difference in my analytical facilities or effort. So, it has been sheer luck when it’s worked.

Mad Fientist: Well, the other problem—and the position I find myself in (and I don’t know how many years ago)—I’ve thought, “This is an amazing opportunity,” I was like, “This is crazy! I’m just going to have to pick up some of the stock,” and I did, and I was right, luckily, like you said, I could’ve equally been wrong because the amount of analysis I put into it was laughable.

But now, I got this stock that’s gone up a lot in my taxable account, and I can’t sell it because I don’t want to take the tax hit and I’m like, “Oh, I just want to get rid of it and just be fully VTSAX,” but…

JL Collins: Let me just correct you on one thing. The problem was not that you didn’t put enough work in the analysis. It wouldn’t have mattered.

Mad Fientist: Yeah, exactly.

JL Collins: You could’ve put in 10,000 times the amount of work and analysis. It’s just picking individual stocks is a fool’s game.

I spent a little bit of time in working for an investment research firm. We had some of the best analysts that were working at the time. And that’s not just my opinion. They were institutional investor. And I think it’s still around. It was a magazine that served the market in the day that would periodically write and pick the best stock analysts that were out there. And it was common that the analysts working for the firm where I was working with would take those awards, and they would know these—

And these are guys who live and breathe this stuff. They have, first of all, the best educations you can have in the field. They have dedicated their career to following and analyzing stocks. They live and breathe it every day. They are focused on one, maybe two, industries and maybe half a dozen companies in each of those industries.
They know these companies intimately. They know the CEO’s and CFO’s and the top managers of these companies. They go out and talk to their customers. They go out and talk to the rank and file. That’s their business. They live and breathe this stuff.

And they still get it wrong!

Mad Fientist: Right!

JL Collins: And then, the idea that you or I or any of our listeners are going to read a few 10K’s and successfully compete in that market, it’s just silliness. And that’s why, as I’ve talked about earlier, Warren Buffet is so famous and so revered because he’s done something that is pretty much impossible and so people are willing to do.

And let me make another point as long as the subject of Warren Buffet came up. When we were talking, I was saying earlier that you can’t predict the stock market. And so, therefore, you can’t sidestep when the market plunges either to take advantage of it or to avoid the pain.

So people, when the market collapsed in 2008, 2009, and Warren Buffet, of course, came out smelling like rose, and people said, “Well, see, that’s part of Warren Buffet’s skill. He was able to predict the stock market crash and avoid it,” well, that’s not true. Warren Buffet did not predict the stock market crash. And in fact, towards the bottom of the market plunge, I looked it up and Warren was down $33 billion. Now, he still had about $25 billion left, so I was going around saying to all my friends, “I wish I was down $33 billion.” I mean, the implication being…

So, it wasn’t that Buffet wasn’t able to predict the decline and step away from it. What Buffet did—and what made him successful—is he didn’t panic in the decline. He didn’t sell anything. And because Buffet has great resources, he also was able to deploy new money during the decline and buy at those cheap prices.

So, as I was saying earlier, any of our beginning investors or younger investors or even those that are in the middle part of building their wealth, you should be welcoming declines. And if anything, not only should you not panic and sell, if anything, like Warren Buffet, you should be deploying new capital if you have it.

Mad Fientist: Absolutely!

So, I usually end my interviews with one question which I asked you four years ago which I’m pretty excited about because I haven’t listened to that episode in a while, so I can’t remember what you said. I will be interested to see if you say the same thing or not.

JL Collins: And I don’t remember what the question was.

Mad Fientist: Well, good! So we’re hoping to get a fresh, new answer.

So, yeah, if you had one piece of advice for someone who was open to pursue financial independence, what would that be?

JL Collins: Oh, I’m pretty sure I’m going to give the same answer that I did four years ago. Well, actually, I’ll probably give a little more elaborate answer this time. But I would guess the answer I gave four years ago, and the answer I would give now, is index funds.

I think that I would encourage people not to waste as much time as I did pursuing individual stocks and pursuing mutual funds that are operated by people who are trying to pick individual stocks.

And by the way, let me just make a quick point on that. It’s not as if individual stocks and actively managed mutual funds can’t make you money. I actually achieved financial independence investing in individual stocks and investing in mutual funds that were run by managers that I thought would outperform. You can make money doing that. I did!

But index funds are not only easier. They are more powerful. I would’ve made more money more easily if I adopted indexing earlier.

So, that would be my biggest piece of advice. If you haven’t already embraced the power of indexing, then embrace it.

And then, secondarily, my advice would just be the core that we talked about in the beginning. If you want to be wealthy and successful in life, there’s really keys—and that’s avoid debt, live below your means and invest the difference.

Mad Fientist: That’s it, Jim! I think, like I said, I haven’t listened to that episode for a while, but just listening to you talk after me asking that question, it brought it all back. And I think that is exactly what you said the first time four years ago.

JL Collins: You have to link to that interview, so people can check.

Mad Fientist: Absolutely! I will. And I’m going to actually go check after we get off the phone.

JL Collins: Yeah, let me know. I probably won’t bother to check, but let me know how I did.

Mad Fientist: So yeah, Jim, thanks so much for joining me again all these years later. Congratulations on the book, The Simple Path to Wealth.

JL Collins: Thank you.

Mad Fientist: I’m really excited about it. Like I said, it’s everything you need to know to be a successful investor. I definitely recommend it to everyone.

And yeah, thanks again, buddy. It’s nice to chat to you now that we’re good friends and you’re not just some stranger on the Internet.

I have to say, I was a little weirded out to meet—I think you may be the very first person I met in real life from the blog. And I was like…

JL Collins: Oh, really! Good to know that.

Mad Fientist: Yeah, I think because I came down to your place for dinner.

JL Collins: This is when you used to live in Vermont. And of course, we live in New Hampshire.

Mad Fientist: Yeah. Exactly! You’re two hours away. Your wife cooked us an amazing curry, a delicious curry.

JL Collins: Lamb curry, that’s right, which is my favorite.

Mad Fientist: Yeah, it was amazing! But yeah, I think you’re the very first person that I met in real life. I was like, “Man, this is weird. We’re going to go and meet people I met on the Internet. What if they’re crazy? Or what if they kill us?”

JL Collins: And you had such an experience. The next thing I knew, you were selling your house in Vermont and moving [south].

Mad Fientist: Exactly!

JL Collins: I’ll try not to take that personally.

Mad Fientist: Yeah. No, it was a very enjoyable evening. We had a great time, and we’ve done it many times since.

JL Collins: We had a great time with you guys as we always have.

Mad Fientist: Excellent! Well, thanks, Jim.

JL Collins: Thank you, by the way, for your very kind congratulations on the book. It’s been a ton of work getting that out, but I can genuinely say that I am very pleased with the way that it turned out. And I hope that if anybody listening chooses to read it, they enjoy it, but they’ll drop a comment and let me know.

Mad Fientist: Absolutely, yeah.

JL Collins: And thank you for inviting me back!

Mad Fientist: Oh, yeah.

JL Collins: Oh, I hope I won’t have to wait four years.

Mad Fientist: No, definitely not.

Alright! Thanks. Hopefully, see you soon.

JL Collins: Thank you, my friend. Take care.

Mad Fientist: Bye!

JL Collins: Bye bye.

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JLCollinsNH - The Importance of F-You Money

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20 comments for “JL Collins – The Simple Path to Wealth

  1. Zed
    June 21, 2016 at 6:57 am

    JL Collins, again congrats on the book. I am looking forward to my copy, and sharing it with my friends. (and maybe some family)

    One review coming up! If that is what it takes (not like writing a positive review for a great podcast is difficult) to get more episodes, consider it done.

    Downloading now for my drive to work!

    • The Mad Fientist
      June 21, 2016 at 5:12 pm

      Thanks a lot for the review! I’m currently the #10 investing podcast in iTunes, which I think is my highest ranking ever, so maybe more reviews do actually make a difference?

    • The Mad Fientist
      June 21, 2016 at 5:13 pm

      Yeah, had I found that book at the beginning of my journey, everything would have been a lot easier!

  2. June 21, 2016 at 11:10 am

    Thank you for the podcast Brandon, really like this episode. Looking forward to reading this book! I usually get my books at the local public library. Not sure how long it will take for it to get there so I might do Amazon this time :)

    It was great meeting you at camp Mustache this year. So far you are the only Tar Heel Mustachian I know.

    • The Mad Fientist
      June 21, 2016 at 5:30 pm

      Great to hear from you, Juan, and glad you enjoyed the episode!

      I had a blast hanging out with you and Elisa at camp so I’ll let you know next time I’m in your neck of the woods and hopefully we can get together :)

      • June 22, 2016 at 3:15 pm

        Sounds great! we’d love to get together next time you are in the triangle. If you need a place to crash just let us know :)

  3. Jonathan B.
    June 21, 2016 at 5:18 pm

    Hey JL, I see you’re published on Amazon Kindle, but any chance your book is coming to Google Play Books soon? Thanks, and congrats! I look forward to checking it out.

  4. June 21, 2016 at 8:57 pm

    Thanks for the podcast, it’s so good to hear from ‘the man himself’ (Jim has the perfect voice for the audiobook by the way!) we thoroughly enjoyed the book and will definitely be recommending it to friends.
    Off to iTunes now, I believe I have a review to leave there……

  5. Mr. PIE
    June 22, 2016 at 1:22 pm

    This really is for both yourself and Jim.

    The work product of both your blogs and various podcasts has been transformational in terms of what it is doing to accelerate our plans toward FIRE in two years. And investing plans, withdrawal plans beyond that. I think I listened to your first Jim podcast about half a dozen times. Similar number of times to the one with the Millionaire Educator. So many learnings, so much wisdom.

    The least I can do is go and write a review on the podcast (we actually were delighted to be able to review Jims book prior to publication and put it up on our relatively young blog and Amazon) to give a little something back to the volume of information that has provided so much guidance for our family journey.

    Look forward to hearing more from you and your guests. Please keep up the great work. I hope life is treating you very well in my native country, which I do miss from time to time!!

    • The Mad Fientist
      June 23, 2016 at 4:14 am

      Wow, thank you very much for the kind words (and for leaving a review)!

      Let me know if you make it back over here at some point and we’ll grab a coffee or a pint :)

      • June 29, 2016 at 4:53 pm

        Sound great. Will do.

        I got the short review up there last night under Plan Invest Escape. apologies for delay – work stuff. Aargh!

  6. Kelsey
    June 22, 2016 at 7:51 pm

    I always enjoy listening to your podcast Brandon! Is there a way non-iTunes ppl can show some love? (or maybe I’m just not accessing the link above right?) I use an Android app to listen.

    • The Mad Fientist
      June 23, 2016 at 4:15 am

      You just showed some love so thank you very much :)

  7. July 1, 2016 at 9:44 am

    I listened to the episode twice to make sure I didn’t miss anything :). Great interview, looking forward to more. I don’t have iTunes either :).

  8. Mr Name
    July 2, 2016 at 5:07 pm

    Great episod (as always!) and new website. I don’t have an iTunes account, is there any other way I can help? 2 podcast/month would be awesome! Thanks for the work.

  9. Mrs. Motivation
    July 15, 2016 at 4:19 pm

    Mad Fientist,

    I just want to say that listening to your podcast has changed my life beyond words. I listen to all of your podcasts over and over again. I have the motivation to do something no one else in my family cares to do. I’m still working on my husband (He’s coming along slowly). I keep telling him that we be financially independent before our supposed retirement age! He’s coming along. I won’t make it there until about 50, but who’s counting? :-) Keep podcasting please!!!

  10. Angelo DeGiralamo
    July 31, 2016 at 12:00 am

    Just finished listening to your second podcast with Jim Collins.

    Collins has a great radio voice – if he had been born sooner he could have been a smash hit on radio. And although I have not listened to your first interview with Collins, you need not make any apologies for this one – I think you asked some good questions, and got to the heart of Jim’s investment guidance.

    However, I was more than a little surprised when Jim discussed his “revised” recommendations – moving from recommending 3 Vanguard funds, (S&P500, Total US Market, Real Estate) to recommending one fewer fund. I believe that most “retail” investors will be well served with a simple approach to investing, and having only two funds is almost as simple as you can get, (one is the simplest of course). So what was the source of my surprise?

    Jim chose the wrong fund to discard! He should have made the Vanguard Real Estate Fund one of the two funds investors need.

    The Total Market Fund and the S&P 500 fund are highly correlated – check out the results – about 80% of the two funds are identical, invested in the largest US companies. If you have one you (almost) have both! Check out the results since the inception of the Total Market Fund, the newer of the two funds. I think Morningstar has an article comparing the two funds…on 1 year, 3 year, etc. results.

    On the other hand, the Vanguard Real Estate fund has only about a 36% correlation with its S&P 500 fund, and the lower correlation provides a greater degree of safety for the investor seeking diversity.

    So, given the above, a wiser recommendation, in my opinion, would have been to keep Vanguard’s real estate fund and discard one of the other two.

    Which of the two, the two largest Vanguard funds should be discarded?

    Well the guy that popularized (“invented”) index funds, Jack Bogle, prefers the Total Market Fund to the S&P 500 – but that’s because he’s a purist. Jack dislikes the fact that the S&P 500 fund is “slightly managed” i.e., a committee makes choices between the largest US funds and changes the lineup in the fund – for good reasons, generally – (e.g. company results suffering), but also when an individual’s ownership of the company exceeds 50%, as recently occurred with Sears.

    Bogle believes the Total Market Fund is superior to the S&P 500 because it is “truer” to the concept he has for an index fund. Essentially Jack believes in “including them all”, – that is all of the US funds. Actually the managers of the Total Market are not quite able to do that…for the simple reason that there simply aren’t enough shares outstanding in some of those “tiny guys” to fill the buckets of Total Market Fund owners.

    Anyway, with the above exception, it was a pretty good show – especially useful for the newer investor.

    I think his three foci – minimize debt, maximize savings, invest the surplus – is the way to go. I’ve discussed similar guidelines to our 8 daughters as they were growing up, and am now looking forward to educating their children, (19 grandchildren thus far). But the best way to help family to understand what is important is to believe and live the guidelines yourself – lead by example.


    P.S. I have about 15 years on Jim. I bought my first shares of stock in 1960, and have been continuously investing in company shares and mutual funds since then. I “retired” in 1993, age 56 – at the time we had 5 of our 8 daughters still living with us. Three were in college, one in high school and one in elementary school. All 8 daughters have at least one college degree and none had any debt at graduation. We’ve owned our principal residence since 1965, we are now living in our one-level mortgage-free sixth home.

  11. MRhon
    August 25, 2016 at 4:35 pm

    At 24:40 currency risk is mentioned. I would like to point out, that there always is the currency chance as well. You may profit from rising values of foreign currencies, as long as you are invested in foreign companies.

    Additionally you can combine foreign index investment with regular rebalancing of your portfolio and in the end you will gain some additional surplus, as you are automatically investing in “cheaper” stocks.

  12. Jason
    January 5, 2017 at 3:53 pm

    I attempted to post on JL Collins website, but it stated that he isn’t accepting comments.

    So VTSAX is comprised of approximately 81% large cap, 6% mid cap, and 13% small cap stocks. All of the investment literature I’ve read states that small cap allocation represents greater risk, greater return. If your investment horizon is longer, say 20+ years, don’t you want greater exposure to small and mid cap? Based on the risk/return profile below, I would think you want a greater % in small/mid cap funds?
    (I pulled 3 “blend” Vanguard Admiral Shares, small/mid/large cap and Google Finance was the source of the data.)

    “All” return (Nov 24, 2000-Jan 4, 2017)
    Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) – 178.46% standard deviation: 14.81%
    Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX) – 228.61% standard deviation: 13.47%
    Vanguard Large-Cap Index Fund Admiral Shares (VLCAX) – 109.09% standard deviation: 12.27%
    Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – 85.07% standard deviation: 12.51%

    10 year return (Jan 5, 2007-Jan 4, 2017)
    Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) – return: 93.65% standard deviation: 19.85%
    Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX) – return: 85.48% standard deviation: 17.93%
    Vanguard Large-Cap Index Fund Admiral Shares (VLCAX) – return: 64.95% standard deviation: 15.36%
    Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – return: 65.86% standard deviation: 15.79%

    5 year return (Jan 6, 2012-Jan 4, 2017)
    Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) – 76.96% standard deviation: 13.07%
    Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX) – 79.54% standard deviation: 11.45%
    Vanguard Large-Cap Index Fund Admiral Shares (VLCAX) – 68.57% standard deviation: 10.41%
    Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – return: 80.64% standard deviation: 10.64%

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