The Simple Path to Wealth

J.L. Collins

5/5

"I loved it"

Wow, a great book! I started reading The Simple Path to Wealth and got so hooked, I finished it only a few hours later. I really appreciate JL Collins’s writing style and methodology, and this book lived up to every bit of praise I read about it online. Here’s the gist:

Picking stocks, or any type of active fund management, is a fool’s game. Only the luckiest 20% of professional investors can beat index funds for a single year, and nobody wins consistently. Instead, you should put all your eggs in one basket— well, kinda. Index funds, which invest your money in the entire stock market, are essentially the path to wealth. The index fund of Collins’s choice, VSTAX, has a rock-bottom expense ratio of 0.05%, and some of the highest returns possible (12% historical yearly average, though 8% is more future-realistic). When you’re young, your investments should be 100% in VSTAX (or similar). When you’re nearing retirement (think 5-10 years in advance), slowly switch to about 75% stocks, 25% bonds (there’s a Vanguard fund for bonds too).

If that sounds simple, that’s because it is. But rest assured, this isn’t just the simplest path to wealth, it’s also the best! If you try harder to grow your investments, like by picking stocks, or hiring a financial advisor, you will almost certainly lose money in comparison to this strategy. Despite this fact, plenty of people attempt to pick stocks, or day trade, or hire “the best financial planner who always wins” (hint: those people don’t exist, and if they did, they’d have so much money they wouldn’t be talking to you). VSTAX, or a total stock market index fund, is the way to go.

In owning VSTAX you are tying your financial future to that same large, diverse group of companies based in the more powerful, wealthiest and most influential country on the planet. …Some of these companies will fail, losing 100% of their value… As these fall away, they are replaced by other newer and more vital firms.

If you employ a strategy like this, it will sometimes appear that you will lose— sometimes, the market crashes.

The next 10, 20, 30, 40, 50 years will have just as many collapses, recessions and disasters as in the past… Every time it will be scary as hell. Every time all the smart guys will be screaming: Sell!!

But, you have to understand that “Crashes, pullbacks and corrections are all absolutely normal… Learning to live with this reality is critical to successful investing over the long term” (Collins). Simply look at a history chart of the S&P 500, and you’ll see that the “catastrophic crashes” in the news are typically recovered only a short time later.

So you know how to invest, but what about how to retire? Collins discusses “The 4% Rule”— essentially, studies show that a 4% withdrawal rate is safe over a 30-year period; more specifically, if your investments are 75% stocks and 25% bonds, and you withdraw 4% of your investments each year (to live on), and you increase your withdrawal each year to account for inflation, it is almost certain (~95%) you will still have money leftover (extra money, even!) after 30 years. “The 4% Rule” should not be a hard-and-fast rule for every year of retirement, but rather a guideline; your actual withdrawal rate should reflect the market’s performance (better market —> you can draw more).

To be honest, I didn’t learn a lot from this book. JL Collin’s strategy is one I’ve read online in many places, and he’s not breaking new ground. But for many people, his advice will be shocking, and even if you’re a finance nerd like me, you’ll probably still learn something (I certainly did). If nothing else, this excellent book is another reminder that index funds are still the answer.

Collins’s Strategy

3 investments:

  1. Stocks: VSTAX
  2. Bonds: VBTLX
  3. Cash (for emergencies/routine expenses)

Debt

Debt has been normalized, but it should not be normal. If you already have debt, deal with it based on its interest rate:

International Funds

Collins recommends against international funds for 3 reasons:

  1. Additional risk
    • Due to the relative instability of currencies other than the USD
    • Due to lower accounting standards across the world
  2. Added expense
    • International funds typically have higher fees than VSTAX
  3. It’s unnecessary
    • VSTAX includes some of the biggest international businesses
    • Fluctuations in international markets are likely to show up in VSTAX as well, due to globalization

Nonetheless, Collins admits he doesn’t strongly oppose international funds.

TRFs: Even Simpler

TRFs, or “Target Retirement Funds”, are a set-and-forget investment strategy offered by many companies. These funds auto-adjust between stocks and bonds as you get older, but are sometimes criticized for being too conservative or too aggressive for specific tastes. They’re a great option if you don’t want to rebalance your portfolio. Just be aware even the lowest-cost TRFs have much higher fees (0.15 expense ratio, some are much higher), so be sure to check that.

Why VSTAX/VBTLX?

Investment Advisors

Collins suggests you avoid financial advisors/investment managers/brokers/etc.

DCA

Dollar cost averaging (DCA) is a strategy for investing a large sum of money: you split the money “into equal parts, then invest those parts at specific times over an extended period of time” (Collins). Essentially, it’s hedging against a market drop, because you’re too afraid to invest all at once.

I’ve read lots of praise online for DCA’ing, but Collins discourages it for one simple reason: DCA is a bet that the market will drop. For any given year, historically, this is unlikely (23% chance). So don’t do it! But, if you do, “It won’t be the end of the world” (Collins).

Misc.