JL Collins Q&A | 284 | Author of The Simple Path to Wealth

everyone very excited about today's episode probably one of our most requested and i would also say one of our most important episodes that we have done and that it's time to do again but also do again in a better way we are going to be speaking with jl collins author of the simple path to wealth and the stock series which you can find at jlcollinsnh.com probably one of the most influential books in this community has sold hundreds of thousands of copies and what i think is really important to note about that is that that is with literally a zero dollar marketing budget that is though every one of those copies has been sold entirely due to word of mouth because people have been looking for this information they've been looking for a way to share this information with friends with family members and the reviews on this book are unlike anything i've ever seen we all know that there's books out there that are just fake it till they make it stats that just have massive budgets behind them and they the only reason they're at the level that they're at is because just mon you know money has just been thrown at them this is the opposite of that this book has had the impact that it's had and has the reach that it has because people want everybody to know about this information and in the phi community i cannot think of a single book literally to date that has had more of an impact than the simple path to wealth and we have the good fortune of having the author of that book jail collins on the show with us today to really talk about the why behind this book but even more important that the the actual philosophy the underpinnings of this investment strategy which can be simply defined as let's keep it simple and you'll actually do better so with that welcome to the ultimate crowdsourced personal finance show this is choosefi all right very excited to dive into today's episode and we're going to be speaking with the author of the simple path of wealth and the stock series jl collins and help me with this i have my co-host brad here with me today brad very exciting today how you doing buddy oh man i am doing quite well it's hard to not be doing well when you're getting ready to talk to j.l collins and like you said the stock series the simple path to wealth i mean it's not hyperbole to say that that content changed my entire life it changed the trajectory of my investing life and it's put me in a place where i feel comfortable investing and you cannot overstate how important that is and yeah i mean jim has come to be a friend of ours a friend of the show a friend of mine personally it's amazing he's just a an incredible human being and uh with that jim a uh a real heartfelt thanks for coming back on the show welcome oh it's it's an honor to be asked i think we should end the interview now because there's nothing i can say that is going to top what that introduction was so you thank you for the very kind words i'm honored it was well deserved but and and we're obviously going to dive into the stock series but i think they are into the simple path to wealth but i think the way to start there is actually do an origin story and not so much an origin story for for you as much although there's going to be probably some overlap here but really an origin story for this book the simple path to wealth because i think those two are intertwined and specifically for the reason this book has done as well is because people want to share and what you encapsulate in this book is the probably the easiest thing in the world to share with people that are trying to make sense of what has always seemed so complicated and out of reach so let's just start there tell us a bit more about the origin of this book and you know what explains the success that you've seen with it but also why you took the time to create it so if i could if you'll indulge me i'm gonna go back and actually start with the origin of the blog because the book was enough growth of the blog at jlcollinsnh.com so in 2011 my daughter was in college i had managed to turn her off to all things financial by pushing the information too hard too early too fast and i decided i really needed to put something down on paper for that i wanted her to know about how to invest and how to handle money uh for the day that she was ready to hear it and just in case i wasn't around to personally deliver it and a friend of mine said you know you ought to archive this stuff on a blog and it's pretty interesting maybe share with some friends and family and i i had no interest in starting a blog but i love the idea of having a place to archive this as opposed to just pieces of paper or document on my computer and so i did that and and much to my amazement the audience started to grow ironically my family and friends didn't care about it but there were strangers who found their way to it and the next day i knew i had an international audience and and i'd had a body of work that had been put together and i'd always kind of had an ambition to write a book but i never had a subject in mind until that moment and so let's see it'd probably be about 2013 i started work on the book finished it in the early part of 16 and and published it that uh spring and as i've said to people many times there's by design there is nothing in the book that you can't find on the blog the book's a little more concise it's better organized i won't say the writing's more polished i'll say i spend more time polishing it and let the reader decide if if i succeeded or not and it really i've wrote it for my daughter and i i didn't you know i hoped it would be successful um at least within the fi community i never dreamed that it would have the success that it's had or that what is it four years later it it would be selling even better than every year it sold better than the year before which just uh amazes me that was far beyond my expectations and somebody observed to me that there's a voice of authenticity in it that people respond to and i suspect that's because it is authentic because this is the information i wrote for my daughter i frequently said there's only one person i've ever tried to persuade about this stuff and that is uh that is her and by the way if anybody's curious at this point she's a young adult she's on board and and she has absorbed the information and and i didn't have to sweat it when she was younger the way i did nice so jl the book came out in 2016. and you you just said 2020 was actually the highest selling year what do you attribute that to well i think jonathan put his finger on it uh in his very kind introduction it has been entirely word of mouth when when i launched the book i put a fair amount of effort into the launch i i send copies out to other bloggers who are my friends uh i offered uh for the first hundred of my readers uh who who asked for it a free copy a free online copy with the caveat they put a review of it and i said hey you know good better and different just put the review up obviously i was hoping it'd be good and they were uh but that's all i ever did i mean was in that first month and then the book did pretty much what i expected it to do it spiked kind of nicely uh into the summer it came out in june as a may or june i'm forgetting now you can spike kind of nicely and then it began to drift down and then it spiked again for christmas a little bit and i figured that was and then it would just sort of drift away but uh in 2017 it it started to ramp back up and 2017 was much stronger than 2016 on a per month basis 2018 was stronger than that 2019 blew away 2018 and 2020 is blowing away 2019 and it's i i think it's just word of mouth as jonathan pointed out all right so that is th that's the arc of the book and i'm sure people going into this new year are are going to be very interested and they'll definitely check it out but now let's talk about what this what is the message that this book contained that really captured uh the imagination because i think it crystallized well i guess brad why don't why don't i just give it to you real quick brad what did this book and this blog series mean to you and then maybe we can have jl uh kind of engineer a little bit more about what his own experience what experience that he had led to this you know to this book yeah i think for me investing always seemed like a black box like it always seemed like something that you needed to spend thousands of hours understanding you needed some inside information you needed some i don't know cfa or some cfp license or some such and this is coming from me who was a cpa and theoretically understood some stuff about about finance right but it still seemed impenetrable to me and when that happens usually your brain often just shuts down it says oh that's impossible that's for somebody else i could never learn that and i think that to a large degree is is where i was until i started reading the stock series on jim's website jlcollinsnh and and it just gave me it gave me hope it gave me a sense that all right if i can control what i can control which are the expense ratios if i can buy a little portion of every company in america i can benefit from the ingenuity and the hard work of 150 million americans and i mean these were the kind of the ideas that i got and okay this is going to give me the best chance of long-term success of a 40 50 60-year wealth right and i think that for the first time took it from wow i need a stock tip i need to get lucky i need to play this game or this uh casino type thing of wall street into oh wow i'm purchasing real companies i'm purchasing tiny little bits month after month year after year for decades and that's going to lead me somewhere that i'm going to be really really happy with and brad and what you just said there i think it's important to point out jl your experience kind of mirrors this it's not that this is the only way that you have invested like the simple path of wealth is not the only it's not the it's not the investing advice that you followed for the entire duration of your investing career rather it's what came out of that lessons learned i'd love for you to unpack that for the audience so you're you're exactly right about that in fact the the method of investing i describe on the blog and in the book is the last method i came to and and the best and uh unlike brad uh i i loved delving into this stuff and but the book is written exactly for people like brad and i'll explain i'll come back and explain that in a second i i enjoyed investing i it was it was a passion of mine and and i went through all the iterations in fact one of the uh one of the dirty little secrets if you will is that i achieved financial independence not with index investing which is what i recommend now but by picking excuse me by picking stocks and picking mutual funds that were run by active managers that were picking stocks and so the point is it's not that those things don't work they do work the point is that it's a lot harder and they're less powerful than investing in a low-cost index fund i've said frequently in fact one of sort of the backhanded compliments that sometimes my my thoughts on investing get is oh this is great for beginners and people who really don't want to learn about investing well and i appreciate the comment that is great but i would say it's the best way to invest for everybody and i've said if i thought there was a better way a more powerful way to invest that required a little more work that's what i would have written about but the conclusion i came to is ironically counterintuitively the most powerful way to invest is also the simplest and the easiest and i had an epiphany my daughter came home from college one one christmas probably and and of course i immediately started in on telling her about investing and and she uh she put up her hand and she said dad dad i get it i know it's important i just don't want to have to think about it all the time kind of like what brad just said and that was the epiphany a lightbulb went off and i thought you know i'm the odd one out here most people don't want to think about this stuff the way i like thinking about it most people like my daughter like brad like you have more importantly like many of the people listening have more important things to do with their lives you know they're out building businesses and bridges and curing diseases and they know like my daughter like you guys they know that investing is important but they don't want to occupy a huge part of their life and again the beauty is that if you follow the approach i described it will occupy a very small part of your life you can set it forget it and get on with the more important things you're doing and over time you'll get the most powerful result that you can reasonably expect to get so i think we've done a great setup here for why this is important and maybe even a little hint about the what this is but let's just go ahead and go right to the core of it when we say index fund investing or the simple path to wealth what really are we talking about how is it possible that something that's simpler and less expensive and doesn't require that you have a person a really smart person handling enough where how could it possibly do better you just said if there was a better route that could get me there more consistently i would be doing that and writing a book on that how is it possible that simpler is the better choice why don't we just go ahead and share that with the audience well let me let me start with an illustration and again i i think of this because of a comment brad made a moment ago about how initially before he read my book he was looking at this investment world it just seemed so incredibly difficult and complex and involved and that's not his imagination it is difficult complex and involved and it's that way by design because the more complex it's made the more wall street can charge in terms of fees the more they can encourage people to come into their arms and the more they can say don't worry you're pretty little ahead about this bring us your money and we will take care of it for you and of course i'll charge a large fee for that so imagine that you're sitting at a huge banquet table and this banquet table is groaning under every kind of of exotic dish food you could possibly imagine and you were tasked with not only picking the ones that you wanted to eat but trying to understand how these things were made and what my book does is come along and say you know what in this tiny corner of that banquet table are the simple foods that your body really needs to thrive best and you can put your arm in front of those foods on that table and sweep everything else onto the floor all that complicated stuff that's out there because you don't need it and you'll get better results without it and those simple little foods in the investment worlds are low-cost index funds why do they work better well there's a couple of reasons one is that they're low cost jack bogle who first invented invented the first index fund uh is the founder of vanguard i was first one who really talked about the concept of index indexing one said performance comes and goes costs are forever and so actively managed fund active managers or stock pickers are always trying to outperform and sometimes they do and sometimes they don't and on average outperforming as counterintuitive as this is outperforming the market as a whole is extraordinarily difficult something on the order about 20 of active managers in any one year can do it so you have an 80 chance of of you're going to be 80 percent of active managers in one year when you go out five years ten years that percentage that outperform gets smaller and smaller by the time you're out 30 years and by the way investing as a long-term gain the number of active managers outperform the market is less than one percent that's statistically zero but of course marketing people who are selling these funds point to the the people who've done it think warren buffett and i always cringe when when i hear people say well i'll just do what warren buffett does as if i mean that's kind of like saying you know i'm just going to do what mike tyson does and climb in the ring with him well good luck you know you're not mike tyson unless mike you're listening and if you are good on you hi mike and you're probably not warren buffett either unless you're listening warren and good to talk to you again and jl the interesting thing if i could just kind of jump in here real quick is in warren buffett's 2013 annual shareholder letter to the berkshire hathaway uh to his berkshire hathaway company he wrote about basically how he would advise the trustee of his estate to invest the money and he said my advice to the trustee could not be more simple put 10 percent of the cash in short-term government bonds and 90 in a very low-cost s p 500 index fund i suggest vanguards i believe that trust 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 so it's fascinating that you're talking about buffett as one of the few few few examples of maybe somebody who could outperform over 30 years but yet his advice is exactly yours low cost index it's not really surprising when you think about it because warren buffett is not trying to sell you his services right and he knows what what it takes to make this happen and he has watched i'm sure countless people try to do it and and failed so he realizes that he's an outlier uh i suspect that mike tyson would say the same thing to the average person about boxing you know i mean he'd say look you know it takes an enormous amount of effort enormous amount of training and frankly it takes some some physical gifts it's the same thing with investing and mike tyson is blessed in boxing and and warren buffett is blessed in in investing and i'm not mike tyson and i'm not warren buffett and i'm humble enough to know it i would like to you know make sure that we recognize there's people listening to this that don't know what any of these terms mean they're hearing them for the very first time and so we just mentioned something out there we talked about the cost we talked about actively managed funds we talked about index funds maybe people right now are thinking about individual companies that you buy so individual stocks that you might buy i think there's probably it's important for people to really get a sense for what what is an index fund what does that mean um and specifically you now we've mentioned this warren buffett s p 500 is that the one that you talk about in your book kind of give us a little sense for definitions of terms and why we're putting such an emphasis on index funds sure so let's start with what's a mutual fund and or and or an etf which stands for exchange traded fund there are slight differences between those but for the purpose of our conversation we'll lump them together so that's simply a a a fund or an etf takes a bunch of money from a lot of different investors lumps it together and then invests in something and the funds tell you what they're going to invest in so the s p 500 index fund invests in the 500 largest u.s companies that make up the s p 500 index which tracks those companies an actively managed mutual fund might focus on a different kind of parameter they could be a sector fund they might focus on energy or technology but it's a pool of money that comes in and that's invested according to to the guidelines that the the fund sets up so what's the difference then between active managed and indexing well an active management fund is one that attempts to pick stocks that will outperform over time the index and that's an expensive thing to do among other reasons i mean you those guys are highly paid they typically have analysts working for them or that they're paying on the side so that's an expensive route and it's reflected in what you the investor pay for the fund that's called an expense ratio now there are lots of other ways that funds can dip into your pocket but just to keep it simple for now the expense ratio is the main one every fund index or otherwise has an expense ratio and it matters a lot as to how high that expense ratio is interestingly with the advent of index funds and as their growing popularity that has had the benefit of forcing down the fees that actively manage funds charged so even people who still want to invest actively have been blessed if you will by by the advent of index funds because it's lowered their costs but an index fund because it doesn't have those expensive managers as rock bottom fees to put that in perspective uh vtsax which is the fund that i recommend most has a fee of point zero four percent that's about as close to zero as you can get not be there an actively managed fund i think average is something like one percent i think it's really important for people to like translate that into like something that's meaningful because i could imagine someone saying to themselves well one percent's not that bad that means i keep 99 you know what's what's you know a great point over percent is less but one percent is still they're letting me hold on to 99 what's the problem yeah and you know the other thing is not only are they presenting it in that fashion but they're also saying you know if we can return 18 20 what's one percent coming to us well that's a big if returning that kind of percentage over time but one percent compounded it gives extraordinary results i mean it's just amazing how much money that's your money goes into their pocket as opposed to yours better way to look at it is let's suppose that you had a a million dollar portfolio and you were gonna withdraw four percent of that which is commonly viewed as a reasonably safe thing to do over time right and you're in actively managed funds that are charging one percent well you're withdrawing four percent that's forty thousand dollars one percent of your annual income ten thousand dollars is going to the people running those funds so that's the better way to look at the one percent not as well it's only one percent against 99 but how much of your income and even if you're not drawing on your portfolio that one percent is still being drawn from it which reduces the amount of money that can grow for you that can compound for you over time so we can we can get lost in the weeds on the math of this but maybe suffice to say one percent is a big deal over time i'm going to give this back to brad because i know brad you've been able to run these and tell stories with it but just if you could quickly recall we ran this one example where someone is paying you know one percent to expense ratios and then one percent assets under management if you could just drop a version of that you know real quick back in the envelope for the audience what did you estimate what was the difference between for an individual over an investing lifetime what did that two percent difference make over their investing lifetime uh it's good to have an accountant in the group and jonathan you know me so well i i literally was furiously calling up this article while while jl was talking about it so admittedly this is an article i wrote years ago so the actual return the gross return that i anticipated is a little higher than is probably reasonable but the math works so that's that's the key part here so i talked about 100 000 invested and this is over 40-year period you're putting a thousand dollars in monthly okay so this is a 40-year investing lifetime you're starting with 100 grand let's say you get a 9 gross return so that's just nine percent year-over-year return and that again that's higher than we anticipate now but but let's put that aside your balance at year 40 would be 7.2 million okay if you invested that money in vanguard's vtsax which at that time had a 0.05 expense ratio it's actually lowered as jl just told us you would have lost about a little more than a hundred thousand dollars to fees okay so you instead of having 7.2 million you'd have 7.1 million all right if you instead put it in a typical one percent expense ratio fund and got then an 8 net return you would have lost 1.9 million dollars to fees you would only have about 5.3 million and if you doubled down on this and had that expensive fund plus an investment advisor who charge you one percent assets under management so you only had a seven percent net return you would have lost 3.3 million dollars to fees so you would have a little more than half of what you would have had if you invested this in vtscx so that is as stark of an example of fees matter and they compound over these decades over an investing lifetime so brad you mentioned vt sax again going back to definition of terms here because we talked about this s p 500 fund uh by warren buffett but uh jail collins you're talking more about more a little bit more about this vt sax i'd love for our audience to understand what that represents um and the one thing i'd like to add on to that is that when we own an index fund in a particular sector that means we own all the companies which means that potentially we're owning we're owning winners and losers and how is it possible that if we're owning winners and losers we're going to do better than someone that's only picking the winners well let me start with that last one if you could find someone who only picked winners that person would do better but that person isn't even warren buffett not even warren buffett only picks winners so that's really not a very apt comparison btsax is vanguard's total stock market index fund and that means that it invests in virtually every publicly traded company united states and that's around 3 600 companies the fund that warren buffett has recommended uh is i forget what the call letters are on it but it's vanguard's index 500 fund and it invests only in the the 500 largest u.s companies that by the way is the same fund that jack bogle the founder of vanguard and the creator of index funds that is the fund that he was invested in uh for all of his life he now he passed away a couple of years ago and it was the first fund that that mr bogle started so are these guys wrong should they be in vtsax no i mean that's an awesome fund and anybody who's holding it can comfortably hold it forever in fact there's very little difference between vtsax and the s p 500 fund because these index funds are cap weighted that simply means that they own more of the largest companies so about 80 percent of vtsa x is in the s p 500 and then the other 15 20 percent is in smaller mid cap and small cap companies i like having a little bit of the small and mid-cap companies which is why i prefer it but it's kind of like do you like a little hot sauce on your eggs or not it's not going to make a whole lot of difference long term i say to people you know if if you buy the index uh the s p 500 fund and i buy the total stock market fund 10 years from now one of us will have done slightly better than the other but it'll be very very close and there's no predicting who will have done slightly better so don't worry about it you know it's very interesting uh actually timely right now as we're going into 2021 is that we actually do have this interesting use case which actually points a little bit towards the advantages of one versus the other and that is specifically with tesla a real market mover here and i just i would love to get your perspective on this but let's just highlight the way these two would work so with tesla you have a relatively small market cap company that just exploded and has become massive massive massive and now because of its sign meets its qualifications and is now is getting added uh almost retroactively to the s p 500 but it has massive market cap and it's only now being added to the s p 500 whereas with vt sax it's a publicly traded company and you owned it the entire time that it was publicly traded inside the united states so you actually saw some of that gain was included in your own personal return this is a very weird example maybe a once in a lifetime example in that tesla is such an a ridiculous outlier that the s p 500 would not have captured the rise the same way that like a vtsax would it's one of those things that i love just your comment on if you've thought about that or if that in any way adds anything to your opinion uh just because they're talking about when they're adding you know tesla to the s p 500 they really were concerned that it would it would shake things around a little bit while they were figuring it out what are your thoughts on that that's a that's a great great question and a great example so let me start by saying one of the things i love about index funds uh whether it's the index 500 or or the total stock market is they are what i call self-cleansing it's a term i'm proud of because i created it what that means is that you're not trying to pick the winners and losers because you realize you can't do that but you benefit from the winners and if some if some company hits the rocks it will drift away from your portfolio right so what's the worst that can happen to a company well you can lose a hundred percent and by the way it'll fall off the index long before it actually loses a hundred percent unless something very uh quick and catastrophic happens think enron anyway what's the upside well the upside is 100 or 200 or 10 000 or 100 000 percent something like tesla so you are always the the index is always self-cleansing you're always picking up the winners and you're always shedding the losers and tesla's a great example of where owning the total stock market plays to your advantage a very dramatic example of it there are much less dramatic examples of that and this is one of the reasons i like the total stock market is you will pick them up uh every company that ultimately makes its way to the uh 500 index fund index you will pick up earlier by the same token though in all fairness if a company on the index begins to lose its touch and drift down if you own the index 500 once it falls off that index it's out of your portfolio if you own the total stock market it will drift down further before it falls off so i'm sure there's an example i can't think of one as you pointed out tesla is a great example of the upside i'm sure there's an example of of one drifting down on the downside that you would have been better off being rid of sooner with the s p 500 than with the total stock market and that's probably one of the reasons those two track as closely as they actually do does that make sense yeah that was great i just thought it was such a timely analogy really highlighting the difference between an s p 500 versus a total stock market fund right and the other thing i don't know if you want to record this for now with tesla now i own tesla well actually i've owned it for a while but i don't have to worry about tesla's future if tesla continues to blow the doors off as it has i'll continue to benefit if tesla starts to slow down for whatever reason well it's one of 3600 companies i own it'll slowly drift down and it'll be replaced by by something else uh and that's the difference between owning it in the index and owning it as a stock yeah jim i i love that analysis that right when you said i i now own a little bit of tesla like my my eyebrows went up but i thought you actually bought individual shares i'm like no let it it can't be but but yeah you're right as part of having a total stock market index fund and now an s p 500 fund we all do own a little bit of all of these companies but like you said it is self-cleansing and that's that is again something that's very reassuring to me and and i wanted to kind of go back to the the fees because we actually get this question a lot and and i just want to make it clear when we're talking when when you're talking about vtsax here like we're not giving very specific advice to go out and buy this exact thing obviously like this is informational use only but we you and i and jonathan we believe in this for our own selves and i think that's what's important is we're talking about our own experiences right and you've for years talked about vanguard and vtsax but what a lot of people have asked is what about fidelity and their zero percent fees right they have these these new funds i think it's what is it fz rox is their total stock market yeah so fz rox and that has zero percent expense ratio like we've actually had emails come in like should i sell vtsax and buy this fcrox like you know and i say there are lots of good funds you know fidelity schwab vanguard other companies there are lots of funds that are substantially similar but i guess my question to you is why do you like vanguard and what's your response to that question about fidelity or just hey it's not point zero four it's point zero two what do i do then so that that's a that's a broad question uh they're actually there are a couple of questions well went in there so you might have to have to help me remember them as i answer the ones that i that i start with uh so first of all let me say that that a an s p 500 index fund is essentially the same whether it's in vanguard or fidelity or tbro price or any other because it's tracking an index right same thing with the total stock market index fund uh btsax advan is vanguards and i don't know off the top my head what fidelities are but it will be essentially the same portfolio right so it will it should get identical performance the reason i prefer vanguard is vanguard is the only investment company out there that is structured in a fashion that their interests and the investors interests are identical and that's because the investors actually own the vanguard funds that's a profound difference because it motivates vanguard to continually drive down costs so you mentioned correctly that vtsa x used to have an expense ratio of 0.05 it actually used to be higher than that and vanguard has steadily brought it down because that's the culture at vanguard is to lower costs there's no point in having higher costs at vanguard because those would just create a taxable event that would go into the pockets into our pockets as the investors fidelity and every other this is not unique to fidelity but every other investment company serves two masters they certainly serve the their investors who invest in their fund that's how they keep people coming back but they also serve their owners now fidelity happens to be a privately held company t row prices are examples of publicly traded companies so its shareholders are its owners but of those two masters the owners are always going to be number one and so fidelity and t rowe price and every other company has as their primary motivation to make as much money in fees from their investors as they can now if that's the case why do they have zero fees well it's a it's a loss leader competitive move they're obviously trying to to steal people away from vanguard and they've done it on a pricing basis um i'm not going to switch because a i know their heart's not in lower costs their hearts just in a promotional thing i don't trust how long it's going to continue uh i i somebody has to pick up the cost of running that fund so basically what they're doing is shifting the burden to people who own other funds that have fees i have an ethical issue with that so i would not go to fidelity for that the other thing is just when you get fees are important but at a certain level they become academic when you're down to point zero four percent you're not really to you're not gonna have the kind of result that you so eloquently described with one or two percent uh so you know there there's a point where you you can stop chasing it um there is a reason that when jack bogle died he was worth i think 300 million dollars which is a lot of money but if he had structured vanguard the way other companies are structured he would have had multiple billions of dollars but that's because he chose to create a company that favored the investor as opposed to the owner you know when you're talking about these different types of funds i think one thing because people often have been on the sidelines because suddenly it's simple and it makes sense they're like i'm gonna i'm ready to get started and then one thing that maybe one of the things they bump up against is they cost to get started and it used to be that with vtsax it used to be that i think you needed as much as like ten thousand dollars to get started with the fund and i believe that's come down i'd love for you to talk about what it looks like generally to get started with this type of approach and then maybe as that also relays to like um you know etfs versus mutual funds just kind of in your mind with your community and your audience how do people best get started now and you know if they don't have ten thousand dollars yeah so before we go on to that just if i can add one thing to our last bit of conversation uh if anybody has uh an index fund with fidelity or one of these other companies say in your 401k you certainly don't have to run away from it as they say it's the same portfolio you'll do fine let me add a comment on that as well i actually have uh total stock market funds with fidelity with schwab and with vanguard i agree with most of what jl collins just said i would never move to go from .04 percent to .01 or .02 or 0.03 or zero like i just don't make moves based on that but i wouldn't you know i don't have any there's no problem there go with whichever one your 401k offers and be happy about how low the fees are and then you know if you're picking in a vacuum you can certainly appreciate jailcon's perspective on how vanguard is about us i mean they are just that their heart is 100 in the right place so i'll just double down on what you just said yeah and it's it's much more important to invest in low-cost index funds than it is to worry about who's providing them all right so my question was cost to get started yeah so vanguard is not only continually driving down costs as part of their corporate culture but they also are continually trying to make things more accessible at the same time as maintaining value for their existing shareholders so it used to be vtsax had an investor shares version i forget what those what what the ticker letters were for that but there was a three thousand dollar uh uh entry minimum to get into that and vtsax was ten thousand and it had a slightly higher expense ratio so the moment you got to 10 000 uh you should you should have switched it to vtsax for the lower ratio um now they've done away with that investor shares and they've just made the entry as last time i looked at least three thousand dollars for vtsax which is their admiral share version as they call it so they've lowered the cost of entry at the same way they're lowering expenses now what if you don't have three thousand dollars well you mentioned etfs and there's an etf version i think it's vti or the call letters for that and one of the nice things about an etf is you can buy with any amount of money so you can start with as little money as you have and then just keep adding it if you want to if you want to do that and there's nothing wrong with holding an etf for the long term it doesn't have to be a mutual fund let's let's let's uh differentiate that if you don't mind because i mean we're talking now about an etf versus a mutual fund can you maybe distinguish some of the pros and the cons of each or even if it's not a pro or con what some of the differences are for someone that's trying to pick between the two well let's start out with with the similarities right so as i say i think vti is the etf exchange traded fund version of vtsax they hold exactly the same portfolio they have i think the same expense ratio or it's very very close the etf might be slightly lower etfs were created primarily as trading vehicles right so you could take in a mutual fund and trade it during the day traditionally and to this day for that matter if you buy or sell a mutual fund you put in the order sometime during during the business hours and you'll get the price at the close of the market that day so you might put in an order at 10 o'clock in the morning and see the price go up or down before your order is executed if you bought an individual stock your order gets executed almost immediately at whatever that price is and an etf just takes a mutual fund portfolio and allows it to trade just like a like a single stock so when you buy an etf you get whatever that price is immediately if you're buying and holding for decades which i recommend you don't have any need for that if you are trading in and out of of your fund then you're going to want an etf but you're also making a terrible mistake uh warren buffett once said that uh you know in the last century the market started something like 600 and ended at 12 000. how does somebody lose money in a market in the century like that he said it's easy they dance try to dance in and out of the market they try to market time so i'm not at least but interested in trading i don't care about that but that's one of the key advantages uh or distinctions maybe is a better word than advantages that etfs have but the key thing is that they are very very similar that the differences are much less important than the similarities for our kind of investing right so for someone who is maybe sticking around and trying to wait until they get that three thousand dollars to invest in vtscx in your mind there's no reason not to just start buying shares of vti in that case right the etf that's at least at the time of recording it's under 200 per share like if that was a point of differentiation and someone came to you and said jl it's gonna take me a year to save three thousand dollars should i just start buying individual shares of this etf what would your response be to that well so it's it's two things one there there's no reason in the world not to start with the etf version on the other hand a year is no time at all i mean if you're talking about investing for decades so if it were me i'd probably just save up the money over the course of the year but if somebody wants to get going right away and i appreciate you know that maybe they read my book or blog or something else and they get excited about it then there's no reason at all not to buy the etf again my only concern there are other differences of etfs but they're so small in my mind i can't even bring them to mind at the moment even though i've i've written a post about it so listeners can go and find find that post the only concern i had i have about etfs is again it makes it so easy to trade in and out of it and trying to time the market and trading in and out is so tempting and so destructive to your wealth will be my only concern i you know i it's one less temptation but in terms of the portfolio and the performance over long term it's going to be the same i think i wanted to add a little bit extra flavor here and hopefully it'll add value to our audience that maybe is at this particular point in the journey um two things one with etfs you traditionally did have to purchase a whole share amount so with like vtsax if you had 35 you want to contribute this you could just contribute the 35 and buy whatever fractional share of that mutual fund that you wanted no big deal with an etf historically and again you can hear there's a caveat there historically you needed to buy a whole share so like if the etf is selling for 170 you have 180 then you could buy one share 170 and then you have 10 dollars sitting on the sideline conversely if you're buying the mutual fund you could just buy 180 worth of that mutual fund and all of your money is at the work it's not sitting on the sidelines the caveat being now with tools like m1 m1 finance is the one that you guys have heard me mention repeatedly it will now allow you to buy fractional shares of etf so you could find something like vti on the m1 finance platform and you could buy a fractional share of this amount the other thing that came to mind i don't know if you have an answer on this but i feel like i'd heard this before if you were to then if you were to purchase this etf called vti on the vanguard platform and you were to have something like you know 30 40 50 100 shares you were to easily blow by the 3 000 you know limit do they have some sort of in-kind uh transition on the vanguard platform where you can go from vti to you know the mutual fund alternative if you wanted to do that i'm i'm just wondering if i'm making that up or if you had heard something similar about that you know i i i don't know the answer to that uh i and it's it's an important question because if you hold these things in a tax advantage count account like an ira you can just go from vti to vtsax or the other way and because it's in a tax sheltered account there's no tax consequence but if you hold it outside of of a tax favored account it's possible that in selling your vti to buy vtsax you might trigger a capital gain if you have a gain or a capital loss and that's something to consider i know that in the old days when they had investor shares and admiral shares you could go from one you could go from investor shares to admiral and it was not a taxable event whether that's true of going to the etf to the mutual fund candidly i i don't know i've never looked at it but i'm sure that if anybody's curious the vanguard website will tell you or you can call them and they can they can answer that for you i wanted to switch gears and talk about uh time in the market versus timing we just came through actually a very interesting um well we all lived at 2020 very interesting year and uh there were some individuals that even in january or february said i got to get my money out of the market and then those people in march felt really good about it but then other individuals that said i need to keep my money out of the market and then the market went right back up and they they missed the ride and and then but even now some people some people would say uh well why you know if you know it's gonna go down why wouldn't you just get all your money out like just you know why don't what if we could just skip when the market goes down and only buy it you know when it's going up wouldn't we wouldn't we make more you can see what i'm setting up for you here jail but uh but i'm just curious people that are like why not time the market we could just skip all the bumps well wouldn't that be wonderful you know and it would be just as wonderful if if if i could magically turn random items into gold the problem is i can't do that and nobody can time the market now how do i know that nobody can time the market how can i make such a sweeping statement well this is how anybody who could successfully do what you just said step out when the market was about to go down wait till it got to its bottom step back in and repeat that reliably over time would be far far richer than warren buffett far far more lionized there is no superpower more powerful in the financial world than the ability to do that that's one of the reasons a lot of people try to do it that's what we were referring to when i said warren buffett said how do you lose money in a century where the market goes up so extraordinarily you try to dance in and out of it dancing in and out of it is is is trying to time the market it just doesn't work now sometimes some people get it right in 1987 just before black monday which was i think in october uh like with weeks before there was a there's a woman on wall street by the name of elaine garzarelli who predicted it almost precisely almost precisely the day almost precisely the level of that drop which was the single biggest percentage drop in history i think it was about 25 in one day and of course she was immediately and it was documented that she made this prediction she was immediately lionized and and on all the all the talk shows and and what have you and everybody figured that this was a woman who knew how to do this she got lucky she was never able to consistently repeat that that's not a slam on a lane nobody's able to do it the analogy i use is if you knew somebody who won the powerball lottery you wouldn't look at that person and say brad you have figured out how to pick winning lottery numbers no you would look in and say brad you got stunningly lucky because so many people were buying lottery numbers that somebody had to come up with the winning combination and brad happened to be the one that doesn't mean brad has any predictive powers he happened to get lucky it's the same thing with wall street in any given moment in time there are so many people making predictions that virtually anything that the market can do at any given period of time is almost by definition been predicted and some person is going to be right doesn't mean they have predictive abilities it just means they happen to get the lottery numbers so you cannot time the market and if you try to time the market it will it will bring tears you mentioned this spring and it is a great example i have for years now been preaching the fact you can't time the market i have no idea what the market's doing right now i don't know what's going to do tomorrow i don't know what's going to do with you now the end of the year or what's going to do next year with pretty significant confidence 20 years out i could say it's going to be substantially up even 10 years because i have history to support that but in the short term the market is very volatile very unpredictable so last spring covet comes along it comes out of nowhere and the market takes an immediate dive and i'm on twitter i'm on facebook i'm on my blog saying the same thing i don't know what's going to happen next you know and the market i think got down as far as loss about 32 33 i had lots of people commenting on my social media on my blog saying jim this time it's different this time it's a pandemic this time it's it's you know all the reasons that it's different and i said well you have knowledge that i don't have i even posted on twitter at one point that i've i've discovered a new symptom of covet clairvoyance because it just seemed that everybody around me knew exactly what the market was going to do well i've often said mr market will do exactly what it takes to embarrass the most people so of course the market immediately turned around sharply and it's never looked back did i know that was going to happen no i mean when the mark was down to 32 percent i was saying it could go down another 32 it could turn around and go back up it could bounce along nobody knows and the most important thing when you start investing to understand is you have to stay the course and if you get chased out every time you get scared because you think the market's going to go down you're going to lose markets are volatile uh market will go down by the term you own it it's like living in new england and being surprised when it snows i mean and by the way the blizzard doesn't last forever it might be miserable it might be difficult to live with but just like a market drop it doesn't last forever sunny days come again it's like living in florida and being surprised if there's a hurricane well that's part of living in florida does that mean hurricanes aren't scary no does it mean they don't do damage no does it mean you shouldn't be surprised yes you should not be surprised and the hurricane will pass it's the same thing with the market you don't know when the storms are coming you know ultimately that pass the thing to do is stay the course and a lot of what we talk about with investing it is this psychological aspect right of you try to time the market you try to and i'm not saying this as a good thing clearly but people people try to time the market they try to say oh i think it's going to do this and oh i should put more money in or i should just wait until it gets to this point and and your point is nobody can time the market you you can't you're lucky enough to get it right once but you have to get it right on both sides the buying and the selling which is virtually impossible so it's just really a fool's errand but but we shouldn't discount the psychological aspect of when you see a 32 33 drop right and like you said you have to expect it occasionally certainly over an investing lifetime but that doesn't mean that it's not painful it doesn't mean that it you don't have to steal yourself for for this inevitability right and and i guess my question to you is you've been through a bunch of these these experiences over your investing lifetime how did you react personally if at all and that might that might be the answer also like just internally not that i expect that you sold things clearly that that's not what i'm talking about the psychological aspect when when march came and it did drop 30 some odd percent what was going through your mind at that point so i think i think this is not going what was going through my mind at that point but this general question brad is might be the single most important thing we talk about today right i've written um and i i think it's in my book it's certainly on my blog i've written that nobody should follow my advice until they are absolutely clear that they will not sell when the market drops they will not sell in panic because if you do if you're not absolutely sure about that and you do sell when the market drops and in a panic which as you just pointed out is a very natural reaction reaction market drops are very scary my advice will leave you bleeding by the side of the road any investing advice will leave you bleeding by the side of the road so job one before you go down the simple path to wealth as i outline it is to make sure you've got your mind right that you just know that selling is not an option when the time comes because you know that these drops while they're scary and terrifying and it's it's horrifying to look at your portfolio and see it's down 30 or 40 percent it is also temporary just like the hurricanes when it's sitting on top of you and the winds are blowing and the windows are rattling it's it's terrifying but it'll pass and until you know that you should not follow my advice or any investing advice now i frequently thought to myself is that something people can learn just by my saying it by reading what i've written about it or do you have to live through one of these things and make the mistake of selling at the bottom i had to live through it so in 1987 i mentioned black monday came along this is in the days before computers and online trading where you actually had stock brokers and that was a monday black monday uh i was working i had no idea what was going on in the market it's not like you could call it up on your computer like we do today and at the end of the day just on a whim i called wayne who was my stockbroker and he was kind of a friend right and i just hadn't talked to wayne in a while and then i just randomly called him that day and i he picks up the phone i say man how you doing and there's this long pause and he says you're joking right and i said no he said you don't know what happened today and i said no he said man this has been a worst day of my life and he went on to tell me that the market had dropped 25 well i was horrified that meant you know that i had 25 less money than i had before now i knew what the right thing to do was i knew the right thing to do was to stay the course and in fact i did that for a month and then two months and then three months and after that initial drop the market just kept grinding down lower and lower and lower and lower and finally i didn't have the fortitude i didn't have my mind right and i sold i want to say three maybe four months into it and if that wasn't the exact day the market decided to turn around it was it was close enough not to matter and then i sat on the sidelines for a year and watched the market march right on back up and past where it had been on black monday before i finally got in that lesson has burned into my mind so how did i feel in 2008 i was scared i mean man in 2008 2009 you know march 2009 the market hit and this is something that people ought to think about before they if they've never been through a major collapse this is what it looks like march of 2009 the market hit its bottom i want to say that it was 666 the biblical mark of the devil right what you have to understand is nobody knew that was the bottom at that time that was about a 50 drop nobody knew that was the bottom all the smart people i was talking to at that point were saying it's going to drop another two thirds so let's do that mentally let's suppose you went into that crash with a million two and by march of 09 your million two is now six hundred thousand and everybody around you is saying it's about to go to two hundred thousand that's what a really ugly market looks like and do you stay the course under that circumstance i did but i'm not sure i could have done it if i didn't have that 1987 experience i'm not sure i could have done it just based on knowing it intellectually without going through my gut so that's one of the things i worry about with my readers because the markets other than this march is really since i've been writing my blog done pretty much nothing but go up but you have to be prepared for those gut-wrenching gut-wrenching changes now the other thing you asked is how did i feel in march i didn't even phase me a little bit i didn't even think about it uh you know so now i look back and i say i wish i'd moved some bonds should have rebalanced uh okay yeah so so this is this is great and i think the the one other thing i wanted to go to is actually back to self cleansing a little bit here because i don't think i don't think that is as intuitive people as i don't think people realize how powerful that actually is so let's play out an actual scenario here scenario a person is invested in just straight winners they've picked a few companies that have been rock-solid companies the last 10 years and uh these companies are just absolutely crushing and they they own the actual stocks the other individual has invested in like a total stock market index fund the last 10 years and they also have had a good run you know maybe not gone up quite as high as these others but they own all the same companies inside of the index fund now the thing about it is that the index fund is cap weighted and you said that in passing but for people that means that in your total stock market index fund you own a disproportionate percentage of the more valuable the higher market cap companies and we know kind of what these are these would be facebook amazon apple microsoft netflix now tesla you know these types of tech companies are going to disproportionately take up uh the top now here's the hypothetical here and i just want to compare and contrast and i'd love for you to kind of play it out a little bit uh jl you know what self-cleansing means in this context we go into the new year and some sort of anti-trust legislation happens or maybe something else i don't know who knows what it is but one of these massive companies or multiple these massive companies or whatever some unknown thing happens and these companies that make up a vast percentage a huge percentage and like brad we looked it up the other day what do like the top five or ten companies make up in terms of holdings in a vt sax fund yeah i think it was somewhere around a quarter i think when we looked up uh the s p 500 it was somewhere around uh 30 maybe a little bit less and i think it's about a quarter but i can uh i can get back to you if it's markedly different no no it's fine so like 20 did we say like 20 companies make up 30 of your holdings in an smp 500 phone it was something along those lines okay that sounds about right to me cool so all right so in this example um this one individual owns this total stock market fund so 30 of their net worth is tied up in a small group of companies disproportionately in the tech sector something really bad happens and some of these companies go away get crushed from 50 they get split up maybe they go to zero obviously some sort of black swan event like that would be uh would be pretty demoralizing for either of these investors but i'm curious your take on the self-cleansing approach that would occur inside of a total stock market index fund versus the stock investor who just directly bought these companies and they watched it go to zero what what you know what would be the difference there and just kind of play that out a little bit that's a that's a great great question so um one of the criticisms of index funds is just what you were talking about so they'll look at the vtsax of today and of recent years and they'll say you know essentially because it's cap weighted as you described and the biggest companies are a very large percentage of the total portfolio you're buying a technology heavy fund you know you're really betting on technology and today that's true but what's lost in looking at it just today is the fact that wasn't always true you know in the past the index has been dominated by financial companies it's been dominated by energy companies and that's the self-cleansing thing because any company that rises to the top rises the top of the index and you own more of it any sector whether it's technology or energy or financial or real estate or whatever the sector might be if that is going to have its moment in the sun it will rise to the top of your index and you will own it as it's rising just like you own technology as it's rising now at some point i have no idea when at some point i would guess that technology is going to fade away and it might be replaced with something else at the top that's an advantage that's part of the self-cleansing process and your hypothetical investor who owns say those 10 top technology stocks and is just going to hold them is going to be badly hurt in that process because he's going to get the fading effect without the new companies taking their place now to be clear anybody who bought the 10 biggest technology companies in the s p 500 or the total stock market today has vastly outperformed right but they got very lucky they picked the right sector the right companies because there are a lot of technology companies that didn't work out and they're now vulnerable to this fading effect let me give you an ex two examples to illustrate this back when i was young and uh we were showing dinosaurs out of the path in around 1968 1970 somebody came up with the concept of what they called the nifty 50. and the idea was they looked at the 50 most successful publicly traded companies in the united states at that point and said you know what these are blue chip companies if you buy these 50 companies you can you can just buy them and forget about them because they will they will give you great performance over the decades well of course there were no teslas in that 50. there were no amazons there are no microsofts there are no oracles there were no facebooks there you know they were companies like uh kodak like general motors like i mean these were the stars of the day the wheel turns while they were the most powerful companies of their time they're not the most powerful companies today and the most powerful companies today will not be the most powerful companies decades from now i used to like to say to people you know yes the the dow index which is the most popular one is now 30 companies that started in 1880 1890 something like that had 18 companies and i'd like to say how many of those 18 companies do you think are still in the dow 30 today the answer used to be one well it used to be one it was general electric and about two years ago general electric faded off so now the dow jones industrial average has no companies that were on there originally is that a bad thing no it just means that the dom companies of the late 1800s were not the dominant companies of the late 1900s or the early 2000s that's why this self-cleansing process and again very proud of that term is such a powerful part of owning the index because you will always you never have to worry about what's fading and what's rising because you will always be there all right uh so wow this uh we've we've gone just about an hour almost an hour and a half here and this every single question was really a slightly better question a slightly better version of a question that we asked in in episode 19 i think the information that we covered is timely i think it's necessary i think it's vital for someone getting started on the journey to just be aware of this as a strategy for getting started i think it removes a lot of the fear and i think you're doing a great service to this community and to the world by sharing this approach because it just makes sense some some things when you see him you're just like yep that's it that makes sense that's right it's unassailable because it's just true it's just kind of how it has worked and how it will work going into the future uh jail i would love to just invite you to join us again at some point over the next couple months to continue the conversation and expand this to other asset classes and other strategies so we would need to talk about maybe the role of bonds and a portfolio smoothing the ride as i know you've mentioned in the past and also we've talked about accumulation but what does decumulation what does drawdown look like for you would you like to come back on the show at some point in the near future i'd love to i love hanging out with you guys uh i uh by the way kudos to you for for the incredible platform you've built and the incredible service you provide to the community so anytime i can add value to that i'm i'm happy to hang out with you i always have a good time so why not nice all right everyone so let me just give you um obviously we talked about the book the simple path the wealth you can wait for the next you know episode but i would encourage you what a great time to to read this content and realize that it it it has always worked and it will be the best chance you know if if you want to give yourself the best chance of success stop trying to beat the game right stop trying to beat the game and just just realize that it's time in the market not timing the market and you can win over time just by keeping it simple go check out this book the simple path to wealth you can find it it's very easy to find on jl's website just go to jlcollinsnh.com jlcollinsnh.com there's a banner on the right hand side to pick up a copy of the book and let them know leave them a review let him know that you appreciate it let him know that it's been helpful give him some feedback on this episode we are so grateful for his time jail thanks again for coming on the show today my pleasure thanks for the invitation i'm already looking forward to next time all right everyone i'm so excited about how this episode came together it's one that it's time and honestly you could listen to the original episode 19 that we did probably worth your time and still get incredible value from this episode it's timely it's meaningful and i think it's very important information please listen to it take action on it share it with friends and family member a lot of people have had a lot of stuff taken away from this year and i think in a world of uncertainty simple information like this truly can make a difference all right my friends the fire spreading we'll see you next time as we continue to go down the road less traveled [Music] you

Channel: ChooseFI

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Keywords: the simple path to wealth, the simple path to wealth summary, the simple path to wealth audiobook, jl collins stock series, jl collins, jl collins the simple path to wealth audiobook, jl collins vtsax, jl collins google, index fund investing, index funds, index funds vs etf, index funds for beginners

Id: ObBS-ihFM7s

Length: 76min 29sec (4589 seconds)

Published: Mon Jan 04 2021